On May 9, 2019, FinCEN, the U.S. federal agency charged with combating money laundering, issued two new interpretive documents of interest to the crypto community. The first is interpretive guidance titled “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies” (the “Guidance”). The second document is an “Advisory on Illicit Activity Involving Convertible Virtual Currency” (the “Advisory”).
On May 2, 2019 US Department of Treasury’s Office of Foreign Assets Control (OFAC) published “A Framework for OFAC Compliance Commitments” (the Framework), which provides a specific outline of what OFAC considers to be essential elements of an effective sanctions compliance program. Crypto businesses should consider the applicability of the Framework to their products.
Read our full alert here.
As this short video explains, the “initial exchange offering,” or IEO, is the latest innovation in the offer and sale of cryptocurrencies. By partnering with a crypto exchange to aid in marketing and listing efforts, issuers engaging in an IEO hope to obtain better visibility and liquidity for their products. But like the ICOs they seek to replace, IEOs raise a host of potential issues under the US federal securities laws.
On April 25, 2019, the New York Attorney General announced that it had obtained a court order enjoining iFinex Inc. (operator of the Bitfinex digital asset trading platform), Tether Limited (issuer of the “tether” stablecoin) and their affiliated entities from further violations of New York law in connection with ongoing activities that the Attorney General alleges may have defrauded New York investors that trade in virtual currencies. The Attorney General’s investigation focuses on the potential loss or dissipation of over $850 million in customer funds. Bitfinex subsequently issued its own statement denying the Attorney General’s claims and insisting that “we have been informed that these… amounts are not lost but have been, in fact, seized and safeguarded” by unnamed parties.
On April 18, 2019, the Financial Crimes Enforcement Network (“FinCEN”) announced its first enforcement action against a peer-to-peer virtual currency exchanger, which also included its first civil monetary penalty against a virtual currency exchanger, for failure to file Currency Transaction Reports (“CTRs”). According to FinCEN’s order, the respondent’s virtual currency exchange operated as an unregistered money service business (“MSB”), had no written policies or procedures for ensuring compliance with the Bank Secrecy Act (“BSA”), and failed to report both suspicious transactions and currency transactions. To settle the enforcement action, the respondent paid a $35,000 civil monetary penalty and agreed to an industry bar that would prohibit him from providing money transmission services or engaging in any other activity that would make him a “money services business” under FinCEN regulations.
In a letter released to the public on April 10, 2019, New York’s Department of Financial Services (DFS) denied Bittrex’s two separate applications to engage in a virtual currency business and to engage in money transmission activity in New York state. The action came after an extended trial period in which DFS sought to “address continued deficiencies and assist Bittrex in developing appropriate controls and compliance programs commensurate with the evolving nature of the sector.”
After months of teasing, on April 3 staff of the Securities and Exchange Commission (“SEC”) issued a long-awaited Framework for “Investment Contract” Analysis of Digital Assets. The Framework provides further guidance under the SEC’s Howey test as to whether digital assets constitute securities under federal law.
Writing with former SEC commissioner Troy Paredes, Hunton Andrews Kurth partner Scott Kimpel provides a complete survey of the federal securities laws’ impact on offerings of security tokens.
The latest state to confront the utility token issue, Colorado, recently enacted the Digital Token Act (the Act). The Act amends the provisions of the Colorado Securities Act that require the registration of all securities offerings in the state unless an exemption is available. Specifically, the Act provides a conditional exemption from registration for certain utility tokens qualifying as “digital tokens” that have a “consumptive purpose.” It also provides limited relief from broker-dealer registration for intermediaries effecting transactions in such digital tokens.
Hunton Andrews Kurth attorney, Mayme Beth Donohue, member of the firm’s blockchain working group, was recently interviewed as part of the University of Virginia’s new podcast series, Common Law, exploring cutting-edge issues about the future of law. Mayme discussed various practical applications of blockchain, including supply chain management, product authenticity and blockchain-based mortgages, and how in-house lawyers should think about issue spotting blockchain implementations.
An audio recording of the interview is now available.