Enterprises around the world are actively implementing a wide variety of blockchain solutions to improve efficiencies, enhance user experiences and lower transaction costs. But the private sector’s development of distributed ledger technology is often outpacing the legal and regulatory regimes that impact it. In the United States, numerous regulators have asserted jurisdiction over blockchain applications, frequently in redundant or even contradictory ways. With the Blockchain Legal Resource blog, we at Hunton Andrews Kurth plan to keep track of the most notable legal and regulatory developments in the blockchain space, providing our commentary and legal insight along the way.
On August 9, 2018, the World Bank issued a press release highlighting what it described as the “World’s First Blockchain Bond.” It will be issued in Australia and, according to news reports, will be called a BONDI—both in honor of the famous Australian beach and also a clever acronym for “Blockchain Offered New Debt Instrument.” The issue size is approximately AUD $100 million (about USD $74 million).
Current regulations in the United States limit the ability of securities to trade exclusively over a blockchain, but over time we believe they will become more commonplace as the rules and market practice adapt. More fundamentally, there is a huge potential in blockchain to disrupt the current U.S. trading and settlement process that developed after the paperwork crisis of the early 1970s and is now based on a decades-old business model.
On August 6, 2018, the Federal Trade Commission (“FTC”) published a notice seeking public comment as to whether broad-based changes in the economy, evolving business practices, new technologies or international developments might require adjustments to competition and consumer protection law, enforcement priorities and policy. The notice, published in the Federal Register, does not specifically mention blockchain or distributed ledger technology specifically, but the broad list of topics that the FTC lists as areas in which it seeks comments could easily accommodate market developments due to the emergence of blockchain technology and related applications. Continue Reading FTC to Commence Hearings on Competition and Consumer Protection in the 21st Century
Recently, the federal Office of the Comptroller of the Currency (“OCC”) announced that it is now accepting applications for national bank charters from nondepository banking institutions. Numerous consumer groups and state banking agencies have publicly expressed their dissatisfaction with the concept of a national “FinTech charter,” and it is likely one or more of these groups will sue the OCC over the legality of the new form of charter. However, assuming that the OCC prevails in the oncoming litigation, the FinTech charter may present an attractive alternative to certain businesses dealing in digital assets that under current law may be required to obtain money transmitter or similar licenses in each state in which they do business. In theory, a FinTech charter from the federal regulator would, under the National Bank Act, preempt most state banking laws and streamline state regulatory compliance. The tradeoff to businesses that successfully obtain FinTech charters is that they would become subject to substantial regulation as national banks.
We discuss the parameters of the new FinTech charter in our detailed client alert.
In a terse press release issued July 26, 2018, the Swiss Financial Market Supervisory Authority (“FINMA”) announced that it has launched enforcement proceedings against an ICO issuer based on evidence that the company may have “breached financial market law.” According to FINMA, the proceedings focus in particular on possible breaches of Swiss banking law resulting from the potentially unauthorized acceptance of public deposits. FINMA noted that, in the context of its ICO, the subject company “accepted funds amounting to approximately one hundred million francs from more than 30,000 investors in return for issuing EVN tokens in a bond-like form.” Continue Reading Switzerland Announces ICO Enforcement Action
On July 27, 2018, the Justice BN Srikrishna committee, formed by the Indian government in August 2017 with the goal of introducing a comprehensive data protection law in India, issued a report, A Free and Fair Digital Economy: Protecting Privacy, Empowering Indians (the “Committee Report”), and draft data protection bill called the Personal Data Protection Bill, 2018 (the “Bill”). Noting that the Indian Supreme Court has recognized the right to privacy as a fundamental right, the Committee Report summarizes the existing data protection framework in India, and recommends that the government of India adopt a comprehensive data protection law such as that proposed in the Bill. Continue Reading India’s Draft Data Privacy Law Issued
In a lengthy order issued on July 26, 2018, by a 3-1 vote the U.S. Securities and Exchange Commission (“SEC”) denied an application by the CBOE Bats BZX Exchange, Inc., (“BZX”) seeking to list and trade shares of the Winklevoss Bitcoin Trust. The denial marks the culmination of a two-year effort by the Winklevoss brothers to launch the first bitcoin-based exchange-traded fund, or ETF, in the United States. In denying the application, the SEC cited various concerns about the lack of oversight in the underlying bitcoin market, and ruled that BZX did not demonstrate that bitcoin and bitcoin markets are uniquely resistant to manipulation, or that alternative means of detecting and deterring fraud and manipulation are sufficient in the absence of a surveillance-sharing agreement with a significant, regulated market related to bitcoin. Continue Reading SEC Denies Application for Bitcoin ETF
On July 12, 2018, a federal judge of the U.S. District Court for the Eastern District of New York reaffirmed its view that cryptocurrency fraud is subject to the U.S. Commodity Futures Trading Commission’s (“CFTC’s”) anti-fraud and anti-manipulation enforcement authority. The ruling involved a federal civil enforcement action filed by the CFTC in January 2018 against Patrick McDonnell and his company, CabbageTech, Corp. d/b/a Coin Drop Markets (“CDM”), charging the defendants with fraud and misappropriation in connection with purchases and trading of the virtual currencies Bitcoin and Litecoin. The CFTC’s complaint alleges that McDonnell and CDM operated a deceptive and fraudulent virtual currency scheme to induce customers to send money and virtual currencies to CDM in exchange for purported virtual currency trading advice, and for virtual currency purchases and trading on behalf of customers under McDonnell’s direction. Continue Reading U.S. District Court Reaffirms CFTC’s Authority over Cryptocurrency Fraud
On July 16, 2018, the Commodity Futures Trading Commission (“CFTC”) issued a customer advisory on digital tokens. Citing various studies and reports, the advisory identified high rates of fraud in some initial coin offerings, and warned investors to be on the lookout for the following risks associated with investing in digital tokens:
- The potential for forks in open-source applications that could split away market participants, increase the number of digital coins or make coins obsolete.
- Decrease in mining or validation costs (if price is tied to those factors).
- Acceptance of other currencies, coins or tokens for offered goods and services.
- The link between the value of a digital coin or token and the offered product or service.
- Adoption of the digital coin or token as a broad medium of exchange or store of value.
- Future competitors or technological changes that could disrupt the underlying business.
- Future demand or uses for an application, network, product or service.
- Liquidity in the market for a specific digital coin or token.
- Changes to the underlying technology that could devalue digital coins or tokens.
- Risk of theft from hacking.
The CFTC has largely ceded enforcement authority for digital tokens that are securities to the Securities and Exchange Commission, but the advisory reminds readers that “digital tokens and coins can also be derivatives or commodities, depending on how they are structured.”
As published on the Hunton Privacy and Information Security Law blog, on June 27, 2018, the Ministry of Public Security of the People’s Republic of China published the Draft Regulations on the Classified Protection of Cybersecurity (网络安全等级保护条例（征求意见稿）) (“Draft Regulation”) and is seeking comments from the public by July 27, 2018. Continue Reading China Publishes the Draft Regulations on the Classified Protection of Cybersecurity
On July 11, 2018, in an emergency cease and desist order, the Texas securities commissioner took action against several individuals and affiliated companies based in Utah to halt the offering of unregistered cryptocurrency mining investments to Texas residents. The order alleges numerous violations of the registration and antifraud provisions of the Texas Securities Act. Continue Reading Texas Shuts Down Offering of Interests in Cryptocurrency Mining Businesses