In connection with its annual meeting in Davos, Switzerland, on January 24, 2020, the World Economic Forum announced the creation of a Global Consortium for Digital Currency Governance. The initiative is touted as the first of its kind “to bring together leading companies, financial institutions, government representatives, technical experts, academics, international organizations, NGOs and members of the Forum’s communities on a global level.” The consortium will focus its efforts on developing solutions for what it describes as a fragmented regulatory system. According to its organizers, “Efficiency, speed, inter-operability, inclusivity and transparency will be at the heart of this initiative.” It will call for innovative regulatory approaches to achieve these goals and build trust. The announcement follows a press release issued on January 21, 2020, indicating that the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Swedish Riksbank and the Swiss National Bank, along with the Bank for International Settlements (BIS), have created a working group to assess the potential cases for central bank digital currency (CBDC) in their home jurisdictions.
In 2019, Hunton Andrews Kurth LLP’s structured finance and securitization team closed a number of substantial transactions, developed novel structures for our clients and advised on important tax, regulatory and other industry developments, including emerging uses of blockchain solutions.
On January 16, 2020, Reps. Suzan DelBene (D-Washington) and David Schweikert (R-Arizona) introduced H.R. 5635, the Virtual Currency Tax Fairness Act of 2020. Under current IRS guidance, taxpayers who sell virtual currency must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses. Taxpayers can also recognize gains due to fluctuations in exchange rates between virtual currencies and fiat currencies. H.R. 5635 would provide some relief from this tax treatment to encourage small consumer transactions in virtual currency by excluding from taxable gross income any gain by reason of changes in exchange rates of up to $200 incurred in respect of personal transactions. The bill also instructs the IRS to issue regulations providing for informational returns on virtual currency transactions for which gain or loss is recognized.
In an investor alert issued on January 14, 2020, staff in the Securities and Exchange Commission’s Office of Investor Education and Advocacy warned investors in initial exchange offerings (IEOs) to “use caution before investing . . . through online trading platforms.” According to the SEC staff, “Claims of new technologies and financial products, such as those associated with digital asset offerings, and claims that IEOs are vetted by trading platforms, can be used improperly to entice investors with the false promise of high returns in a new investment space.”
In a recent op-ed, Gita Gopinath, the IMF’s chief economist, posited that “digital currencies will not displace the dominant dollar.” In particular, the dollar’s status is supported by the “institutions, rule of law, and credible investor protection” that the United States provides. She also expressed her view that a synthetic hegemonic currency—a digital basket of reserve currencies recently proposed by outgoing Bank of England governor Mark Carney—faces steep obstacles to implementation. While the world would benefit from a greater role for the euro and the renminbi, Gopinath suggests that their institutions require greater development. Instead, the US may be developing an advantage in making the dollar the dominant digital currency through its efforts to combat money laundering and terrorism.
On December 10, 2019, FinCEN Director Kenneth Blanco delivered prepared remarks to a banking conference held in Washington, DC. Among topics he discussed were trends in suspicious activity reporting (SARs) since FinCEN published updated guidance on convertible virtual currency (CVC) in May 2019.
On December 11, 2019, the New York Department of Financial Services (DFS) published proposed guidance regarding adoption or listing of virtual currency by holders of a BitLicense. Specifically, under the proposed guidance, DFS seeks comment regarding two proposed changes affecting coin listings, both of which are intended to streamline and expedite the process.
On December 10, 2019, the Swiss Financial Market Supervisory Authority (FINMA) published its inaugural report on market risk in the Swiss economy. The report provides an overview of what FINMA believes are the most important risks currently facing Swiss supervised institutions and describes the resulting focus of its supervisory activity.
At a mutual fund industry conference held on December 3, 2019, Dalia Blass, director of the Securities and Exchange Commission’s Division of Investment Management, previewed a new structure for registered mutual funds seeking to invest substantially in digital assets and related investments.
In particular, Director Blass indicated that an unnamed registered closed-end interval fund with a bitcoin futures strategy is preparing to launch. As a result of recent industry feedback and engagement, and in response to issues the SEC staff previously identified:
- The fund expects to generally value its bitcoin futures holdings at daily settlement prices reflected on a CFTC-registered futures exchange, consistent with the principles of the Investment Company Act of 1940 and US GAAP.
- With respect to custody, the fund will invest in cash-settled futures and will therefore not face the challenges presented by direct holdings of digital assets.
- Structured as a closed-end interval fund, the fund will not offer daily redemptions and will not be subject to potentially large, unexpected liquidity demands over short periods. And as an unlisted fund, its pricing will not depend on an efficient arbitrage mechanism and the willingness of market makers to make markets in a fund pursuing a digital asset strategy.
According to Director Blass, the fund also has taken steps to address issues related to potential manipulation in the digital asset markets. These steps include disclosing prominent risks, offering the product only through registered investment advisers, and limiting the size and future growth of the fund, with an initial cap of $25 million.
The full text of Director Blass’s speech is available here.