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.
The Council of Institutional Investors (CII) and Templum, Inc. (Templum) each recently submitted comments to the SEC to call for the agency to embrace blockchain technology in a variety of contexts regarding the registration and transfer of securities. The dominant system for clearance and settlement of securities in the United States has its roots in the “paperwork crisis” of the early 1970s, and the resulting regulatory regime based on immobilization of securities is largely inconsistent with a blockchain-based system of traceable shares.
The 116th Congress is off to a busy start, and various members in both the House and Senate have introduced a wide range of bills impacting blockchain technology and digital currencies. Some of the bills would provide greater regulatory certainty to operators of blockchain businesses, while others focus on preventing the use of digital currency to facilitate unlawful behavior. A few of the bills were introduced in the last congress but did not pass. Though passage of any bill is never assured, we have summarized a number of the most recent bills of interest to blockchain developers and the crypto community.
To date, virtual currency exchanges in the United States have structured their operations in an effort to avoid being required to register as an exchange with either the Securities and Exchange Commission or the Commodity Futures Trading Commission. While these efforts may be entirely legal, without the regulatory protections of exchange registration, they could create enhanced risks for customers, particularly in the case of a fund’s insolvency or collapse. A recent federal case highlights these risks and provides a roadmap for asserting personal jurisdiction over a virtual currency exchange.
In a case being closely watched by the crypto community, a California federal judge reversed his earlier decision and, on reconsideration, issued a preliminary injunction against ICO issuer Blockvest LLC. Although the SEC has a high success rate in litigated cases, its action against Blockvest was notable because the judge initially declined to grant the SEC’s request for a preliminary injunction, then ruling that “at this stage, without full discovery and disputed issues of material facts, the Court cannot make a determination whether the BLV token offered to the 32 test investors was a ‘security.’” After reviewing new evidence, the judge subsequently reversed his position and found that Blockvest had indeed issued a security.
On January 30, 2019, a Florida appellate court reversed the trial court’s dismissal of State v. Espinoza, instead holding that a Bitcoin business was both a money transmitter and a payment instrument seller, subject to Florida’s statutes governing money services businesses. The decision contrasts with recent guidance in Texas and Pennsylvania regarding cryptocurrencies, where virtual currencies in those states were not deemed money under applicable state statutes and businesses that conduct transactions exchanging virtual and sovereign currencies do not generally require a currency exchange license.
The Pennsylvania Department of Banking and Securities recently issued guidance under the Money Transmitter Act (“MTA”) for entities engaged in various forms of virtual currency business in the commonwealth. The MTA, like similar statutes in other states, requires entities engaged in a money transmitter business to obtain a license, maintain minimum net worth standards, pay a surety bond, be subject to periodic examinations, and take other actions to safeguard customer funds. As we previously reported, many of these statutes were not drafted with virtual currency businesses in mind, which has created various compliance challenges for the crypto community.
On January 7, 2019, the United States Patent and Trademark Office (USPTO) issued further guidance on patent subject matter eligibility, which should ease some of the burden placed on patent applicants seeking to obtain U.S. patents on certain technology, including blockchain technology.