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.”

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