On October 2, 2018, Venezuelan President Nicolas Maduro appeared on national television and announced the official launch of the Venezuelan Petro cryptocurrency. First announced in December 2017, and purportedly backed by the country’s oil and mineral reserves, the Petro is intended to supplement Venezuela’s national currency, the bolívar, which has depreciated at an exorbitant rate in the past year. The International Monetary Fund has predicted that inflation in the country will reach 1 million percent. Continue Reading The Venezuelan Petro: A Blocked and Chained Cryptocurrency in the United States

A recent bipartisan letter from Members of Congress seeks clarification from SEC Chairman Jay Clayton as to the status of digital tokens and cryptocurrencies under the federal securities laws. The signatories expressed their view that not all digital tokens should be deemed securities, and voiced their concern that the SEC should not use its enforcement mechanism alone to craft policy on this issue. Instead, the Members advocated in favor of formal SEC guidance to clear up “uncertainties which are causing the environment for the development of innovative technologies in the United States to be unnecessarily fraught.” Continue Reading Members of Congress Request SEC Guidance on Crypto Assets

Recently, in a wide-ranging speech, the SEC’s Chief Accountant, Wes Bricker, provided his thoughts on how the SEC accounting staff analyzes accounting issues surrounding digital assets and distributed ledger technology. Bricker emphasized that companies must continue to maintain appropriate books and records, irrespective of whether distributed ledger technology, smart contracts or other technology-driven applications are (or are not) used. Likewise, when accounting for digital assets, companies should act appropriately within the parameters of the existing requirements of the federal securities laws. Accordingly, they should consider traditional regulations and accounting standards such as those relating to books and records, internal accounting controls, internal control over financial reporting, and custody. Bricker emphasized that “[d]istributed ledger technology and digital assets, despite their exciting possibilities, do not alter this fundamental responsibility.” Continue Reading SEC’s Chief Accountant Discusses Digital Assets

On September 11, 2018, capital markets regulators announced a series of cases that are the first of their kind in the digital assets space.

The SEC announced its first case charging unregistered broker-dealers for selling digital tokens. According to the SEC’s order, the defendants operated a self-described “ICO Superstore” that solicited investors, took thousands of customer orders for digital tokens, processed investor funds, and handled more than 200 different digital tokens in connection with both ICOs and the defendants’ own secondary market activities. The defendants also promoted the sale of approximately 40 digital tokens in exchange for marketing fees paid by digital token issuers. Because the digital tokens issued in the ICOs and traded by defendants included securities under the SEC’s DAO Report, the SEC concluded that the defendants’ market activities required broker-dealer registration with the SEC. Continue Reading A Day of Firsts

On August 28, 2018, as reported in Business Insurance, Lloyd’s of London underwriters have agreed to insure digital currency storage company, Kingdom Trust Co., against theft and destruction of cryptocurrency assets. The cover comes after almost a decade-long search by Kingdom Trust for insurance to cover its cryptoassets. According to Business Insurance, Kingdom Trust sees the availability of insurance as a key factor in bringing institutional investors into the marketplace by dispelling concerns about lack of traditional safeguards in the emerging cryptoasset space. Continue Reading Lloyd’s Jumps Into the Cryptocurrency Market, Insuring Part of Kingdom Trust’s $12 Billion Assets

A recent settled SEC enforcement action against an ICO issuer (the “Company”) and its promoter calls into question the viability of the “airdrop” model of distributing digital tokens to investors. In the ICO context, an “airdrop” generally refers to the widespread distribution of digital tokens to community members either for free or in exchange for performing menial tasks. Whether such a distribution model runs afoul of the federal securities laws has been the subject of much debate in recent months, and the SEC’s case provides additional insight into their analysis of the issue. While a narrow path for airdrops may remain, the case will significantly curtail their current use. Continue Reading SEC Brings Enforcement Case Involving “Airdrop” of Securities

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.

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.”