On September 10, 2018, the New York Department of Financial Services (“DFS”) authorized Gemini Trust Company and Paxos Trust Company to each offer a price-stable cryptocurrency, also known as a stablecoin, pegged to the U.S. dollar. Both Gemini and Paxos hold limited purpose trust company charters under the New York Banking Law and are authorized to offer services for buying, selling, sending, receiving and storing virtual currency. Gemini is controlled by the Winklevoss brothers, whose application for a Bitcoin ETF was recently denied by the SEC. Continue Reading New York DFS Authorizes Two Stablecoins

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 September 9, 2018, the SEC announced the temporary trading suspension of two securities known as Bitcoin Tracker One (“CXBTF”) and Ether Tracker One (“CETHF”). According to the SEC’s order, the broker-dealer application materials submitted to enable the offer and sale of these products in the United States, as well as certain trading websites, characterize them as “Exchange Traded Funds.” According to the SEC, other public sources characterize the instruments as “Exchange Traded Notes.” By contrast, the SEC observed that the issuer of these securities characterizes them in its offering materials as “non-equity linked certificates.” CXBTF and CETHF are listed and traded on the NASDAQ/OMX in Stockholm and have recently been quoted on OTC Link (formerly known as the “pink sheets”) in the U.S. The SEC temporarily suspended trading in these securities in light of apparent confusion among market participants regarding the characteristics of these instruments. Continue Reading SEC Acts Over Weekend to Suspend Trading in Certain Crypto Stocks

This post has been updated. 

On August 22, 2018, following its recent decision denying the application of the Winklevoss Bitcoin Trust, the SEC denied applications for nine more Bitcoin ETFs. The orders involving applications by Cboe BZX and NYSE Arca (here and here) are similar to each other and cite many of the same reasons for denial. As with the Winklevoss application, the SEC went out of its way to emphasize that “its disapproval does not rest on an evaluation of whether bitcoin, or blockchain technology more generally, has utility or value as an innovation or an investment.” Instead, the SEC reasoned that the exchanges failed to meet their burdens under SEC regulations to demonstrate their ability to prevent fraudulent and manipulative acts and practices in respect of the planned ETFs. Notably, the exchanges did not demonstrate that bitcoin futures markets are “markets of significant size.” These orders are not surprising in light of the recent position the SEC took with the Winklevoss application, and they continue to show that the SEC remains skeptical of the burgeoning digital asset economy.

Update: Since this blog post went to press, the SEC announced that the commissioners would review the earlier orders, and the denial of the nine ETFs has, as of August 24, been stayed.

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

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

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 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

On June 25, 2018, a magistrate judge of the U.S. District Court of the Southern District of Florida released a report finding that cryptocurrency tokens issued in an initial coin offering (“ICO”) by the startup company, Centra Tech, are securities under the federal securities laws. This report was released in connection with a class action lawsuit filed by former investors claiming that Centra Tech and its founders violated the federal securities laws through a token sale that ultimately raised $30 million in cryptocurrencies. The former investors allege that the sale of the Centra Tech tokens was an unregistered offer and the sale of securities was in violation of the Securities Act of 1933 (“Securities Act”). Continue Reading U.S. Judge Finds That Centra Tech Token Is a Security