On October 15, 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued “Sanctions Compliance Guidance for the Virtual Currency Industry” (the “Guidance”).  The Guidance follows recent guidance and advisory letters directed to the virtual currency industry relating to the risk of facilitating ransomware payments[1] and is OFAC’s most comprehensive virtual currency-specific advisory to date.  In particular, the Guidance directly addresses some simpler interpretive questions, discusses sanctions compliance programs and “best practices,” and provides hints about OFAC’s enforcement priorities going forward.
Continue Reading OFAC Issues Sanctions Guidance to Virtual Currency Industry

On September 21, 2021, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC): (i) issued an updated advisory on potential sanctions risks for facilitating ransomware payments; and (ii) designated SUEX OTC, S.R.O. (SUEX), a virtual currency exchange, on the list of Specially Designated Nationals and Blocked Persons (SDN List) for its role in facilitating financial transactions for ransomware actors.[1]  These actions demonstrate the U.S. government’s increasing focus on virtual currencies as a key means of facilitating ransomware payments and related money laundering, as well as OFAC’s commitment to combating ransomware attacks and other malicious cyber activities.
Continue Reading OFAC Updates Ransomware Advisory and Sanctions Virtual Currency Exchange

On August 9, 2021, the SEC issued a cease-and-desist order against digital asset exchange Poloniex, Inc. for allegedly operating an unregistered exchange in violation of Section 5 of the Exchange Act in connection with its operation of a trading platform that facilitated the buying and selling of digital asset securities.[1]

In the cease-and-desist order, the SEC alleged that Poloniex met the definition of an “exchange” because it “provided the non-discretionary means for trade orders to interact and execute through the combined use of the Poloniex website, an order book, and the Poloniex trading engine.”  The SEC also found, based on internal communications, that Poloniex decided to be “aggressive,” ultimately listing token(s) it had internally determined carried a “medium” risk of being considered securities under the Securities Act of 1933 pursuant to the test set forth by the U.S. Supreme Court in SEC v. W.J. Howey.[2]  However, the SEC did not identify what digital asset(s) it determined were securities nor why, simply stating that Poloniex facilitated trading of “digital assets that were investment contracts and therefore securities.”

Without admitting or denying the SEC’s findings, Poloniex agreed to the entry of the order and a payment of $10,388,309 in disgorgement, prejudgment interest, and a civil penalty.
Continue Reading SEC Enforcement Action Against Poloniex Signals Heightened Scrutiny for Crypto Exchanges

While large financial institutions have traditionally been hesitant to enter new areas of financial products, particularly virtual assets, many more banks and companies have expressed interest in virtual currencies as cryptocurrency has become increasingly mainstream.  Given the use of such services by terrorist groups, it is important for banks and other financial institutions to consider

On January 4, 2020, the Office of the Comptroller of the Currency (“OCC”) published an interpretive letter (the “Letter”) clarifying that national banks and federal savings associations (“banks”) may engage in and facilitate payment activities through new technological means, including serving as a node in a distributed ledger system such as those utilized by some stablecoins, facilitating customer conversion of fiat currency to or from digital currencies, and issuing stablecoins.

The Letter reasons that payment services are a core banking function, and that independent node verification networks (“INVNs”) and stablecoins are merely new means of effecting pre-existing permissible bank activities.

The letter follows other recent actions by former Acting Comptroller of the Currency Brian Brooks to clarify the authority of national banks to engage in certain digital asset activities, including the issuance of two other interpretive letters last year clarifying permissible cryptocurrency-related activities for banks (custodying digital assets and holding certain stablecoin reserves).  The Acting Comptroller, whose resignation became effective today, also spearheaded an initiative to grant national bank and national trust bank charters to fintech companies.

The Letter notes that banks “should consult with OCC supervisors, as appropriate, prior to engaging in these activities.”  This guidance, OCC precedents in expanding permissible bank activities, and the controversy surrounding recent crypto-related charter applications may lead to a deliberative approach by the OCC to banks expanding into these activities.
Continue Reading OCC Affirms Authority of National Banks to Engage in Additional Cryptocurrency-Related Activities, Including Issuing Stablecoins

On September 15, 2020, the Securities and Exchange Commission issued a cease‑and‑desist order against Unikrn, Inc. concerning its 2017 initial coin offering  of UnikoinGold .  The SEC found that the Unikrn ICO violated the prohibition in Section 5 of the Securities Act of 1933 against the unregistered public offer or sale of securities.  The SEC imposed several remedies, including requiring Unikrn to permanently disable the UnikoinGold token and a civil money penalty of $6.1 million.
Continue Reading SEC Issues Enforcement Action Against Unikrn, Inc. for its ICO, Prompting Rare Public Dissent from Commissioner Hester Peirce

On July 22, 2020, the Office of the Comptroller of the Currency (“OCC”) published an interpretive letter clarifying that providing cryptocurrency custody services to customers is a permissible activity for national banks and federal savings associations.  This letter marks an important milestone in the expansion of permissible banking activities related to digital assets.
Continue Reading OCC Interpretation Opens the Door for Banks to Enter the Crypto Custody Business

On September 18, 2019, the Securities and Exchange Commission (“SEC”) filed its first civil suit alleging violations of broker-dealer registration requirements in U.S. digital asset markets.  In a case filed in the U.S. District Court for the Central District of California, the SEC alleged that Defendants ICOBox and its founder, Nikolay Evdokimov, illegally conducted an unregistered public securities offering for their 2017 initial coin offering (“ICO”), and have operated an unregistered brokerage service facilitating the launch of ICOs in digital asset securities since 2017.
Continue Reading SEC Files First Suit Against Alleged Unregistered Broker-Dealer Operating in Digital Asset Markets

On July 25, 2019, staff of the Securities and Exchange Commission (“SEC”) granted its second no-action letter in the digital asset space to Pocketful of Quarters, Inc. (“POQ”), permitting POQ to sell digital tokens (“Quarters”) recorded on the Ethereum blockchain without satisfying registration requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Acts”). Like the SEC’s prior no-action letter to TurnKey Jet, Inc. (“TKJ”), which permitted TKJ to sell digital tokens pegged to $1.00 for the limited purpose of purchasing air charter services, Quarters will also be sold at a fixed price and limited to a purely consumptive purpose within the Quarters platform.

Due to these similarities, the POQ letter does little to clarify the SEC staff’s most recent guidance, released with the TKJ letter on April 3, 2019, that lists characteristics of a digital token that may affect its classification as a “security” under the Acts (the “Framework”).[1] The POQ letter merely reemphasizes that projects where the platform is already fully developed and the digital asset is subject to extensive restrictions on secondary trading, like TKJ, are more likely to fall outside the scope of federal securities laws.
Continue Reading SEC Provides Second No-Action Letter in the Digital Asset Space

In May 2019, the UK Jurisdiction Taskforce (the “UKJT”) of the LawTech Delivery Panel published its public consultation paper on the status of cryptoassets and distributed ledger technology, as well as the enforceability of smart contracts, under English private law. While much of the literature around cryptoassets in the legal context has been centred on their regulation, the UKJT’s consultation paper focuses on the legal characterization of these instruments themselves. In this article, we consider how cryptoassets can be defined using the existing vocabulary of English private law and the implications of this characterization.
Continue Reading Are Cryptoassets Property Under English Law?