On July 31st, the Treasury Department (“Treasury”) released its fourth and final report in response to President Trump’s Executive Order 13772. The report, entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation” (the “Report”), only briefly addresses distributed ledger technologies, blockchain and digital assets, but takes broad aim at perceived regulatory challenges to innovation. The Report argues for a significant rethinking of state and federal regulation across data access, licensing, payments and many other issues. Continue Reading Treasury Report Recommends More Consistent Regulation to Spur Innovation
Today, Treasury released its long-awaited FinTech report entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation”. While the report provided only a very truncated discussion of distributed ledger technologies, blockchain, and digital assets, it discussed at length other key innovation and technology issues that are impacting the market for financial services. While DLT and digital assets appropriately garner many headlines, the innovative potential of new technologies for how financial services are accessed, delivered, bundled, analyzed, marketed, and regulated offers great opportunities as well as risks. The focus of the Treasury FinTech report on these fundamental issues no doubt will spur even more examination of our changing financial environment. Continue Reading Treasury Releases FinTech Report, and OCC Immediately Relaunches a National FinTech Charter
On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud. These orders follow a growing line of state enforcement actions aimed at ICOs.
This was not Massachusetts’s first foray into regulating ICOs. On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”
Part 3: Developments in the United States and the Rising Tide of Enforcement
In 2017, the use of initial coin offerings (“ICOs”) as an alternative means to raise capital took off worldwide. By the end of the year, ICO sponsors raised over $5.6 billion globally through token offerings. At the same time, U.S. regulators’ focus on ICOs has rapidly expanded as well. Since releasing the DAO Investigative Report in July 2017 (the “DAO Report”), the U.S. Securities and Exchange Commission (the “SEC”) has steadily increased its focus on ICO activity. As exemplified by numerous investor advisories, the creation of the Cyber Unit within the Enforcement Division with the purpose to halt and deter cyber-related misconduct in the securities markets, enforcement actions against ICOs, and the Office of Compliance Inspection and Examinations’ (“OCIE”) announcement that monitoring ICO sales will be one of its top 2018 priorities, it is clear that the SEC views ICOs as squarely within the scope of its mandate for regulation and enforcement. Unsurprisingly, state enforcement actions and private class action litigation targeting ICOs are also on the rise. Continue Reading Around the World in ICOs: ICOs in the United States
On February 6, 2018, Chairman Clayton of the Securities and Exchange Commission (SEC) and Chairman Giancarlo of the Commodity Futures Trading Commission (CFTC) testified before the Senate Banking Committee (the Committee) on their agencies’ oversight role for virtual currencies. Consistent with his prior statements, Clayton took a strong stance on SEC regulation of Initial Coin Offerings (ICOs). But, when it came to cryptocurrencies themselves, he and Giancarlo struck a somewhat more circumspect tone. In particular, despite acknowledging that their existing jurisdiction does not extend to spot transactions in cryptocurrencies, the Chairmen did not yet seek additional regulatory authority.
However, Chairman Clayton particularly expressed concerns about whether virtual currency exchanges provided adequate protections for investors and whether state regulation as payment services was sufficient. While the Chairmen did not request new authority, it is clear that there would be support within the Committee for legislation in this area, and Clayton and Giancarlo committed to work with each other and other authorities (including bank regulators and law enforcement authorities) to develop an appropriate approach. When the Chairmen of the SEC and CFTC express that they are “open” to exploring whether increased federal regulation is needed, there is a clear message. Continue Reading SEC and CFTC Testimony on Virtual Currencies: Is More Regulation on the Horizon?
Recent media reports, including in State-connected media, suggest that China is about to block access to all cryptocurrency trading platforms, including those operating overseas. In September 2017, the People’s Bank of China (“PBOC”) and six other government agencies jointly issued guidance immediately banning fundraising through offerings of tokens, such as initial coin offerings (“ICOs”), and requiring the closure of cryptocurrency exchanges in China by the end of September 2017. Continue Reading Chinese Government Moves To Effectively Ban Cryptocurrency Trading
On Friday, January 12th, during an appearance at The Economic Club in Washington, D.C. United States Treasury Secretary Steven Mnuchin announced that the Financial Stability Oversight Council (FSOC) was forming a virtual currency working group. The announcement follows FSOC’s discussion of virtual currency issues, including “price volatility, investor protection and the potential for illicit use”, and commitment to continue reviewing these risks at its meeting in December.
In his remarks to The Economic Club, Secretary Mnuchin emphasized that Treasury was concerned about the potential for money laundering and the risk to consumers investing in virtual currencies. Continue Reading Secretary Mnuchin Announces FSOC Working Group to Combat Money Laundering and Speculative Risks in Virtual Currencies
Following the December 2017 listing of futures contracts based on Bitcoin by two exchanges regulated by the Commodity Futures Trading Commission (CFTC), several fund sponsors and securities exchanges applied to the Securities and Exchange Commission (SEC) to list exchange-traded funds (ETFs) that would invest in those futures contracts. By investing in futures contracts regulated by the CFTC, instead of Bitcoin itself, these ETFs seemed designed to address concerns that had previously led the SEC to deny applications to list ETFs linked to Bitcoin. This change was not sufficient, however, as the SEC raised new concerns in early January that led to the withdrawal of these new applications. Exchanges, ETF sponsors and investors are now left wondering: what will it take for an ETF linked to Bitcoin to pass muster with the SEC? Continue Reading SEC Requests Withdrawal of Bitcoin Futures ETFs
On January 4, 2018, the North American Securities Administrators Association (NASAA) released an investor reminder regarding the risks associated with cryptocurrencies, initial coin offerings (ICOs), and cryptocurrency-related investment products. In the warning, the NASAA described factors that investors should consider before making investments in cryptocurrencies and cryptocurrency-related investment products, as well as common red flags of investment fraud. Continue Reading Regulators Remain Focused on Risks Associated with Cryptocurrencies, ICOs, and Cryptocurrency-Related Investment Products
On Friday, December 15, 2017, the Commodity Futures Trading Commission (CFTC) issued a proposed interpretation of the term “actual delivery” for purposes of determining whether certain virtual currency transaction could be deemed “retail commodity transactions” subject to the CFTC’s jurisdiction under the Commodity Exchange Act (CEA). Continue Reading The CFTC Issues a Proposed Interpretation Regarding Retail Commodity Transactions Involving Virtual Currency