Lessons Learned – The Importance of Governance and Regulatory Oversight in Storing Crypto Assets

Quadriga “Loses” Keys to Stored Digital Assets

Quadriga, Canada’s largest cryptocurrency exchange, is unable to gain access to about $145 million (USD) of bitcoin and other digital assets following the sudden death of Gerald Cotten, its co-founder and CEO, in December 2018.  According to Quadriga, Cotten stored those digital assets in a “cold wallet” on his encrypted laptop and repeated attempts by his widow to gain access to the laptop have proved unsuccessful.  Additionally, details of how to access the encrypted laptop appear to not have been recorded or are nowhere to be found.

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The sandbox goes global – Launch of the Global Financial Innovation Network

The UK’s Financial Conduct Authority (FCA) has announced the launch of the Global Financial Innovation Network (GFIN), an association of 29 regulatory bodies (Members) which will cooperate to promote innovation and share experiences and approaches to supervising new technologies in the financial services sector.

The proposal to launch the GFIN was set out in a consultation paper in August 2018, and has received strong industry support. A key GFIN initiative is a pilot scheme allowing firms to test innovative products, services or business models across more than one jurisdiction – referred to by the FCA as a “global sandbox”.

We summarise below some of the key elements of the GFIN and the practical opportunities for firms under this initiative.

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The Shipping Industry Receives a Boost from Blockchain

After several successful trials over the last year, Israel’s largest cargo shipping company, Zim, has implemented a blockchain platform for electronic bills of lading.  According to Zim, this technology could replace paper bills of lading and further improve other activities which rely on physical means of transfer.

Zim recently conducted several transactions in which bills of lading were transferred to the receiver less than two hours from the vessel’s departure, a process that typically takes days or can take weeks.  Following these successful trials and initial transactions, Zim will soon be entering the next phase, providing an opportunity for all of its customers to take advantage of electronic bills of lading utilizing blockchain technology.

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UK Treasury Committee to appoint special advisor to oversee financial services technology shortcomings

At the end of 2018 the UK Treasury Committee announced that it would launch an inquiry into information technology (IT) failures in the financial services sector. The Treasury Committee has stated that it will appoint a specialist advisor to help provide analysis and aid the inquiry.

The past 18 months have seen numerous IT failures in the financial services sector. Equifax, Barclays and TSB have all suffered incidents, to name a few. TSB is arguably the highest profile case, when 1.9 million customers were logged out of their online banking accounts for up to a month and with some customers also claiming to have been able to view other customers’ bank details. This occurred after the bank attempted to migrate customer information from its former owner to current owner Banco Sabadell.

Read the full report on our sister site the Technology Law Dispatch.

99 days to go… before London loses its FinTech dominance

As much as there can be tradition in something that is less than five years old, London has ‘traditionally’ been considered to be the capital of financial technology (FinTech).

London provides a haven in which FinTechs have been able to grow operational expertise, supported by the combination of significant and sophisticated investment, tech-skilled talent, tech-minded people, a pragmatic and forward-thinking regulator, and a supportive government with its own strategy on FinTech. These have been the key ingredients in establishing the success of this new sub-sector This recipe has resulted in London becoming an echo chamber of its own FinTech success, which has now perpetuated the growth of the greatest number of unicorn FinTech companies in Europe. With 99 days to go until the UK is scheduled to leave the EU, it is more important now than ever for Britain to consider how to best retain its FinTechs.

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Mark Carney’s backdoor to the European financial system

Every month is probably a busy month for the Governor of the Bank of England, Mark Carney, but September and October seemed especially so. The quiet Remainer was asked in September by the Chancellor, Philip Hammond, to extend his tenure for a further seven months, which Mr Carney responded positively to. From Mr Hammond’s perspective, it is one way of ensuring some form of stability somewhere.

Mr Carney has so far managed to hold back from anything too outspoken, only pitching in on the odd occasion when he can’t help himself. It now seems that he has waited to feel secure in the job before really letting loose.

No sooner had news of the extension broken and the Governor was speaking out with a warning that a no-deal Brexit could be equal in severity to the 2008 financial crash.[1] By November, however, the whips had got to him as he provided some surprisingly quick and positive support for Theresa May’s draft withdrawal agreement and was even the one who suggested a possible extension to the transition period.

Whatever his reasons for the support, Mr Carney must have also come to the conclusion that adding to the backbiting cannot possibly be the strategy for which he should be remembered.

Stewarding a steady recovery from the recession and a “smooth and successful Brexit”[2] – now that’s more like it. But surely that can’t involve armchair commentary every now and again during the lead up to the UK’s departure?

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Federal Court denies SEC Injunction in Blockvest ICO

On November 28, 2018, the United States District Court for the Southern District of California denied the U.S. Securities and Exchange Commission’s (SEC) request for a preliminary injunction against Defendants Blockvest, LLC (Blockvest) and Blockvest’s founder and chairman Reginald Buddy Ringgold, III (Ringgold). Securities and Exchange Commission v. Blockvest, LLC, et al.[1]

The SEC alleged that Blockvest and Ringgold were offering and selling unregistered securities in the form of digital assets called BLV tokens. According to the SEC, Blockvest sold the tokens in an initial coin offering (ICO) that, according to the SEC’s complaint, began with pre-sales starting in March 2018.

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SEC settlement of two ICOs based on sales of unregistered securities: No fraud claims asserted

On Friday, November 16, 2018, the U.S. Securities and Exchange Commission (SEC) announced that it settled two cases against digital token issuers. The settlements, one with CarrierEQ Inc. (AirFox) and the other with Paragon Coin Inc. (Paragon), are the first time that the SEC has imposed civil penalties on companies solely for offering digital tokens in an initial coin offering (ICO) that allegedly violates the securities laws. In addition to agreeing to pay civil fines of $250,000 each, both companies agreed in the settlements to allow certain token purchasers to elect to receive a refund. The settlement agreements also require both companies to pursue registration of their digital tokens as a class of securities under section 12(g) of the Securities Exchange Act of 1934 by filing a Form 10.

In each case, the SEC’s enforcement action was grounded on the sale of unregistered securities. There were no assertions of fraudulent statements having been made in connection with the ICOs.

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SEC in First Enforcement Action Against Token Exchange

On November 8, 2018, the U.S. Securities and Exchange Commission (the “SEC”) settled its first case against an unregistered cryptocurrency exchange.  Zachary Coburn, founder of EtherDelta, agreed to pay $313,000 in disgorgement and interest, along with a civil fine of $75,000, in order to settle SEC allegations that EtherDelta was acting as an unregistered securities exchange.

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September report details UK digital currency regulations

Last month (September 2018), the House of Commons Treasury Committee issued a report on its inquiry into the regulation of crypto-assets. The inquiry examined, amongst other subjects, the role of digital currencies in the UK; the impact of distributed ledger (blockchain) technology; and how these should be regulated. The report recommends improvements to consumer and anti-money laundering protections (AML) when dealing in crypto-assets. The improvement will be achieved in part by extending the Financial Services and Markets Act (Regulated Activities) Order 2000 (RAO) to crypto-assets and associated activities.

Read the full report on our sister site, the Technology Law Dispatch.

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