New York Regulator’s Suit Challenging OCC Fintech Charter Dismissed as Premature

On Tuesday December 12, 2017, a federal judge dismissed without prejudice a suit filed by the New York Department of Financial Services (NYDFS) against the Office of the Comptroller of the Currency (OCC) challenging the OCC’s proposed new special-purpose fintech charter.  Judge Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York held that the NYDFS suit required dismissal because the OCC has not yet reached a final decision on whether to issue special-purpose fintech charters.  However, Judge Buchwald dismissed the case without prejudice and did not make any decision on the merits of whether the OCC’s issuance of special-purpose fintech charters would exceed the agency’s powers under federal law.  To the extent that the OCC does finalize the fintech charter process and announces it is ready to accept fintech charter applications, NYDFS will likely re-file its suit.

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ICOs Must Remain Aware of Regulatory Enforcers

Digital assets, popularly referred to as “cryptocurrencies”, “coins”, and “tokens”, continue to provoke regulatory attention and create discord amongst regulators. Recent actions by the U.S. Commodity Futures Trading Commission (“CFTC”) and the U.S. Securities and Exchange Commission (“SEC”) demonstrate that activities by the issuers of tokens may draw scrutiny from either or both agencies. As new token issuance schemes hit the market every day, cryptocurrency market participants must be cautious because multiple regulatory enforcement arms are becoming increasingly active in this rapidly evolving arena.

Read our full client alert at reedsmith.com.

Security Implications for Blockchain Technology Reviewed by SEC

On October 12, 2017, the U.S. Securities and Exchange Committee (“SEC”) held an Investor Advisory Committee (“IAC”) meeting to consider, among other things, blockchain technology and the implications for securities markets.1 The meeting covered a broad range of topics relating to blockchain and distributed ledger technology (“DLT”), including initial coin offerings (“ICO”), post-trade processing, and decentralized applications. In the wake of the SEC’s recent enforcement action alleging that two recent ICOs were fraudulent,2  the SEC is cautiously and carefully approaching these topics in order to better capture the benefits of this new technology while avoiding the potential for fraud and abuse.

Read our full client alert at reedsmith.com.

ICOs Receive Guidance from Abu Dhabi FSRA

Earlier this month, the Financial Services Regulation Authority of the Abu Dhabi Global Market joined the ranks of various regulatory agencies from countries, including Australia, Canada, and the United States that have addressed ICOs, by issuing Supplementary Guidance on the regulation of ICOs and virtual currencies. The Guidance offers parameters for classifying, for legal and regulatory purposes, various types of digital assets. The Guidance is generally consistent with the product-and activity-based regulation approaches of the United States and the European Union.

Read our full client alert on reedsmith.com.

Regulatory Authorities Respond to Coin Offering Endorsements

Floyd Mayweather, a world famous boxing champion, recently used his Twitter and Instagram accounts to help a company raise more than $30 million in an initial coin offering (“ICO”).1 Other celebrities have similarly capitalized on their “influencer” status by promoting digital tokens to their Twitter and Instagram followers. Token issuers raised over $3 billion via ICOs in 2017,2 and while many are concerned about a bubble, there is no sign of a slowdown. Some reports suggest that early stage companies have raised more money via ICOs this year than through traditional early stage venture capital funding.3 This growth in new token issuances has elevated the profile and “coolness factor” of token sales, and celebrities are paying attention. As ICOs continue to grow in popularity, issuers of tokens may increasingly seek to involve celebrities in their advertising and promotional campaigns.

Read our full client alert at reedsmith.com.

Using Tether’s Loss to Prepare for Possible Cryptocurrency Theft

On November 20-21, 2017, Tether, the company behind USDT – a digital token backed by fiat currencies like the dollar and euro – disclosed that a hack resulted in the loss of $30.95 million worth of tokens.1 Tether posted an announcement to its website November 19 reporting that a “malicious action by an external hacker” resulted in the coins being “removed from the Tether Treasury wallet” and “sent to an unauthorized Bitcoin address.”2 Tether is now working to “blacklist” or otherwise inhibit hackers from using the stolen coins.

Please reference our full client alert on reedsmith.com.

CFTC and SEC Chairs Seek to Apply Existing Laws and Regulations to Digital Assets

Nine years after Satoshi Nakamoto circulated his whitepaper and introduced the world to bitcoin, regulated bitcoin derivatives are about to be introduced in the United States. CME Group recently announced that it will begin to offer bitcoin futures based on the CME CF Bitcoin Reference Rate later this year[1] and the Chicago Board Options Exchange has announced it will begin listing bitcoin futures contracts in Q1 2018.[2]  Ahead of any futures contract launch, U.S. Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo revealed that he does not feel that any new laws or regulations are necessary to accommodate the new bitcoin futures products or digital assets generally.

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SEC Files Complaint Against Trader Involving Bitcoin Conversion Scheme

On October 30, 2017, the U.S. Securities and Exchange Commission (“SEC”) filed a complaint in federal court against a day trader for allegedly committing fraud and market manipulation during which the trader utilized a digital currency exchange in a supposed attempt to cover his tracks. The SEC claims that defendant’s associate obtained unauthorized access to other people’s brokerage accounts and caused them to enter unauthorized trade orders at artificial prices.  Many of these orders then executed, directly or indirectly, against the defendant’s orders.  The defendant then allegedly transferred a share of the profits to his associate.  Notably, the defendant transferred the proceeds, which were denominated in U.S. dollars, to a digital currency company that converted the dollars to bitcoin and transmitted them to the defendant’s associate.

While the connection to cryptocurrency seems mostly incidental here, this is the type of press that sullies the reputation of digital assets. In this case, the defendant could have simply transferred dollars offshore or tried other methods of obscuring the transfers without comment, but the connection to bitcoin will likely give this case more press than it deserves.  The digital currency industry continues to encourage discussion on self-regulation efforts intended to address perceived risks and governance issues raised by cases such as this and combat reputational concerns.

The SEC’s complaint is available here.

CFPB Releases Data Sharing Principles for Fintechs and Financial Institutions

On October 18, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) entered  into the long simmering debate over consumer-authorized data sharing.  This debate pits mainstream financial institutions, which are typically reticent to share customer data with third parties, against data aggregators and other fintechs.  Those newer companies provide services directly to consumers—or to enhance the consumer experience—and rely on data from mainstream institutions in order to do so.  Both sides are grappling with complex issues surrounding consumer information, including who owns consumers’ financial data as well as how it can be used, shared, and kept secure.  The CFPB released a set of nine consumer protection principles  to address those and other issues and “help safeguard consumer interests as the consumer-authorized aggregation services market develops.”  Read the full report on our sister site, the Technology Law Dispatch.

CFTC Releases Primer on Virtual Currencies

On October 17, 2017, the U.S. Commodity Futures Trading Commission’s (“CFTC”) LabCFTC released a primer on virtual currencies, available here.  The primer is an “education tool” that provides an overview of the virtual currency landscape and is “not intended to describe the official policy or position of the CFTC, or to limit the CFTC’s current or future positions or actions.”  While the document is largely unrevealing, everyone in the initial coin offering (“ICO”) market should carefully review the risk factors outlined in the document to ensure that they are incorporated into their whitepapers and offering materials.

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