The convergence of blockchain technology and creative intellectual property through a non-fungible token (“NFT”) is having a mainstream moment. Media stories abound with reports of artwork, tweets, and other digital media selling for millions of dollars on blockchain marketplaces when they are represented by an NFT.

In addition to addressing how NFTs are linked to sales of digital media, we take a look at the practical intellectual property considerations that can arise when buying or selling the creative works that the NFTs are attached to.

To understand how creative works become tied to NFTs, one has to understand how an NFT functions. First, an NFT refers to unique crypto tokens that are managed on the blockchain. A blockchain acts as the decentralized ledger that tracks the ownership and transaction history of each unique NFT.

The main difference between NFTs and other traditional cryptocurrency like Bitcoin is interchangeability (or lack thereof). One bitcoin in a digital wallet is interchangeable for another bitcoin in a different wallet because each bitcoin has the same value and use.

NFTs, on the other hand, are coded to have unique IDs and other metadata that no other token can replicate. This gives NFTs the attributes of originality and scarcity that make them so attractive when coupled with digital media.

NFTs are written with software code (called smart contracts) that governs actions such as verifying the ownership and managing the transferability of the NFTs. Like any software application, NFTs can be programmed beyond the basics of ownership and transferability to also include a variety of other applications and functionality, including linking the NFT to another digital asset.

 For example, a smart contract could be written to automatically allocate a portion of the amounts paid for any subsequent sale of the NFT back to the original owner, thus giving the owner an ability to realize the benefits of the secondary marketplace (see the proposed EIP-2981 standard for handling royalty payments for ERC-721 tokens).

Thus, when someone makes – or “mints” – an NFT, they are writing the underlying smart contract code that governs the qualities of the NFT and adding those qualities to the relevant blockchain on which the NFT is managed.

 Many blockchains can be used to manage NFTs, including Ethereum (with its long-established ERC-721 and ERC-1155 smart contract standards), FLOW, and Wax, but the process is largely the same with each.

Notably, certain NFT marketplaces only function with certain blockchains, and so the choice of which blockchain to use for an NFT can have real commercial implications for the seller. NFTs could have applications beyond being used to transact in content, including supply chain management of physical goods and secured finance transactions.

However, this post focuses only on NFTs when sold in connection with related content.

NFTs Govern Ownership of the Token, Not the Underlying IP Rights

Ownership of an NFT as a unique token – versus ownership of the content that such NFT may be associated with – is a critical distinction. When someone purchases an NFT tied to a piece of content, they have not automatically purchased the underlying intellectual property rights in such piece of content. Under Section 106 of the U.S.

Copyright Act, a copyright owner has certain exclusive rights to reproduce, prepare derivative works of, perform, display, and distribute the copyrighted work. As a general rule, the purchase of a piece of art does not transfer all copyright in such work to the buyer.

For example, when someone buys a painting at an art gallery for their home, they are acquiring the physical painting itself, which they can display, but not the underlying rights to reproduce, make derivative works of, or distribute copies of such painting. 

In reality, the underlying copyright only transfers if the copyright’s owner evidences in writing that they intend to transfer those rights alongside the copy of the work.

Unless the NFT owner has received explicit permission from the seller, the NFT owner does not automatically acquire the legal right to take pictures of the creative work attached to the NFT and make T-shirts or postcards for sale. 

Absent further documentation, the purchaser of an NFT acquires through that purchase an implied non-exclusive license to display the related media in their token wallet for personal purposes only, but does not own the underlying copyright in the content the NFT is associated with or the right to display that media on third-party products, websites, or platforms.

The question of “What rights are you buying?” when someone buys an NFT tied to a creative work is something that the parties can, and ideally should, contract around.

For example, Dapper Labs, operator of the popular NBA Top Shot platform, has promulgated a template NFT License that NFT sellers can adopt to outline what rights are being licensed to the NFT buyer. The NFT License distinguishes the actual NFT token from the “art” associated with the NFT (the underlying image, music, sound, or combination thereof).

The license clarifies that the buyer of the NFT receives (i) a personal license to use and display the art associated with the NFT, as well as (ii) a commercial license to make merchandise that displays that art associated with the NFT, a license subject to a $100,000 gross revenue per year limit.

To be clear, the NFT License is merely a suggested contract that buyers and sellers can use as they deem appropriate. For example, when the YellowHeart platform facilitated the sale of a new Kings of Leon album as an NFT, the terms of service of the YellowHeart platform included some elements of the NFT License, but with significant modifications.

The YellowHeart Terms of Service state that buying the NFT gives the buyer a right to display the art (defined as the album artwork and images) and included merchandise (defined to include the music files) associated with the NFT, for as long as the buyer owns the NFT and only for personal purposes.

The commercial license element of the NFT License was not included, and the YellowHeart terms include a host of clauses restricting commercial activity related to the creative works behind the NFT, such as prohibiting the use of the related art or included merchandise in third-party products or within movies or other media.

NFTs Do Not Inherently Authenticate IP Rights

Many market participants claim that NFTs can be used to prove authenticity. In fact, NFTs can authenticate ownership of a token itself, as well as the unique history of how such token was developed and linked to a creative work — on the public blockchains, anyone can see an owner’s wallet address and its linked metadata, as such information is available as a public record.

However, a simple NFT by itself cannot help with matching the creator or owner of an NFT to a real person in the physical world, nor does it validate that the creator of the NFT has the underlying rights to tie that NFT to any specific creative work.

Counterfeiting is an issue associated with NFT artworks. Collectors can be easily left wondering whether some digital art they spent thousands of dollars on is a real Banksy work or merely a knockoff. To solve this issue, some platforms use an old-fashioned method to verify the identities of creators on their platform: manual verification.

For example, SuperRare requires artists wishing to post their digital work for sale on its platform to first submit an application that requires information such as name, email, selection of artworks, social network presence, etc. Through this, SuperRare can ensure that collectors receive authentic artworks from reputable artists who have appropriate rights in the underlying art.

Other NFT marketplaces attempt to avoid the counterfeiting issue with broad disclaimers. For example, if a user attempts to buy a listing via the AtomicAssets marketplace, they encounter the following notice, which the user must accept to move forward with the purchase:

“Anyone can create AtomicAssets NFTs and freely choose attributes such as name and image, including fake versions of existing NFTs or stolen intellectual property. Before buying an NFT, always do your own research about the collection and double check the collection name to ensure that you are buying genuine NFTs.”

Where Is the Creative Work Actually Stored?

In order to link an NFT with a digital creative work, the NFT needs to carry unique information about such digital work within its smart contract. One way to do this is to store the entire data for the video or song within the actual NFT code.

This is often called “on-chain storage.” However, on-chain storage is impractical on most blockchains, since transfers on the chain incur a transaction fee based on the size of the token. Including the entire data for a large file into the NFT code would result in costly and time-consuming transfers. 

New technologies could resolve this issue, such as by developing secondary layers that allow for larger data sizes to be more easily transferred. However, as of the date of this article, that technology is still largely at the development stage.In the meantime, the alternative way to link the NFT to the data for the creative work is to store such data off the chain, such as on a standard web server.

The NFT then points to the address at which the digital asset is hosted online (in an ERC-721-compliant smart contract on Ethereum, that pointing happens via the TokenURI function).

While simply pointing the NFT to the asset off-chain cuts down on monetary and time costs associated with transferring the NFT, the hosted content is now back to being centrally stored rather than being immutably stored on the blockchain.This raises a legal question:

Who has the legal obligation to host off-chain data for the associated creative works? NFT sales contracts or the terms of service for NFT marketplaces rarely specify whether the seller has a legal obligation to host the data in a way so that a specific NFT will always be retrievable by the owner.

Absent such contract commitments, a buyer often has no guarantee that the URL or other web address will not be changed or be taken offline. This risk can defeat the whole purpose of using an NFT to secure immutability of the digital assets in the first place.

Some technology solutions attempt to solve this off-chain storage problem, such as the InterPlanetary File System (“IPFS”). At a high level, IPFS breaks up data for any image or other file into hashes — also called content identifiers or CIDs. The data for a specific piece of content is stored in chunks on decentralized nodes.

No single web server hosts that content, so the content is still available and retrievable if a single node goes down.

Applications of NFTs Beyond Art

Buying and selling creative works is merely one application of NFT technology. NFTs appear to offer great promise in other spaces, such as a proxy for memberships or tickets to physical events. For example, Unlock offers users the opportunity to purchase an NFT with a key to unlock memberships to an ad-free version of the Forbes website.

Other applications tie NFTs to physical items. For example, the Austrian Postal Service launched Crypto Stamp, a project through which it has issued physical stamps carrying private keys tied to some amount of ETH and digital versions of such physical stamps.

This maintains the utility of the physical stamp, while also allowing collectors to include the stamp in their digital collections (permanently, if they want), and owners can easily trade the Crypto Stamps on NFT marketplaces.While the world of NFTs is a fast-moving space, participants should be aware of some fundamental legal issues.

First, a buyer of an NFT does not automatically receive all the intellectual property rights underlying the work associated with the NFT being acquired.

 The terms in the license agreement associated with the sale will usually determine a buyer’s specific intellectual property rights. The law is still not settled on what exactly is acquired absent any such express intellectual property license or assignment grant.

Second, buyers and sellers of an NFT should pay close attention to how the underlying media is being stored, and who has the obligation of storing the media associated with an NFT.

Last but not least, despite all the uncertainties for NFTs, participants in this rapidly evolving area can expect to see more and more creative applications of NFTs beyond the current use, which is mainly for collectibles.Ghaith Mahmood is a partner at Latham & Watkins, handling a full spectrum of IP and technology matters.

Benjamin Naftalis is the Global Vice Chair of the White Collar Defense & Investigations Practice and a partner in the Litigation & Trial Department.Wenqian (Veronica) Ye is an associate in the Los Angeles office of Latham & Watkins. 

As Bitcoin reaches historical maximum prices, regulation must now become an important priority for financial monitoring agencies, says the CEO of one of the organizations largest independent financial advice from the world.

The call to action from Nigel Green, CEO and founder of deVere Group, comes as the price of Bitcoin hit a new high, surpassing $61,000 on the deVere Crypto exchange on Sunday for the first time.

Green says: “Like it or not, cryptocurrencies, there is no getting around the fact that Bitcoin is becoming an increasingly important part of the global financial system. Bitcoins in circulation are now worth a trillion dollars, and prices have recovered 890% over the last year.

Most of the major financial institutions, including investment giants and payment firms, are now backing the world's largest cryptocurrency, and there is growing interest from retail investors.

"He continues: “The movement towards digital currencies will increase, and at the same rate, in the coming years. That is why financial regulators must now make regulation of the crypto sector a major priority."

Reduce any potential disruption

“With a growing dominance, Bitcoin and other cryptocurrencies must be held to the same standards as the rest of the financial system with a solid and viable international framework. 

This will help reduce any potential disruption to global financial stability, protect investors, address illicit activity and give an economic boost to countries that adopt and adhere to it.

"Previously, the head of deVere, who is a long-time and high-profile cryptocurrency advocate, has said that one of the best ways to tackle regulatory issues is through exchanges.

“Almost all currency transactions are carried out through banks or exchange houses, and this is what should happen with cryptocurrencies. When the flows go through regulated exchanges, it will be much easier to address possible irregularities, such as money laundering, and make sure that taxes are paid," he said.

"For this to happen, banks will need to open accounts for exchanges, so they must be regulated."The deVere CEO concludes: “We are at an important point for Bitcoin, which is now worth more than the GDP of many countries. 

Financial watchdogs need to bring this asset class to the regulatory shop sooner rather than later through exchanges."

Non-fungible tokens (NFTs) have taken the world by storm, empowered a new generation of digital artists and turned many into millionaires and household names. Beyond allowing artists to monetize their work without expensive middlemen, NFTs hold the promise of unlocking radical new ways of expression, fan engagement and information dissemination.

As valuations for NFTs continue to climb and established rights owners enter the fray, intellectual property (IP) considerations will undoubtedly take center stage. Creators and collectors are going to inadvertently give up rights if they are not familiar with basic IP law.

They can also get into serious trouble if they unintentionally violate the rights of others. Further, they need to read between the lines of the marketplaces on which they launch. We don’t want to replace one traditional middleman with another blockchain middleman.

Amy Madison Luo is general counsel of Centre, an international standards-setting body for fiat-backed stablecoins such as USDC. In her spare time she advises artists and teams working at the intersection of art, social and blockchain.

This article is intended to be a primer on some of the most important copyright considerations in the United States. It does not cover other equally relevant topics, such as trademarks and licensing considerations (including open-source and creative commons licensing), each of which warrant discussions of their own. 

What do I get as a collector of an NFT?

The holder of a copyright has the exclusive right to copy, distribute, modify, publicly perform and publicly display the work. Unless specifically granted to someone else, these rights remain with the creator. 

When collectors purchase an NFT, they are usually getting the right to utilize the copyrighted work depicted by the NFT for personal consumption and the “pride of ownership” of the actual NFT.

The collector generally does not expect to make commercial use of the image (other than to resell the NFT).

Take music, for example. The actual rights to the copyrights to the song and recording belong to the copyright owner(s) (generally the artist and/or the record label). 

Depending on the marketplace, there may be additional terms attached. For example, Dapper Labs restricts the use of any purchased NBA Top Shots to “advertise, market or sell any third-party product or service.” Whereas, on its CryptoKitties platform, it specifically permits the commercial use of the purchased CryptoKitty up to $100,000 per year.

In the case of EulerBeats, a generative art platform, minters of an original NFT actually receive the exclusive right to commercialize their work, while purchasers of prints receive only the right to use, copy and display the original NFT for their own personal, non-commercial use. 

How can I protect myself as a creator?

Creators face a different set of issues, including making sure they adequately protect themselves and don’t unintentionally violate IP laws that can get them in trouble.

Copyright protections kick into gear as soon as the work is “fixed in a tangible form of expression.” While registration is not required in the United States, it is necessary to bring a claim in court, to be eligible for statutory damages and recovery of attorney’s fees in successful litigation, and is generally good evidence of copyright ownership. Registration is also recommended if you have more than one creator. 

See also: State of Crypto: It’s Time to Talk About NFTs and Intellectual Property Law

It is important for creators to read the terms of the marketplace they’re working with, and to make sure their rights are reserved to avoid ambiguity at a later date.

Most of these marketplaces require creators to grant a right to them, broadly speaking, to use, reproduce, modify, publish, display and distribute your “content” on a worldwide, non-exclusive and royalty-free basis.

Normally, this is so these marketplaces can actually post the NFT on their platform for sale, use the creation as a marketing and advertising to promote their marketplace, and occasionally embed the creation within indexes for better user experience and ease of search. 

While most marketplaces limit the use to these purposes, some do not and even allow them to further sublicense these rights to third parties. This means that while creators largely retain their IP rights vis a vis the collectors of their NFT, they do specifically grant these rights to the marketplace on which they sell their art.  

NFTs and the Law

What are some of the legal considerations for non-fungible tokens? Anderson Kill Partner Preston Byrne and DLx Law co-founder Lewis Cohen dive into the murky NFT waters.
 Furthermore, moral rights protect a creator’s right to attribution and integrity. The right of attribution refers to the right to have a work published anonymously or pseudonymously.

The right of integrity prevents intentional distortion, mutilation or other modification of a work that is likely to harm the creator’s reputation and prevents the destruction of any work of recognized stature.

Moral rights generally apply to single works of visual art or those produced in limited editions of 200 or fewer and signed and numbered by the artist. 

See also: How NFTs Became Art, and Everything Became an NFT

Recently, a group minted a Banksy piece entitled “morons,” burned the original and sold the NFT for almost four times the original price. Banksy arguably would have a claim for copyright infringement for the commercialization of his or her work without consent. Had this been an original (rather one of 500 copies), Banksy would also have a claim for infringing on his or her moral rights. 

If you see unauthorized use of your creations or an infringement of your rights in someone else’s work, most platforms have a process under the Digital Millennium Copyright Act (usually found in their terms of service) where you can request the infringing content be removed. 

What is fair use?

You can create anything your imagination can dream of, provided that it doesn’t infringe on the IP rights of another creator, contain illegal content and/or violate the content moderation rules of the platform you’re engaged with (including age-appropriate restrictions).

Generally speaking, you can’t reproduce or create derivative works from someone else’s creation without the permission of the copyright owner. But there is one broad exception to this rule: fair use. 

Fair use is an American doctrine that allows for the use of copyrighted material without the permission of the copyright owner for certain limited, “fair” purposes. At a high level, this means you can use a copyrighted work for the purposes of commentary, criticism, news reporting, teaching, research and/or parody. 

See also: Burnt Banksy NFT Sells for $380K in ETH

In the NFT world, Beeple’s use of Homer and Bart Simpson or Buzz Lightyear can arguably be considered transformative works under the fair use doctrine because the artworks comment on the roles that such fictional characters play in popular culture and do not adversely impact the market for those property owners.  

We’re in the equivalent of what I like to call, the “recipe printing phase of the internet.”

As we advance beyond simply minting existing media onto the blockchain and harness the real power of Web 3.0, we’re quickly going to see NFTs transform the value of data as they interact with decentralized finance, and enable novel revenue sharing arrangements and new dimensions of engagement that we’ve yet to fathom.

As NFT values continue to smash records (Beeple’s “Everydays: The First 5000 Days” sells for $69.3 million), and pieces change hands in vibrant secondary markets (CryptoPunk sells for $7.5 million), the IP rights of the creators behind these works are going to be more important than ever.

Introduction: Background on SEC’s Cryptocurrency and DeFi Regulation

The U.S. Securities and Exchange Commission (SEC) has long resisted the total acceptance of blockchain and its enabled decentralized finance (DeFi) ecosystem, including cryptocurrencies (such as Bitcoin), digital securities with a utility value and DeFi applications on a blockchain, which resulted in a number of complex and often contradictory regulations applicable to DeFi.

The purpose of this report to shed light on recent developments at the SEC and provide guidance to those who might be considering participating in, developing or incorporating DeFi projects and applications.

While the emerging DeFi ecosystem remains a novelty to many businesses, its evolving regulatory structure will ultimately bring it into widespread use, particularly in money transfer services, financial services, and the technology sector.

In this dynamic regulatory environment, people have been watching with interest as government agencies struggle to legitimize and regulate cryptocurrencies, digital securities and DeFi sector.

When they were written, most federal and state laws governing currency, financial services, taxes, and money laundering never contemplated the use of digital currencies, other blockchain tokens or DeFi.

In fact, only a handful of states have laws that address even the relatively widely adopted virtual currencies, and there is very little case law. Accordingly, the U.S. Treasury requires any businesses that hold or transmit a virtual currency, as well as DeFi projects, to comply with the same laws applicable to financial services businesses.

Participants in the blockchain and FinTech space, from users to DeFi projects to investment funds, need sound advice about structuring and launching DeFi projects and applications.

However, with the fast-paced nature of new developments in this industry, it is important to comply with tax and consumer protection laws, know-your-customer (KYC) and anti-money laundering (AML) regulations, as well as the dynamics of local and international markets.

To stay on top of the emerging and potentially lifechanging DeFi industry, it is important to convey the latest and most relevant dialogue in the FinTech space related to decentralized finance (DeFi) and DeFi application development, including the pitfalls, and potential regulatory issues for software developers.

In summary, here are some of the top things DeFi application developers and other project participants need to know to reduce the risks associated with the SEC regulatory compliance:

• It is important to think through potential scenarios before starting any DeFi project and determine who will be the responsible parties if something goes wrong, preferably a compliance officer with practical experience in fintech (i.e., who will be dealing with the regulators?)
• The SEC’s FinHub is a resource by which one can research the SEC’s guidelines related to blockchain, cryptocurrencies, decentralized applications and regulatory guidance for DeFi applications.
• It is advised that DeFi project developers set up a virtual meeting with an SEC officer to gain insight about what the potential issues might affect the project or trigger an SEC investigation.
• The SEC Commissioner Hester Peirce’s recent policy draft proposal for a “safe harbor,” under which companies launching crypto and DeFi projects would receive a three-year grace period to build and empower their networks before the SEC could take enforcement action against them for possibly offering unregistered securities via their blockchain networks.
• A DeFi project involving so-called “utility tokens” should fail the Howey test, so that the SEC will not view the blockchain tokens as an investment contracts and subject the DeFi project to federal securities laws.
• The SEC’s report on decentralized autonomous organizations (the DAO report) states that offers and sales of digital assets from DAOs are subject to federal securities laws.
• Become familiar with other applicable SEC’s guidelines, such as the ones related to Anti-Money Laundering (AML) and Know-Your-Customer (KYC) regulations.
• Be prepared to explain the token development plan in a way that is both achievable and equitable.
• Any holdings, expenses and transactions of the project should be recorded and publicly accessible on a network for complete transparency and for the ease of the exchange of relevant information with the regulators, if necessary.
• As DeFi and other blockchain projects become more ubiquitous, the SEC will step up their scrutiny through enforcement and investigation. It is important to seek legal counsel when responding to the SEC, whether in relation to an investigation or less formal inquiry.

An Overview of the SEC Commissioner Hester Peirce’s Safe Harbor ProposalPrior to joining the U.S. Securities and Exchange Commission in early 2018 as one of President Trump’s appointees, the SEC Commissioner Hester M. Peirce conducted research on the regulation of financial markets at George Mason University.

Commissioner Peirce also served as Senior Counsel to the U.S. Senate Committee on Banking, Housing and Urban Affairs and held many other positions in the legal and government sectors.

Having earned her bachelor’s degree in Economics from Case Western Reserve University and her JD from Yale Law School, Commissioner Peirce is uniquely qualified to advise the SEC on new ways to interpret the laws concerning financial regulation.

Ms. Peirce was recently sworn in for a second term.Since its release in February 2020, SEC Commissioner Pierce has explained and defended the nuances of her Safe Harbor proposal in numerous interviews and articles. Many of the best legal and financial minds in the FinTech industry have grappled with how its framework might support the growth of DeFi.

While it is encouraging to see a key figure at the SEC asking fundamental questions about regulations surrounding blockchain and DeFi, there are some in the FinTech community who believe her proposal creates as many problems as it seeks to solve.

The SEC and DeFi ChallengeIt is important to be aware of the SEC’s role in DeFi regulation, as it is not a single federal agency  surveilling the field. The Commodity Futures Trading Commission (CFTC) has one piece of the crypto space; the SEC has another.

• Commodities and derivatives are in the jurisdiction of the CFTC
• The CFTC seems to be more forward-thinking about crypto issues
• Both the SEC and the CFTC are considered capital markets regulators

The mandate of the SEC is to oversee/regulate the securities space, broker dealers, public companies’ filings, make sure adequate information is disclosed to investors, regulate mutual funds and other types of investment companies. While they have interacted with crypto companies, none of these products have made it through the process.

The SEC has extensive jurisdiction in the financial space, and crypto and DeFi currently are just small pieces of that. Commissioner Peirce attributes the SEC’s visibly slow pace adapting to DeFi and the public frustration to this fact.. In addition, COVID-19 has affected volatility and its unique issues are keeping the agency quite busy.

According to Commissioner Peirce, about 5,000 employees work in dozens of regional offices on a day-to-day basis writing rules, enforcing violations, and helping registrants comply with a very complicated rulebook.

The SEC should be more forward-thinkingWith so much activity surrounding DApps, FinTech and DeFi, providing an accurate definition of DeFi has become a focus of the agency. Commissioner Peirce thinks that one of the best definitions of DeFi so far is a “technological movement towards decentralizing legacy financial instruments, institutions and use cases, including trading, lending, investment, wealth management, payment, and insurance.

”At a virtual DeFi Discussion conference in May of 2020, Peirce was asked whether there is room for and other structures for regulatory-compliant decentralization, Commissioner Peirce made it clear that she believes the SEC must adjust the way these laws work.

“While it can be disarming for many traditionalists at the SEC,” she says, “If there is something that society wants to do, such as come together in a new or decentralized way, the SEC must adapt.”In terms of community governance, Peirce believes the most important feature for regulators is embracing forward-thinking strategies.

As she explained in a recent DeFi conference, “It is Important to think in advance about who will be responsible if something goes wrong. From a regulatory perspective there must be someone who is thinking through scenarios, asking if we will run up against any regulatory issues, who will be responsible for this and who will be dealing with the regulators?

”Peirce opened up about the practicalities of how the SEC interfaces with developers and she recognizes how much work still needs to be done. “There must be an educational component,” she said, “come talk to us and tell us what you’re planning to do to get insight about what the potential issues might be.

”One of the more revolutionary resources available to developers is SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), a portal that aims to streamline communications between the SEC and the public.

By using the FinHub, individuals and businesses can present their ideas to the SEC and receive valuable feedback in order to achieve full compliance before rolling out a new product.

A meeting with the FinHub representatives may reveal which issues could be problematic, while helping the SEC to address potential pain points, including via by adopting new forward-thinking regulations.Commissioner Peirce, the “Crypto Mom” Best known in the FinTech community as the “crypto mom, Commissioner Peirce takes a more progressive stance on regulating DeFi than her colleagues at the SEC and generally believes regulators should resort to a hands-off oversight.

Peirce got to the heart of the issue in a recent DeCrypt interview, when she explained, “The goal of DeFi, as I understand it, is to eliminate intermediaries and to allow people to engage with one another directly, and typically, the way regulators have regulated the financial system is to regulate intermediaries.” She said, “[DeFi] is going to cause [the SEC] to sit down and ask some fundamental questions about regulations.

”As she begins her second term as an SEC Commissioner, Ms. Peirce hopes to tweak existing regulations to improve access to regulated cryptocurrency markets for Americans, while making it easier for crypto companies to raise capital and build DeFi networks.

As she told DeCrypt recently, ““My main priority, with respect to anything, and not just crypto, is to allow people in the market to engage in transactions that are mutually beneficial,” she said. Provided, of course, that no one is being defrauded.

A Safe Harbor in the Crypto Sphere?One of Peirce’s main priorities, for example, is to revise her policy draft for the crypto industry known as the “Safe Harbor,” which would allow crypto and DeFi companies a three-year grace period to build and empower their networks before the SEC could take action against them for selling what might otherwise be described as “unregistered securities.

”However, while many involved in the crypto world see Commissioner Peirce as the industry’s savior, she is less confident about her ability to be a change driver , because of the established bureaucratic mechanism at the agency and system of government as a whole.

She may be right about the fate of Safe Harbor, given the initial opinions of her fellow commissioners, but perhaps by being nimble and making the recommended changes to the Safe Harbor proposal, along with DeFi, Peirce will have a better chance in her second term.In her comments about Safe Harbor, Peirce defines her underlying motivation as an attempt to provide technology innovators with a way to develop new projects without breaking any SEC laws.

“It is important to write rules that well-intentioned people can follow. When we see people struggling to find a way both to comply with the law and accomplish their laudable objectives, we need to ask ourselves whether the law should change to enable them to pursue their efforts in confidence that they are doing so legally.

”According to Peirce, the most pressing technical problem facing developers is the ability to raise funds during the ramp-up phase. When building a mature network that is at once functional, decentralized, and independent, it is necessary to freely distribute tradeable tokens to potential network participants.

But that “bootstrapping” ability has never been available to application developers.As Peirce explains in her speech, “Secondary trading of tokens typically provides essential liquidity for the users of the network and aids in the development of the network.

She further explains that the application of federal securities laws to these transactions frustrates the network’s ability to achieve maturity, thereby preventing “the transformation of the token sold as a security to a non-security token functioning on the network.

”To resolve this frustration, Commissioner Peirce recommends a three-year “safe harbor” period where the initial team of developers can issue a token and begin the process of building a decentralized network, all while remaining exempt from registration with the SEC.

The proposal assures purchaser protection by requiring some disclosures and subjecting sellers to the SEC’s anti-fraud protection laws.However, in order to become eligible for this exemption, certain requirements must be satisfied. For example, “network maturity” must be achieved in three years, as defined by some rather subjective language in the proposal.

The definition of “maturity” in Peirce’s proposal is designed to preclude the network from being “controlled” by any one person or entity, but it leaves a few too many questions unanswered.

Not only are there virtually no current crypto projects where this total decentralization actually exists at the present moment; the proposal also fails to define what measures would be used to determine if a project were sufficiently decentralized.

Also unclear is who makes this determination, and what happens if the network fails to reach “maturity” within three years.

According to Reuben Yap (project steward for privacy-first digital currency, Zcoin) in his interview with Thomson-Reuters, it is questionable whether a three-year exemption period is sufficient.“What happens if after the three-year safe harbor period, the token hasn’t achieved sufficient network maturity?” he said.

“The vast majority of projects have not, and even those where it is arguable, took longer than three years. There exists a huge disincentive to then rule it as a security due to the chaos that can ensue. In a way, many feel that EOS, which raised $4.1 billion, got off lightly with a $24 million fine only because of this. It is also questionable whether any network can gain sufficient decentralization after only three years.

”In his article for The Block, (The SEC meets decentralization theater with safe harbors for token sales), Stephen Palley deconstructs the Safe Harbor requirements with aplomb, but he still lands squarely on the side of adopting it.

 “As far as I can tell, this presents a potentially great way for people to raise tons of money selling digital tokens that don’t have any actual utility. If you can “sufficiently decentralize” your project in three years and, in the meantime, get your tokens listed on an exchange, it’d be a nifty way to make a lot of money if you keep a slug of those tokens for yourself.

”When Commissioner Peirce was asked in a recent interview who is responsible for achieving the goal of decentralization at the three-year mark, she answered this way: “Whoever is building this product, by the time they reach three-year mark they know what they are doing, they are a cohesive group, and they have funding.

They will identify themselves as people taking advantage of Safe Harbor. Ideally, they will let the SEC know they are done and that the thing will live on if they go away, but if [an investor] had questions, they would ask the initial development team.

”The DAO Report and Decentralization

On the 25th of July in 2017, the SEC released its decision, commonly known as the DAO Report about a decentralized autonomous organization (DAO), which is also known as a “virtual” organization.

According to the report, offers and sales of digital assets from DAOs are subject to the requirements of the federal securities laws. Also known as “Initial Coin Offerings” (ICOs) or “Token Sales,” such offers, are conducted by organizations using a distributed ledger, or blockchain technology.

The “decentralized” and “autonomous” portions of this ruling referred to “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government.

”While the SEC may recognize the DAO token as an unregistered security offering, a phrase in the report says that “DAO tokens are too widely dispersed to have meaningful control over the enterprise.” When asked to reconcile this phrase with decentralization at the DeFi Discussion (May 2020), Peirce said she was not sure how she would have voted on the DAO if she were at the SEC at the time it was issued.

“I think here they are trying to say – people who are scattered across the world – do they have a real role or a nominal role?” she asked. “Decentralization is a good thing in that it means activity and decision making is spread across a wider group, but the feedback on Safe Harbor has been that people need a better idea of what it means to be decentralized.

” She concluded that in this case, the SEC guidance on such a project might be in the form of a question: “If any particular entity or person disappeared, would the [the thing] live on?

”The Importance of TransparencyThe way Hester Peirce describes the three-year incubation period in her Safe Harbor proposal is as if it were a delicate ecosystem; a fertile soil in which developers can organically grow their networks.

She compares it to a “living, breathing thing that interacts with other projects.

”“Knowing how regulations were promulgated, with an ethos in mind to protect consumers, an important part of Defi is complete transparency,” said Peirce at the DeFi conference (May 2020).

“DeFi requires complete transparency to make sure there is no information asymmetry between the creators and users of the product.

“SEC’s mission is protecting investors, facilitating capital formation, and protecting the integrity of the marketplace.

DeFi has the ability to contribute to each of these things – bringing people together and matching each other’s needs is the essence of what a marketplace is, and there are ways to build in transparency that would have been unimaginable 100 years ago.

Really powerful.”In a recent article for Medium.com (Cryptocurrency Transparency Is Essential in Marketing A Coin), Steven Krohn attributes the success of ICO projects to best practices implemented by new FinTech companies. The most critical element of success in this space is cryptocurrency transparency.

That transparency is achieved in a number of ways, most notably the creation of publicly accessible networks for the exchange of information for all parties concerned, including investors, platform users and regulators.

This practice not only builds trust; it makes for a more reliable project that is more widely accepted.According to Krohn, there are at least three areas where crypto can be more open and transparent.

• The holdings of the business must be clearly communicated, meaning crypto teams should publish asset reports on a regular basis and invite auditors in to review them for accuracy.
• Cost reporting is another area where transparency can be improved. Crypto teams spend a lot to develop code to run the blockchain, set up the network nodes, and ensure global access to the network. Technical development costs, legal fees, and regulatory expenses should also be disclosed in a detailed report of assets and expenses.
• Recording transactions is an important aspect of transparency as well, since serious investors like to see that the majority of coins are not held by a small group of investors. When a small group holds the majority of coins, the price is subject to manipulation, which is often called a “pump and dump” scheme.

“We believe that this must change for crypto markets to be seen as serious and reliable business models. You simply cannot have a business, crypto or otherwise, which fails to share basic information about its income, expenses and assets,” says Krohn.

“If we don’t want the markets to collapse under their own weight, we must have more open, transparent and reliable information for everyone.”Can the SEC be Technology-Neutral?When asked if the SEC can be technology-neutral, SEC Commissioner Peirce explains, “The securities industry laws have been very prescriptive rules, meaning people only do X, Y, and Z and do it this way only.”

She believes the SEC should be responsive as people push them to create more principals-based, or objectives-based, rules. Because technology is changing so rapidly, Peirce always tries to take technology-neutral view, leaving as much room as possible for experimentation.

One of Hester Peirce’s major influences was former CFTC Chair Gensler, who has spoken frequently about the need for regulators to adopt a “technology neutral” stance in order to “promote innovation” in the crypto and DeFi industries.In an interview with Bitcoin.com, “Former CFTC Chair Advocates ‘Technology Neutral’ Cryptocurrency Regulations” the former CFTC chair stated:

“We should … not regulate the blockchain technology, but just ensure that its application, like cryptocurrency, [ensures] investors are still protected. What does that mean?

That we make sure there’s not fraud, manipulation, to the extent we can, in the bitcoin markets.

”When asked of the risk of stifling innovation through heavy-handed regulation of the new and rapidly evolving cryptocurrency industries, Gensler stated:

“If [crypto] gets broad adoption, if we really think the crypto world is going [to] be part of the future, it needs to come inside a public policy envelope, that means we need to guard against illicit activity, and yes, we need to protect investors.

The crypto exchanges, big exchanges like Coinbase, need to really come within either SEC or CFTC … inside of something to protect investors.”Being technology neutral at the SEC means seeing the benefits of what new technologies can do; it means reimagining things previously taken for granted.

 When asked about the agency’s neutrality in this area at a recent DeFi Discussion (May 2020), Peirce said, “we can’t be so wedded to the old way of doing things that we say we’re never going to change our rulebook… but this is really hard to do because many humans are resistant to change.” It is clear that Commissioner Peirce is not one of them.

The Future of StablecoinsThe notorious volatility of cryptocurrency has kept many investors out of the market, thereby limiting its utility as a platform for exchanging goods and services, particularly in the COVID era. As the lowest volatility version of crypto, the stablecoin is linked to a “stable asset,” such as the US Dollar.

According to a recent Benzinga article, “Best Stablecoins and 4 Types of Stablecoins,” stablecoins are useful for investors who want to keep their assets in the crypto space. “Switching from crypto to fiat currency can be expensive and time consuming.

Stablecoins give investors the best of both worlds — a stable asset within the crypto space with an advantageous transactional speed,” says Chris Davis.

“Because of their relative stability, stablecoins also have an easier time staying in compliance with regulators. The Gemini Dollar (GUSD) and the Paxos Standard (PAX) are 2 examples of coins to win the regulatory approval of the New York State Department of Financial Services.

”In a recent discussion about DeFi, Commissioner Peirce was asked about the newly proposed Managed Stable Coins and Securities Act, and to share her thoughts on the future of stable coins. “There is a lot of interest in stable coins,” according to Peirce.

“We are always looking for ways to make our financial instruments more robust and resilient,” says Peirce. “Ways to do that include having more people involved, not being too reliant on any one particular entity. In such a time of increased volatility, DeFi offers the ultimate business continuity plan and that has to be attractive to some people.

”SEC Framework for Investment Contracts: The Howey TestIn April 2019, the SEC laid out a framework for determining which digital assets fall under the category of an investment contract.

Using the 1946 Supreme Court decision (SEC v. W.J. Howey), which dealt with the sale of a Florida citrus grove, the SEC’s interpretive guidance concluded that “an investment contract exists when money is invested in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.

” (See the SEC’s Framework for “Investment Contract” Analysis of Digital Assets)

Regardless of whether it has any characteristics of typical securities, this SEC framework implies that the so-called Howey test applies to any contract, scheme, or transaction.

In addition, federal securities laws require all offers and sales of securities, including those involving digital assets, must be registered with the SEC, or qualified for an exemption from registration.

The registrant’s statement must also be complete and not materially misleading.In her remarks to Thomson-Reuters Tax and Accounting, Peirce said applying the Howey analysis to crypto tokens is not easy.

For example, the contract or transaction by which the token is sold may constitute an investment contract, but the token may not bear the hallmarks of a security.

“Conflating the two concepts has limited secondary trading and has had disastrous consequences for the ability of token networks to become functional,” Peirce said.

“Also, of concern, suggesting that tokens will increase in value, combined with securing secondary market trading, can trigger a conclusion that those tokens are being sold pursuant to an investment contract.

There are circumstances in which the security label fits, but, in other cases, promises made about tokens increasing in value are nothing more than expressions of the hope that a network will succeed and be used by lots of people.

”When asked at a recent DeFi Discussion (May 2020)  how she felt about “under construction” cryptocurrencies being registered as securities, Peirce said, “I feel that once a crypto is released it cannot be classified as a security under the Howey test because while it was being developed it may be argued that all of the profits come from the efforts of others.

Even if a DAO itself is building it.”“I think that’s why the Safe Harbor is really useful,” Peirce emphasized, “to kind of cover that period.

”Commissioner Peirce’s safe harbor proposal would provide network developers with a three-year grace period during which they develop a functional or decentralized network without registering with the SEC.

New ICOs and SEC Enforcement ActionsUp until recently, almost every Initial Coin Offering (ICO) has operated under the assumption that tokens are not securities.

Many developers continue to hold this position and they need to understand the risks being undertaken, specifically how an SEC decision would be made about their particular project.

Although the DAO report noted that the token vs. security question was based on individual facts and circumstances, the report was also directed to sellers of distributed ledger tokens as a means of raising capital, essentially putting the industry on notice.

A recent article published on Coindesk by Jason Somenatto, The DAO Report: Understanding the Risk of SEC Enforcement, lays out a clear set of guidelines to help the developer know what to expect.In most cases, when an SEC enforcement action is commenced, a resolution will take many months, if not years, to conclude.

“Beyond the sheer length, cost and invasiveness of an SEC enforcement action,” says Somensatto, “developers should consider how their legal position that their tokens are not securities will be resolved,”As more ICOs are launched, we will see much more scrutiny from the SEC, whether through enforcement actions or investigations.

For this reason, it is important to seek counsel when responding to SEC requests, as most will involve expansive document requests, witness interviews and negotiations over potential settlements or charges.

Unless there is a settlement, when the SEC’s investigation concludes, the agency may choose to bring a formal enforcement action through a civil lawsuit in federal court, or through an in-house proceeding.

Either action may result in traditional discovery practices, including deposition and document production.

Most people will ultimately settle with the SEC before a lawsuit is filed, resulting in the SEC releasing a public statement about their position.

However, if the SEC simply walks away from an investigation into a token sale, that decision will not be made public, meaning no precedent will be set under which others can easily argue that future token sales are not securities. Thus, the risk to others of facing a similar investigation is not negated, leaving future development teams a target for similar investigations.

This is not to suggest that fighting the SEC should be considered a waste of time, however, but developers must realize that a decision about whether a token is a security will require several months of investigation, including much communication between attorneys, and in the end the decision may be made by someone unfamiliar with distributed ledger technology.

An attorney will help to reduce the risk of running afoul of the law, and if the SEC does attempt to investigate, charges may be avoided if a developer has been relying on the advice of that attorney.Future outlookIn the DAO report, the SEC explicitly noted that their findings were intended to “put the industry on notice.

” Knowing this, a a fundamental risk that ICO developers must be willing to accept is an SEC investigation, especially in this new arena where an applicable precedent does not yet exist.

Even with Commissioner Peirce’s Safe Harbor proposal and a growing list of encouraging SEC positions related to token development, the SEC is still way behind in its technology-neutral acceptance of cryptocurrency.

That said, the riskiest players in this industry are still those who blindly continue to use ICOs to raise capital. Before rushing into this space to raise money, developers need to understand the risks of such a strategy and how the issue might be resolved, lest they end up in the SEC’s crosshairs.

Commissioner Peirce has made it clear in numerous interviews how she feels about helping developers who lack the funding for a full regulatory workup. “I always recommend going into FinHub and getting a lay of the land.

They are likely to tell you to go hire a lawyer. A lot of people have really studied our securities laws and are trying to be creative, but there isn’t always an easy answer,” Peirce says.

“Be honest and give regulators as much information as you can,” recommends the Commissioner.

“Watch the [SEC’s] informational videos and read documents designed to help developers take the first step. This helps them understand what rules might be useful or problematic down the road.

Prosecutors and regulators are signaling an intent to expand accountability amongst cryptocurrency platforms under U.S. laws and regulations, including the Bank Secrecy Act (BSA). On October 8, 2020, the United States Department of Justice (DOJ) released a report on enforcement challenges and areas of focus related to entities dealing in cryptocurrency.

The report came shortly after the DOJ and the Commodity Futures Trading Commission (CFTC) announced an indictment and civil charges against directors and entities related to BitMEX, a platform for trading in futures contracts and other derivatives tied to cryptocurrencies, for failing to register with the CFTC as a Futures Commission Merchant (FCM) and to implement proper anti-money laundering (AML) measures.

The DOJ report and related enforcement actions are aligned with an international focus to increase AML accountability and broaden jurisdiction over cryptocurrency trading platforms.

Shortly before the DOJ’s report was released, the European Commission published several proposals for new EU regulations on crypto-assets and digital operational resilience for the financial sector, further signaling a global interest in clarifying the laws and regulations that govern cryptocurrency.

Shearman’s reporting on these regulations can be found here.DOJ Releases Report Outlining Threats and Enforcement Challenges Related to CryptocurrencyOn October 8, 2020, the DOJ Attorney General’s Cyber-Digital Task Force released “Cryptocurrency: An Enforcement Framework.

” The report outlines the emerging threats and enforcement challenges related to the use of cryptocurrency and the Department’s response strategies.

The report shows that authorities are continuing to grapple with the “breathtaking possibilities” of cryptocurrencies and the “emerging threats posed by [the] rapidly developing technology.

”The report begins by outlining the legal and “illicit” uses of cryptocurrency. Illicit uses fall into three categories: (1) financial transactions associated with the commission of crimes; (2) money laundering and the shielding of legitimate activity from legal requirements; and (3) crimes, such as theft, directly implicating the cryptocurrency marketplace.

The report appears to be particularly concerned with criminals (including foreign terrorist organizations) using cryptocurrency to carry out illegal activities.For example, the report emphasizes the risk that cryptocurrency can be used as a tool for money laundering:

“[u]nlicensed or unregistered exchanges or money transmitting businesses can provide an avenue of laundering for those who use digital currency for illicit purposes.

” The report warns of cryptocurrency exchanges that avoid compliance with AML and know-your-customer (KYC) regulations, allowing criminals and terrorists “to hide their illicit financial activity from regulators and investigators.

”Next, the report outlines the laws and regulations that govern the use of cryptocurrency. The report notes that “[m]uch of the regulatory activity conducted by the agencies [overseeing the use of cryptocurrency] focuses on money services businesses (MSBs) and virtual asset service providers (VAPs).

” In the United States, individuals and entities that offer money transmitting services involving virtual assets (such as cryptocurrency exchanges, issuers and brokers) are considered MSBs that are subject to the BSA and its AML regulations.

Authorities with regulatory control over the use of cryptocurrency include the DOJ, the Department of the Treasury, the Securities and Exchange Commission and the CFTC.In particular, under the Commodity Exchange Act (CEA), the CFTC has oversight over derivatives contracts, including futures, swaps and options that involve a commodity.

The CFTC (and multiple federal courts) have held that virtual currencies fall within the CEA’s definition of “commodity.” Further, “[t]he CFTC’s jurisdiction is implicated when a virtual currency is the underlying asset in a derivatives contract, or there is fraud or manipulation involving a virtual currency traded in interstate commerce.

” For example, the report notes that the CFTC has taken action against unregistered bitcoin futures exchanges illegally offering margined or financed retail virtual currency transactions in violation of the retail commodity transaction provision of the CEA.

However, the report further notes that the CFTC’s jurisdiction does not cover ‘spot’ or cash market exchanges and transactions involving virtual currencies that do not utilize margin, leverage or financing.

Finally, the report warns that many entities dealing in cryptocurrency (including exchanges and brokers) “often fail to comply, in whole or in part, with the BSA and other legal requirements, thereby threatening the Department’s investigative abilities and undermining public safety.

” Specifically, the report appears concerned with cryptocurrency exchanges, peer-to-peer exchangers and platforms, and cryptocurrency kiosks, which are considered MSBs and are subject to the BSA and must register with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and follow AML and KYC protocols.

The report also warns that “the global and cross-border nature of transactions involving virtual assets [and] the lack of consistent AML [protocols] . . . is detrimental to the safety and stability of the international financial system.

” Importantly, the report notes that companies using cryptocurrency physically located outside of the United States may still be subject to U.S. law, including the BSA, if, for example, entities or individuals engage in money transmission as a business and operate in part in the United States.

The report emphasizes that the DOJ will continue to work with its regulatory partners, including the CFTC, to prosecute “those who use cryptocurrencies to commit, facilitate, or conceal crimes.

” The DOJ will also work with federal, state and foreign regulatory and law enforcement groups to increase awareness about the threats posed by cryptocurrency platforms.

DOJ and CFTC Charge BitMEX Over Failure to Implement Anti-Money Laundering MeasuresOn October 1, 2020, the DOJ filed criminal charges against four founders and executives of BitMEX, a platform for trading in futures contracts and other derivatives tied to cryptocurrencies, for violating and conspiring to violate the BSA.

Prosecutors allege that defendants willfully caused BitMEX to fail to establish, implement and maintain an adequate BSA-compliant anti-money laundering AML program.

The indictment, along with a concurrent civil action brought by the CFTC, further show that U.S. prosecutors and regulators may consider certain cryptocurrency trading platforms that serve U.S. customers to be FCMs subject to the BSA, regardless of where the platforms are incorporated.

The charges also indicate a push to hold directors and executives of such platforms accountable under AML rules and requirements.Jurisdiction over defendants appears to be predicated on BitMEX’s offering to U.S. customers trades in futures contracts, options, swaps and other derivatives products tied to the value of cryptocurrencies.

For example, as noted in the indictment, “BitMEX accepts Bitcoin to margin and guarantee its derivative products, and . . . has offered its customers up to 100 times leverage on certain of its products.

” According to the indictment, these activities caused BitMEX to have been operating as an FCM required to comply with the BSA.

In addition to alleging that BitMEX is an unregistered FCM, the CFTC complaint charges defendants with operating a facility for the trading of swaps without being registered as a swap execution facility or as a designated contract market, in violation of the Commodity Exchange Act and CFTC regulations.

According to the indictment, defendants took affirmative steps to exempt BitMEX from having to comply with the BSA, including by incorporating BitMEX in the Seychelles, where defendants believed that they could serve U.S. customers without having to comply with U.S. laws (the indictment alleges that one defendant even bragged that it would cost less—“just ‘a coconut’”—to bribe regulators in the Seychelles than it would in the United States).

However, as defendants “intended for BitMEX to solicit and accept customers in the United States,” and, in fact, operated within the United States and served thousands of customers located in the United States, the indictment alleges that BitMEX “has at all relevant times been a [FCM] required to comply with the [BSA].

”Accordingly, BitMEX was required to register with the CFTC and to maintain an adequate AML program that included a KYC component—which BitMEX failed to do.

The cumulative effects of defendants’ actions, according to the indictment, made BitMEX “available as a vehicle for money laundering and sanctions violations.

”The CFTC’s civil enforcement action, which was filed in the United States District Court for the Southern District of New York against three of the defendants (the founders of BitMEX) and five related entities, alleges that defendants failed to register with the CFTC and failed to implement AML and KYC procedures and a customer information program.

In a press release accompanying the filing of the action, CFTC Chairman Heath P. Tarbert noted that “[d]igital assets hold great promise for our derivatives markets and for our economy. For the United States to be a global leader in this space, it is imperative that we root out illegal activity like that alleged in this case.

”On October 8, 2020, BitMEX announced that each of the four individuals charged in the DOJ indictment have stepped back from their respective roles with the company.

Anticipated Impact on Cryptocurrency Platforms and ExchangesThe report and charges show that prosecutors and regulators are concerned with the harm that can be caused by cryptocurrency platforms that operate unchecked—particularly with regards to AML accountably.

As the DOJ noted in its press release announcing the BitMEX indictment, the charges “represent another push . . . to bring platforms for money laundering into the light.

” As noted throughout the DOJ report, several regulatory bodies have oversight over companies dealing in cryptocurrency, and the DOJ will continue to work with those bodies to ensure that such companies comply with the pertinent laws and regulations (e.g., the BSA or CEA).

Accordingly, directors and executives of such companies—even those incorporated in foreign jurisdictions—should be aware of their company’s potential classifications as MSBs or VAPs, and potential liability under U.S. laws like the BSA.

Directors and executives should develop compliance programs that strictly adhere to proper AML and KYC practices.

Cryptocurrency trading companies must also continuously monitor transactions and collect data analytics, be mindful of key risk indicators when onboarding new customers, and promptly report suspicious trading activities.

While the DOJ report suggests that there are several open jurisdictional issues related to cryptocurrency platforms (e.g., the extent to which prosecutors can reach to enforce U.S. laws against foreign actors), these statements and actions collectively indicate that authorities may be expanding their reach into cryptocurrency platforms.

Shearman & Sterling LLP - Danforth Newcomb, Philip Urofsky, Donna Parisi, Reena Agrawal Sahni and Daniel Chozick

Security tokens are taking the world by storm and many progressive legislators and regulators have begun defining the lexicon within their jurisdiction’s laws. Over 15 countries have defined the financial instrument with several more on the way.

Most countries already have existing securities frameworks that digital securities fall under, but these often don’t specifically define the concept or create a token framework to place securities under.

We hope that the pioneering countries below set an example for the rest of the world to follow in order to define security tokens globally.

See missing information on this list? Leave a comment below! This list was last updated on September 4th, 2020.

🇧🇷 Brazil

Passed Legislation: In November 2017, the Brazilian securities regulators (CVM) released an FAQ on token sales on their website.STO Framework: The classification of virtual tokens as securities would be supported as part of existing law under Article 2, Subsection IX, of Law N. 6.385/1976. This classifies virtual tokens as securities under a similar test as the Howey Test in the US which also determines what qualifies as a security.Blockchain Views: The CVM has made it possible for ICOs and distributed ledger technology-based tokens to succeed if they can clearly distinguish themselves from being classified as a security.

🇫🇷 France

Passed Legislation: In December 2017, the Blockchain Order was passed to allow for the delivery of securities against payment (settlement) for unlisted financial instruments, paving the way for security token technology.STO Framework: In March 2020, the AMF of France released a legal analysis dedicated to security tokens. In this document, the AMF has acknowledged security tokens as their traditional counterpart and has declared the need for all the right licenses for financial services providers operating in the industry, including the need for on MTF (Multilateral Trading Facility) license for secondary exchanges.Blockchain Views: In April 2019, France passed the PACTE law which was aimed at modernizing the financing process for private companies in France and included allowing ICOs as public offerings as a method of fundraising in France. The AMF has shown concerns for decentralized security token exchanges in their legal analysis.

🇯🇵 Japan

Passed Legislation: In May 2019, Japan’s National Diet passed a bill to amend the Act on Settlement of Funds and the Financial Instruments and Exchange Act (FIEA).STO Framework: The changes to FIEA defines security tokens as “interests in a collective investment scheme that are represented by tokens” and even clarifies that cryptocurrencies used to participate in a security token offering are considered money and, therefore, an investment. The same principles for traditional securities apply to STOs as well, and issuers are required to comply with disclosure requirements such as filing a securities registration statement and ongoing semiannual securities reports. The detailed items to be disclosed are not yet specified. STOs are also required to file under an exemption in Japan.Blockchain Views: The FIEA does not regulate ICOs other than STOs, i.e., if the token holders do not have the right to receive profit distribution from the issuer, such ICOs are not regulated by the FIEA. Such ICOs may be regulated by the Settlement Act if the tokens fall under the definition of “crypto assets” under the Settlement Act.

🇱🇮 Liechtenstein

Passed Legislation: Legislators passed the Blockchain Act in July 2019, defining security tokens and ICOs into a framework designed to foster innovation in the country.STO Framework: The bill introduces the Token Container Model which is designed to allow for the tokenization of any asset or right. This progressive model provides legal certainty for pre-existing rights that are tokenized as well as for the information stored on blockchain-based systems. Liechtenstein amended its civil law to allow the token world to have priority over the physical world for the cases where tokens exist for rights and assets.Blockchain Views: The legislators took a broad approach and referred to the blockchain as transaction systems based on trusted technologies (VT systems) as a way to describe blockchain systems such as Ethereum but also covers distributed ledger technology and potential other use cases. The Liechtenstein government hopes that this use of more abstract terminology will enable them to future-proof and keep the law valid for the next generations of technology and to allow for the flexible interpretation within a light-touch regulatory framework.

🇲🇾 Malaysia

Passed Legislation: In January 2019, the Securities Commission Malaysia (SC) issued an order that sets out the characteristics of “digital currency” and “digital tokens” that are prescribed as being securities for the purposes of Malaysia’s securities law.STO Framework: Following the order, the SC released a consultation paper in March 2019 that outlines the rules for conducting “Digital Token Offerings.” The framework ultimately comes with a lot of compliance requirements, including limits to how much can be raised and quarterly reporting requirements.Blockchain Views: Ultimately, the concept of the ICO has been completely regulated into security tokens and has been strictly enforced. The underlying technology presents an innovation that the SC wants to allow in its borders but will not stand for anything outside of its control.

🇲🇨 Monaco

Passed Legislation: Monaco adopted legislation for security tokens and ICOs in June 2020 and also partnered with tokenization platform Tokeny to power all offerings in the country.STO Framework: The model enables Monaco-based issuers to use security token offerings akin to traditional securities offerings. This means qualified investors only but the possibility for a global audience to reach Monaco-based assets.Blockchain Views: The new framework also offered a model for ICOs for Monaco-based entities. According to the document, “ICOs may be private or public, under the conditions laid down by sovereign ordinance.” The document doesn’t specify between a blockchain or distributed ledger technology, only referring to it as a technology that supports a shared registry.

🇵🇭 Philippines

Passed Legislation: The PSEC initially issued a set of draft rules for regulating ICOs for public review in August 2018. Then the Philippines introduced a new set of rules governing Digital Asset Token Offerings in February 2019, which defined utility and security tokens.STO Framework: The Philippines uses its existing securities test to define security tokens. All security tokens must follow the existing securities framework and requirements.Blockchain Views: Regulators were set to release new ICO guidelines for utility tokens but nothing has been passed, leaving only a path for security token offerings in the country.

🇷🇺 Russia

Passed Legislation: In July 2020, Russia signed into law a bill called ‘On Digital Financial Assets’ that allows companies can issue digital securities on a blockchain if they are properly registered with the Bank of Russia as issuers and satisfy certain criteria.STO Framework: Digital financial assets, or DFAs, represent digital rights, including monetary claims, the possibility of exercising rights under issuable securities, the right to participate in the capital of a nonpublic joint-stock company, and the right to demand the transfer of issuable securities. However, issuing these security tokens requires strict adherence to securities laws that is not for the light-budgeted.Blockchain Views: Russia is not particularly keen on crypto or ICOs having enacted bans in the past and the Central Bank of Russia being vocally anti-bitcoin. It is expected that new regulations regarding crypto will be enacted later this year as the bill was split into parts between security tokens and other crypto asset types.

🇸🇬 Singapore

Passed Legislation: The Monetary Authority of Singapore (MAS) has set up a sandbox with companies to operate security token exchanges and platforms. After working with the market participants, the MAS released a guidance paper for Digital Token Offerings in May 2020.STO Framework: The guidance paper defines security tokens as traditional securities based on Singapore law, and therefore must follow all similar regulations and requirements to comply. The guidance paper also clarifies the various operator types in the market, such as exchanges and financial advisors, and reinforces the need for the approval by the MAS and the pre-requisite licensing that’s needed to perform such activities. Using multiple example scenarios, the MAS broadly covers all aspects of issuing a security token ensuring explicit clarity for the industry.Blockchain Views: The MAS has also made cryptocurrency exchange operators, as well as ICO advisors, be required to get licensed, creating room for ICOs to operate in Singapore if they aren’t considered securities but strict regulation around the market infrastructure to attempt to curb bad actors. The MAS does not differentiate between public or private blockchains and distributed ledger technology for the purposes of security tokens.

🇨🇭 Switzerland

Passed Legislation: In 2018, FINMA released guidelines for ICOs which outlined and confines Security Tokens to the same treatment as their traditional counterpart.STO Framework: Security Token issuers must follow the same financial framework that currently exists in Switzerland. This includes any financial service providers needing to get licensed to conduct their activities.Blockchain Views: ICOs have the ability to establish themselves with a utility purpose but if FINMA determines it has a partial or majority economic interest from holders that it will treat the token as a security.

🇹🇼 Taiwan

Passed Legislation: In 2018, the Money Laundering Control Act and the Terrorism Financing Prevention Act were passed to tighten the supervision of financial institutions and cryptocurrency exchanges. In May 2020, The Financial Supervisory Commission (FSC) of Taiwan released STO regulations.STO Framework: The STO framework followed the same approach as the private market in the US, enabling private companies to access capital from professional investors only. The result has had many critiques on the STO model in Taiwan for not including retail investors. Still, Taiwan has ushered in a new form of private capital via security tokens that didn’t previously exist to issuers in the country.Blockchain Views: The country is considered more crypto-friendly than most countries in Asia and doesn’t discriminate against distributed ledger technology or public blockchains but considers most ICOs of tokens as STOs.

🇹🇭 Thailand

Passed Legislation: In February 2018, the Thai Central Bank banned financial institutions from cryptocurrency transactions and two months later the country imposed strict cryptocurrency legislation which included jail time and hefty fines for unregistered token brokers. In September 2019, Thailand’s Securities and Exchange Commission amended its Securities and Exchange Act of 2019 to allow market players to trade digital securities in primary markets.STO Framework: Security tokens in Thailand are limited to institutional issuers and investors but thanks to September’s changes have now ushered in security token exchanges, enabling end-to-end digital securities management on the blockchain. The Stock Exchange of Thailand also plans to support tokenized securities sometime in the future, having already been approved for a license.Blockchain Views: Thailand’s approach to blockchain has been pro-innovation, including on ICOs. In March 2019, the country approved a regulatory ICO portal for all token issuers.

🇬🇧 UK

Passed Legislation: In January 2019, The FCA regulators in the UK released a consultation paper on token offerings that defines security tokens and other crypto assets.STO Framework: The FCA distinguishes between three types of tokens; exchange, utility, and security. Security tokens are seen as investment instruments as outlined by the Regulated Activities Order (RAO) and also defined by MiFID.Blockchain Views: The FCA is promoting blockchain and DLT innovation within the region, but limiting what capacity utility tokens can take form by truly needing to differentiate from an investment instrument. The FCA approved the first security token exchange in August 2020.

In The Works

🇨🇳 China

China, specifically Beijing, has actually made STOs by private issuers illegal. However, the country has numerous blockchain projects in the works, including active trials of the tokenization of government bonds and more! It seems the approach is to have complete control over all security token activity in the country, and it is anticipated the People’s Bank of China may roll out private issuer solutions in the future.

🇩🇪 Germany

German legislators introduced a draft bill ‘electronic securities’ in August 2020 to allow for the creation of bearer bonds without handheld signatures, enabling securities to go digital, which includes using the blockchain. The bill modernizes the ‘Investment Asset Act’ in Germany that restricted most types of security tokens in the country due to the wet-signature requirement. The lawmakers hope the bill is passed and enacted within the year.

🇬🇮 Gibraltar

Passed Legislation: The Gibraltar government hasn’t actually passed any specific laws but the nation’s Minister of Digital and Financial Services, Albert Isola, stated in May 2020 that security tokens are legal and welcome in the country. Security tokens are required to follow the same regulations and laws as traditional securities in Gibraltar. All crypto assets and tokens will be seen as security tokens unless otherwise demonstrated to the regulators that it is a utility token.

🇦🇪 The United Arab Emirates (UAE)

The UAE SCA has been exploring crypto and security token legislation when it launched a crypto asset consultation paper in October 2019. They have even set up a [email protected] email address for feedback and questions. It is anticipated that the SCA will be releasing final legislation on crypto assets and security tokens in 2020. Security tokens are required to follow the same regulations and laws as traditional securities in Gibraltar.

🇺🇸 The United States of America (USA)

The USA has not successfully passed any legislation that defines security tokens or any other crypto-asset regulation. The country's various regulations have simply policed their respective jurisdictions within the current confines of the law. However, numerous attempts at bills regarding security tokens and cryptocurrencies have been introduced to Congress but have not passed. This includes The Managed Stablecoins are Securities Act of 2019 HR 5197, the 116th Congress (2019–2020): Token Taxonomy Act of 2019, and over 30 other related bills so far. As the industry continues to grow, it is expected that clarity for defining security tokens and crypto-assets will come from legislators or regulators, especially given the crypto-friendly SEC Commissioner Hester Pierce, who was confirmed for another 5-year term in 2020 and has previously spoken publicly about wanting to introduce a crypto safe harbor framework for conducting ICOs.

Countries Where Security Tokens Are Legal But Not Defined by 

Legislators/ Regulators

The following is a list of countries that support security tokens under the existing securities frameworks, but do not have legislation or regulations specifically defining security tokens. Some countries, such as the United States of America, have burgeoning security token industries despite not having given great legal clarity for security tokens and blockchain-based securities issuances. This list may not be exhaustive:*EU Restrictions
**ICO Regulations Enacted

• Anguilla
• Austria*
• Bahamas
• Barbados
• Belgium*
• Canada
• Cayman Islands
• Croatia
• Denmark*
• Finland*
• Hungary
• Italy
• India**
• Indonesia**
• Ireland
• Israel
• Kenya
• Malta**
• Mexico
• Norway*
• Netherlands*
• Luxembourg*
• Poland*
• Saudi Arabia
• South Korea**
• Spain*
• Sweden*
• United States of America
• Uzbekistan
• Vietnam

Donna Redel is the former chairman of COMEX, a board member of New York Angels and an Adjunct Professor of Law at Fordham Law School. Olta Andoni is an Adjunct Professor at Chicago-Kent College of Law and Of Counsel at Zlatkin Wong, LLP. 


A corner of the crypto universe representing less than 1% of total market capitalization of crypto assets has been grabbing the headlines since June. This is the world of decentralized finance, or DeFi, which alternatively is referred to as the center of innovation, an experiment or the new wild, wild west where projects move fast and break things. 

A recent glance of articles on CoinDesk demonstrates the phenomenon. Once again, crypto headlines are focusing on the “craze,” the “frenzy of yield farming,” “investors pouring money into” and “another protocol going up in a fireball.” 

Will the nonstop headlines and framing around the “hot” new DeFi protocols chill the institutional adoption that is beginning in earnest for crypto, digital assets and blockchain technology? 

We believe that, at a minimum, the industry needs self-regulation. Without it, it is on a trajectory to serious regulatory scrutiny and reputational risk.We are not the only ones to express concern about DeFi.

Vitalik Buterin tweeted Aug. 14:

Also, Robert Leshner, the founder of Compound, a leading DeFi project, said of the yield farming craze recently:

As with almost everything in crypto, the strong sentiments and opinions make it difficult to determine the true essence and reality around the majority of DeFi projects. For us, this refrain is reminiscent of 2017’s frothy initial coin offering (ICO) days that ended badly for the good names of blockchain and crypto. 


There are certainly similarities: trading frenzy; projects emerging with little or no testing and without audit; no clear regulatory guidance and the recycling of ETH now leading to inflated gas prices.

Are we on the precipice of one of the regulatory agencies waking up and sending a missive similar to The Dao Report? 

On the legal front, there is a lack of clear consensus about which agency should be regulating. And, again, there is a lack of guidance from multiple agencies that could be responsible for DeFi projects or for the space generally.

 We are alarmed and concerned with the apparent lack of 360-degree understanding of the potential role of the various actors or operators and their possible interactions with the projects, the governance and hence DeFi ecosystem.

Tokens are appearing overnight. Projects are hesitant to use, or totally avoid, terminology that might infer “issue,” “issuance” or “issuer,” as these are hypersensitive words in the securities world. 

See also: What Is Yield Farming? The Rocket Fuel of DeFi, ExplainedCalling a project an “experimental game” or an “innovation” is not sufficient to take it out of the regulatory ambit.

The focus is shifting from securities regulation of “the issuer” and the Howey Test prevalent during the ICO days and after, to more complex analysis of the application of commodities regulation, questions relating to who is the “controlling stakeholder(s)” and whether liability or responsibility falls on them.  

Many questions, from a perspective of both securities law and commodities laws, should be examined anew to see how they may be applied to, as well as reimagined for, a disintermediated-decentralized financial model. 
 The outstanding questions include whether the “controlling stakeholders” are determined by voting control on DeFi platforms, who among the investor group and founders who has voting control, and whether there should be standards for exchange listing. 

Furthermore, it remains to be seen whether defining these projects as  “decentralized” puts them outside of the regulatory reach or whether  the “centralized” ones should be referred to as “disintermediated finance” – aka the ability to conduct secure financial transactions directly, without the use of financial intermediaries. 

CALLING A PROJECT AN 'EXPERIMENTAL GAME' OR AN 'INNOVATION' IS NOT SUFFICIENT TO TAKE IT OUT OF THE REGULATORY AMBIT.

Despite the regulatory uncertainty, traders, projects and exchanges are going full steam ahead, with the result that tokens run high risks of unwarranted price changes, which impacts governance, liquidity and the well-being of the projects.

The mid-March meltdown of Maker was a warning to all about systemic risk and leverage. DeFi’s leverage and exposure to ETH has resulted in price escalation that compromised the governance voting for the projects, thereby necessitating a revamp of governance procedures.

Some are optimistic about ETH’s rising price but are higher gas fees and network congestion compatible with DeFi’s long term goal of the democratization of finance?

In our view, the DeFi experiment demonstrates the need for creating a new set of industry rules: audits, proper risk disclosures and planning to anticipate what could go wrong before it actually happens.

DeFi self-regulation should normalize collateral sufficiency reviews, auditing standards, governance both on an ongoing and crisis basis as well as the distribution-centralized ownership of tokens. 

A DeFi sandbox organized with the appropriate regulators would be a pathway to validation without excessive volatility or velocity of assets locked up principally due to “yield farming.” Experiments should grow at a measured pace which is the sandbox approach, where “experimental” projects would be launched  and the community’s participation would be monitored. 

See also: Redel/Andoni – A Safer Harbor: Improving Hester Peirce’s Proposal for Regulating Token Sales

An example of DeFi chaos is YAM, a project with an unaudited code, claiming to be a stablecoin, which made headlines for its rapid boom and bust all within 48 hours.

With respect to stablecoins, we should remember regulators are still considering their status. 

Valerie Szczepanik, the Securities and Exchance Commission (SEC) senior adviser for digital assets, has said that certain types of stablecoins “…could raise issues under securities laws.” 

Additionally, the IOSCO (International Organizations of Securities Commissions) report indicated stablecoins could be securities. We need both specificity on a national and global level including from the G20.

Governance is central to many DeFi projects and definitely a component of regular finance that is looking for reformation. Unfortunately, crisis governance has become too frequent in DeFi. Many of these projects rely on governance protocols where a very small group of participants are able and/or pressured to change the protocol.  

It remains to be seen how a regulatory loophole in which these tokens are created, distributed and traded all without regulatory supervision will play out.

 At least with a modified Safe Harbor, proposed by Commissioner Hester Peirce, and which we commented on earlier this year, the SEC would have some oversight.

For the moment, tokens in the DeFi are appearing daily and the explosion of tokens is leading to a distortion of purpose and “investors” are getting burned as projects implode.

This past June, Neufund, one of the first European platforms to issue security tokens, announced its intent to move away from digital securities. The Berlin, Germany based Fintech issued the following surprising statement:

“We’ve been active participants of the discussions held at the Bundestag, engaged BaFin in a dialogue about our platform and blockchain’s solutions since 2016. We’ve been patient to their months [of] delayed decisions, last-minute requests, and announcements that harm the businesses.

But the last months showed that financial authorities are not just slow, they are paralyzed with the fear of new technologies and avoid any dialogues or decisions hoping that someone else, like global corporations or other countries, would deal with it.

Together with our investors, we agreed that there is no reason to wait for the institutional changes. Today we have announced the freezing of all upcoming fundraising campaigns and start working on the new product, which will let us continue bringing value to our investors and community.

In November of 2018, Neufund announced the first digital security issuer – its parent company Fifth Force GmbH. The following month, Neufund announced that it had raised almost €3 million in the offering. Just before the offering went live on the platform, Neufund was asked by BaFin to set a fairly steep minimum of €100,000 – something that most certainly dimmed participation from a wider audience.

Regardless, soon Neufund distributed the digital securities to its investors.A second security token offering took place late in 2019 when e-Bike startup Greyp raised €1.4 million (a sister company of Rimac) backed by over a thousand investors from 34 different countries.

Things appeared to be going well on the surface but apparently the regulator must of had a different opinion. Following several successful offerings and the announcement of future issuers, Neufund announced a change of direction. So what went wrong?Crowdfund Insider contacted Zoe Adamovicz, founder and CEO of Neufund, to learn more about her struggles as the first German STO primary issuance platform. Our conversation is below.

So what happened with Neufund in the end? Was there an issue with BaFin that was insurmountable?

Zoe Adamovicz: Since the beginning, we’ve built the platform in a transparent and compliant way, and we are convinced it’s fundamentally correct that securities are regulated.

We know that innovations are anything but easy, and it has been our business practice to actively engage the financial authorities in a dialogue about the opportunities of new technologies, the way how they work and how we can create better companies and finance.

But we’ve faced inactivity and silence. It appeared to be worse than any resistance: we were neither allowed nor banned, there was never any quorum to debate or discuss.

This situation made us freeze all upcoming fundraising campaigns and start working on the new product to continue bringing value to our investors and community.

The platform is maintained, investors have full ownership of their wallets, tokens, they can claim payouts or withdraw nEUR anytime. New post-investment activities and features are progressing, but all upcoming fundraisings are paused.

At one point, Neufund had indicated it would operate via the Liechtenstein regulatory environment. Was this not a viable path?

Zoe Adamovicz: The first retail offering hosted on the Neufund was conducted under the laws of Liechtenstein. Greyp’s campaign collected 1.4M EUR in funding from over 1000 investors from 34 countries around the world. It demonstrated the power of turning a community into shareholders and proved that blockchain makes the future of finance possible today.

Together we made history, but it can not be a general solution, we may not push every company to fundraise in Liechtenstein.

Neufund has indicated that it will continue to service existing issuers. Do you anticipate spinning this vertical off?

Zoe Adamovicz: As we’ve promised, the platform is maintained. A lot of thoughts and work were put there, not to mention thousands of investors who already participated in the previous fundraisings. Investors have full ownership of their wallets and tokens, they will be able to use the tokens to collect payouts and to act on their token holder rights.

We keep working on new post-investment features and instruments, which would be available for our community and investors.

Neufund is in the midst of pivoting, can you share the direction you are heading?

Zoe Adamovicz: Our pivoting project is in progress, but we will keep the details in secret and will announce them later.Besides that, we work on several projects: maintain the investing and fundraising platform, support our current portfolio of products (like ESOP Manager, Light wallet, and others), and create new solutions, which would ease the access to blockchain-based products for a broader audience, especially non-tech-savvy users.

For example, one of the nearest releases – Neufund’s mobile app – considers all pains and fears of onboarding, will propose login with Face ID and the easiest way of storing the recovering phrases. The app will let you manage your Wallet and Portfolio, as well as signing and approving of changes and transactions using your mobile device, just like you do it every day.

How has COVID impacted things?

Zoe Adamovicz: The pandemic did not make anybody’s life easier: it has influenced all the markets, slowed the economy.  I think that we will see the consequences in the nearest future.At the same time, we may see how the process of digitalization has accelerated: personal meetings are replaced with video calls, sports clubs had to create online training programs, years of talks and discussions about remote work became our reality in several weeks.

Due to COVID 19, startups and investors had to rethink their strategies and adapt quickly to the new world. However, we still have a record high uncalled capital on the private equity market, and investors are craving for better instruments that would help them act rapidly.

Any thoughts or comments on the future of digital assets and tokenization?

Zoe Adamovicz: We may see many successful cases on the market, and there are more to come. Today all kinds of ownership claims might be digitised.

It’s a long-term game, there is still a lot of work to be done, and there are obstacles to overcome: fear of the new technology, development of Legaltech and Regtech, and implementation of user-friendly products and interfaces, which would open the technology to a broader audience.

Mainstream adoption is yet to come, but digital assets are here to stay. 

Starting New Year’s Day, you may notice a small but momentous change to the websites you visit: a button or link, probably at the bottom of the page, reading “Do Not Sell My Personal Information.”

The change is one of many going into effect Jan. 1, 2020, thanks to a sweeping new data privacy law known as the California Consumer Privacy Act. The California law essentially empowers consumers to access the personal data that companies have collected on them, to demand that it be deleted, and to prevent it from being sold to third parties.

Since it’s a lot more work to create a separate infrastructure just for California residents to opt out of the data collection industry, these requirements will transform the internet for everyone.

Ahead of the January deadline, tech companies are scrambling to update their privacy policies and figure out how to comply with the complex requirements.

The CCPA will only apply to businesses that earn more than $25 million in gross revenue, that collect data on more than 50,000 people, or for which selling consumer data accounts for more than 50 percent of revenue.

The companies that meet these qualifications are expected to collectively spend a total of $55 billion upfront to meet the new standards, in addition to $16 billion over the next decade. Major tech firms have already added a number of user features over the past few months in preparation.

In early December, Twitter rolled out a privacy center where users can learn more about the company’s approach to the CCPA and navigate to a dashboard for customizing the types of info that the platform is allowed to use for ad targeting.

Google has also created a protocol that blocks websites from transmitting data to the company, which users can take advantage of by downloading an opt-out add-on.

Facebook, meanwhile, is arguing that it does not need to change anything because it does not technically “sell” personal information. Companies must at least set up a webpage and a toll-free phone number for fielding data requests.Some companies are reportedly hiring outside firms to design special buttons that users can click to exercise their CCPA rights.

The links and buttons will direct users to interactive forms where they can specify what they want done with their data. Each company will have its own way of setting up these forms, but there are some basic pieces of information that most will want to fulfill the request.

“You might want to capture who is the consumer, what exactly is the information, and depending on how much information you store about consumers, you might want to know what time frame they’re talking about,” says Joseph Lazzarotti, a privacy and data lawyer who is assisting companies with CCPA compliance.

Depending on which right a consumer wants to exercise—access, deletion, or opting out—there may be different kinds of information that a company will want to gather through the web form in order to verify the identity of whoever is making the request.

“With regard to the right to access your data, that has the highest threshold for risk analysis and what mechanisms you use to authenticate the person,” says Tara Cho, a privacy and cybersecurity lawyer who is also helping companies navigate the new law. “You could end up creating a data breach by sharing the information with a fraudulent actor.”

The law is vague on how much power and transparency companies must offer to consumers in this process. Some companies may thoroughly spell out in their privacy policies exactly what kinds of information they collect and use; data covered by the CCPA includes IP addresses, contact info, internet browsing history, biometrics (like facial recognition and fingerprint data), race, gender, purchasing behavior, and locations.

In some cases, consumers may be able to choose what specific data they want the company to use or delete, though this isn’t strictly mandatory under the CCPA. Other companies will be much vaguer about data collection methods in their privacy policies to meet the bare minimum of transparency requirements set out by the law.

“We’ve seen a real spectrum in the level of granularity in the disclosures. There’s a lot of confusion over how exactly you’re supposed to do it,” says Adam Connolly, a privacy and cybersecurity lawyer at Cooley LLP, another firm working with clients on CCPA issues. Some of this ambiguity may be clarified in the final draft regulations, which the California attorney general’s office is expected to release later in 2020.

Though the law will really only have teeth in California, many companies will extend these new protections to users across the country so they don’t have to worry about distinguishing who is or isn’t a resident of the state. For example, Microsoft has decided to extend protections under the CCPA and Europe’s General Data Protection Regulation to all of its customers in the U.S.

According to Lazzarotti, companies may want to spell out in their websites’ privacy policies that they will only fulfill requests for Californians, but then apply the new standards to everyone regardless of residency in practice. That way the company isn’t legally obliged to accommodate people out of state, but can still do so just to be safe.

“If you wanted to do this for everybody, even though your website says it’s only for people in California, that would be OK,” says Lazzarotti. “You’re being more generous in that sense.” Future Tense is a partnership of Slate, New America, and Arizona State University that examines emerging technologies, public policy, and society.

On October 3, the Parliament of Liechtenstein approved a new regulatory action, the Blockchain Act, which will give investors greater protection while also helping to combat money laundering.

This new act will take effect on January 1, 2020, and will help to make the country the first to offer comprehensive regulations regarding a token economy.

In a statement, officials for the government explained that “On the one hand, the law regulates civil law issues in relation to client protection and asset protection.

On the other hand, adequate supervision of the various service providers in the token economy will be established. ”Lichtenstein may be the smallest country in Europe, but they are also one of the richest.

One of the reasons they have been so successful economically is because of their innovation and welcoming of ideas to promote financial markets.

These new regulations should help to greatly enhance the success of the fintech industry within the country. The act took three years to prepare before the first reading was provided. That came in June, with the second reading occurring on October 2.

It was approved by the parliament the following day and now goes to the desk of the Prince of Liechtenstein for final approval.

Once he signs off, the final stage will be the enforcement of the act.While a giant step forward for the small country, it is not the first time that Lichtenstein has delved into the emerging token industry. In May 2018, the Token and VT Service Provider Act (TVTG) was passed.

This ensured that blockchain companies would receive legal protections while also offering protection for consumers and investors.A month later, the Liechtenstein Financial Market Authority (FMA) created the Regulatory Laboratory/Financial Innovation Group.

This group now works to facilitate between the market and regulators, helping to facilitate communication.

A press release by Prime Minister Adrian Hasler added “With the TVTG, an essential element of the government’s financial market strategy will be implemented and Liechtenstein will be positioned as an innovative and legally secure location for providers in the token economy.

”Many have hailed this as a historic moment in the industry. In a statement, Smart Valor CEO Olga Feldmeier wrote:

Oh what a big day! …Liechtenstein passes the blockchain act without any rejections! The big victory for hashtag#cryptocurrency and hashtag#blockchain industry. As the Parlament discussed the new law, that same moment I had a pleasure to exchange views on innovation in fintech with Alois, Hereditary Prince of Liechtenstein and US Ambassador at the 300 years Liechtenstein celebration in Vaduz. Impressive visionaries and great leaders!

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The House Financial Services Committee (HFSC) held a hearing on Tuesday, September 24, 2019 titled “Oversight of the Securities And Exchange Commission:

Wall Street’s Cop On The Beat”. For the SEC, this was a chance for all five Commissioners to publicly meet together and sit as witnesses before the Committee in the House of Representatives. For Democrats, this was an opportunity to discuss Facebook’s Libra and how the SEC might also be “Big Tech’s Cop On The Beat” with respect to Libra and cryptocurrencies.

Chairwoman Maxine Waters (D-CA) has been unrelenting in her concern of Facebook’s new Libra project and today’s hearing was no exception. The following timeline indicate her rigor and focus on Big Tech’s move into cryptocurrency:

• July 2 - Committee Democrats send a letter was sent to Facebook asking them to halt production of Libra
• July 17 - Full Committee holds a hearing with David Marcus, head of Facebook’s Libra
• August 25 - Committee Democrats travels to Switzerland to understand how the Libra Association would be regulated as a Swiss non-profit
• September 24 - Holds a hearing with the SEC, asking for details on the level of regulation and scrutiny applied to Facebook’s Libra

In the hearing on Tuesday focusing on the SEC as Wall Street’s cop on the beat, the Chairwoman wasted no time turning her attention to how the SEC also needed to be Big Tech’s cop on the beat as well.Today In: Money

“I’m very concerned about Facebook’s plan to create a digital currency Libra and digital wallet Calibra. It appears that Facebook is working to create a global financial system that is intended to rival the U.S. dollar...I hope to hear what steps the SEC has taken is doing to ensure that Libra is appropriately and rigorously regulated.”Chairwoman Maxine Waters (D-CA), of the House Financial Services Committee

Chairwoman Rep. Maxine Waters, D-Calif. speaks to a colleague as David Marcus, CEO of Facebook's ... [+]ASSOCIATED PRESS

During the question period, Chairwoman Waters asked whether Chairman Jay Clayton of the SEC had a specific committee, commission or advisory group to focus on Libra. Clayton responded that the SEC does have a group focused on digital assets examining both the potential they have to add efficiency as well as the risks they create.

He noted, “To the extent that crypto assets would be used to evade ... regulations, I have a real problem with it.”Representative Al Green (D-TX) followed up on the Chairwoman’s concerns on Libra and provided an overview of how the Libra Reserve will be funded by the Libra Association. Members pay $10 million to join the Libra Association and receive a Libra Investment token, which entitles them to receive dividends.

The fact that the Libra Coin is funded from the Libra Investment token potentially means both tokens would be classified as securities by the SEC.

Chairman Jay Clayton welcomed Representative Green’s offer to write a letter to the SEC with what he feels the proper disposition of Libra should be.The comments from Representative Green were very similar to the Committee Memorandum provided prior to the hearing by the House Financial Services Committee, where it states, “On the matter of whether both Libra tokens are securities, the Committee Memorandum states,”However, the offer of Libra could be integrated into the offering of the Libra Investment Token, thereby deeming both securities.

The Footnote referenced the SEC’s complaint against Kik on June 4, 2019 in regards to how the SEC could rule both Libra tokens as securities.”

“What about the entire blockchain phenomenon? What do you know about that? What work has been done on that? Is there an opportunity to perhaps brief the legislators on the work you are doing on Libra and the work you are doing or all of blockchain.”Chairwoman Maxine Waters (D-CA)

Republicans Ask For Regulatory Clarity On Digital Assets To Avoid Innovation Flight From AmericaFor the House Financial Services Committee, this was a chance for many Republicans, particularly Congressman Warren Davidson (R-OH), Congressman Ted Budd (R-NC), and Congressman Anthony Gonzalez (R-OH), to ask for regulatory clarity for digital assets so that innovation and entrepreneurship in this new industry will thrive in the U.S. and not be driven to Singapore and the United Kingdom that have provided regulatory clarity for this new asset class.

Congressman Davidson stated that Bill Hinman, Director of the Division of Corporate Finance at the SEC, described an approach to digital assets through facts and circumstances rather than a bright line test, was not sufficient to providing the regulatory clarity needed in the United States for the digital currency space.



UNITED STATES - SEPTEMBER 24: Jay Clayton, center, chairman of the Securities and Exchange ... [+]CQ-ROLL CALL, INC VIA GETTY IMAGES

“This company by company approach prevents regulatory clarity and it suffers from the charm and inefficiencies of third world power structures.”Representative Warren Davidson (R-OH)

Representative Davidson argued that this regulator clarity exists in Singapore, United Kingdom, and Switzerland while hundreds of countries in the U.S. await no-action letters.

The Congressman went on to applaud Commissioner Hester Peirce in her comment that enforcement is a poor way to announce policy and asked Commissioner Peirce if a law passed by Congress would be a better way to announce policy. Commissioner Peirce responded it is “always better to have a clear way as to what is or is not permissible”.

Under questioning from Congressman Gonzalez (R-OH), Commissioner Peirce did note the recent SEC framework provided on digital currencies was “guidance did muddy the waters.”Commissioner Peirce Suggests A “Safe Harbor For Utility Tokens”Commissioner Peirce noted that, in terms of what the SEC needed to do for the digital assets space, that there is work to do to make sure people can develop in compliance with our rules.

Chairman Clayton commented “to the extent this technology facilitates more access in a protected way”, he would not completely shut the door on token technology; however, in his opinion, the ICOs in 2017 were a very poor example of this.

Follow me on Twitter.



Jason Brett

I am a former U.S. Regulator with the FDIC, compliance examiner for the Making Home Affordable Program (HAMP) with U.S. Treasury, and have been active in bitcoin and bl... Read More

Last month, the U.S. Securities Exchange Commission (SEC) issued a no-action letter to Pocketful of Quarters, Inc. (PoQ), a Connecticut-based gaming start-up looking to issue tokens on the Ethereum blockchain.

The noaction letter paves the way for PoQ to legally sell its tokens (called "Quarters") to the public on an exempt basis, sparing PoQ from the requirement to file a registration statement.

The no-action letter is only the second ever issued by the SEC to a ryptocurrency company looking to launch a token sale, and the first in respect of an ERC-20 token.

The no-action letter, which distinguishes PoQ's Quarters from securities, offers fresh insight into the qualities that characterize a true "utility token" - i.e., one that will not fall under the umbrella of securities regulation.

Background

The question of whether cryptocurrencies offered to the public are securities that should be subject to securities laws has recently been a subject of focus amongst regulatory bodies, and a point of interest for market participants and observers.

In order to avoid the application of securities laws to their tokens, issuers have often attempted to classify their cryptocurrencies as "utility tokens", a term often applied in the cryptocurrency sector to tokens that are tied to a certain function, such as allowing the holder to purchase particular services using the token.

To date, regulators have been unwilling to accept as a rule that tokens characterized by issuers as "utility tokens" are not securities.

The SEC in the U.S. and the Ontario Securities Commission (OSC) and Canadian Securities Administrators (CSA) in Canada have taken the approach of considering cryptocurrency offerings on a case-by-case basis, considering each token in the context of its particular facts and circumstances to determine whether it constitutes a security for securities law purposes.

In 2018, the CSA issued a staff notice stating that characterizing a token as a "utility token" will not in itself rule out the application of securities laws to the offering of such token.

Instead, regulators in Canada will consider the characteristics of each offering of tokens to determine whether such offering involves the distribution of an "investment contract"2, or if the tokens offered can otherwise be characterized as securities.


For more information on the CSA staff notice, see our June 12, 2018 update Focus on Substance over Form – CSA Provides Further Guidance on Token Offerings.

The PoQ No-Action Letter

PoQ's Quarters, the brainchild of the company's 12-year old CEO, are intended to function as a "universal gaming token" that can be utilized by video gamers to make in-game purchases across multiple platforms and games.

PoQ will function as an exchange for the cryptocurrency, selling the Quarters on its website, and allowing Quarters holders to store the tokens in online "wallets".

On July 25, 2019, PoQ's legal counsel submitted a letter to the SEC's Division of Corporate Finance seeking confirmation that the regulatory body would not take enforcement action against PoQ if the company sold Quarters to the public without filing a registration statement for the tokens.

On the same day, the SEC issued a no-action letter confirming that, based on the representations made in PoQ's submission, no enforcement action would be pursued. The letter noted the following considerations in reaching the position that no action would be taken:Immediate functionality.

The SEC noted that the Quarters platform has been fully developed and PoQ will be fully operational prior to the sale of any tokens. Thus, the Quarters will be fully useable for their intended function as a universal gaming token at the time they are sold to purchasers.

This is in stark contrast to many other sales of utility tokens, in which the proceeds of the offering were stated to be used to fund the development of a platform or service in respect of which the tokens would have functionality at some future date. No secondary market.

As part of the offering of Quarters, PoQ implemented technological and contractual provisions to restrict the transfer of Quarters. Specifically, Quarters holders will only be able to transfer the tokens to game developers and influencers who have opened approved accounts with POQ, and to PoQ in connection with participation in e-sports competitions.

Developers and influencers who receive Quarters will be able to exchange them for "Ether" tokens at pre-determined exchange rates. These rules function to restrict secondary trading of the Quarters for investment purposes, which is one of the important indicia of a security token.

No profit potential. The Quarters are a "stablecoin", meaning that PoQ sets the price of the tokens as the only sellers thereof and the price will not fluctuate, removing the possibility of purchasers acquiring tokens for speculative investment purposes.

Implications

POQ's Quarters, and the SEC's no-action letter regarding the offering of the tokens, help to clarify the relatively narrow circumstances in which securities regulators will accept that "utility tokens" are not securities.

Though the SEC noted the functionality of the tokens was a factor in issuing the no-action letter, its comments regarding the lack of a secondary market, and the stable pricing of the Quarters, highlight other important considerations regarding the application of securities laws to cryptocurrencies, especially when the Quarters are compared against other purported "utility tokens" making recent news.

In particular, the SEC's treatment of PoQ's Quarters stands in sharp contrast with the ongoing case relating to the "Kin" tokens offered by Kik Interactive Inc. (Kik).

Though Kin tokens possess functionality tied to a messaging app developed by Kik, the SEC has taken the view that the Kin tokens are in fact securities, and that Kik's ICO of the tokens amounted to an illegal offering of securities.

Importantly, Kik purportedly represented to investors that rising demand for Kin would drive up the value for the tokens and that Kik's future business activities would spur this increased value, paving the way for token holders to turn a profit by trading the tokens on secondary markets.

For further background on the SEC's lawsuit against Kik, refer to our June 5, 2019 update, SEC Sues Canadian Company for Conducting Illegal Token Offering.

The PoQ no-action letter, combined with the SEC's arguments in the ongoing Kik litigation, highlight the relatively narrow circumstances in which the SEC will accept that a "utility token" should not be treated as a security.

Goodmans Tech Group

To assist clients in the technology sector, Goodmans brings together our acknowledged expertise in corporate/commercial, private equity, corporate finance, mergers and acquisitions, outsourcing, licensing, intellectual property, privacy, regulatory and media, cleantech, tax, litigation, human resources, corporate restructuring and administrative law.

We do so both for innovative businesses in their start-up phase and for well-established businesses of all types. Goodmans continues to lead in the technology sector and is partnered with the DMZ at Ryerson University.

The DMZ is a leading business incubator (selected by UBI as the top-ranked university incubator in the world), which connects its start-ups with resources, customers, advisors, investors, and other entrepreneurs.

Goodmans is also a proud partner of IDEABoost, an initiative of the Canadian Film Centre's Media Lab; building the next generation of technology-based media entertainment products, services and brands.

Through these partnerships, Goodmans provides legal advice, mentorship and networking opportunities to assist start-ups in maximizing their potential. Goodmans is also an internationally recognized leader in other aspects of technology law and transactions.

From our thought leadership, through participation on the Boards of associations such as CanTech (Canadian Technology Law Association), CORE (Centre for Outsourcing Research and Education), CIEG (Canadian Institute for Exponential Growth, which organized the Summit) and iTechLaw (International Technology Law Association), to our involvement in major technology procurement, joint venture and outsourcing transactions, to our representation, in court proceedings and in arbitrations, of major technology providers, and users of technology, in ground-breaking cases, our Technology Group is consistently at the forefront of leading technology transactions and cases.

Members of our Technology Group are recognized as leading technology lawyers in Chambers Global, Lexpert, Legal 500 Canada, Legal Media Group's The Best of the Best, The Best Lawyers in Canada, Law Business Research's The International Who's Who of Business Lawyers, and The Lexpert/American Lawyer Guide to the Leading 500 Lawyers in Canada, teach internet and communications law at Canada's largest law schools, are regular lecturers at technology industry events and legal conferences, and have published articles in the technology law field.

Footnote1 Quarters are built according to the ERC-20 standard, a technical standard applied to most tokens on the Ethereum blockchain.2 Case law in both Canada and the U.S. has identified that the four elements of an "investment contract" are: (i) an investment in money, (ii) in a common enterprise, (iii) with the expectation of profit, (iv) to come significantly from the efforts of others.The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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ContributorAllan Goodman

Introduction

Innovation will always be marked by the influence of regulation around it, historically and also at present, technological entrepreneurs think that the absence of regulation accelerates innovation, while excessive regulation stagnates it.

Given this, it is important the surgical system of intermediate scenarios that create innovation-friendly ecosystems in a practical way, the so-called "regulatory sandboxes" which are consistent in small ecosystems that can test new technologies in sectors and markets that are not subject to the typical regulations of the traditional industry for each case.

This invites regulators to create balanced scenarios that can be the impetus for innovation and do not hinder it, always and in any case, taking care of the stability of the technological sector that is innovating, call Fintech, Healthtech, etc.

Together with “Big Data”, biometric mechanisms and artificial intelligence, Blockchain technology and Distributed Accounting Technologies (DTL), are fundamental pieces in current regulatory and technological innovation, so in this article we will focus on in them within the scope of Regtech.

RegtechWe can understand this term from two points of view, the first from the regulatory framework that encompasses technological advances (data protection, cybercrime, electronic commerce, etc.), and second, as the companies that are dedicated to providing technological compliance solutions of said regulatory framework for third parties.

We will understand this term in the words of my teacher, Lisa Rabbe, as the "digitalization of regulatory compliance", a clear example of the different programs affected to identify AML, KYC issues that financial institutions have. In this line the Regtech.

One of the main functions of the Blockchain and DLT technologies is to provide security for the capricious invariability of the records of the databases attached to each block.

This revolutionary technology undoubtedly issues of personal identification, the same modifications of AML, recruitment in general.The redesign of the regulation for financial and all kinds of services around the final recipients and not of the product itself, can grow exponentially (and securely), the degree of use or inclusion of people in sectors to which He hardly had access at any given time.

BlockchainNamed in global development forums as a "mega trend," Blockchain technology is here to stay. We have seen its development more than anything from the scope of Fintech (companies that use technology to provide financial solutions), which regulators created around the world.

However, despite its popularization through Bitcoin, the use of this technology is revolutionizing the forms of service innovation around the world, and we can say with ownership that it is, along with "Big Data" and "IoT" The most disruptive technologies of the moment.

In terms of financial and financial services, the Blockchain has allowed the growth of financial inclusion in our inhabitants are among the billions of unbanked people in the world, BitPesa in Kenya is used to consolidate different currencies of African countries to perform more Efficiently purchasing raw materials in dollars, Banqu in Indonesia offered bank services to refugees at the time.

Not to be said for the sending and collection of remittances, the CASHAA service has generated hundreds of miles in saving the costs of remittance transfers between the United Kingdom, Africa, India, among others.In terms of electricity, in Australia the Power Ledger platform (www.powerledger.io) was created, which allows those individuals who generate renewable energy to sell the excess generation to their neighbors who need it, this can be in person One person (P2P).

One of the benefits that DTL technology has and that fascinates me specifically, is the relationship with supply chains, since it allows transactions made between the components of that chain to validate the authenticity, certifications, provenance, The legality of all participants of all suppliers of a raw material for the final producer.

This allows you to verify that the diamond in your engagement ring is not a "blood diamond" or that the oranges in your morning juice are not checked for farms marked with child exploitation.From the legal point of view, the issue of identification is incredible, since DTL technology allows us to solve the problems of major frauds that we have today.

Due to its characteristic of validation and strong immutability, we will have certainty of the people with the contracts, of the goods that we are acquiring, of the price that we are paying, of the consequences of the breaches, all the foregoing in an automated way and without delays.

With the use of Blockchain technology, smart contracts are created, called "smart contracts" that are self-executing programs that can be interlaced via API with the financial institutions or records necessary to ensure compliance.

 This would allow closing a sale of real estate in less than 10 minutes, because at the moment it can be verified with 100% certainty who is the owner of the property, if the selected property is in accordance with the title (location, extension and debt free ), if the buyer has the resources to buy it and if those resources are lawful.

Not even its usefulness in promises, leases, insurance contracts, etc.

ConclusionThe regulatory technology issue is a great opportunity for the creation of Regtech ventures, it is something that all industries will need (Fintech, proptech, healthtech, insurtech, etc.)

The great challenges we face in applying technologies for regulation, using blockchain or other solutions, implying for the ease of interlacing actors, the speed of response, the adherence to the affected legal norms and specially to keep the contents of the databases intact and private.

Blockchain regulators aren’t just listening, they’re evolving. Take Blockstack, for example, but there are bigger developments afoot.  Brent Wadman reckons something big is happening with blockchain.

Blockchain regulation is coming of age, as regulators provide boostThis summer was a big one for blockchain news. For the most uninitiated, the shiniest objects were the Congressional hearings to understand Facebook’s new cryptographic asset, Libra better.

For the average crypto investor, it was that the SEC allowed even unaccredited investors to buy a stake in a company called Blockstack. But blockchain regulation is coming of age tooFor the real crypto-regulatory obsessives like me, there was something even more significant this month.

Something that not many noticed but which could have even larger implications, allowing digital currency to come into its own as an asset class faster than anyone had anticipated, and offering the potential to fund a boom in new ventures and applications sitting atop blockchain technology.

Let’s being the story with Blockstack.This month, the SEC allowed Blockstack to crowdsource funding for its tokens, marking the first time that a digital asset had received agency approval.

It also may have marked the unofficial end of the lawless age of initial coin offerings, or ICOs, which resulted in countless prosecutions and lawsuits, the recent civil action against struggling messaging startup Kik, is a good example.Even before the SEC’s blessing, Blockstack was a success.

At least it successfully raised money from traditional investors — the company had managed to get $50 million in funding from some of the country’s most prominent venture funds. Now, it can raise money from anyone, with less fear of the unknown that had previously hung over the industry.

Switzerland opens the regulation door for blockchain

Switzerland has become one of the leading locations for blockchain companies and blockchain business models

That’s good news.Here’s even better news: even after setting aside the Blockstack story, you can already start to see the future regulatory structure for blockchain take shape… if you know where to look.

For instance, in a recent joint statement on broker-dealer custody of digital assets released only weeks ago, the SEC and the Financial Industry Regulatory Authority (FINRA) took a big step forward in their understanding of the blockchain industry and its technology, as evidenced by their recognition of the unique “nature of distributed ledger technology, as well as the characteristics associated with digital asset securities” and their acknowledgment that it may impact the ability to comply with recordkeeping and reporting rules.

However, they clearly hold tight to their belief in the current regulatory system, stating that “whether a security is paper or digital, the same fundamental elements of the broker-dealer financial responsibility rules apply.

”There’s no denying that with cryptocurrencies, digital tokens, or blockchain technology, the learning curve can be steep. For proof, look no further than President Donald Trump’s unenlightened and, I would argue, incorrect tweets about Bitcoin only last week.

Are blockchain-based smart contracts stupid?

Blockchain-based smart contracts were supposed to revolutionise transactions, however, use cases are hard to come by and they appear unable to meet the needs of businesses

But the wording of those two recent statement suggests to me that regulators, or at least some of them, are starting to get it. The first sentence says they’re curious enough to make quick progress up the steep learning curve. The second sentence says they’re willing to apply old rules to a new idea.

Maybe this happened simply because of Blockstack’s willingness to plough the road. The company spent 10 months and a reported $2 million working side-by-side with the SEC to develop a protocol from scratch. One of the company’s co-founders even jokingly called the expense “our donation to the crypto industry.

” (The fact that Blockstack is projected to raise $100 million makes that “donation” seem well worth it.) But whatever the reason—time, experience, or a combination of the two—the government regulators who were once viewed as detractors are now looking more and more like facilitators. And that has massive implications for blockchain entrepreneurs.

The industry has attracted some incredibly bright minds who also, for complicated ideological reasons, often seek to subvert existing systems rather than play well within them. A ‘donation’ like the one Blockstack made is often viewed as too costly.

These are brilliant problem solvers. From their perspective, those upfront costs are just an opportunity to find a new workaround. And when it was still assumed that the government would stand in the way of entrepreneurship, rather than working alongside it, that problem solving and cost avoidance made even more sense.Now it no longer does.

Five blockchain use cases: from property to sustainability

Blockchain use cases have to be identified before the technology can be adopted. Five experts do exactly that across their respective industries

I understand this perspective because I spent years myself in completely different industries, lobbying and waiting for regulatory change that never came. But whereas in my previous life, the government never seemed to learn the right lessons, it’s now clear to me that blockchain regulators aren’t just listening, they’re evolving.

Unlike more traditional industries, blockchain represents so much financial opportunity, and produces so much noise, that the regulatory framework seems to have been fast-tracked, at least relative to how quickly things usually move.

To those in the industry who’ve enjoyed this uninhibited, rapid growth, all of this formality could be interpreted as bad news.

But the fact is, by following the same well-worn regulatory path that has been applied to various industries like oil and gas, commodities, and more, we can now better predict what’s coming next legally for blockchain.

And that is a powerful advantage for what some consider a still-emerging industry.

The time is now for the industry to grow into its new status as a mainstream technology. If today’s innovators want blockchain, and the digital assets that come along with it, to become ubiquitous, if they want the broader public to start using these tools and enjoy the profits that come from that adoption, then they need to understand that they don’t have to start from scratch.

Companies like Blockstack that get started now will be that much further ahead once regulations roll out in force. The only question is who else is prepared to join them.

Brent Wadman is a Partner with Messner Reeves’ Corporate, Crisis Management, Natural Resources Practice Groups.

U.S. lawmakers struggle to understand the blockchain industry. But some blockchains are more misunderstood than others, according to the latest crypto-focused lobbying group taking the fight to D.C.

A group of cryptocurrency industry insiders and attorneys recently launched the Proof of Stake Alliance (POSA)—an organization dedicated to educating regulators on the key differences between proof-of-stake (PoS) blockchains, such as the much-ballyhooed Cosmos, and the energy-guzzling proof-of-work systems, like Bitcoin. 

With any luck, they hope to convince both Congress and regulatory agencies, such as the SEC and FinCEN, that not all blockchains should be treated the same.

And with Ethereum’s planned transition from a proof-of-work to a proof-of-stake system scheduled for 2020, the way in which these specific networks are regulated could have vast implications for the industry.

“Stakable assets have unique legal, regulatory and tax issues, which—given the number of protocols utilizing this consensus mechanism—must be addressed sooner rather than later,” said Ryón Nixon, a founding board member of POSA, in an interview with Decrypt.

Nixon, a founding partner of blockchain law firm Horizons Law, is joined on POSA’s board by fellow attorney Evan Weiss, Polychain Capital COO Matt Perona, and Santiago Roel Santos, the president and co-founder of EON, a staking-as-a-service blockchain company.

The group is also supported by a strong contingency of a dozen inaugural members, including the Binance-backed Harmony, Blockfolio, the Interchain Foundation (a Cosmos-focused organization), and TQtezos (a Tezos incubator).

Federal bill to exempt digital tokens from securities laws gets a new look, and a downgrade

The goal, Nixon said, is for POSA to achieve the oft-discussed but seldom defined “regulatory clarity” that the cryptocurrency industry so desperately seeks—all while promoting the growth and adoption of PoS networks.

Blockchain not Bitcoin

Unlike Bitcoin and Ethereum currently, PoS blockchains don’t require large amounts of computational power to mine or validate block transactions. Instead, “mining” power is based on the amount of the underlying digital token that each miner (referred to as “validators” on PoS systems) owns—their “stake” in the network.

These validators essentially bet on which block will be added next to the chain and receive rewards in proportion to their stake when they are right.

And while regulators are beginning to get a handle on how to treat cryptocurrencies like Bitcoin, the same can’t be said for their proof-of-stake counterparts, including Ethereum-based tokens down the road, according to Nixon.

“Currently, there exists no framework for the proper legal or tax treatment of stakable assets,” he said.

The tax issue is a big deal—in fact, it’s the most pressing issue that PoS blockchain businesses currently face, said Angela Angelovska-Wilson, an attorney and co-founder of DLx Law, and an advisor to POSA.

“Tax treatment for rewards and tax implications on staking-as-a-service providers” are particularly important to sort out, she said.

Nixon offered the following example: When users on PoS networks delegate tokens to a validator, who then stakes the assets, the validator takes a small cut of the rewards from the PoS network before giving the remainder back to the user.

“In this scenario, how many taxable events would this be?” he posits. Is it taxed as income or capital gains? “The stakes, no pun intended, of addressing these issues are obvious,” said Nixon.

High stakes

POSA is particularly concerned with ensuring that Congress gives “clear and reasonable guidelines for the treatment” of these assets. But other regulatory issues, such as lingering questions surrounding the applicability of federal securities laws, are similarly urgent, according to the Alliance.

It’s unclear, for example, if such agreements between blockchain network asset holders and validators—referred to as “delegations”—could be considered “investment contracts” and therefore fall under the purview of the SEC, Nixon said.

“From our conversations with the SEC, we understand they are looking into the issue of whether a delegation constitutes an investment contract,” he said. “POSA will be engaging [international law firm] Paul Hastings to draft a staking whitepaper to be used to engage with the SEC,” said Nixon.

POSA plans to make the whitepaper, as well as any other similar documents, available to each of its members.Additionally, POSA is working closely with Angelovska-Wilson’s DLx Law to draft a no-action letter addressed to the Financial Crimes Enforcement Network (FinCEN) that could potentially have wide-reaching ramifications.

“This no-action letter will request a ruling stating that staking as a service providers and validators are not considered money-service businesses (MSBs) under the [Bank Secrecy Act],” said Nixon.

“We believe there is a high likelihood of response given our conversations with key officials at FinCEN, and FinCEN's May 2019 guidance—which stated mining-pool operators are not MSBs.

Without getting clear answers from each of the relevant agencies, as well as Congress, businesses on the cutting-edge of this technology—including those building on PoS networks such as Cosmos, Tezos, Polkadot, and soon, Ethereum—will continue to flee overseas, according to POSA.

And while the rapidly evolving crypto industry could, as a whole, do with some much-needed clarity from Washington, POSA’s singular focus is based on where it believes the industry is going, and not where it’s been. 

Said Nixon: “The crypto-community already has a myriad of issues under the current securities and tax regimes. PoS networks and their participants potentially face even more issues.”

• The industry has poor oversight at this stage.
• The regulator wants to bring its rules in compliance with FATF requirements.

The Estonian authorities intend to further tighten the regulation of the cryptocurrency industry. Thus, the head of the Financial Inspection of this Baltic country, Kilvar Kessler, said that his office would soon start bringing the cryptocurrency industry to discipline. 

In an interview with a local radio station, Kessler noted that, currently, companies engaged in cryptocurrency-related business in Estonia were registered with the Money Laundering Bureau. However, no authority performed adequate oversight of the industry.

He also referred to the recent statements of the Financial Action Task Force on Money Laundering (FATF).  The experts of the Task Force noted cryptocurrency could be used for money laundering and illegal operations.It should be noted that the FATF recently introduced new rules for the cryptocurrency market.

They obliged cryptocurrency exchanges and other virtual assets service providers VASPs) to comply with AML and CFT procedures (countering the financing of terrorism), applicable to the traditional financial institutions.

It is worth noting that in May the Estonian government tightened control over the licensing to cryptocurrency companies in the country. According to the head of the Ministry of Finance, the measures were also aimed at combating money laundering.

The United States Senate Banking Committee is set to hold a broader debate on crypto and blockchain regulatory frameworks next week.

An official committee announcement indicates the hearing — entitled “Examining Regulatory Frameworks for Digital Currencies and Blockchain” — will take place on July 30. 

The planned witnesses will be Jeremy Allaire, co-founder and CEO of payments company Circle, who will speak on behalf of The Blockchain Association; Rebecca M. Nelson, a specialist in International Trade and Finance at “Congress’s think tank,” the Congressional Research Service; and Professor of Law Mehrsa Baradaran, from the Irvine School of Law at the University of California.The hearing is scheduled for 10 a.m. EST and will be broadcast live.
 

Lawmakers eye regulatory matters beyond Libra

The announced hearing comes on the heels of proceedings before congressional committees on Facebook’s Libra earlier this month. As reported, the Banking Committee of the U.S. Senate grilled social media titan Facebook on its planned cryptocurrency project Libra, homing in on concerns such as privacy, trust and regulatory compliance. 

In the aftermath of the Banking Committee Hearing, Chairman Mike Crapo and Ranking Member Sherrod Brown shared additional insights into their concerns. At the time, Crapo said: 

“We've got to look at how we structure data protection in the United States […] We need to move to a comprehensive approach. What that structure exactly is, I can't tell you.”

During a hearing at the U.S. House Financial Services Committee held the following day, one House representative asked David Marcus — the CEO of Facebook’s planned Calibra wallet service — how lawmakers could be expected to trust a firm whose collection, storage and misuse of customer data had landed it a $5 billion penalty.

The SEC is stepping up their requirements for public blockchains. Newly-released requirements released makes it so that all data must be sourced from hosted nodes rather than blockchain explorers. 

The SEC has just released some new requirements for all public blockchains. From now on, all public blockchains must source their data from the hosted nodes themselves.

These stipulations especially pertain to Bitcoin and Ethereum, but also to Bitcoin Cash, Stellar, Zcash, NEO, and XRP. The SEC also says that, as new blockchains gain prominence, these criteria will expand.

The new requirements come at a time when Facebook is set to release the Libra. Data sharing and compliance is a key focus for the SEC during these complicated times. The regulatory body says that more data provided from blockchains will ensure compliance, inform future policy, and also allow for proper risk assessment.

In the future, the SEC will also be looking at more data such as hashing algorithms, hashing power, mining difficulty, coin supply, and blockchain size.

All data is expected to be sent from the hosted nodes through an encrypted feed and must be synced with the existing network.

This will ensure that the data collected is accurate and meets the requirements of any standard financial audit.

The SEC has been getting more and more precise in their position on the cryptocurrency industry.

In April, the regulatory body released a new set of guidelines for security tokens. There’s also an indication that they will be speeding up approvals for pending projects.

Do you believe the SEC will soon green-light many new cryptocurrency projects? Let us know your thoughts below. 

Lawmakers in Nevada on Wednesday sent their fourth piece of legislation concerning blockchain technology to Gov. Steve Sisolak in the past two weeks.

The latest measure, Senate Bill 161, would provide businesses testing new uses of the distributed-ledger technology with temporary exemption from certain financial regulations.

Modeled after similar legislation passed in Arizona, the act would provide what the state is calling a Regulatory Experimentation Program for Product Innovation, under which companies could test the viability of new blockchain-based products without facing initial regulatory hurdles.

The legislation is aligned with three other bills passed last week attempting to remove barriers for adoption of blockchain technologies by both the private and public sectors. Sisolak signed Senate Bills 162, 163, and 164 last Friday.All four bills were introduced by Republican state Sen.

Ben Kieckhefer, who explained earlier this year that the legislation is designed to spur economic growth and promote innovation in business. “[We want to] develop and support an ecosystem to change how we think about economic development, to grow the next big company here locally rather than importing it,” Kieckhefer said on his campaign website.

Senate Bill 162 permits government entities throughout the state to accept records recorded on a blockchain as they would other forms of digital documents.

The law also prohibits the state from collecting additional fees from those submitting blockchain records beyond what it would charge for certified electronic or paper copies of the same document.

Bill 163 allows businesses to store their records and permits required by the secretary of state using blockchain technology, while Bill 164 defines cryptocurrencies as intangible personal property for the purposes of taxation.

Nevada is one of many states to test and encourage adoption of blockchain technology both in its markets and inside government offices.

Colorado hired a “blockchain solution architect” last month, who has been tasked with researching the use of distributed ledger technology in identity management for state residents.

The state’s legislators are also considering the technology to help manage its agricultural supply chain.New York was an early regulator of blockchain technology’s use in the private market, creating a controversial BitLicense program in 2014 that quickly drove many cryptocurrency businesses out of the state.

In January, the state formed a cryptocurrency task force to help resolve lingering issues with BitLicense, which has since had its requirements relaxed, and explore how the technology should be treated by government going forward.

West Virginia used a blockchain-based app to allow overseas members of the military vote in a recent election. The company behind the app says other states and cities, including Denver, Colorado, are now expressing interest, as well.

Illinois has been studying possible use-cases for blockchain in government, such as lands records management, for several years.

And Nevada itself has attracted interest from a private investor who wants to build a city themed around blockchain technology in the middle of the desert.

A member of the U.S. House of Representatives last week called for a bill outlawing Americans from making cryptocurrency purchases, aligning with anti-cryptocurrency policies in countries such as Iran and Egypt.

There is no language for this potential bill or any explanation of whether such a bill would ban Americans from buying cryptocurrencies, using cryptocurrencies to make other purchases, or both.

Nonetheless, it’s a good moment to remind everyone why a bill outlawing cryptocurrencies is a terrible idea.  Attempts to ban cryptocurrencies are often rooted in fundamental misunderstandings.

Attempts to ban cryptocurrencies are often rooted in fundamental misunderstandings. One common refrain is that criminals use cryptocurrencies to facilitate illegal activity, and thus we should ban cryptocurrencies to hamper that illegal activity.

This is wrong for several reasons: first, it ignores the many entirely legal uses for cryptocurrencies that already exist and that will continue to develop in the future. Cryptocurrencies have been used for a decade to store and transfer value with near-zero transaction costs and no need for intermediaries like banks.

As more applications make holding and exchanging cryptocurrencies easier, everyday consumers are using cryptocurrency regularly for innocuous activities like buying furniture on Overstock.com and sending money to family members overseas.

And innovation related to cryptocurrency technology is giving rise to more use cases: for example, some cryptocurrencies enable programmers to write computer programs (so-called “smart contracts”) that automatically transfer cryptocurrency to others upon certain conditions being met.

These are just a few examples of the many potential uses of this technology that a ban on cryptocurrency would undermine.

The fact that a technology could be used to violate the law does not mean we should ban it. Notably, criminals have long used cash—which, like some cryptocurrencies, allows for greater anonymity—to aid in committing crimes. But we don’t call for a ban on cash as a result, and we don’t blame Ford when one of its cars is used as a getaway vehicle in a bank robbery.

Nor would such a law likely stop criminals from using cryptocurrency, since criminals are, by definition, more willing to violate existing laws. Ultimately, banning cryptocurrencies would rob Americans of opportunities to access potentially significant technologies, and have no real impact on criminals abusing these tools.We’ve seen this line of reasoning before.

Critics of end-to-end encryption and Tor have claimed criminals can hide behind the privacy-protective functions of such technologies. But the increased anonymity and privacy-enhancing features of some cryptocurrencies are part of what make the technology so potentially important.

To date, many cryptocurrencies are not terribly private; transactions are recorded on permanent public ledgers, and while users are identified with pseudonymous public keys, this is far less privacy-protective than using cash.

There are promising new approaches to developing more private cryptocurrencies. However, none of those tools has yet reached the widespread popularity of Bitcoin or Ethereum.

As the rise of privacy-protective cryptocurrencies begins to gain traction, it’s important we don’t let regulatory backlash prevent these tools from reaching people. 

Our financial transactions paint an intimate portrait of our lives, often exposing our religious beliefs, family status, medical history, and many other facets of our lives we might prefer to keep private. Yet American laws do not adequately secure financial privacy.

 Rather, there is a patchwork of limited protections. These include the Gramm-Leach-Bliley Act (which requires banks to notify you about their information-sharing policies and give you some opportunity to opt out); the stronger California Financial Information Privacy Act (if you happen to be Californian); and the Fair Credit Reporting Act (which is primarily focused on credit and not financial transactions).

That’s why new tools that people can use to protect the privacy of their own financial transactions are so appealing: they offer a technological solution to protecting consumer privacy when the legal rights aren’t as robust or enforceable as we would like.

A bill banning cryptocurrency would cut off this pro-privacy innovation, chilling the development of new technologies that might protect financial privacy before they have any chance of being developed and widely adopted.

Cryptocurrency innovation also holds the promise of righting other power imbalances. There are millions of people living in the United States who cannot obtain a bank account because they don’t have appropriate government-issued identification, don’t have a permanent physical address, fear exposing their home address for safety reasons, or have a history of unpaid bank fees.

The Fair Credit Reporting Act requires banks to tell consumers why they are denied an account, but doesn’t guarantee them a bank account. Cryptocurrency may eventually help many of these unbanked individuals get access to financial services.

Cryptocurrency is also naturally more censorship-resistant than many other forms of financial instruments currently available. At EFF, we’ve tracked numerous websites engaged in legal speech that faced financial censorship, often with little recourse.

These include a social network for kinky people, a nonprofit supporting LGBTQ fiction, an online bookseller, and most famously the whistleblower website Wikileaks.

Cryptocurrencies provide a powerful market alternative to the existing financial behemoths that exercise control over much of our online transactions today, so that websites engaged in legal-but-controversial speech have a way to receive funds when existing financial institutions refuse to serve them.

These ideas are not new. Censorship-resistance and privacy are attributes of cash, which people have enjoyed for thousands of years. Cryptocurrencies offer a pathway for bringing those attributes into our online world.This is not to imply that cryptocurrency has achieved all of these goals.

In fact, many watching the space have expressed frustration and skepticism about whether cryptocurrency can ever execute on some of the hopes of early adopters. But even the staunchest cryptocurrency critic should be concerned about how misguided regulation in this space might constrict the legal rights of coders.

As with many new technologies, the cryptocurrency ecosystem faces serious challenges. These include fraudsters taking advantage of people’s ignorance about technology to scam them, problems around achieving true decentralization of control, strong security in the applications built on top of cryptocurrencies, and the opportunity for entities holding cryptocurrency keys to abuse that access.

These problems likely require responses that are technological and community-driven. In some instances, laws may be appropriate. But thoughtful laws regulating cryptocurrencies must focus on those who abuse the technology for fraud, not everyday consumers.

Crafting such laws requires a lot of care. Any such law would need to provide a significant on-ramp for emerging technologies, clear protections for anyone engaged in non-custodial services that technically aren’t able to exchange or take cryptocurrency from users without their participation, and strong protections for people who are merely writing and publishing code.

These laws must also be technologically neutral, to avoid enshrining one particular cryptocurrency into law in ways that have unexpected consequences for projects with similar functionality.

Finding the right balance for regulating cryptocurrency requires that lawmakers protect consumer rights and foster innovation. Banning Americans from cryptocurrency purchases is short-sighted and anti-consumer, and falls far short of that standard.

With thanks to Marta Belcher, who provided feedback on an early draft of this post. 

Switzerland’s executive branch will undertake the unenviable task of clearing up the muddied lines around crypto trading platforms, FINMA’s supervisorial reach, and anti-money laundering provisions.

Switzerland's Federal Assembly, the federal legislature of the Swiss parliament, approved a motion on March 20 instructing the Swiss Federal Council, which serves as the country's collective executive head of government, to begin adjusting existing legislation to apply to cryptocurrency regulation.

According to the press release, the Federal Council will now be responsible for "adapt[ing] the provisions on procedural instruments of the judicial and administrative authorities so that they can also be applied to cryptocurrencies.

"Introduced by assemblyman Giovanni Merlini, the approved motion is meant to help the Swiss government "close gaps in protection against abuse" of cryptocurrencies, which Merlini says favors "extortion and money laundering.

" Specifically, Merlini hopes that, by adapting the existing laws, a clarification will be made regarding cryptocurrency trading platforms and whether they should be subject to regulation by the Financial Market Supervisory Authority (FINMA), Switzerland's financial regulator.

While it is tempting to view the approved motion as an attempt to forcibly mold existing laws around a new type of financial technology they weren't designed for in the first place, a similar proposal made by Switzerland's Federal Council in December 2018 suggests the government branch will work with favorable flexibility in mind.

At the time of the December proposal – which also asked that existing financial laws be adapted to "deal with new technologies including blockchain" – the Federal Council hoped to create "the best possible framework conditions so that Switzerland can establish and develop itself as a leading, innovative and sustainable location for fintech and blockchain companies.

"Along with the Federal Council's plan to create a pro-crypto regulation framework, the government body also wanted to see a crackdown on the country's anti-money laundering laws.

The Federal Council asked that the Swiss Federal Department of Finance conduct research regarding whether money laundering legislation should be adjusted in relation to certain forms of crowdfunding, as well as reworking the country's Money Laundering Act to more explicitly include decentralized trading platforms.

While the Swiss government works to regulate the nascent financial technology, Swiss retail and financial businesses have been hard at work creating a crypto-friendly environment.

Just this week, the Swiss online retailer group, Digitec Galaxus AG, announced it would begin accepting 10 different cryptocurrencies as payment options for its online retail stores, Digitec and Galaxus.

Additionally, earlier this month, an online banking and trading platform, Swissquote, unveiled the launch of its cryptocurrency storage service, which offers nuclear weapon-proof storage with servers held in a former military bunker within the Swiss Alps.Translations by Google.

NICHOLAS RUGGIERI

Nicholas Ruggieri studied English with an emphasis in creative writing at the University of Nevada, Reno. When he’s not quoting Vines at anyone who’s willing to listen, you’ll find him listening to too many podcasts, reading too many books, and crocheting too many sweaters for his dogs, RT and Peterman.
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Consider it confirmed: the Howey test is definitely the US Securities and Exchange Commission‘s (SECs) gold standard benchmark for deciding whether a cryptocurrency is in fact, a security.

“Security” is a term used for describing certain financial assets that can be traded. It can refer to any form of financial instrument, even cryptocurrencies and associated tokens.Volume 0% Chairman Jay Clayton finally responded to calls to clarify how the SEC approaches classifying cryptocurrencies as securities. A set of political representatives formally submitted concerns a few months back, which were supported by digital asset think-tank Coin Center.

His reply outlines the SECs stance clearly: the Howey test is its “litmus test” for detecting securities within the blockchain industry, and it’s entirely possible for digital assets once classified as securities to shed that definition altogether.This was enough for Coin Center to declare this a reinforcement of previous SEC statements, which deemed Ethereum (currently) too decentralized to be a security.

“This letter is another reference point for lawyers and developers to look to when determining how their project fits into current regulation,” Coin Center’s comms director Neeraj Agrawal told Hard Fork. “As far as reactions go: people welcome any clarity they can get.”

What constitutes a security in the context of cryptocurrency

The Howey test comes as a result of a legal battle from 1946. It’s really a framework for determining whether a particular asset is considered to be an investment contract (security). It is commonly used to enforce federal securities law.

Clayton’s letter expressed that SEC regulators consider the “touchstone” of securities as “the presence of an investment in a common venture, premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.

”“Your letter also asks whether I agree with certain statements concerning digital tokens in Director Hinman’s June 2018 speech,” wrote Clayton. “I agree that the analysis of whether a digital asset is offered or sold as a security is not static […].

”Whether a digital asset is considered a security depends on the circumstances and facts surrounding the original investment. Clayton gave an example: when investors (who have “pooled” assets to contribute to funding a project) no longer expect a dev (or group of devs) to carry out managerial or entrepreneurial efforts, their investment may no longer be considered a security.

“A digital asset may be offered and sold initially as a security because it meets the definition of an investment contract, but that designation may change over time if the digital asset later is offered and sold in such a way that it will no longer meet that definition,” he added.

The SEC is ‘policing these markets vigorously’

Clayton also took time to really hammer it home to entrepreneurs in the cryptocurrency space. He noted many stakeholders have engaged with SEC regulators “constructively” and in “good faith,” but others have been preying on the excitement of retail investors to commit fraud.

“The Division of Enforcement has brought a number of important cases in this area, and I have asked the Division’s leadership to continue to police these markets vigorously and recommend enforcement actions against those who conduct ICOs or engage in other actions relating to digital assets in violation of the federal securities laws,” he warned.

Likely, Clayton is referring to a sudden string of settlements with fraudulent projects.

In particular, Floyd Mayweather and DJ Khaled were forced to pay a combined $750,000 for failing to disclose endorsement deals with the CentraTech cryptocurrency.

Around the same time, SEC authorities charged the founder of “decentralized” digital asset exchange EtherDelta with running an unregistered national securities exchange. He agreed to pay $300,000 in fines and penalties.

“The Commission acted swiftly to crack down on allegedly fraudulent activity in this space, particularly where the misconduct has targeted Main Street investors,” boasted Clayton.

“Regardless of the promise of distributed ledger technology, those who invest their hard-earned money in opportunities that fall within the scope of the federal securities laws deserve the full protections afforded under those laws.

”For the full letter, click here. For a breakdown of how cryptocurrency’s asset classification can change over time, click here.

Did you know? Hard Fork has its own stage at TNW2019, our tech conference in Amsterdam. Check it out.

The Chamber of Digital Commerce, headquartered in Washington, D.C., released its proposals last week asking "the highest levels of the U.S. government to embrace a comprehensive, national strategy for blockchain technology,” including a set of “guiding principles.”

By MP McQueen 


A blockchain trade group is concerned that a patchwork of regulations in the United States will deter progress in the technology, and is asking policymakers to take action to “recognize and incentivize the development of blockchain solutions for government and industry,” according to a statement from the Chamber of Digital Commerce.


The chamber, headquartered in Washington, D.C., released its proposals last week “calling on the highest levels of the U.S. government to embrace a comprehensive, national strategy for blockchain technology,” including a set of “guiding principles.

”The group represents more than 200 companies, including Cisco, block.one, BNY Mellon,  TDBank, KPMG, PwC (PricewaterhouseCoopers), Microsoft and Ripple.

Its lawyers committee members include such firms as Buckley; Cooley; Dentons; Debevoise & Plimpton; and Reed Smith.


Amy Davine Kim, chief policy officer at the chamber, said in an interview Monday, “we are trying to make sure that blockchain is afforded the same weight and importance” as the development of the internet for commercial purposes more than 20 years ago.

The organization, founded in 2014, is concerned that without such direction, U.S. leadership in the technology will fall behind other countries such as the United Kingdom, Switzerland, Singapore, the United Arab Emirates and Japan.

“We just want to ensure that the U.S. government at the highest levels promotes and supports this technology and to shine a light on all it can do for government, for business and for consumers,” said Kim, who formerly was an attorney at Buckley and Patton Boggs, now Squire Patton Boggs, where she advised on cross-border transactions and U.S. regulation.

The report said “most public statements regarding virtual currencies in particular have been in the form of advisories, warnings and enforcement actions.” The group wants the government to make a “clearly articulated statement” of support for development of blockchain technology and its positive applications.

Kim said the plan has received positive feedback from agency officials in the federal government and others since its release. The plan was presented to the Commodity Futures Trading Commission and the Consumer Financial Protection Bureau earlier this week.

Some of the other applications of distributed ledger technology, which includes blockchain, are payment systems, medical data transfer, health care benefits administration and supply chain management.

For instance, blockchain could have helped authorities quickly identify the source of tainted lettuce in a recent recall, eliminating the need to discard tons of produce because of an inability to determine the origin of a shipment with precision, Kim said.

Walmart recently has started using blockchain for that purpose.

Read More: As JP Morgan Ventures Into Cryptocurrency, a Blockchain General Counsel Spells Out What It MeansIn-House Lawyers Face Growing Demands Due to Intense Regulatory Environment, Survey Finds

MP McQueen

MP McQueen is editor-at-large, and can be reached at [email protected]

More from this author 

Regulatory uncertainty in Britain’s blockchain sector has emerged as one of the biggest concerns for distributed ledger technology firms in the country.

According to research conducted by digital innovation agency Digital Catapult, 74% of blockchain firms in the United Kingdom cited regulatory issues as being one of their key concerns, surpassing other issues such as access to technical, business or legal expertise.

These regulatory challenges include the European Union’s General Data Protection Regulation (GDPR). As the GDPR unifies Europe’s regulatory landscape regarding the use and storage of personal data, the legislation has become a sticking point for firms which use permissionless blockchains since the storage of data is not limited to any one particular geographical location.

“This legislation raised concerns for companies using permissionless, public blockchains, which are open to anyone regardless of location, and where full copies of the database are replicated across all of the nodes participating in the network, making it impossible to selectively limit where the data goes,” Digital Catapult wrote in the report titled ‘Blockchain in Action: State of the UK Market’.

Right to Erasure

Additionally, the GDPR empowers citizens to delete their personal data at any point and this is in conflict with the nature of permissionless public blockchains where data becomes immutable once recorded.

The regulatory uncertainty surrounding the raising of funds via Initial Coin Offerings was also another cause of concern.

The report noted that the UK Financial Conduct Authorityhad indicated in April this year that it would regulate ICOs but has yet to issue formal guidance as at the publication date of the survey.

Per the firms that were surveyed, the delay in issuing guidance has further heightened the uncertainty and consequently hampering the ICO plans some projects may have had:

“This uncertainty was raised many times by the companies consulted, as they were unsure whether they should conduct an ICO in the UK or allow UK citizens to participate given the current regulatory landscape.

”The regulatory uncertainty has also affected relationships between blockchain firms and traditional financial institutions. In the survey which polled 264 DLT firms, 54% of the blockchain companies indicated that they faced difficulties opening a bank account with the firms which were particularly hard hit being those dealing with cryptocurrencies.

Still Growing

Additionally, the survey found that firms which had raised funds in crypto-assets found it particularly hard to obtain a traditional bank account despite the necessary Anti-Money Laundering and Know Your Customer checks being undertaken on investors.

Despite the regulatory challenges, the report noted that the DLT sector in the UK is on a growth path with investments in the sector continuing to balloon:“…investments rose from just over US$50m in Q3 of 2016, to US$150m by Q2 of 2018 (with ICO-related investments topping US$100m in Q4 of 2017 and fiat investments climbing to over US$100m in Q2 of 2018).

”Featured image from Shutterstock.

Get Exclusive Crypto Analysis by Professional Traders and Investors on Hacked.com. Sign up now and get the first month for free. Click here.

Andrew Gillick, 11 Jul 2018 -Bitcoin, Blockchain, Cryptocurrency, Opinion

An idyllic lakeside town nestled in Switzerland is becoming the unlikely global control centre for blockchain and cryptocurrency. Zug has been dubbed “Crypto Valley” for attracting startups, ICOs and brain power but the country as a whole is carving itself out as the dominant thought and policy leader in the industry.

With its culture of financial secrecy and favour for the ultra-wealthy, should we be asking whether this is such a good thing?

Historically, Switzerland is synonymous with growing the wealth of the rich and hiding it away from the rest of the world to preserve it. Private banking, vaults of gold hidden deep within mountains and personal financial alchemy have become the country’s domain of expertize since the Japanese outdid them at watchmaking with their quartz technology.

Why are the Swiss so interested in crypto?

Since bitcoin was conceived as a way to send pseudo-anonymous transactions it is only natural that the Swiss would be interested in a technology that makes their job of hiding people’s money easier.

Switzerland is the world leader in private banking and home to the world’s largest private wealth manager, UBS, with $2.3 trillion of assets under management for high net-worth individuals — Credit Suisse is the third largest wealth manager behind JPMorgan.

Comparatively, this is over three times the annual GDP of the entire country. Both Swiss bank CEOs and policymakers are alert to the potential disruption crypto assets pose to this business if people really were to use them as a store of value as opposed to gold.  These fears are shaping the corporate form of the industry as the Swiss create novel ways of integrating the new technology with its legacy financial sector.





The price of bitcoin against the US dollar BTC/USD in red over gold and US dollar XAU/USD.One of the major benefits of crypto assets over the traditional physical storage of value, like gold, is precisely that it is digital and doesn’t need to be physically stored.

However, an almost parodic industry has been created in Swiss wealth management - computer servers housing cryptocurrency private keys stored in Swiss gold vaults, hidden within alpine mountains.

This month, the company that operates the Swiss stock exchange, SIX, announced its plans to launch a crypto trading platform that will be “the first market infrastructure in the world” to be fully regulated where digital assets can be issued and existing securities can be tokenized. The Swiss seem determined to put an “official stamp” on crypto first.


Home of the World Economic Forum 
With a population of just 8 million, Switzerland has a disproportionate representation in the financial world, with the world’s largest banks and the most influential financial think tank, the World Economic Forum (WEF), situated there.

The not-for-profit WEF was created in 1971 by German economist Klaus Schwab who was also a business professor at the University of Geneva at the time.

Its annual conference in the alpine town of Davos has become the Coachella of the financial world where politicians, bankers, CEOs, rock stars and celebrities of all kinds network apparently for the benefit of mankind.

The invite-only event costs in the region of $72,000 for membership and a ticket — and as much as Davos has become the mecca for globalization and neo-liberal economics, it has also become a focus point for protestors who make an annual pilgrimage there to object to its corporate doctrine.  

The Swiss school of cryptonomics
In 2016, Schwab the 80-year-old progenitor of the WEF published a book titled The Fourth Industrial Revolution, outlining his thesis of the future economy and the chronology of the previous three — contrary to years of acceptance that there has been just two preceding revolutions.

To propagate Schwab’s Fourth Industrial Revolution thesis, the WEF has established the Centre for the Fourth Industrial Revolution in the US. This month it also opened a centre in Japan and later this year will open centres in India and China.   

The centre says it engages with “governments, leading companies, civil society, and experts from around the world to co-design and pilot innovative new approaches to policy and governance in the Fourth Industrial Revolution.

”The centre is “co-designing and piloting policy frameworks and governance protocols across nine areas of focus” - among them AI, machine learning, IoT, drones and blockchain technology.The forum’s board of trustees is a diverse bunch of politicians, business people and royalty, among them former US vice president Al Gore and Alibaba founder Jack Ma.

That global centres of research and policy-making for the future of these emerging technologies are taking place under the banner of one man’s book is almost unheard of — apart from Scientology’s L Ron Hubbard. Would we be receptive of Al Gore’s Centre for Inconvenient Truths that influenced global climate policy?

Conclusion
Many countries are positioning themselves for the impending technology revolution — regardless which iteration — and many of them are smaller nations like Malta, Cayman Islands, Gibraltar and Lichtenstein that want to protect the financial centers that make up a significant part of their economies.

Switzerland is no different in this regard but its expertise in growing and hiding the money of the world’s ultra wealthy and helping them circumventing jurisdiction tax laws is a culture antithetical to the “unbanking the banks” ethic that cryptocurrencies have sprung from. 

The WEF, while by no means an official representative of Switzerland, is the pinnacle of neoliberal economic thinking of a class of millionaires and billionaires that pushes for globalization uber alles (even though Trump’s protectionist policy has proven its powerful efficacy).

The massive push of its Fourth Industrial Revolution doctrine espoused by one man is worrying and has the potential to take the financial power of cryptocurrencies away from the people they were created to empower. 

See more analysis from Brave New Coin here: https://bravenewcoin.com/news/should-we-trust-the-swiss-with-shaping-global-crypto-policy/

France’s “Monsieur Bitcoin” Jean-Pierre Landau released an initial report into cryptocurrency July 5, claiming it was “neither desirable nor necessary” to regulate the technology.

Government official and academic Landau consciously compares “technological” and “financial” innovation in the report, which runs to over one hundred pages. Some of the conclusions may come as a surprise to industry commentators, Landau arguing that over-regulation of cryptocurrency would constitute a “three-pronged danger.”

“Direct regulation is not desirable as it would oblige us to define, classify and therefore constrict objects which are essentially fluid and still unidentified,” he wrote in a summary section on cryptocurrency. The report continues:

“The danger is three-pronged: that of freezing the rapid evolution of technology in legislation, that of failing to grasp the real nature of the object we intend to regulate and that of pushing innovation towards regulatory avoidance. On the contrary, regulation should be technologically neutral, and in order to become so, address the actors and not the products themselves.”

Elsewhere, Landau advocates “minimal principles of transparency, integrity and robustness” for cryptocurrency exchanges, something which European lawmakers are reportedly considering as part of what is known as a ‘Euro-Bitlicense.

The report further contains several instances where financial and technological innovation are differentiated, Landau adopting a cautious tone.“We must dissociate technological innovation –– which we should encourage and stimulate –– from monetary and financial innovation, which should be considered with care,” he wrote, continuing:

“In the current phase, the correct approach would be to let cryptocurrencies - and the innovations they bring - develop in the virtual realm that they occupy, but in parallel we need to avoid and confine any contagion.”

Landau received a cold reception when he became head of a governmental cryptocurrency working group in January due to previously likening Bitcoin (BTC) to the 17th c. Tulip Mania

Zug is a municipality and small town located just outside of Zurich in Switzerland. The tiny region has earned itself a reputation for being known as “Crypto Valley,” due to its establishment of a global hub for virtual currencies. Equally as important, a number of blockchain and DLT (distributed ledger technologies) innovations have also occurred in Switzerland, ranking it as one of the top 10 European countries for starting a blockchain company.

For example, Zug recently demonstrated the successful test of a blockchain-based voting platform. Zug is also known for attracting the team behind Ethereum, the leading open-source, public, blockchain-based distributed computing platform. The Ethereum Foundation, which promotes and supports the cryptocurrency, is based in Zug and Bitcoin Suisse helped advise the group on its initial coin offering (ICO) in 2014.

However, according to Swiss entrepreneur and cryptocurrency investor, Marc Bernegger, the legal and regulatory actions in Switzerland have further fueled Zug as the world’s “crypto valley.”

Of course, one example for Zug’s success in the cryptocurrency space is due to the creation of Ethereum. As a result, some of the most relevant people, especially the tech guys—the geeks behind all the protocols and projects—have spent most of their time or at least part of their time in Zürich,  located just outside of Zug. In turn, this has created a very strong ecosystem. For instance, if you look at all the numbers of funding ICOs, a small country like Switzerland is quite ahead of the curve, which is unique, Bernegger told me.

And in comparison to places like Silicon Valley - which is known for being a leader in digital innovation - Switzerland as a whole stands out as a small country, yet key player for blockchain, DLT and cryptocurrency. According to Bernegger, Silicon Valley is lagging behind towns like Zug largely due to strict regulations and legal uncertainties .

In general, Switzerland has a very liberal and direct democratic political system that is quite decentralized, Bernegger said. This is one of the reasons that the Swiss  government embraces blockchain technology. They understand how a decentralized network works. And as a liberal state that is open for entrepreneurship and prosperity, we’d rather endorse new technology than protect the status quo.

Andrea-Franco Stöhr, the CEO of Switzerland's Crypto Finance Conference (CFC) and head of the legal team at Crypto Real Estate AG, agrees with Bernegger that regulations are holding Silicon Valley and other regions in America back from being leaders in the blockchain space. In particular, Stöhr points out this could be a result of the 2007-2008 financial crisis, which was primarily caused by deregulation in the financial industry.

In America, anything tied to banking has been subject to additional regulation following the financial crisis, Stöhr said. This is why I think it’s far more challenging to do anything that is somehow related to banking services. And that’s definitely one of the reasons why the whole cryptocurrency development didn’t really happen to the same extent that it could have in Silicon Valley thus far, he explained.

Considering that Silicon Valley has become home to significant innovations, the tech capital hasn’t been as open as Switzerland in terms of blockchain, cryptocurrency and DLT. The Security and Exchange Commission (SEC) has kept an even closer eye on cryptocurrencies following Bitcoin’s surge in December of 2017. 

Currently, the SEC is declaring all ICOs as securities and therefore are subject to strict regulations.Lessons Silicon Valley Can Learn From ZugYet when all is said and done, Bernegger believes that there are 3 lessons that Silicon Valley can really learn from the Swiss in order to catch up with Zug’s blockchain advancements. 

First, Bernegger notes that Switzerland already has a decentralized government system in place, so naturally Swiss entrepreneurs and investors believe in the idea behind blockchain. For instance, the blockchain-based voting system trial demonstrates how the Swiss government continues to look towards DLT for advancements.

As Zug Mayor, Dolfi Müller, stated in a press release following the blockchain-based voting system trial, “Decentralized e-voting, data sovereignty and transparency are highest for the voters because of their individual comprehensibility.

"Secondly, Bernegger credits the small, yet culturally diverse population of Switzerland - which consists of about 8 million inhabitants - for influencing new, technological ideas. 

And lastly, Bernegger notes that Switzerland is a very small market, encouraging entrepreneurs and investors here to think globally from day one.“If you completely ignore the potential and underlying technology of cryptocurrency, which can disrupt the existing economic system, you’ll miss some of the biggest future trends,” Bernegger warns.

the legal and regulatory actions in Switzerland have further fueled Zug as the world’s “crypto valley.”Silicon Valley is lagging behind towns like Zug largely due to strict regulations and legal uncertaintiesIn order to help influence regions like Silicon Valley to come up with new ways for adopting blockchain, cryptocurrency and DLT, Bernegger and other Swiss investor are hosting Switzerland's next Crypto Finance Conference (CFC) in Half Moon Bay, located just outside of the San Francisco Bay Area.

The previous CFC event was held last May at the exclusive Swiss ski resort, St. Moritz, and was attended by Federal Councillor and Head of the Federal Department of Economic Affairs, Education and Research of Switzerland, Johann N. Schneider-Ammann, along with high-level investors and entrepreneurs, all of whom the CFC board members had to personally approve to be invited.

It was also during this conference where the “crypto nation” statement was officially announced.This year’s conference will focus on bringing innovation to the U.S. market, as Bernegger remains optimistic and believes that cryptocurrency and blockchain developments will soon come to Silicon Valley and other tech hot spots, like Berlin and London.“

Ultimately I think it’s the regulation behind these regions that will define if new cryptocurrencies and blockchain technology can really succeed.

As long as you have a very “crypto-unfriendly” political mindset, it’s difficult as an entrepreneur to create a real big company. We hope to change this,” said Bernegger.You can follow Rachel Wolfson on Twitter and LinkedIn to stay up to date on the latest cryptocurrency happenings.

Presently, France is creating a legal framework for initial coin offerings, which is expected to be finalised next year.

Moneycontrol News@moneycontrolcom

   
The world of cryptocurrency is inviting various views and this time, a new warning has been issued by France’s financial markets regulator, The Autorité des Marchés Financiers (AMF). It has cautioned its citizens against various business entities operating crypto trading business without the government’s consent.

On Monday, the notice against four unauthorised platforms offering cryptocurrency investments was issued along with a warning. According to a report by Bitcoin News, the four websites blacklisted in the domains offering crypto investments without authorisation:

• 
  
• https://www.bitoraxe.com/
• 
  
• https://connect-coin.fr/
• 
  
• https://www.solutioncrypto.com/
• 
  
• https://www.solution-crypto.com/
• 
  

However, at the time of this writing, AMR brings it to the notice that connect-coin.fr is already offline. The other three are still live but all traffic of solution-crypto.com is redirected to solutioncrypto.com.

Presently, France is creating a legal framework for initial coin offerings (ICOs), which is expected to be finalised next year.

Clamping down on bitcoin derivatives was started by the agency in February. The tax rate on crypto capital gains was slashed in the country from 45% to 19% in April.

The AMF being an independent public authority, is responsible for ensuring that savings invested in financial products are secured. Law no. 2016-1691 on transparency states that – No investment offer can be directly marketed in France without a registration number or seeking prior consent from the AMF.

Previously, the AMF had published a list of 15 websites offering crypto investments without authorisation. 

Three lists of unauthorised websites are maintained by the regulator – one for Forex products, one for binary options, and one for other goods including diamonds, wines, and cryptocurrencies. 

The agency started keeping track of blacklisted sites in July last year and began including crypto sites in December.

https://www.moneycontrol.com/news/business/cryptocurrency/france-issues-a-warning-to-citizens-agains...

Leave it up to a cryptocurrency company named Ripple Labs to be at the center of a lawsuit with potentially wide-reaching consequences. In May 2018, Ripple Labs was hit by a securities class action filed in the San Francisco Superior Court and brought by Ryan Coffey, an investor in the company’s XRP cryptocurrency.

The lawsuit argues that, because of past SEC comments and the way XRP is distributed and managed, XRP is a security and as such is in violation of federal securities laws.

The lawsuit is unique in the cryptocurrency scene, where the most cases revolve around fraud allegations or the legality of certain initial coin offering (ICO) “token-presales.

” A favorable ruling for the plaintiffs in the class action could likely have repercussions for how other cryptocurrencies operate in markets for years to come.

Ripple Labs has much on the line. If its XRP cryptocurrency is found to be both a security and in violation of Section 5 of the Securities Act of 1933, which mandates that securities must register with the SEC and be offered on a registered exchange, all purchases of XRP would come to a halt.

“If they are not registered securities, if they are not listed anywhere, the general public cannot invest in them,” said Marc Elovitz, partner and chair of the Investment Management Regulatory & Compliance Group at Schulte Roth & Zabel.

But that may be the least of Ripple’s problems. After halting XRP exchanges, there is then the question of “whether the people who purchased the securities offering have the right of rescission, meaning they can go back to the company and say, ‘I bought this thing from you under false pretenses, and therefore I want to rescind my purchase, and I want to get back the money I paid for it,’” he added.

What’s more, should the lawsuit succeed, the company and its leadership may also face criminal charges. If XRP is a security, “Ripple labs and its CEO may have violated the Securities Act of 1934, because they should have been registered as a broker dealer,” said Sara Crovitz, partner at Stradley Ronon, who was a former deputy chief counsel and associate director at the SEC.

“The ramifications for acting as an unregistered broker-dealer can be severe; they can even be criminal. I’m not saying it will go that far, but that is a possible implication.”

Crypto Complications

To be sure, XRP operates much differently than other cryptocurrencies like Bitcoin or Ether, both of which William Hinman, director of the Division of Corporation Finance at the SEC, said in a June 2018 speech should not currently be defined as securities.

Though the SEC cautioned that Hinman’s speech didn’t reflect the agency’s views, Crovitz noted that “people can take that [speech] to be a pretty clear signal of what the commission thinks as well.

”While individual units or “coins” of Ether and Bitcoin have to be mined on the blockchain by individual users to become actualized property, all 100 million units of XRP are already in existence.

And, according to Fortune Magazine, 61 percent of all XRP units are still owned by Ripple Labs—their original owner—which has been slowly selling cryptocurrency to the public over several years.While the centralized XRP offering allows Ripple to directly profit, it also exposes the company to potentially high rescission liabilities.

The Securities Act of 1933 does allow some securities exemptions from having to register with the SEC or operate on registered exchanges. But Sam Waldon, partner in Proskauer Rose‘s litigation department, notes it’s far from certain Ripple could obtain an exemption. “My sense is that, if there is a strong argument that it is a security, it is going to be tough to establish there is an exemption from registration.

”But even if XRP did get classified as an exempt security, it would still face certain restrictions. Waldon notes that “most of the exemptions prohibit general solicitation” meaning Ripple could not advertise or promote. More important, “almost all the exemptions require you to sell your securities to sophisticated accredited investors who are very well off,” Waldon added, meaning XRP would be barred from being sold to the general public.

The Decentralized Debate

One big factor for determining whether XRP is a security will likely be the centralized nature of the cryptocurrency’s offering. Stephen Aschettino, chair of the payments technology group at Loeb & Loeb, noted SEC director Hinman’s speech hints that decentralization is “one of the more important of the Howey four factors” for assessing if a transaction is a security.

Aschettino was referring to the “Howey test”—a standard set forth by the U.S. Supreme Court in SEC v. Howey that defines an “investment contract,” essentially a security, around four distinct characteristics.

Under Howey, a transaction is a security if it is an investment of money, has an expectation of profits, if said profit comes from the efforts of a third party and if the investment of money is in a “common enterprise,” which is the factor where decentralization comes into play.

It’s not clear a court would place emphasis on one Howey factor over another. But, should a court rule against Ripple in this lawsuit, it would set a potentially seminal precedent about how to go about determining whether cryptocurrencies are securities. “It will be judicial opinion that will be precedent going forward,” Waldon said, noting the court may even rely other tests outside of Howey in its determination.

A court ruling could have wide impact because, the lawsuit has been shifted out of the California State Court to the U.S. District Court for the Northern District of California, meaning the precedent could be more widely applied. Also, Ripple Labs faces a similar class action lawsuit in California that aims to classify cryptocurrency as a security.Some attorneys, however, believe it is unlikely a ruling will come down in the federal case.

“The likelihood is that any class action like this will not be decided by a court,” Schulte Roth’s Elovitz said, noting that most class actions settle out of court.

Elovitz also believes it is more likely for the regulatory environment to change before a court even hands down ruling in this case.

“Regulators, even though they haven’t resolved a lot of these issues yet with cryptocurrencies, they do generally move faster than the courts.”It’s unclear how regulators may act, however, in light of the fact that classifying some cryptocurrencies like XRP as securities would fundamentally alter how they were designed to work.

Daniel Fuke, a partner working in the Securities and Mergers & Acquisitions group of Toronto-based law firm Fasken, noted that, while there is an upside to regulating cryptocurrencies as securities, doing so may be ill-suited to such nascent products.

“In my opinion, classifying digital assets as securities achieves greater investor protection, but also forces issuers to comply with rules that were not designed with digital assets in mind,” he said.

“Securities laws have not yet evolved to the point where all features of digital assets are reflected, namely their economic upside, hyper-transferability and utility.”

Rhys Dipshan

CT-born, New York-based legal tech reporter covering everything from in-house technology disruption to privacy trends, blockchain, AI, cybersecurity, and ghosts-in-the-machine. Continually waiting for law to catch up with tech. (It's like waiting for Godot, but without the clowns)