To remain competitive, companies find themselves increasing their efforts to digitally transform their businesses by developing new offerings based on emerging technologies and integrating these technologies into existing product and service offerings.
This is our tenth monthly bulletin for 2020, aiming to help companies identify important and significant legal developments governing the use and acceptance of blockchain technology, smart contracts and digital assets.
While the use cases for blockchain technology are vast, from copyright protection to voting, most of the current adoption is in the financial services section and the focus of this bulletin will be primarily on the use of blockchain and or smart contracts in that sector. With respect to digital assets, we have organized our approach to this topic by discussing it in terms of traditional asset type or function (although the types and functions may overlap), that is, digital assets as:
- Virtual currencies
- Deposits, accounts, intangibles
- Negotiable instruments
- Electronic chattel paper
- Digitized assets
Digital assets can themselves be assets or instead can reflect the ownership of an underlying asset. For example, electronic records that are the equivalents of negotiable instruments and electronic chattel paper would be digital assets, as would an electronic recording of a security interest in the underlying asset, such as recording title to real or personal property and the use of tokens to represent revenue streams from otherwise illiquid assets such as patents and commercial real estate (sometimes referred to as a “tokenized” or digitized asset).
In addition to reporting on the law and regulation governing blockchain, smart contracts and digital assets, this bulletin will discuss the legal developments supporting the infrastructure and ecosystems that enable the use and acceptance of these new technologies.
Each issue will feature in-depth insight on a timely and important current topic. In this issue, we first review the court’s decision granting summary judgment to the SEC against Kik Interactive, Inc., and then we review the Department of Justice’s new cryptocurrency guidance and the resulting enforcement priorities and industry implications.
For further information on the status of Blockchain regulation, see “Blockchain Regulation: Speedbumps, Roadblocks and Superhighways,” a September 3 CoinTelegraph article by our partners Margo Tank and Michael Fluhr.
To build on our recent increasing recognition in the fintech and blockchain space, the DLA IPT and Real Estate teams joined up to contribute to the inaugural edition of the Chambers and Partners Blockchain Guide 2020. Led by partner Scott Thiel and supported by Jonathan Gill and Kenny Tam, the team wrote the Hong Kong and China “Law and Practice” sections of the guide detailing the blockchain market and key legal and regulatory issues to note in each jurisdiction.
For related information regarding digital transformation, please see our monthly bulletin, eSignature and ePayment News and Trends.
SEC wins summary judgment that Kin token is a security
Judge Alvin Hellerstein of the Southern District of New York has granted summary judgement in the SEC finding that the Kin token issued by Kik Interactive, Inc. was a security. After the Telegram decision, this conclusion is not surprising. Rather, it emphasizes that many of the proposed arguments that digital tokens are not securities will be unsuccessful. Read more.
Unpacking the DOJ’s cryptocurrency guidance: enforcement priorities and industry implications
By Benjamin Klein and Deborah R. Meshulam
The US Department of Justice’s Cyber-Digital Task Force has issued its first crypto-related guidance, “Cryptocurrency: An Enforcement Framework, an 83-page report intended to help the industry comply with US legal obligations. While the DOJ’s report praises blockchain and digital ledger technology for their “breathtaking possibilities,” it also issues a stark warning: “cryptocurrency technology plays a role in many of the most significant criminal and national security threats that the United States faces.” After providing a helpful overview of cryptocurrency for lay readers, the report examines the role of the DOJ in prosecuting crypto-related misconduct, including applicable federal statutes, key partnerships and enforcement challenges. Read more.
Legislation introduced to amend the ESIGN Act for blockchain and smart contracts. On October 6, Representative David Schweikert (R-AZ) and Representative Darren Soto (D-FL) of the Blockchain Caucus announced their introduction on October 2 of HR8524, the Blockchain Records and Transactions Act of 2020, which modifies the Electronic Signatures in Global and National Commerce Act (ESIGN Act) to ensure that smart contracts and records created and stored using blockchain may not be denied legal effect or validity solely due to the underlying technology. Specifically, the Blockchain Records and Transactions Act:
- Amends the definition of electronic records to include records maintained using blockchain technology
- Amends the definition of electronic agent to include smart contracts
- Defines each of blockchain and smart contracts and
- Requires states to give legal recognition to blockchain records and smart contracts.
For more information on the application of smart contracts and blockchain to ESIGN and state UETA statutes, see Chapter 2: “Smart Contracts, Blockchain, and Commercial Law” of the Chamber of Digital Commerce report, Smart Contracts: Is the Law Ready? authored by Margo Tank, David Whitaker and Mark Radcliffe of DLA Piper, and published in September 2018.
Cleveland Fed studying CBDC. On September 23, the President and CEO of the Federal Reserve Bank of Cleveland, Loretta Mester, disclosed in a speech at the 20th Anniversary Chicago Payments Symposium that staff members from several Reserve Banks are working with the Cleveland Fed to build and test a range of distributed ledger platforms in connection with the Federal Reserve’s research on issues raised by central bank digital currency (CBDC).
CIA lab identifies DLT as research area. On September 21, CIA Labs, a research division of the Central Intelligence Agency announced that distributed ledger/blockchain-enabled technologies are identified research areas for the division.
Space Force awards contract to develop blockchain-based data protection systems. On September 20, the Department of Defense Air Force Research Lab reportedly awarded a contract through the AFWERX program to Xage Security to “evaluate and prepare for the delivery of end-to-end data protection across military and civilian assets to support command and control for the U.S. Space Force (USSF).”
House of Representatives passes blockchain bills. On September 29, the US House of Representatives passed two pieces of legislation:
- HR8132, the American COMPETE Act, requires the Federal Trade Commission (FTC) and the Secretary of Commerce to conduct studies, including a study on the state of the blockchain technology industry, the marketplace and supply chain of blockchain technology, and provide recommendations to Congress to develop a national strategy to advance US business sectors and mitigate current and emerging risks, as well as to develop legislation to advance the adoption of blockchain technology.
- HR8128, the Consumer Safety Technology Act, directs the FTC to study and report on the current and potential use of blockchain technology in commerce and the potential benefits of blockchain technology for limiting fraud and unfair and deceptive acts and practices. The Act also incorporated the Digital Taxonomy Act, which directs the FTC to develop and deliver an annual report on actions of the FTC related to unfair or deceptive acts or practices in digital token transactions, as well as any recommendations to Congress for legislation to protect consumers.
DOJ joins with authorities to issue international statement on government access to end-to-end encryption. On October 11, the DOJ published International Statement: End-to-End Encryption and Public Safety, co-signed by US Attorney General William Barr and officials from the UK, Australia, New Zealand, Canada, India, and Japan, which encourages technology companies to build into their products using end-to-end encryption a means of lawful access to the content of communications by law enforcement for purposes of public safety.
Congressional bill proposes to amend securities laws for tokens. On September 24, Representative Tom Emmer (R-MN), Co-chair of the Congressional Blockchain Caucus and Ranking Member of the House Committee on Financial Services, introduced HR8378, the Securities Clarity Act, which proposes amending federal securities laws to exclude tokens from the definition of a security. The Act clarifies that an “investment contract asset,” defined as a digital token, is exempted from the definition of a security. “Investment contract asset” is defined as “an asset, whether tangible or intangible, including assets in digital form sold or otherwise transferred, or intended to be sold or otherwise transferred, pursuant to an investment contract; and that is not otherwise a security.”
Congressional bill proposes to regulate token trading platforms. On September 24, Representative Mike Conaway (R-TX), ranking member of the House Committee on Agriculture, introduced HR8373, the Digital Commodity Exchange Act of 2020, to create a single national framework for the regulation of cryptocurrency trading platforms under the supervision of the Commodity Futures Trading Commission (CFTC). The act extends the existing commodity markets framework and provides authority for the CFTC to register and regulate such platforms similarly to intermediaries in commodity derivatives markets.
OCC issues follow-up interpretation on approved cryptocurrency custody services. On September 21, the Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1172, clarifying the OCC’s earlier Interpretive Letter #1170 which concluded that national banks and federal savings associations have the authority to provide cryptocurrency custody services for their customers. Specifically, Interpretive Letter #1172 concludes that national banks and federal savings associations are authorized to hold deposits that serve as stablecoin reserves, provided that the stablecoin is:
- stored in a hosted wallet
- backed on a 1:1 basis by a single fiat currency and
- verified by the bank at least daily to confirm the reserve balances are equal to or greater than the issuer’s outstanding stablecoins.
For more information on Interpretive Letter #1170, see our August issue.
FinCEN issues advisory on ransomware. On October 1, the Financial Crimes Enforcement Network (FinCEN) issued an Advisory on Ransomware and the Use of the Financial System to Facilitate Ransom Payments alerting financial institutions to predominant trends, typologies, and potential indicators of ransomware and money laundering activities. Specifically, the advisory provides information on the role of financial intermediaries in the processing of ransomware activity, trends and typologies of ransomware and associated payments, ransomware-related financial red flag indicators and reporting and sharing information related to ransomware attacks.
OCC issues advisory on risks for facilitating ransomware payments. On October 1, the Office of Foreign Assets Control (OFAC) issued an Advisory on Potential Sanctions Risks for Facilitating Ransomware Payments directed to companies that facilitate ransomware payments to cyber actors on behalf of victims, including financial institutions, cyber insurance firms and companies involved in digital forensics and incident response. OFAC asserts that facilitating such payments may risk violating OFAC regulations as well as potentially encouraging future ransomware payment demands.
Digital Dollar Project publishes pilot testing scenarios for a US CBDC. On October 12, the Digital Dollar Project announced the publication of initial proposals for nine pilot programs to identity practical opportunities to test and evaluate key features of a US CBDC. The Project seeks feedback on the pilot proposals, which may be provided to info@DigitalDollarProject.org, and will host a live webinar on October 30 to discuss global projects completed to date and potential pilots for wholesale and retail use cases.
FINRA opens registration for FinTech office hours. On October 7, the Financial Industry Regulatory Authority (FINRA) announced it will conduct FinTech Office Hours November 9-10, to discuss market and regulatory implications and related benefits associated with innovations in the securities industry. Office hours appointments are limited and offered on a first-come, first-served basis. Registration is available here.
SEC issues no-action letter enabling ATSs to settle digital asset security trades. On September 25, the SEC Division of Trading and Markets (DTM) issued a No-Action Letter regarding the role of registered broker-dealers in operating alternative trading systems (ATSs) that trade digital asset securities. The Letter asserts that the DTM will not recommend enforcement action by the SEC if a broker-dealer operating an ATS, that the ATS may facilitate trades between the broker-dealer and its customers using the approved modified “three-step process” under the following circumstances:
- The broker-dealer maintains a minimum of $250,000 in net capital
- The agreement between the broker-dealer and its customers clearly states that the broker-dealer does not guarantee or have responsibility for settling the trades
- The broker-dealer has established and maintains procedures to assess whether the digital asset securities are registered, or are exempted from registration and
- The transactions in digital asset securities otherwise comply with the federal securities laws.
California expands and renames Department of Business Oversight. On September 25, California enacted AB1864, which goes into effect on January 1, 2021. The new law changes the name of the Department of Business Oversight to the Department of Financial Protection and Innovation (DFPI). According to a press release from the DFPI, the new law “will help us cultivate financial innovation, and allow the department to track and regulate emerging financial products so we can serve consumers and licensees in a more meaningful and efficient way.” This new authority granted to the DFPI will extend to “industries that currently exist unregulated in California or new products or services that may enter the market in the future,” such as cryptocurrencies.
Wyoming partners with Chainalysis to combat money laundering and criminal activity. On September 17, Chainalysis, a blockchain analysis company, announced its partnership with the State of Wyoming’s Division of Banking to use Chainalysis products to verify Wyoming banks’ compliance with anti-money laundering, Bank Secrecy Act, know-your-customer and sanctions requirements. The Division of Banking intends its use of Chainalysis products to monitor large volumes of digital asset activity and to identify high-risk transactions on a continuous basis.
NIST seeks comments on draft framework for token designs and management. On September 29, the National Institute of Standards and Technology (NIST) announced the release of Draft NISTIR 8301, “Blockchain Networks: Token Design and Management Overview,” which provides a high-level technical overview and conceptual framework of token designs and management methods – highlighting the different types of tokens, how they are held in custody, and transaction management based on validation, submission and viewability. NIST seeks comments on the draft by October 30, with special focus to ensure the draft adequately and appropriately:
- Defines and differentiates the main types of token data models
- Explains how following common token data models allows for tokens to be composed with one another and for protocols that enable more advanced operations to be built
- Helps make sense of where blockchain-based tokenization on top of mutualized infrastructures fits in the wider landscape of web applications, especially in terms of how new types of network and protocol governance can be implemented and
- Identifies and describes the main differences between transaction management techniques at the second layer as well as key components and approaches for infrastructure management.
WEF publishes blockchain global standards mapping initiative. On October 14, the World Economic Forum (WEF) announced the publication of a white paper entitled Global Standards Mapping Initiative: An overview of blockchain technical standards, which provides an overview of the blockchain landscape to: (1) map the technical standardization efforts underway; (2) identify gaps and areas of overlap; and (3) identify critical next steps for the ecosystem. The Initiative is based on input from over 30 technical standard-setting entities, 185 jurisdictions, and nearly 400 industry groups. The Initiative is led by the WEF and the Global Blockchain Business Council, with various industry collaborators.
FSB issues report on global stablecoin. On October 13, the Financial Stability Board announced the publication of a report entitled Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements, setting out ten high-level recommendations that promote coordinated and effective regulation, supervision and oversight of global stablecoin (GSCs) arrangements to address the financial stability risks posed by GSCs, at the domestic and the international level. The report states that GSC arrangements are expected to adhere to all applicable regulatory standards and to address risks to financial stability before commencing operation, and to adapt to new regulatory requirements as necessary. The FSB has also agreed to the following further actions as a key building block of the roadmap to enhance cross-border payments commissioned by the G20:
- Completion of international standard-setting work by December 2021
- Establishment or, as necessary, adjustment of cooperation arrangements among authorities by December 2021 (and as needed based on market evolution)
- At a national level, establishment or, as necessary, adjustment of regulatory, supervisory and oversight frameworks consistent with the FSB recommendations and international standards and guidance by July 2022 (and as needed based on market evolution)
- Review of implementation and assessment of the need to refine or adapt international standards by July 2023.
For more information on prior FSB reports, see our April issue.
Central banks issue report on principles for CBDCs and monetary policies. On October 9, seven central banks (the US Federal Reserve, the European Central Bank, and the central banks of Canada, England, Japan, Switzerland and Sweden) and the Bank for International Settlements announced the issuance of Central Bank Digital Currencies: Foundational principles and core features. The report outlines three key principles for Central Bank Digital Currencies (CBDCs):
- The CBDC must coexist with fiat currency and other existing monetary forms “in a flexible and innovative payment system”
- Introduction of the CBDC should “support wider policy objectives and do no harm to monetary and financial stability” and
- Features of the CBDC should “promote innovation and efficiency.”
Based on these principles, the core features of any future CBDC system must be:
- resilient and secure to maintain operational integrity
- convenient and available at very low or no cost to end users
- underpinned by appropriate standards and a clear legal framework and
- have an appropriate role for the private sector, as well as promoting competition and innovation.
TRP working group releases crypto AML API. On October 8, the Travel Rule Protocol (TRP), a working group focused on crypto compliance with global anti-money laundering (AML) standards, released TRP application programming interface (API) version 1.0.0. The TRP API enables firms to exchange identification data about the originators and beneficiaries of crypto transactions, in accordance with the Financial Action Task Force (FATF) Travel Rule recommendations for virtual assets, including AML, counter-terrorism financing and know-your-customer protocols.
PwC releases annual global crypto tax report. This month, PwC released its Annual Global Crypto Tax Report 2020, which aims to evaluate and review the existing digital assets tax guidance globally and identifies areas where there are gaps or where guidance may need to be refined and added. The report discusses survey participants’ views of the development of tax guidance internationally to date and sets forth a tax jurisdiction by jurisdiction view on digital assets as a means of exchange and an investment class, trading and exchanges, lending, mining and issuance, and tax reporting. The report attaches an appendix of tax information for 29 jurisdictions.
Treasury Inspector issues report on virtual currency tax reporting. On September 24, the Treasury Inspector General for Tax Administration (TIGTA) published a report entitled The Internal Revenue Service Can Improve Taxpayer Compliance for Virtual Currency Transactions, finding that third-party reporting of virtual currency transactions has made it difficult for the IRS to identify taxpayers with virtual currency transactions. The TIGTA found that some virtual currency exchanges “exhibited business characteristics that may qualify them as Third-Party Settlement Organizations” under the Internal Revenue Code, requiring them to file a Form 1099-K for customers with more than 200 transactions in a year that total in excess of $20,000. The TIGTA recommended that the IRS issue guidance clarifying virtual currency transaction information reporting. The IRS agreed with TIGTA’s recommendations.
AICPA adds stablecoins and fair value measurement to accounting guidance. On October 8, the Association of International Certified Professional Accountants (AICPA) announced the update of its practice aid, “Accounting For and Auditing of Digital Assets,” to add questions and answers on fair value and stablecoins. The new guidance is divided into the following key areas:
- Meeting the definition of an investment company when engaging in digital asset activities
- Accounting by an investment company for digital assets it holds as an investment
- Recognition, measurement, and presentation of digital assets specific to broker-dealers
- Considerations for crypto assets that require fair value measurement and
- Accounting for stablecoin holdings.
CFTC charges BitMEX with illegally operating cryptocurrency trading platform. On October 1, the CFTC announced the filing of a civil enforcement action in the US District Court for the Southern District of New York charging Arthur Hayes, co-founder and CEO; Ben Delo, co-founder and COO; and Samuel Reed, co-founder and CTO of the BitMEX trading platform, and related companies, with operating an unregistered derivatives trading platform and violating multiple CFTC regulations. The complaint charges BitMEX with operating a facility for the trading or processing of swaps without having CFTC approval, and violating CFTC rules by failing to implement know-your-customer procedures and anti-money laundering procedures. BitMEX’s platform has received more than $11 billion in bitcoin deposits and made more than $1 billion in fees. The CFTC seeks disgorgement, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction from future violations of the Commodity Exchange Act. The US Attorney for the District of New York also announced the criminal indictment of Hayes, Delo and Reed, and Gregory Dwyer, Head of Business Development, on federal charges of violating the Bank Secrecy Act and conspiracy.
For additional information on other cases pending against BitMEX, see our June issue.
CFTC charges foreign trading platform with offering illegal leveraged transactions in virtual currency. On September 28, the CFTC announced the filing of a civil enforcement action against in the US District Court for the Southern District of Texas against Laino Group Limited d/b/a PaxForex, a company registered in St. Vincent and the Grenadines. The complaint charges Laino Group with engaging in unlawful retain commodity transactions and failing to register as a futures commission merchant, due to Laino Group’s offer of or engaging in retail commodity transactions in ether, Litecoin, bitcoin, gold and silver. The CFTC seeks disgorgement, monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations.
CFTC enters into consent order with principal of cryptocurrency escrow company. On October 2, the CFTC announced entry of a consent order against Jon Barry Thompson, the principal of Volantis Escrow Platform LLC and Volantis Market Making LLC (collectively, Volantis), in the Southern District of New York. The order imposes injunctive relief and restitution of approximately $7.4 million. In a related criminal action, Thompson pled guilty on October 1 to commodities fraud in connection with his involvement in a scheme to defraud a company of over $3 million in bitcoin. Thompson will be sentenced on January 7, 2021. For more information on the indictment, see our August issue.
SEC charges Florida man with cryptocurrency offering fraud. On September 30, the SEC announced charges against Thomas J. Gity, a Florida businessman, for defrauding investors in a digital asset trading scheme. The complaint alleges that Gity received more than $6.8 million from at least 18 investors by misrepresenting that he was a digital asset trader, although he had no professional financial industry experience. The SEC seeks a civil penalty and injunctive relief, as well as disgorgement and an asset freeze.
SEC charges McAfee with fraudulently touting ICOs. On October 6, the SEC announced it charged businessman and computer programmer John McAfee for promoting investments in initial coin offerings (ICOs) to his Twitter followers without disclosing that he was paid more than $23 million in digital assets to do so. The complaint further alleges a separate scheme of secretly accumulating a large position of a digital asset security, then touting the security on Twitter, all while intending to sell it, then selling the holdings as the price rose. The SEC seeks permanent injunctive relief, return of ill-gotten gains and civil penalties. The SEC further seeks to bar McAfee from service as a public company officer and director. Additionally, the DOJ announced on October 6 that it also brought criminal charges against McAfee.
SEC settles fraud charges against SoluTech, Inc. and CEO. On September 25, the SEC announced it settled fraud charges against Connecticut-based SoluTech, Inc. and its former CEO, Nathan Pitruzzello, in connection with a $2.4 million initial coin offering (ICO). According to the settlement order, SoluTech offers and sold securities in the form of digital assets called SCRL (later renamed XD) to fund the development of a blockchain-based platform called the Scroll Network. Without admitting or denying the findings, SoluTech agreed to destroy all SCRL in its possession, issue requests to remove SCRL from any further trading, and publish notice of the order on its website. Additionally, Pitruzzello is required to pay a penalty of $25,000. The order found that the SEC considered SoluTech’s decision to self-report the matter and its extensive cooperation with the investigation in determining not to impose a civil penalty against the company.
SEC settles with Salt Blockchain over ICO. On September 30, the SEC announced it settled charges against Salt Blockchain Inc. for conducting an unregistered initial ICO, which raised approximately $47 million. The settlement order requires Salt to return the proceeds of the offering to investors, registering the tokens as securities and paying a civil penalty of $250,000.
Overstock.com obtains dismissal of Utah class action. On September 29, Overstock.com announced that the Utah US District Court granted Overstock.com, Inc.’s motion to dismiss the class action complaint, holding that the digital dividend’s “broad media coverage” undercuts plaintiffs’ claims of deceit. See our May issue for information on the motion.
Texas securities regulator issues cease and desist order. On September 30, the Texas State Securities Board (TSSB) issued an emergency cease and desist order against Trademining, Inc. AKA Trademining.io, a Washington company, and its Chairman and CEO, Devon Tyler Shigakia, for engaging in a cryptocurrency trading and investment scheme allegedly involving software that trades bitcoin, placing “up to 160 mathematically sound orders per second,” and which allegedly gained “3700% returns.” The scheme was advertised on the website trademining.io, and social media accounts. The respondents are charged with failure to register with the TSSB as dealers or agents, and fraud.
Arizona securities regulator issues temporary cease and desist order. On October 2, the Arizona Corporation Commission announced the issuance of a temporary cease and desist order against Abuchi Okoye and his affiliated company Coininvest, for engaging in a cryptocurrency investment scheme after allegedly stealing the identity of an Arizona registered securities dealer and misrepresenting the website Arcadia-Capitla.net as being that of the registered dealer. Okoye used the site to solicit investors to purchase investments in cryptocurrency.
SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS
Australian Central Bank finds no case for central bank digital currency. Speaking at the UWA Blockchain, Cryptocurrency and Fintech Conference on October 14, Tony Richards, Head of Payments Policy at the Reserve Bank of Australia, stated, “[T]he Bank’s view is that no strong public policy case has yet emerged for the introduction of a CBDC for general use. Australian households and businesses have access to payment services that have been upgraded significantly in recent years and meet most of their current needs. It is not obvious that a CBDC would be a solution to any particular problems or that there would currently be significant demand for one. However, the Bank has an open mind and will continue to monitor developments in this area.”
Bahamas announces date of new CBDC. On September 25, the Central Bank of the Bahamas announced that, on October 20, it will “gradually release a digital version of the Bahamian dollar nationally” through authorized financial institutions. The Sand Dollar central bank digital currency (CBDC) is a continuation of the Bahamas’ Payments Systems Modernization Initiative.
Bermuda approves Bittrex Global crypto exchange. On September 25, cryptocurrency exchange Bittrex Global (Bermuda) Ltd. reportedly received a Class F Digital Assets Business Act license to operate under the Bermuda Monetary Authority (BMA). The license allows Bittrex to offer digital asset services such as futures, subject to further approval by BMA.
Bank of Canada publishes report on security and convenience of CBDCs. On October 5, the Bank of Canada published a Staff Analytical Note entitled Security and convenience of a central bank digital currency, which discusses the risks and benefits of a CBDC. The Note describes that risks arise from how balances are aggregated, from their transactional use and from the competition between suppliers of aggregation solutions, and that a central bank could mitigate these risks by limiting balances or transfers, modifying liability rules or imposing security protocols on storage providers.
Chinese central bank releases results of digital yuan pilots. On October 5, the deputy governor of the People’s Bank of China (PBoC) reportedly revealed the results of the PBoC’s initial digital currency trials. Fan asserted that the bank opened 113,300 consumer digital wallets and 8,859 corporate digital wallets for residents of Shenzhen, Suzhou and Xiong’an to pilot a digital yuan, and the digital wallets processed RMB 1.1 billion ($162 million) across 3.1 million digital yuan transactions between April and August when the pilots launched and ended.
European Commission adopts new approach to digital finance and retail payments strategies. On September 24, the European Commission announcedit has adopted a new Digital Finance Package, consisting of a Digital Finance Strategy, a Retail Payments Strategy, legislative proposals for an EU regulatory framework on cryptoassets and proposals on an EU regulatory framework on digital operational resilience. The Package proposes a pilot regime for market infrastructures that trade and settle transactions in financial instruments in cryptoasset form. For other cryptoassets, the Commission proposes a framework to protect consumers and the integrity of previously unregulated markets in cryptoassets. The goals of the Digital Finance Package include:
- Tackling fragmentation in the digital single market for financial assets
- Ensuring the EU’s regulatory framework facilitates digital innovation in the interest of consumers and market efficiency
- Creating a European financial data space to promote data-driven innovation, building on the European data strategy and
- Addressing challenges and risks associated with the digital transformation, to promot resilience, data protection and appropriate prudential supervision.
EU Parliament issues report on risks in cryptoassets. On September 17, the European Parliamentary Research Service announced the publication of a report entitled Digital Finance: Emerging Risks in Crypto-Assets – Regulatory and Supervisory Challenges in the Area of Financial Services, Institutions and Market – European added value assessment, to evaluate the impact of the adoption of the EU framework for cryptoassets in terms of the benefits and risk reduction of cyber-resilience and a data strategy. The report identifies possible gaps in EU legislation and evaluated the European added value of policy options to address such gaps.
ECB publishes paper on risks of stablecoin use. On September 15, the European Central Bank Crypto-Assets Task Force published a paper entitled Stablecoins: Implications for monetary policy, financial stability, market infrastructure and payments, and banking supervision in the euro area. The paper summarizes the outcome of an analysis of stablecoins undertaken by the Task Force, and assesses the implications of stablecoins for the euro area based on three scenarios for the uptake of stablecoins: (i) as a cryptoassets accessory function (ie, virtual currency trading); (ii) as a new payment method; and (iii) as an alternative source of value. The paper determines that, “the first scenario is merely the continuation of the current state of the market and, thus far, has not posed concerns for the financial sector and/or central bank tasks,” but “stablecoins of the type envisaged in the second scenario may reach a scale such that financial stability risks can become material, and the safety and efficiency of the payment system may be affected,” and “the third scenario is both the least plausible and the most relevant from a monetary policy perspective.”
EU Europol issues 2020 internet organized crime threat assessment. On October 5, Europol published its annual cybercrime report, Internet Organised Crime Threat Assessment (IOCTA) 2020, in which it identifies ransomware as the top cybercrime threat. The report also identifies online investment fraud as a continuing threat, and SIM swapping was identified as a key new threat. The report also reviewed cybercrime facilitators such as social engineering and phishing, cryptocurrency abuse, abuse of the dark web, and encryption. The report noted that cryptocurrencies continue to facilitate payment for all forms of cybercrime, however, the industry has conducted a “massive effort” to deal with the proceeds of criminal activities, including strengthening know-your-customer measures.
Gibraltar announces updated DLT regulatory framework. On September 17, the Gibraltar Financial Services Commission (GFSC) announced the publication of updated Distributed Ledger Technology (DLT) Provider Guidance Notes. The updated Guidance replace the initial Guidance published in December 2017. As stated by the GFSC, in alignment with Gibraltar’s Financial Services Act 2019 and adhering to best practices, the updated Guidance provides further information to firms and expands its existing expectations of DLT providers.
Netherlands central bank grants first registration to cryptocurrency service. On October 7, the Amsterdam Digital Asset Exchange (AMDAX) announced that it was granted registration with the De Nederlandsche Bank (DNB) as the first provider of crypto services in the Netherlands. The registration authorizes AMDAX to process cryptocurrency transactions and store digital assets.
New Zealand updates cryptoassets tax guidance. On September 7, New Inland Revenue, the tax authority of New Zealand, announced it recently updated its cryptoassets tax guidance. The guidance treats cryptoassets as a form of property for tax purposes, applying ordinary income tax rules to income from selling, trading or exchanging cryptoassets.
New Zealand tax authority requests customer details on virtual currency transactions. On September 28, New Inland Revenue reportedly requested, for enforcement purposes, that cryptocurrency companies to deliver customer details regarding virtual currency transactions, including the customer’s personal information and the type and value of their virtual currency.
Nigerian securities regulator issues statement on digital assets. On September 14, the Nigerian Securities and Exchange Commission (SECN) issued a Statement on Digital Assets and Their Classification and Treatment, under Section 13 of the Nigerian Investment and Securities Act, 2007. The Statement establishes the SECN position that all virtual cryptoassets are securities, unless proven otherwise by the issuer. The issuer must make an initial assessment filing with the SECN for agency determination. If the SECN finds the virtual assets are securities, the issuer must register the cryptoassets with the SECN. Additionally, as all digital assets token offerings, ICOs, security token ICOs and other blockchain-based offers within Nigeria or by Nigerian issuers or sponsors, or by foreign issuers targeting Nigerian investors, are subject to regulation by the SECN, existing offerings have three months to either submit an initial assessment or make registration.
Singapore crypto exchange announces hack. On September 25, the Singapore digital asset exchange KuCoin released a statement that it detected large withdrawals of bitcoin, ethereum and other tokens from hot wallets on the exchange. Assets in cold wallets remain safe and hot wallets have been redeployed.
Bank of Thailand launches blockchain platform for savings bonds. On October 5, the Bank of Thailand (BOT) issued a press release announcing that it “has successfully launched the world’s first blockchain-based platform for government savings bonds issuing a total of $1.6B USD within two weeks.” According to the press release, the blockchain reduced bond issuance time from 15 days to 2 days, and also reduced “operational complexity and the overall cost of issuing bonds.”
UK tax collection agency confirms request for virtual currency transaction information. On October 2, HM Revenue and Customs reportedly confirmed its request of Coinbase UK and other cryptocurrency platforms for customer transaction information to search for tax evaders.
UK financial regulator bans crypto-based products for retail investors. On October 6, the UK Financial Conduct Authority (FCA) announced the publication of rules banning the sale of derivatives and exchange-traded notes (ETNs) that reference certain types of cryptoassets to retail consumers, effective January 6, 2021. The FCA asserts that such products are “ill-suited” for retail consumers for reasons including that such assets have no reliable basis for valuation, the prevalence of market abuse and financial crime, volatility in price movements, inadequate level of consumer understanding of these assets, and the lack of a legitimate investment need for consumers to invest in such products. The FCA bans the sale, marketing and distribution to retail consumers of any cryptocurrency ETNs and derivatives, such as futures, options, contracts-for-difference (CFDs).
The FCA also published Policy Statement PS20/10, Prohibiting the sale to retail clients of investment products that reference cryptoassets, which summarizes the consultation feedback received, sets forth the FAC’s response to such feedback, and describes the changes to the final rules.
UK Law Commission initiates projects on smart contracts and digital assets. On September 21, the UK Law Commission announced it has begun two projects to adapt English law for smart contracts and digital assets. The Law Commission stated it will analyze the law relating to smart contracts, to find any gaps in the law and identify reforms to ensure that the law can meet the growth in the use of this technology. Additionally, the Commission will address digital assets to ensure that the law is capable of accommodating electronic documents, cryptoassets and other digital assets to allow the possibilities of technology to flourish.
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