Blockchain takes over the cyberlaw podcast again! This episode of the cyberlaw podcast is a roundtable discussion of the various new regulations that have been brought into effect in the latter part of 2020 and the first half of 2021. There was a flurry of last-minute rulemakings at the end of the previous administration, many of which spilled over into 2021; an expert panel of lawyers from Steptoe’s blockchain and cryptocurrency practices takes the audience through them.
First, the Treasury Department, through the Financial Crimes Enforcement Network (FinCEN) and the Office of Financial Assets Control (OFAC), have been very busy in the first half of 2021. Evan Abrams discusses the various rulemakings that have been implemented, and how they effect the blockchain and cryptocurrency space.
One proposed rulemaking, the Self-Hosted Wallet NPRM, generated a significant amount of pushback from the industry. All the activity seemed to have an effect, as several extensions to the comment period were granted, and the final rule has not yet been implemented. Evan walks us through the effect that the NPRM would have on the industry, and why the pushback was so strong. Evan also gives us an update on the status of the Travel Rule NPRM that was introduced in late 2020. The comment periods for both rules have closed, and Evan expects that final rules could be issued shortly (or not).
Evan and host Alan Cohn also discuss recent OFAC enforcement actions regarding sanctions compliance. There were two main blockchain enforcement actions, one coming at the end of 2020 against BitGo, and one early this year against BitPay, making these the first enforcement actions by OFAC against blockchain companies. Both involve US companies with individuals using their platforms who are located in comprehensively sanctioned jurisdictions. This shows an increased focus on digital assets and their potential use by sanctioned persons or by persons in sanctioned jurisdictions.
In other news, Matt Kulkin discusses all things Commodity Futures Trading Commission (CFTC), including the jurisdictional reach of the CFTC and recent comments by a CFTC commissioner regarding decentralized finance (DeFi).
Matt, a former CFTC division director, provides a high-level overview of CFTC jurisdiction over cryptocurrencies. The CFTC takes a broad interpretation of the definition of commodity, and has asserted jurisdiction over cryptocurrencies. However, where customers receive actual delivery of the cryptocurrency (or other commodity) within a specific amount of time (called “spot trading”), trading is not subject to CFTC jurisdiction. By meeting this time window and not offering margin trading or leverage, cryptocurrency trading platforms in the US generally don’t need to register with the CFTC as a trading platform.
Matt describes how the CFTC is often one of the first US regulators to issue published statements about how emerging crypto assets fit into existing CFTC regulation. To this end, Matt describes the comments relating to DeFi made by Commissioner Dan Berkovitz. Berkovitz commented that he considers unlicensed DeFi markets for derivatives to be a bad idea, and does not see how they are legal under the Commodities Exchange Act. Matt breaks down the arguments for and against this view.
Lizzie, a former SEC deputy division director, describes the way in which the SEC applies the Howey test to crypto-assets in order to determine if a token is a security, and therefore whether the SEC has jurisdiction. The SEC has issued a framework to help token issuers determine whether they are issuing a security. The SEC has previously issued no action letters to entities that issue stable-value coins used solely within closed platforms, such as TurnKey Jet. Lizzie notes that the SEC has justified a relatively ambiguous application of securities regulation in an effort to promote innovation (and preserve the ability to judge token projects on a case-by-case basis), with clearer guidelines being drawn as blockchain technology matures.
Lizzie notes that this may have changed in the recent SEC enforcement action against CoinSchedule.com, a UK company that the SEC determined had violated anti-touting laws. This enforcement action appears to show that from the SEC’s perspective, the evolution of the Howey framework has ended, and that the SEC is becoming more creative in its enforcement of securities laws in order to go after any conduct that it believes to be a violation. CoinSchedule also demonstrates the SEC’s view on extending jurisdiction to non-US entities that have US customers.
In a roundup of other notable securities-related activities, Alan highlighted:
- SEC v Ripple: This is an interesting case that goes beyond just simply tokens that conducted initial coin offerings (“ICOs”), with the SEC taking new positions that it eschewed in previous enforcement cases. For example, in this case the SEC uses actions that took place before the 21(a) Report on the DAO token in July 2017, which the SEC had previously asserted put the industry on notice that crypto assets could be categorized as securities. The parties are locked in discovery battles, with the SEC trying to rely on ostensibly attorney-client privileged information, and Ripple gaining the ability to depose SEC officials from the 2018 timeframe.
- BlockFi: Five state securities regulators issued cease-and-desist letters against BlockFi for marketing interest-bearing cryptocurrency deposit accounts as the regulators allege they are securities.
- The SEC seems to also be specifically targeting trading platforms, as shown by documents recently filed by Circle regarding the Poloniex trading platform that Circle previously owned, in connection with Circle’s efforts to go public via a SPAC transaction.
Finally, the roundtable discusses what they believe to be upcoming trends in the industry, including:
- Lizzie and Matt discuss SEC and CFTC enforcement focus moving forward, including potential DeFi enforcement trends.
- Evan outlines the potential next steps for the Treasury, FinCEN, OFAC, and the Financial Action Task Force (FATF) relating to DeFi and virtual asset service providers.
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