Judge Holds Blockvest Token a Security Under Howey, and the Wait for a Non-Security Token Continues

Last week, U.S. District Judge Gonzalo Curiel of the Southern District of California reversed his previous November 2018 order and issued a preliminary injunction against Blockvest LLC (Blockvest) and its founder, Reginald Buddy Ringgold, III, after finding that the Blockvest token (BLV token) met the definition of an investment contract under the Howey test and was therefore a security.  While we are keen to see an example of a digital asset that falls outside the definition of a security either through application of the Howey test or a new test, we are relieved that Judge Curiel did not use the Blockvest case to set forth this precedent. Continue Reading

Steptoe Offers Blockchain Regulatory Insights and Authors Regulatory Overviews in GBBC’s 2019 Annual Report

The Global Blockchain Business Council (GBBC) recently published its 2019 Annual Report, “Beyond the Hype: Building Blockchains for Real World.” The report provides a comprehensive update on the global regulatory landscape surrounding blockchain technology along with an overview of some of the blockchain solutions being built by GBBC members.

Steptoe authored an overall insights piece, titled “Regulation in the US: Where are We, and Where are We Going?,” which looks at where the United States stands in terms of regulation and predicts what we’ll see in terms of regulation in 2019. Steptoe also provided regulatory updates for the United States as part of a global regulatory overview, with specific insights on ICO regulation in the US.

To access the GBBC 2019 Annual Report click here.

A Regulatory Fork for Stablecoins: Is New Texas Guidance a Sign of Things to Come?

Last month the Texas Department of Banking published an updated supervisory memorandum discussing the application of the state’s money transmitter law to digital assets.  Nearly every state has a money transmitter statute regulating businesses engaged in the transfer of money within that state, but states vary considerably with respect to how their laws apply to digital assets.  A number of states, including Texas, have taken the position that their money transmitter laws apply only to fiat currency and not cryptocurrency.  Such laws might still apply to a cryptocurrency company, for example one that exchanges cryptocurrency for fiat currency, but don’t govern companies that do not offer fiat-based services. Continue Reading

An Overview of Blockchain Cybersecurity Risks and Issues

Have you ever wondered how blockchains can be considered secure even though hacks of cryptocurrency exchanges routinely make headlines?  Or whether distributing a permanent ledger to every participant in a network might run afoul of privacy laws and regulations?  Data security and privacy are frequently part of the conversation about blockchain and technology in general, and they raise complicated legal issues for practitioners and clients to consider. Continue Reading

Blockchain and The Law: How a Simple Project can get Complicated Quickly

Evan Abrams recently published an article on CIO Review titled “Blockchain and The Law: How a Simple Project can get Complicated Quickly.” In his article, Evan discusses a number of complex legal regimes that CIOs should consider when building enterprise blockchain applications. Companies should assess which legal regimes apply to their specific application from both a federal and state level and keep in mind the laws applying to blockchain technologies can change rapidly. At the federal level, oversight may come from the Department of Treasury’s Financial Crimes Enforcement Network, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Internal Revenue Service, among others. Companies seeking to enter the blockchain space should also look at state regulation, which varies widely. For example, New York has adopted a regulatory regime known as the BitLicense that covers a variety of virtual currency business activity.

To read the full article click here.

Sanctions Compliance Risk Increases for Cryptocurrency Companies

Sanctions compliance considerations have always been an important factor for cryptocurrency companies, but a number of recent US government actions suggest regulators are increasingly focused on the intersection between digital currencies and economic sanctions.   This intensified focus highlights the importance of sanctions compliance for blockchain-related companies, particularly for those considered US persons.

This increased focus has been building for a number of months.  For example, in March of 2018, President Trump issued an Executive Order imposing certain sanctions on the Venezuelan government-issued digital currency known as the petro.

Last week, the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”) took another step to ramp up sanctions against bad actors utilizing digital currency.  Continue Reading

A Thanksgiving Feast: SEC Sets the Table for More Crypto Enforcement Servings to Come

The Securities and Exchange Commission’s (SEC or Commission) November 16 announcement charging two cryptocurrency companies—CarrierEQ Inc. (d/b/a Airfox) and Paragon Coin Inc. (Paragon)—with conducting an initial coin offering (ICO) in violation of the securities registration rules should not come as a surprise to those in the industry. The SEC has repeatedly emphasized that issuers of securities—even those based on a blockchain or distributed ledger technology—must register such securities or comply with an applicable exemption from registration under the Securities Act of 1933 (the Securities Act). The Airfox and Paragon orders explain when the SEC will determine that a token offering constitutes a security, and the remedial measures that the SEC may require for token offerings that do not comply with the Securities Act. Following the announcement, the Commission’s divisions also put out a public statement outlining their views on digital asset securities issuance and trading. We view these actions as signals that the Commission is likely to ramp up its efforts to enforce the securities laws in the weeks and months to come. Continue Reading

Blockchain in the Retail Industry

In a recent Client Alert, Alan Cohn, Jason Weinstein, and Meegan Brooks discuss the impact of blockchain technology in the retail industry, which will likely see more disruption in the next few years than it has seen in decades. What role will blockchain technology play in that disruption?

Instead of completely disrupting the retail industry, blockchain technology could be used to aid compliance with new and evolving regulations. There are three specific applications within the retail industry where blockchain technology can be used to provide greater efficiency, effectiveness, transparency, and trust: (1) supply chain management and tracing the provenance of goods; (2) the resale market; and (3) automatic renewal and subscription services. While implementing any new technology, including blockchain, comes with its own challenges in terms of scalability and implementation, the benefits may outweigh the costs.

To read the full Client Alert, click here.

To learn more about Steptoe’s Retail Industry practice, click here.

The EtherDelta order: SEC continues to articulate what constitutes a cryptocurrency “securities exchange,” weighing in on “decentralized” exchanges

On November 8, the SEC issued a settled order against Zachary Coburn, the creator of the smart contract that powers the EtherDelta decentralized exchange.  In the settled order, the Commission found that Coburn’s EtherDelta smart contract, which enabled trading of Ether against any other ERC20 token, and the EtherDelta website through which buyers and sellers of ERC20 tokens met, operated as an unregistered “exchange” in violation of Section 5 of the Exchange Act.  Without admitting or denying the findings, Coburn consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty.  The Commission’s order notes that Coburn’s cooperation was a consideration in not imposing a greater penalty.

This is the first case involving a so-called “decentralized exchange.”  Continue Reading

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