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On July 25, 2017, the Securities and Exchange Commission (SEC) issued its first guidance on how it will interpret token issuances or “Initial Coin Offerings” (ICOs) under relevant securities laws.

The headlines—“SEC Finds DAO Tokens are Securities”—come from Release No. 81207, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017), in which the SEC determined that the tokens issued in association with the Distributed Autonomous Organization (DAO tokens) in April-May 2016 were securities and explored the various implications of that determination.  (See Steptoe’s analysis of this report here.)

However, the real news may be the other document released on July 25, a notice to investors titled “Investor Bulletin: Initial Coin Offerings” (July 25, 2017).  In that document, the SEC sets out several areas of concern regarding ICOs—framed as advice to investors—from which the reader can discern the SEC’s initial expectations with respect to ICOs.  Much of the guidance is not surprising, but the SEC’s statement paves the way for more certainty for companies considering ICOs.
Continue Reading SEC Begins Offering Guidance on Initial Coin Offerings

The SEC announced yesterday that “offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.”  Although not coming as a surprise, the SEC’s announcement affirms that companies seeking to involve US investors in an initial coin offering (ICO) must register offers and sales with the SEC or else qualify for an exemption.

The SEC chose the token offering by the Distributed Autonomous Organization (DAO) in April-May 2016 as the focus of the study.  The DAO was built on top of the Ethereum  blockchain by the German unincorporated organization Slock.it, and the success of its token offering ushered in the current wave of ICO activity.  Although questions surrounded the DAO offering in terms of its prospective treatment under US securities laws, the DAO made headlines when it suffered an exploitation that led to the loss of $50 million in Ether.  Although the SEC found that DAO “may have violated federal securities laws,” it decided against pursuing an enforcement action, choosing instead to use DAO as a demonstrative for future ICOs (“to advise those who would use a Decentralized Autonomous Organization … or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the US federal securities laws”).
Continue Reading SEC Weighs in on the Distributed Autonomous Organization’s Tokens

Congress has become increasingly interested in the current state of knowledge about potential links between terrorist financing and money laundering.  In the House of Representatives, the Financial Services Committee’s Subcommittee on Terrorism and Illicit Finance held a hearing on June 8, 2017, titled “Virtual Currency: Financial Innovation and National Security Implications.”  In the Senate, Senator Grassley (R-IA), along with Senators Feinstein (D-CA), Cornyn (R-TX), and Whitehouse (D-RI), recently introduced Senate Bill 1241, titled “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” The bill, which generally aims to strengthen criminal money laundering statutes, is specifically aimed at fighting terrorism and terror finance.

Of particular relevance with respect to S. 1241 are the potential implications of the bill on blockchain and digital currencies.
Continue Reading Implications of S. 1241, the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017

An appellate decision from a provincial high court in northeastern China may help to shed some additional light on the Chinese government’s regulation of virtual currency exchanges in China, the anti-money laundering (AML) and know-your-customer (KYC) expectations placed on these exchanges, and the liability that might accrue to exchanges in the event of criminal activity involving virtual currencies.

The Lekuda (OKCOIN trading platform) case was initially filed in the civil division of the intermediate court of the municipality of Suihua (绥化) in northeastern China, Heilongjiang Province. Coincidentally, China’s northeastern region is also known for Bitcoin mining.  In China, there are three types of litigation (三类诉讼), each with their own set of procedural rules and jurisprudence, and the Lekuda case filed in Suihua was styled as a tort case, a type of civil litigation.  While characterized and classified as a civil tort case, the case also implicates certain criminal and administrative issues at its periphery.

The decision that was recently made publicly available was the July 2016 decision of the second instance court (an appellate decision). The underlying Suihua intermediate court decision has not yet been made publicly available, but may eventually become so.  That said, from the appellate decision, we can learn the basic facts.…

Continue Reading Perils in Hosting Virtual Currency Exchanges in China: The Lekuda (OKCOIN Trading Platform) Case

Anyone who has tried to explain bitcoin around their kitchen table knows that it is not easy to put your finger on what exactly the technology is.  Because of their innovative nature, digital currencies don’t have obvious analogs or fit easily into existing categories.  Bitcoin is part currency, part digital payment system, and part immutable ledger.

This confusion is not merely academic.  How digital currencies are defined determines how they are regulated.  For instance, the Internal Revenue Service (IRS) determined that bitcoin is a form of property, not currency, for tax purposes.  The Commodity Futures Trading Commission (CFTC) labeled bitcoin a commodity.  Could the Securities and Exchange Commission (SEC) decide that bitcoin is a form of security?…

Continue Reading Are Bitcoin and Other Digital Currencies Securities?

Following the attacks in Paris and San Bernardino, polls show that Americans identify terrorism—more than any other issue—as the most important problem facing the US.  In this environment, some media outlets have predicted a pending “crackdown” on digital currencies, particularly by European governments, because of the risk that the technology could be used to fund terrorism.

But do digital currencies like bitcoin actually pose a unique threat when it comes to funding terrorist networks?  Jason Weinstein published a post on Medium earlier this week—“Combating Bitcoin Use by Terrorists?”—that seeks to answer this question.…

Continue Reading Bitcoin and Terrorist Financing

This week featured interesting remarks from two of the most influential thought leaders in Bitcoin and the blockchain – Blythe Masters and Brian Forde.

During SourceMedia’s Convene conference, Masters, the CEO of Digital Asset Holdings, observed that while we are in the early days of development for Bitcoin and the blockchain, similar to where we were with the Internet in the early 1990s, “[t]he potential addressable markets for these types of technologies are gigantic.” For instance, Masters noted that blockchain technology could transform the way we trade and settle transactions for stocks, bonds, and derivatives.…

Continue Reading What Does Donald Trump Think About Bitcoin?

On Thursday, April 23, I spoke at the Bretton Woods Committee seminar, “Digital Payments and Currencies: Global Threat or Opportunity?”  The panel discussed the changes digital currencies and payment systems have brought to the market and the disruptive potential of a future in which they may become more conventional.

An audio clip of the seminar…