Long awaited guidance from the US Securities and Exchange Commission (SEC) on application of the Howey test to digital assets came on April 3 in the form of a Framework for “Investment Contract” Analysis of Digital Assets (“Framework”) and a No-Action Letter regarding TurnKey Jet, Inc. (the “TurnKey No-Action Letter”). These two documents are best understood as part of a trilogy with the June 2018 Hinman speech.

The Framework offers the clearest indication yet of the SEC staff’s thinking on the Howey test, with the TurnKey No-Action Letter and the Hinman speech providing examples of where a digital asset fails to meet a necessary element of the test. For purposes of clarity, it helps to think of the Howey test as having four elements:  (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) derived from the efforts of others.[1]

The first two prongs are essentially throwaways inasmuch as the Framework devotes only three sentences to them in total. SEC staff note that these prongs are “typically satisfied” in evaluating digital assets. On the other hand, the Framework pays significant attention to the third and fourth elements.
Continue Reading SEC Smooths Out Digital Assets Turbulence With Further Guidance

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

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,

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 A Regulatory Fork for Stablecoins: Is New Texas Guidance a Sign of Things 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 A Thanksgiving Feast: SEC Sets the Table for More Crypto Enforcement Servings to Come

On October 17, 2018, Alan Cohn participated in a panel discussion with Daniel Alter of Murphy & McGonigle and Scott Kimpel of Hunton Andrews Kurthen titled “Initial Coin Offerings: Can Securities Regulators Balance Market Growth and Investor Protection?” at the Washington Legal Foundation. Cohn lay the foundation for an in depth discussion on cryptocurrency and

On September 4th, Alan Cohn hosted the 229th episode of The Cyberlaw Podcast.  We took a deep dive into all things blockchain and cryptocurrency discussing recent regulatory developments and best practices for users of exchanges.  Our episode begins with Charles Mills discussing the landmark decision coming out of the New York Eastern District Court in

In a Regulatory Notice published July 6, 2018, the Financial Industry Regulatory Authority (FINRA) encourages its members to promptly notify FINRA if they, or their associated persons or affiliates, engage in activities related to digital assets such as cryptocurrencies and other virtual coins and tokens.  The Notice also encourages firms to inform FINRA of changes in the event the firm, or its associated persons or affiliates, intends to begin or in fact begins engaging in activities relating to digital assets not previously disclosed, on a continuing basis through July 31, 2019.
Continue Reading FINRA Encourages Firms to Report Involvement in Activities Related to Digital Assets