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 fifth monthly bulletin for 2021, 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:
- Securities
- Virtual currencies
- Commodities
- 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 discuss the SEC Staff Statement on investments in the bitcoin futures market.
To build on our recent increasing recognition in the fintech and blockchain space, the DLA Piper 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.
INSIGHTS
SEC issues Staff Statement on investments in the bitcoin futures market
The Security and Exchange Commission’s Division of Investment Management has announced that it and the SEC Divisions of Examinations and Economic and Risk Analysis will “closely monitor” the impact of mutual fund investments in bitcoin futures on “investor protection, capital formation and the fairness and efficiency of markets.” The SEC made clear that assessing compliance with the Investment Company Act and its rules and regulations in this area is a “top priority” for the SEC staff. Read more.
FEDERAL DEVELOPMENTS
Digital assets
House passes digital asset working group legislation. On April 20, the US House of Representatives passed the Eliminate Barriers to Innovation Act of 2021, HR 1602, directing the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to jointly establish a digital asset working group to investigate and issue a report analyzing the legal and regulatory framework and developments in the US related to digital assets and developments in other countries related to digital assets, including how such developments may impact the US, and making recommendations for the creation and improvement of primary and secondary markets for digital assets, standards related to digital asset intermediaries and best practices to reduce fraud, improve investor protections and assist in compliance with AML/CFT compliance.
Taxation
California court authorizes service of John Doe summons on Kraken. On May 5, the Department of Justice (DOJ) announced a federal court in the Northern District of California entered an order authorizing the Internal Revenue Service (IRS) to serve a John Doe summons on Payward Ventures Inc. dba Kraken. The summons seeks information about US taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020. For more information, see our April issue. The summons directs Kraken to produce records identifying such US taxpayers and their cryptocurrency transactions.
Virtual currency
OFAC seeks commercial blockchain tracing tools. On May 4, the Office of Foreign Assets Control (OFAC) posted a solicitation for bids on commercial blockchain tracing tools. The tools must provide the following features:
- Address clustering
- Transaction flow mapping and graphing
- Wallet exploring
- User behavior analysis and
- Trade, market data, and exchange rate information.
Responses are due by May 25, by 2:00 pm EDT.
GSA auctions 9.45 Bitcoin for $487,000. On April 27, the General Services Administration (GSA) reportedly closed its third bitcoin auction, selling 9.45 bitcoin for a total of $487,000. All lots sold below estimated market value.
OCC conditionally approves charter for Paxos. On April 23, the Office of the Comptroller of the Currency (OCC) announced the preliminary conditional approval of the application to charter Paxos National Trust, New York. For information on the application, see our December 2020 issue. See our November 2020 issue for information on the Paxos New York Bitlicense.
Securities
SEC delays review of bitcoin ETF. On April 28, the SEC designated a longer period for review of the Cboe BZX proposed rule change to list and trade shares of the VanEck Bitcoin Trust. The proposal was originally published on March 19 and has been extended through June 17. For more information on pending bitcoin ETFs, see our April issue.
Economic consulting firm issues report on SEC cryptocurrency enforcement from 2013-2020. Cornerstone Research announced the publication of SEC Cryptocurrency Enforcement – Q3 2013 – Q4 2020, analyzing SEC enforcement of cryptocurrency. According to the report, the SEC brought a total of 75 cryptocurrency-related enforcement actions along with a number of subpoenas and follow-on administrative orders. Of the 75 enforcement actions, 43 were litigated in US district courts and 32 were resolved within the SEC as administrative proceedings.
STATE DEVELOPMENTS
Digital assets
Wyoming further defines digital assets. On April 5, Wyoming enacted HB0043, effective July 2021, which further defines a digital asset and identifies a digital asset as an intangible under UCC Article 9. The law enables, in part, a secured party with possession or control of virtual currency or digital securities, respectively, to have priority over a security interest held by a secured party that does not have possession or control, and enables perfection of a security interest in digital consumer assets or digital securities by the filing of a financing statement.
NY DFS grants trust charter to Standard Custody & Trust Company. On May 4, the New York Department of Financial Services (NYDFS) announced the grant of a trust charter for digital asset custody and related services to Standard Custody & Trust Company, LLC. To date, NYDFS has approved 30 charters and licenses for companies working in virtual currency business activity.
Virtual currency
Miami-Dade County passes resolution establishing cryptocurrency task force. On May 4, the Miami Board of County Commissioners passed a resolution to establish the Miami-Dade Cryptocurrency Task Force to study the cost, feasibility and security of accepting virtual currency as a form of payment for government taxes, services and fees. The 13-member task force will have to provide a report on feasibility, potential costs, and recommendations within 180 days.
North Dakota city to accept cryptocurrency payments. On May 13, the City of Willison, North Dakota announced it now accepts cryptocurrency payments for utility bills through partnership with BitPay.
INDUSTRY DEVELOPMENTS
Chamber of Digital Commerce publishes guide on best practices for digital asset platform services. On May 4, the Chamber of Digital Commerce published Proof of Reserves – The Practitioner’s Guide to an Emerging Standard for Increasing Trust and Transparency in Digital Asset Platform Services. According to the Chamber, “The guide offers a unified standard and industry best practices for digital asset platforms and custodians to prove that they hold sufficient assets to meet customer liabilities, and
- Highlights the need for a standardized approach to build increased transparency into reserves held by custodians and exchanges.
- Discusses past digital asset meltdowns… where Proof of Reserves would have protected consumers and reassured auditors and regulators.
- Clarifies why Proof of Reserves best practices are urgently needed, explaining how it works in the real world and spells out how to build proof of platform reserves with related technical details and considerations.”
NIST requests public comment on proposed cryptography standards. On May 10, the National Institute of Standards and Technology (NIST) announced it is conducting a periodic review and maintenance of the below cryptography standards, and seeks public comments on the proposed publications:
- Federal Information Processing Standard (FIPS) 197, Advanced Encryption Standard (AES), 2001
- NIST Special Publication (SP) 800-38A, Recommendation for Block Cipher Modes of Operation: Methods and Techniques, 2001
- NIST SP 800-38A Addendum, Recommendation for Block Cipher Modes of Operation: Three Variants of Ciphertext Stealing for CBC Mode, 2010
- NIST SP 800-15, Minimum Interoperability Specification for PKI Components (MISPC), Version 1, 1998
- NIST SP 800-25, Federal Agency Use of Public Key Technology for Digital Signatures and Authentication, 2000
- NIST SP 800-32, Introduction to Public Key Technology and the Federal PKI Infrastructure, 2001
Comments must be submitted by June 11 and sent to [email protected].
PwC publishes global index of CBDCs. In April, Price Waterhouse Coppers published the PwC CBDC Global Index, 1st edition, which is designed to measure a central bank’s level of maturity in deploying their own digital currency. The Index is described as “a synthetic index, capturing the central banks’ progress, stance on Central Bank Digital Currency (CBDC) development and public interest in two distinct use cases:
- Retail CBDC which are held directly by citizens and corporates; and
- Interbank, or Wholesale CBDC which are restricted to Financial Institutions, principally for interbank payments and financial settlement processes.”
DLA Piper honored for offering TOKO – the digital asset creation engine. At the recentFinancial Times Asia Pacific Innovative Lawyers Awards 2021, DLA Piper was named the winning law firm in the Moving the Market Forward category for its work on TOKO.
Developed as a collaboration between DLA Piper and Aldersgate DLS (Digital Ledger Solutions), TOKO is a unique platform that creates digital assets called tokens. It couples the compliance and regulatory rigor of DLA Piper as a global law firm with the innovative technology solutions of tomorrow. TOKO is a fast, secure and cost-effective solution for buying and selling high-value assets, recording such sales and purchases, and facilitating various ongoing token-related activities, using distributed ledger technology.
TOKO’s functionalities include:
- converting a wide range of asset types into tokens
- writing smart contracts in prominent coding languages
- delivering capital distributions and on-chain voting by tokenholders
- providing a platform for transferring tokenised assets
- disposing of or redeem tokens within a regulated & compliant framework and
- distributing broadcast announcements to tokenholders such as distribution payment amounts, upcoming votes, and proposed meetings.
According to its developers, the benefits of TOKO include:
- enabling asset owners to create uniquely structured offerings
- improving asset liquidity
- providing asset owners with access to a wider group of investors
- reducing transaction costs
- allowing faster exit opportunities and
- eliminating fraud through strict, time-stamped audit trails stored on a blockchain.
Ransomware Task Force issues report on combatting ransomware. On April 30, the Ransomware Task Force (RTF) of the Institute for Security and Technology, published Combating Ransomware – A Comprehensive Framework for Action: Key Recommendations from the Ransomware Task Force. The report includes a framework with recommendations organized around four goals: (1) deter ransomware attacks through a comprehensive, nationally and internationally coordinated strategy; (2) disrupt the ransomware business model and reduce criminal profits; (3) help organizations prepare for ransomware attacks; and (4) respond to ransomware attacks more effectively.
ENFORCEMENT ACTIONS
FEDERAL
Virtual currency
DOJ announces arrest of cryptocurrency mixer operator. On April 28, the Department of Justice (DOJ) announced the arrest of Roman Sterlingov, a Russian-Swedish national, who operated Bitcoin Fog, a cryptocurrency “mixer,” on charges of money laundering, operating an unlicensed money transmitting business, and money transmission without a license in the District of Columbia. Bitcoin Fog allegedly moved over 1.2 million bitcoin valued at approximately $335 million.
STATE
Virtual currency
NY AG seeks court order halting Coinseed operations. On May 7, the New York Office of the Attorney General (OAG) announced it filed for a temporary restraining order, a preliminary injunction, and the appointment of a receiver to block Coinseed and its CEO from making any further unauthorized trades and to safeguard investor funds. This request is filed in the lawsuit by the OAG charging Coinseed and two top executives with allegations asserting the sale of unregistered securities, among other violations. For more information, see our February issue.
Massachusetts man pleads guilty to scheme stealing social media accounts and cryptocurrency. The DOJ on April 28 announced that Eric Meiggs admitted to SIM-swapping to hack into the social media accounts of victims and take control of the accounts to obtain account names and cryptocurrency. According to the indictment, Meiggs and his co-conspirators targeted at least 10 victims, stealing more than $530,000 in cryptocurrencies. Meiggs pleaded guilty to seven counts, including conspiracy, wire fraud, computer fraud and abuse, and identity theft.
SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS
Argentina tax authority launches reporting requirements for virtual currency exchanges and payment companies. On May 11, Argentina’s tax authority, the Federal Administration of Public Revenues, reportedly officially launched new reporting requirements for local cryptocurrency exchanges and payment firms using virtual currency. These entities must report monthly on user accounts, including total income, expenses and balances, and verify users’ identities.
Chinese digital yuan to be tested on global wallet platform. On May 11, the Alipay App, a digital payments platform, has reportedly launched a module enabling internal testing of the Chinese CBDC by closed beta users.
Iran Central Bank announces ban on trading of foreign-mined virtual currency. On May 7, the Central Bank of Iran reportedly announced a decree from the Cabinet that digital currency traded in Iran must have been mined or extracted in Iran as well.
Bank of Israel issues consultation on CBDC. On May 11, the Bank of Israel steering committee announced the issuance of a report on the potential benefits and a draft model for an Israeli CBDC and a request for public comment on the report. Responses should be sent by email to [email protected] between May 8, 2021 and July 31, 2021.
Singapore monetary authority commits $42 million to FinTech solutions. On April 30, the Monetary Authority of Singapore (MAS) announced a new regulatory technology grant scheme and an enhancement of the digital acceleration grant scheme to accelerate technology adoption in the financial sector, committing $42 million to the projects. The funds are to promote the adoption and integration of technology solutions in the risk management and compliance functions of financial institutions. Applications are open for both grants.
Seoul seizes cryptocurrency holdings of tax evaders. On April 23, the Seoul, South Korea, tax collection department reportedly seized approximately $22 million in digital assets from the exchange accounts of individuals hiding assets using cryptocurrency.
Taiwanese financial regulator announces new regulations on AML/CFT for cryptocurrency platforms. On April 20, the Financial Supervision and Administration Commission announced the expansion of AML/CFT regulations to apply to virtual currency platforms effective July 1.
Thai anti-money laundering office announces customer verification for cryptocurrency exchanges. As of May 3, the Thailand Anti-Money Laundering Office (AMLO) reportedly announced that, starting in September, local digital exchanges must verify customers’ identities through a “dip-chip” machine that requires customers to be physically present. Current processes enable the opening of new customer accounts entirely online.
Turkish Central Bank bans use of cryptocurrency. On April 16, the Central Bank of the Republic of Turkey announced the introduction of a regulation banning the use of cryptocurrency for payments throughout the country effective April 30.
Turkish police arrest persons in connection with cryptocurrency exchange fraud. On May 1, Turkish police reportedly arrested six individuals in connection with the abrupt shutdown of Thodex, a Turkish cryptocurrency exchange platform, leaving customers of Thodex unable to access their accounts. The individuals were senior staff members and relatives of the Thodex CEO, Faruk Fatih Ozer, who is suspected of fleeing with over $2 billion.