|Securities and Exchange Commission||1/7/2020||Guidance||The Office of Compliance Inspections and Examinations issued its 2020 Examination Priorities, which specifically included financial technology and innovation, including digital assets and electronic investment advice. The priorities also included anti-money laundering programs, which will are required of certain digital currency and blockchain-related businesses.
2020 Examination Priorities
Press Release: SEC Office of Compliance Inspections and Examinations Announces 2020 Examination Priorities
|Securities and Exchange Commission||7/10/2019
|Exemption||The SEC approved exemptions from IPO registration requirements for two companies issuing digital tokens under Regulation A+.
Blockstack PBC planned to use a token offering to raise $28 million (Blockstack blog announcement).
YouNow Inc, planned to issue Props tokens to reward its users and customers of other participating apps (Props Project blog announcement).
|Securities and Exchange Commission||4/3/2019||Guidance||The Division of Corporation Finance and the Senior Advisor for Digital Assets and Innovation issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets. The Framework provides guidance on how to analyze whether a digital asset is offered and sold as an investment contract and therefore is a security, to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.
The Framework is not intended to be an exhaustive overview of the law, and it is a staff interpretation and not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved of its content, and it is not binding on the Commission or the Divisions of the SEC staff.
Framework for “Investment Contract” Analysis of Digital Assets
Statement on “Framework for ‘Investment Contract’ Analysis of Digital Assets”
|Securities and Exchange Commission||4/3/2019||No-Action Letter||The SEC’s Division of Corporation Finance issued a no-action letter to TurnKey Jet Inc., a jet leasing business located in West Palm Beach, Florida that proposed in a letter dated April 2, 2019 to offer and sell blockchain-based digital assets in the form of “tokenized” jet cards. TurnKey Jet Inc. would launch a membership program and develop a token selling platform to sell tokens for air charter services via a private blockchain network.
TurnKey Jet, Inc. No-Action Letter TurnKey Jet, Inc. Incoming Letter
|Securities and Exchange Commission||2/8/2019||Speech||Commissioner Hester Peirce, in a speech at the University of Missouri School of Law, discussed the relationship between innovation and regulation at the SEC and the multiple considerations influencing it. She pointed out the hiring of the first Advocate for Small Business Capital Formation, a new position that will ensure that the Commission will consider whether existing rules favor large and established companies, and related numerous issues affecting how the SEC will enable innovation without compromising the objectives of the securities laws in dealing with blockchain and cryptocurrencies.
Peirce acknowledged that blockchain-based networks offer a new way of coordinating human action that does not fit neatly within the securities law framework while pointing out that many projects being in a centralized manner that looks similar to any other startup. She put the much-discussed Howey test and July 2018 speech by SEC Director of Corporation Finance Bill Hinman into perspective, then pointed out that the SEC staff is working on supplemental guidance to help people think through whether their crypto-fundraising efforts fall under the securities laws, and that there is a standing offer for people to come in for no-action relief.
She expressed concern that token offerings do not always map perfectly onto traditional securities offerings as judged by the Howey test, that the application of the test will be overly broad, and that some projects may not be able to work under the existing Howey framework and securities laws.
Regulation: A View from Inside the Machine
|Securities and Exchange Commission||11/8/2018||Enforcement Action||The SEC on November 8 announced charges against Zachary Coburn, founder of the EtherDelta digital token trading platform, which it had settled with a cease and desist order.
EtherDelta is an online platform for secondary market trading of ERC20 tokens, a type of blockchain-based token commonly issued in Initial Coin Offerings (ICOs). EtherDelta users executed more than 3.6 million orders for ERC20 tokens, including tokens that are securities, and almost all of the orders were traded after the SEC issues its 2017 Report on Examination on The DAO. The cease and desist order found that Coburn caused EtherDelta to operate as an unregistered national securities exchange.
The settlement is the SEC’s first enforcement action based on findings that a digital token trading platform operated as an
|unregistered national securities exchange.
In the Matter of Zachary Coburn, Release No. 34-84553, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (November 8, 2018)
SEC Press Release: SEC Charges EtherDelta Founder With Operating an Unregistered Exchange
|Securities and Exchange Commission||11/5/2018||Annual Report||The Division of Enforcement described its focus on issues related to ICOs and digital assets, led by the Cyber Unit, in its 2018 Annual Report.
The report stated that “exuberance around these markets can sometimes obscure the fact that these offerings are often high- risk investments. For instance, the issuers may lack established track records, viable products, business models, or the capacity for safeguarding digital assets from theft by hackers. And some of the offerings are simply outright frauds cloaked in the veneer of emerging technology.”
The report described the Division’s actions with respect to ICOs and digital assets as taking four forms: (1) public statements to send messages to the ICO and digital asset marketplace on issues, (2) enforcement actions when warranted, with over a dozen stand alone enforcement actions involving digital assets and ICOs as of the close of FY 2018, and dozens of investigations involving ICOs and digital assets in the past year (3) actions against parties beyond the issuers of ICOs, and (4) recommending that the Commission use its trading suspension authority to prevent investors from being harmed by possible scams, with trading in the stock of over a dozen publicly traded issuers suspended in FY 2017 and FY 2018 because of questions concerning, among other things, the accuracy of assertions regarding their investments in ICOs and operation of cryptocurrency platforms.
U.S. Securities and Exchange Commission Division of Enforcement Annual Report 2018
|Congress||9/28/2018||Letter||A group of Representatives led by Ted Budd (R-NC) issued a letter to SEC Chairman Jay Clayton requesting that the SEC clarify its position on the status of digital tokens as securities, expressing concern about the use of enforcement actions alone to clarify policy and stating that formal guidance may be an appropriate approach to clear up legal uncertainties.
The letter specifically requested that the SEC (1) clarify the criteria used to determine when offers and sales of digital tokens should properly be considered “investment contracts” and therefore offerings of securities, (2) state whether it agrees that a token originally sold in an investment contract can nonetheless be a non-security as stated by Director of the Division of Corporate Finance William Hinman, and (3) describe the tools available to the SEC to offer more concrete guidance to innovators on these topics.
Letter from Rep. Ted Budd to the SEC Chairman
|Financial Industry Regulatory Authority (FINRA)||8/16/2018||Investor Alert||FINRA issued an Investor Alert on ICOs giving seven lessons for investors on how to approach ICOs: (1) ICOs offer little investor protection, (2) ICO fraud is real, (3) online platforms that facilitate trading in ICO tokens are not registered exchanges, (4) investors are losing millions to ICO theft, (5) receipt of future tokens it not a given in an ICO, (6) “SAFTs” don’t make ICOs safe, and (7) FOMO can inflate ICO valuations.
Initial Coin Offerings (ICOs) – What to Know and Time-Tested Tips for Investors
|Financial Crimes Enforcement Network (FinCEN)||8/9/2018||Speech||FinCEN Director Kenneth Blanco delivered remarks at a conference that discussed how FinCEN is approaching virtual currency and financial innovation, and the value of Bank Secrecy Act (BSA) filings received from financial institutions, including exchangers in virtual currencies.
Emphasizing FinCEN’s role to protect and secure the U.S. financial system from those who seek to misuse important technological advancements for nefarious purposes, he described FinCEN’s relevant actions over the years, which began with a 2011 final rule amending the definitions and other regulations relating to MSBs providing that money transmission covers the acceptance and transmission of value that substitutes for currency, and continued with FinCEN’s 2013 guidance on the application of FinCEN’s regulations to persons administering, exchanging, or using virtual currencies, and six administrative rulings in 2014-15. FinCEN also is working closely with federal regulatory colleagues including the SEC and CFTC on coordinated policy development addressing risks including potential illicit finance and fraud surrounding ICOs.
He stated, “While ICO arrangements vary and, depending on their structure, may be subject to different authorities, one fact remains absolute: FinCEN, and our partners at the SEC and CFTC, expect businesses involved in ICOs to meet all of their AML/CFT obligations. We remain committed to taking appropriate action when these obligations are not prioritized, and the U.S. financial system is put at risk.”
FinCEN has worked to ensure that virtual currency money services businesses understand and comply with their regulatory obligations through effective supervisory examinations, conducted with the delegated BSA examiners at the IRS. FinCEN and the IRS have examined over 30 percent of all registered virtual currency exchangers and administrators since 2014, including a wide array of virtual currency businesses: virtual currency trading platforms, administrators, virtual currency kiosk (or ATM) companies, crypto-precious metals dealers, and individual peer-to-peer exchangers, focusing on both registered and unregistered exchanges. The goal is to ensure that all virtual currency money transmitters undergo regular, routine compliance examinations.
“We have been surprised to see financial institutions establish an adequate number of compliance staff and take appropriate
|steps to meet their regulatory requirements only after they receive notice. Let this message go out clearly today: This does not constitute compliance. Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate.”
The BTC-e enforcement action, the first action against a foreign-located MSB and the most recent civil action involving virtual currency, was discussed as an example of FinCEN’s commitment to pursuing those failing to have even basic controls to prevent the use of their services for illicit purposes, and also as significant for the $12 million civil money penalty against one of BTC-e’s administrators, the largest individual liability penalty FinCEN has assessed to date. FinCEN led the civil investigation and also partnered with law enforcement and Department of Justice colleagues who indicted and shuttered the exchange.
FinCEN will share its experience on cryptocurrency with foreign partners through the Egmont Group of Financial Intelligence Units (FIUs) and other international forums, with Director Blanco leading a special forum of FIU heads.
There has been a substantial increase in virtual currency SAR filings over the past few years, with FinCEN now receiving over 1,500 SARs per month describing suspicious activity involving virtual currency, with reports coming from both MSBs in the virtual currency industry itself and other financial institutions.
The industry is developing new techniques for identifying suspicious activity in virtual currency, showing what is possible and giving unique insight into certain financial crimes. By helping identify and investigate this illicit activity, the industry can focus on legitimate applications and innovations, and stamp out negative perceptions of virtual currency as the coinage of the dark web and bad actors.
Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the 2018 Chicago-Kent Block (Legal) Tech Conference
|Securities and Exchange Commission||6/21/2018||Testimony||SEC Chairman Jay Clayton, in testimony before the Committee on Financial Services of the U.S. House of Representatives on June 21, indicated that the June 14 statement by Division of Corporation Finance Director William Hinman was a key expression of the SEC’s approach to ICOs.
He stated, “Overall, I believe the Commission is taking a balanced regulatory approach to distributed ledger technology (and FinTech more generally) that both fosters innovation and protects investors. For example, in the area of ICOs, the Commission issued a Report of Investigation in July 2017 regarding the application of the federal securities laws to those products. Our Corporation Finance Division Director recently further outlined the approach staff takes to evaluate whether a digital asset is a security.”
Testimony on “Oversight of the U.S. Securities and Exchange
|Securities and Exchange Commission||6/14/2018||Speech||The Director of the Division of Corporate Finance at the SEC, William Hinman, stated at the Yahoo Finance All Markets Summit: Crypto on June 14 that it is possible for digital tokens issued in ICOs not to be considered to represent securities offerings even after they were considered to represent securities when initially issued. He explained that the circumstances surrounding a digital asset and the manner in which it is sold, not the digital asset itself, is the focus for purposes of this issue. In cases where the is no longer any central enterprise being invested in or where the digital asset is sold only to be used to purchase a good or service available through the network on which it is created, a digital asset originally offered in a securities offering can be later sold in a manner that does not constitute an offering of a security.
“If the network on which the token or coin is to function is sufficiently decentralized – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.”
Bitcoin and Ether were examples given for coins without a central third party whose efforts are a key determining factor in the enterprise, whose offer and sale are not securities transactions.
Digital Asset Transactions: When Howey Met Gary (Plastic)
|Securities and Exchange Commission||6/4/2018||Press Release||The SEC announced that appointment of Valerie A. Szczepanik as Associate Director of the Division of Corporation Finance and as Senior Advisor for Digital Assets and Innovation for the Division Director. The Senior Advisor for Digital Assets and Innovation, a newly created advisory position, will coordinate efforts across all SEC divisions and offices regarding the application of U.S. securities laws to emerging digital asset technologies and innovations, including ICOs and cryptocurrencies.
SEC Names Valerie A. Szczepanik Senior Advisor for Digital Assets and Innovation
|Securities and Exchange Commission||5/22/2018||Statement||SEC Chairman Clayton issued a statement applauding the regulators in the United States and Canada participating in Operation Cryptosweep and warning that the enforcement actions announced by NASAA should be a strong warning that many sets of eyes are watching for frauds and that regulators are coordinating on an international level as well.
Statement on NASAA’s Announcement of Enforcement Sweep Targeting Fraudulent ICOs and Crypto-asset Investment Products
|Commodity Futures Trading Commission (CFTC)
|5/21/2018||Agreement||CFTC Chairman Giancarlo and NASAA President Borg signed a mutual cooperation agreement to establish a closer working relationship between the federal commodity regulator and individual state securities agencies. The agreement is intended to provide a framework for the sharing of confidential|
|Securities Administrators Association (NASAA)||information between the CFTC and state securities regulators, to assist state securities regulators and state attorneys general in enforcing the Commodity Exchange Act as they are statutorily authorized to do alongside the CFTC. Information shared under the MOU also could generate enforcement actions under state securities laws, commodity codes, or other areas of law.
CFTC, NASAA Sign Agreement for Greater Information Sharing Between Federal Commodities Regulator and State Securities Regulators
Remarks of Chairman J. Christopher Giancarlo at the North American Securities Administrators Association (NASAA) Conference, Washington, D.C.
|Securities and Exchange Commission||3/7/2018||Statement||The SEC’s Divisions of Enforcement and Trading and Markets stated that an online trading platform that offers trading of digital assets that meet the definition of a “security” under federal securities laws and operates as an “exchange” must register with the SEC as a national securities exchange or be exempt from registration. The statement listed considerations for investors who use such trading platforms.
Statement on Potentially Unlawful Online Platforms for Trading Digital Assets
|Financial Crimes Enforcement Network (FinCEN)/Department of the Treasury||2/13/2018||Letter||In a letter responding to a December 14, 2017 letter from Sen. Ron Wyden requesting information on the oversight and enforcement capabilities of FinCEN over virtual currency financial activities, the Department of the Treasury’s Assistant Secretary for Legislative Affairs explained that FinCEN has subjected virtual currency exchangers and administrators to Bank Secrecy Act (BSA) money transmitter requirements since 2011 and began to implement examinations of exchangers and administrators for BSA compliance in 2014. The letter also explained that FinCEN is working closely with the SEC and CFTC to clarify and enforce the AML/CFT obligations of businesses engaged in ICOs and that the application of those obligations will depend on the nature of the financial activity involved in any particular ICO, depending on the facts and circumstances of each case. Generally, a developer or exchange that sells coins or tokens in exchange for another type of value is a money transmitter and must comply with the AML/CFT requirements applying to money transmitters.
However, if an ICO is structured to involve an offering or sale of securities or derivatives, certain participants in the ICO could fall under the authority of the SEC or CFTC.
Letter from Treasury Assistant Secretary for Legislative Affairs Drew Maloney to Sen. Ron Wyden (D-Ore.)
|Securities and Exchange Commission||2/7/2018||Guidance||The Office of Compliance Inspections and Examinations (OCIE) of the SEC released its 2018 examination priorities, which included cryptocurrencies and ICOs. OCIE stated that it “will continue to monitor the sale of these products, and where the products are securities, examine for regulatory compliance. Areas of focus will include, among other things, whether financial professionals maintain adequate controls and|
|safeguards to protect these assets from theft or misappropriation, and whether financial professionals are providing investors with disclosure about the risks associated with these investments, including the risk of investment losses, liquidity risks, price volatility, and potential fraud.”
2018 National Exam Program Examination Priorities
|Securities and Exchange Commission||1/22/2018||Speech||SEC Chairman Jay Clayton warned in his opening remarks to the 25th Annual Securities Regulation Institute conference that market professionals in the securities bar “can do better” in “act[ing] responsibly and hold[ing] themselves to high standards” in the ICO space. Securities lawyers appear to be assisting promoters in structuring ICO offerings that have many of the key features of a securities offering but do not comply with the securities laws, and taking a step back from key issues such as whether a “coin” is a security and whether the offering qualifies for an exemption from registration even in circumstances where registration would likely be warranted. He has instructed the SEC staff to be on high alert for approaches to ICOs that are contrary to the spirit of the securities laws and the professional obligations of the U.S. securities bar.
Opening Remarks at the Securities Regulation Institute
|Securities and Exchange Commission and Commodity Futures Trading Commission||1/19/2018||Joint Statement||The SEC and CFTC Enforcement Director issued a joint statement regarding virtual current enforcement actions, stating that: “When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”
Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency Enforcement Actions
|Securities and Exchange Commission||12/11/2017||Statement||In response to the rise of publicity about cryptocurrencies and ICOs, SEC Chairman Jay Clayton issued a statement directed principally at “Main Street” investors and market professionals that warned Main Street investors about the lack of investor protection and greater opportunities for fraud and manipulation, with risks possibly amplified by markets spanning national borders and invested funds possibly quickly traveling overseas without investors’ knowledge, and urged market professionals to read closely the SEC’s July 2017 Investigative Report and review the SEC’s subsequent enforcement actions.
Clayton warned that many attempts by market professionals to highlight utility characteristics of their proposed ICOs in an effort to claim that their proposed tokens or coins are not securities appear to elevate form over substance, emphasizing, “Merely calling a token a “utility” token or structuring it to provide some utility does not prevent the token from being a security. Tokens and offerings that incorporate features and marketing efforts that emphasize the potential for
|profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a security under
U.S. law. On this and other points where the application of expertise and judgment is expected, I believe that gatekeepers and others, including securities lawyers, accountants and consultants, need to focus on their responsibilities.” He warned further, “By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws … I have asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct initial coin offerings in violation of the federal securities laws.”
He also cautioned market participants against promoting or touting the offer and sale of coins without first determining whether the securities laws apply to those actions, pointing out that selling securities generally requires a license, and experience shows that excessive touting in thinly traded and volatile markets can be an indicator of “scalping,” “pump and dump” and other manipulations and frauds. He further cautioned those who operate systems and platforms that effect or facilitate transactions in these products that they may be operating unregistered exchanges or broker-dealers that are in violation of the Securities Exchange Act of 1934.
On cryptocurrencies, he emphasized two points. First, while there are cryptocurrencies that do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security; before launching a cryptocurrency or a product with its value tied to one or more cryptocurrencies, its promoters must either (1) be able to demonstrate that the currency or product is not a security or (2) comply with applicable registration and other requirements under our securities laws. Second, brokers, dealers and other market participants that allow for payments in cryptocurrencies, allow customers to purchase cryptocurrencies on margin, or otherwise use cryptocurrencies to facilitate securities transactions should exercise particular caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know- your-customer obligations. These market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.
Statement on Cryptocurrencies and Initial Coin Offerings
|Securities and Exchange Commission||11/8/2017||Speech||SEC Chairman Jay Clayton stated in a speech about the SEC’s five-year strategic plan and short-term narrowly focused efforts that ICOs would be one of the areas where the SEC would seek to deter, mitigate and eliminate misconduct.
Following the warnings in its earlier report on ICOs, the SEC would continue to seek clarity for investors on how tokens are listed on exchanges and the standards for listing, how tokens are valued, and what protections are in place for market integrity and investor protection.
Governance and Transparency at the Commission and in Our
|Commodity Futures Trading Commission||10/17/2017||Primer||The CFTC’s LabCFTC released a Primer on Virtual Currencies that stated that virtual tokens used in ICOs may be considered commodities or derivatives contracts, depending on the particular facts and circumstances.
A CFTC Primer on Virtual Currencies Press Release
|Securities and Exchange Commission||7/25/2017||Report of Investigation||The SEC’s Division of Enforcement issued a report of investigation pursuant to Section 21(a) of the Securities Exchange Act on the April-May 2016 ICO of The DAO, to advise those using blockchain-enabled means for capital raising to take appropriate steps to ensure compliance with the
U.S. federal securities laws. The report described the applicability of the fundamental principles of the U.S. federal securities laws to the new paradigm, with the use of new technology not removing conduct from the purview of the U.S. federal securities laws. The report emphasized the obligation to comply with the registration provisions of the federal securities laws, with the Howey test used to determine whether sales of blockchain assets are securities required to be registered under the Securities Act, and that a trading system that meets the definition of an exchange must register as a national securities exchange under the Securities Exchange Act or operate pursuant to an exemption. The SEC’s Office of Investor Education and Advocacy simultaneously issued an Investor Bulletin to make investors aware of the potential risks of participating in ICOs.
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934
Investor Bulletin: Initial Coin Offerings