Blockchain & Smart Contracts – Page 6 – FinTech and Blockchain Law Watch

SEC Cautions “Utility Token” Sponsors and ICO Market Intermediaries

Dec 14 2017

On December 11, 2017, the SEC released a cease-and-desist order against a purported “utility token” sold by Munchee Inc. (“Munchee”) and a statement by Jay Clayton on Cryptocurrencies and Initial Coin Offerings. Two takeaways:

The SEC will scrutinize so-called “utility tokens” under the Howey test, and Chairman Clayton believes that most token sales he’s seen constitute securities offerings. The familiarity of the Munchee utility framework to other token offerings coupled with Chairman Clayton’s Statement could very well chill the market for utility tokens seeking to avoid application of federal securities laws.
The SEC expects intermediaries operating in crypto, specifically law firms, accountants, consultants and broker-dealers, to be “gatekeepers” of investor protection.

We will be providing a fuller analysis in the next several days.

France’s Financial Markets Authority considers its options for regulating initial coin offerings

Dec 10 2017

By Claude-Étienne Armingaud, Emilie Oberlis, Alexandre Balducci, Sidney Lichtenstein and Alban Michou-Tognelli

The French Financial Markets Authority, the Autorité des Marchés Financiers (“AMF”), recently published a white paper requesting the views of stakeholders on the best means of regulating the fundraising activities based on cryptocurrencies and blockchain technology and is also launching a digital-asset research program called UNICORN (“Universal Node to ICO’s Research & Network”). In doing so, the AMF is following in the footsteps of the French Ministry of Finance, which published a draft document aimed at adapting the French legal framework to the use of blockchain technology on 19 September 2017 (see our coverage here).

The white paper focuses on initial coin offerings (“ICOs”) which are fundraising activities used to finance technology-based projects at an early stage of development. Participants to an ICO transaction receive tokens issued by the project initiator, in exchange for their investment in cryptocurrency or fiat currency. These tokens (a) have different characteristics depending on the transaction; (b) confer different rights to their owners; and (c) are intended for a technologically-oriented and informed audience that has a good understanding of (i) the nature of the project, (ii) the underlying technology, and (iii) the risks associated with the project.

New SEC Cyber Unit Obtains Emergency Action Against ICO

Dec 07 2017

By Robert M. Crea and Evan J. Glover

On December 4, 2017, the Securities and Exchange Commission’s (“SEC”) new Cyber Unit obtained an emergency asset freeze to halt a Canadian initial coin offering (“ICO”) called PlexCoin that had raised up to $15 million from thousands of investors. The SEC filed its complaint (“Complaint”) in the Eastern District of New York, alleging that the sponsor and his company, PlexCorps, marketed and sold securities to investors in the U.S. and elsewhere under a variety of false pretenses, including that PlexCoin would yield a 1,354% profit in less than 29 days. The complaint seeks permanent injunctions, disgorgement plus interest and penalties.

LabCFTC’s First Primer Covers Bitcoin, other Virtual Currencies, Virtual Tokens and ICOs

Dec 04 2017

By Anthony Nolan and Eric A. Love

The U.S. Commodity Futures Trading Commission’s (CFTC) New York-based LabCFTC has released a twenty-page primer (the “Primer”) about virtual currencies, virtual tokens and initial coin offerings (ICOs). It’s the first in a series of educational primers that LabCFTC will issue in the coming months about innovations in the FinTech industry.

The Primer answers important questions about how CFTC regulations apply to virtual currencies, virtual tokens and ICOs. Notably, the Primer reiterates that Bitcoin and other virtual currencies are appropriately categorized as commodities and also states that virtual tokens can in some instances be commodities or derivatives contracts even if they are also considered to be securities under the U.S. securities laws. The Primer notes that, in applying U.S. commodity futures laws to virtual tokens, the CFTC will look beyond form and examine the “actual substance and purpose” of particular activities.

Initial Coin Offerings “Horrify” a Former SEC Commissioner

Nov 30 2017

By Robert Crea

On Sunday, November 26, 2017, the New York Times published an interview with Joseph Grundfest, former SEC Commissioner and current Stanford law professor. Professor Grundfest is sharply critical of the posture of initial coin offerings under U.S. federal securities laws. Given his persuasive voice on securities law matters and his influence in Silicon Valley, this interview may very well serve as a sobering wakeup call to the ICO marketplace.

Some notable quotes:

“ICOs represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi. . . .It’s more than the extent of the violation . . . . It’s the almost comedic quality of the violation.”
“These are not hard cases . . . . You don’t need teams of accountants poring over complex financing documents [to bring enforcement actions].”
“We’re waiting to see a whole bunch of enforcement actions in this space, and we wonder why they haven’t happened yet. . . .I hope what [the SEC is] doing is planning on a sweep of 50 ICOs.”

The article may be found here.

MAS releases “A Guide to Digital Token Offerings”

Nov 28 2017

By Nicholas Hanna and Samantha See

On 14 November 2017, the Monetary Authority of Singapore (the “MAS”) released “A Guide to Digital Token Offerings” providing general guidance on the application of the securities laws administered by the MAS in relation to offers or issues of digital tokens in Singapore.

The main consideration is whether the digital token is designed in a way that would make it a product regulated under Singapore’s securities laws i.e. if it behaves like a share, debenture or some other form of security. If a token does not function like a security, then technically, neither will the security laws apply.

EU supervisor warns about risks of ICOs and calls for regulatory compliance

Nov 22 2017

By Giovanni Campi and Ignasi Guardans

Following the rapidly increasing use of Initial Coin Offerings (ICOs), the European Securities and Markets Authority (ESMA) issued two statements to warn investors on ICOs’ risks and to encourage companies involved in ICOs to comply with the relevant European legislation.

ESMA defines an ICO as “an innovative way of raising money from the public, using coins or tokens”. In an ICO, businesses issue tokens and sell them in exchange for traditional, or more often, virtual currencies like Bitcoin or Ether. The tokens are created and disseminated using distributed ledger or blockchain technology (DLT).

BaFin publishes a consumer warning for ICOs

Nov 16 2017

By Judith Rinearson and Rizwan Qayyum

Echoing thoughts from the FCA recently, Germany’s Federal Financial Supervisory Authority (BaFin) issued a formal warning to investors and consumers in general to steer clear of ICOs on the grounds that they constitute “highly speculative investments” that contain “substantial risks”

BaFin notes: “Investors should be aware that a total loss of their investment is possible”, whilst further it added that the huge public interest in the tokens “also attracts fraudsters.” This is very reminiscent of language from the FCA earlier this year.

Initial Coin Offerings: Key Considerations You Absolutely, Positively Need to Know About Before Launching an ICO

Nov 08 2017

By Edward Dartley, Anthony R.G. Nolan, Mary Burke Baker, John ReVeal and Amanda M. Katlowitz

Initial Coin Offerings (ICOs) have rapidly emerged as the hottest trend in FinTech financing, albeit one that is not without controversy. Put simply, an ICO is a method of fundraising somewhat akin to an initial public offering of securities, except that in an ICO, the fundraiser uses blockchain technology to issue customized cryptocurrencies (commonly known as coins or tokens), typically in exchange for other established cryptocurrencies such as Bitcoin and Ether. The proceeds of an ICO can provide kick-start funding to develop the technology and platforms for the token holder’s access. An ICO that is properly conceived and structured can provide relatively easy transferability of tokens and the potential for those tokens to be traded on exchanges or resold and converted to government-issued legal tender, also known as fiat currency.

The dramatic rise in value of Bitcoin, Ether, and other cryptocurrencies in recent months has generated great interest in this new form of financing, with new players entering the market literally every day and raising millions in new financing in very short offering times. At the same time, ICOs raise a myriad of complex legal issues in the United States and around the world.

To read more, click here.

A U.S. BitLicense? OCC Acting Comptroller Sounds Open to It

Oct 26 2017

By Eric A. Love and Hilda Li

In remarks delivered during a recent FinTech conference at the Federal Reserve Bank of Philadelphia, U.S. Office of the Comptroller of the Currency (OCC) Acting Comptroller Keith Noreika signaled that he is open to cryptocurrency companies applying for an OCC-issued FinTech charter. According to the Acting Comptroller, part of the OCC’s role is to determine whether issuance of such a charter to cryptocurrency companies is consistent with the OCC’s “statutory obligations.” He cautioned that, “just because you get in the door, doesn’t mean you get out the door on the other side with a charter.” Video of the Acting Comptroller’s full remarks can be viewed here.

Category:Blockchain & Smart Contracts