Timely Insights

Cryptoasset Regulation Update (November 2018)

San Francisco • November 1, 2018

Monthly series on regulatory updates impacting the crypto space.

This piece is part of a monthly series covering regulatory updates related to cryptoassets and provides updates broken down by developments in the United States and the rest of the world.

United States

  1. The SEC launched a new working group to collaborate with blockchain and cryptoasset startups (Oct 18th). The new group will be known as the Strategic Hub for Innovation and Financial Technology (FinHub) and, as described by the SEC in a press release, “will serve as a resource for public engagement on the SEC’s FinTech-related issues and initiatives, such as distributed ledger technology (including digital assets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning.” FinHub will be led by Valerie Szczepanik, who is currently the Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC’s Division of Corporation Finance. The goals of FinHub are broad and include providing “a portal for industry and the public to engage directly with SEC staff on innovative ideas and technological developments” and serving “as a liaison to other domestic and international regulators regarding emerging technologies in financial, regulatory, and supervisory systems.” As examined in the October piece last month, calls for guidance via regulation have come from many cryptoasset industry participants within the US as well as investors that worry that the most promising projects will leave to geographies that provide greater regulatory clarity. To engage with FinHub, projects can fill out a form on the FinHub website to request a meeting.

  2. The SEC is upping its efforts to crack down on ICO funded startups (Oct 10th). As reported by Yahoo Finance, the SEC has followed up on the series of subpoenas it issued at the beginning of 2018 to companies that issued tokens via an ICO process, with a particular focus on those that didn’t take appropriate action to ensure that only accredited investors participated. As identified by Yahoo Finance, “The agency is exerting pressure on many of those companies to settle their cases. In response, dozens of companies have quietly agreed to refund investor money and pay a fine. But many startups that have been subpoenaed say they are left in the dark struggling to satisfy the SEC’s demands, and are uncertain of how others are handling it, according to conversations with more than 15 industry sources.” While the creation of FinHub (detailed above) may help future projects, the question still remains of what constitutes a security and what does not in the digital asset space. It is to be seen what effect this has on projects staying in the US versus considering relocating to other countries.

  3. US senators are calling for sanctions on Venezuela’s state-backed cryptoasset, the petro (Oct 5th). The merits of Venezuela’s petro have previously been called into question for not truly being a cryptoasset given that it is government issued and backed by oil, rather than being issued independently and a standalone asset itself. Now, US Senators are focused on extending existing sanctions against Venezuela to cover the petro. The bill, known as the Venezuela Humanitarian Relief, Reconstruction and Rule of Law Act of 2018, covers a range of issues related to Venezuela and includes a section imposing sanctions on the petro. The bill states that “All transactions by a United States person or within the United States that relate to, provide financing for, provide software for, or otherwise deal in any digital currency, digital coin, or digital token, that was issued by, for, or on behalf of the Government of Venezuela are prohibited beginning on the date of the enactment of this Act.” This step from the US against the petro is one of the first documented instances of a government actively fighting the validity and acceptance of a cryptoasset (though, to be fair, some would argue that the petro does not qualify as a cryptoasset).

Rest of World

  1. Japan granted the cryptoasset industry self-regulatory status (Oct 24th). As reported by Reuters, Japan’s Financial Services Agency (FSA) on Wednesday gave the cryptoasset industry self-regulatory status, permitting the Japan Virtual Currency Exchange Association to police and sanction exchanges for any violations. The FSA approval will give the industry association the ability to set the rules that govern how exchanges store customer funds and fight money laundering; the association will also have the ability to police compliance. Declining to be named, a senior FSA official explained that “it’s a very fast-moving industry. It’s better for experts to make rules in a timely manner than bureaucrats do.” Japan has played an important historical role in the development of the cryptoasset industry, but not always for positive reasons. Mt. Gox, the largest cryptoasset exchange in the world in 2014, was the victim of a hack that led to the theft of ~$450 million in Bitcoin. More recently, two large Japanese exchanges were hacked in 2018: in January, Coincheck was hacked for $500 million and in September Zaif was hacked for $60 million. Cameron and Tyler Winklevoss of Gemini have proposed a similar self-regulatory organization for the US, known as Virtual Commodity Association (VCA), to help the industry evolve. Governments around the world are taking different approaches to cryptoasset regulation from the exchange and ICO ban in China, to wait-and-see policy in the US, to the self-regulation approach being tested in Japan.

  2. EU regulators are considering cryptocurrencies on a case by case basis when evaluating initial coin offerings (Oct 8th). The European Securities and Markets Authority (ESMA) is conducting an ongoing evaluation of initial coin offerings to assess which, if any, should be regulated. While EU regulators haven’t stepped forward to enforce laws against ICOs, they have issued repeated warnings to investors. However, as Andrea Enria, chair of the European Banking Authority, explains “Consumer warnings don’t seem to be sufficiently effective in raising awareness among consumers that there is a lack of safety net for these investments.” As examined in October’s piece, regulators have shown interest in crafting regulation at the EU level to properly address cryptoassets.

  3. Money-laundering watchdog to set first cryptocurrency rules by June (Oct 19th). As reported by Reuters, “The Paris-based Financial Action Task Force (FATF) said on Friday jurisdictions worldwide will be required to license or regulate cryptoasset exchanges and some firms providing encrypted wallets, to help stamp out the use of digital money for money laundering, terrorism financing or other crimes.” While regulators have taken a wait-and-see approach on addressing whether cryptoassets are securities or not, they have been clear and forceful in their approach to enforcing know-your-customer (KYC) and anti-money laundering (AML) laws. Countries that do not comply with the standards created will be subject to being restricted in their access to the global financial syste

  4. Bitcoin is protected as private property within China (Oct 26th). As reported by CoinDesk, “An arbitration body in China has ruled that despite the country’s central bank’s ban on cryptocurrency trading, bitcoin should still be legally protected as a property with economic values.” The case in question involved a plaintiff who had signed a contract agreement that allowed the defendant to trade and manage a pool of cryptocurrencies on the plaintiff’s behalf; the plaintiff alleged that the defendant refused to return the cryptocurrencies after an end date specified in the contract. As further explained by CoinDesk, “The arbitrator said one main argument made by the defendant was that the ban from the People’s Bank of China (PBoC) on cryptocurrency trading and initial coin offerings essentially means crypto payments and transactions should be illegal in China. As such, the entire contract, by default, would become invalid. … However, the arbitrator disagreed, explaining the nature of the case is about the contractual obligation for returning cryptocurrencies, which does not fall under the cryptocurrency trading or initial coin offering categories outlined in the PBoC’s September 2017 ban.” Given China’s ban on both exchanges and ICOs, this is an exciting precedent for those who view Bitcoin favorably.

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