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 first 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:
- Virtual currencies
- 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 and analyze the recent OCC guidance on stablecoins.
For further information on the status of Blockchain regulation, see "Blockchain Regulation: Speedbumps, Roadblocks and Superhighways," a September 3 CoinTelegraph article by our partners Margo Tank and Michael Fluhr.
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.
OCC’s Interpretive Letter on banks’ authority to participate in INVNs and use stablecoins for payment activities
By Guy E. Flynn and Lin Pang
The Office of the Comptroller of the Currency has issued Interpretive Letter #1174, granting permission to national banks and federal savings associations to participate in the independent node verification networks (INVN) as “nodes” and to use stablecoins to facilitate payment activities and other bank-permissible functions, consistent with applicable law and safe and sound banking practice. Learn more.
Insight into the OCC’s perspective on stablecoins and decentralized finance
By Nick Pullman
The Office of the Comptroller of the Currency (OCC), a part of the US Treasury Department and a key banking regulator for federally chartered banks, has recently been taking a favorable position regarding the permitted uses by banks of blockchain technologies, digital assets, and stablecoins. Over the past six months, the OCC has published three interpretive letters on the subject, and the outgoing head of the OCC also published an op-ed on the future of “self-driving banks,” each discussed further below. Taken together, these three letters and op-ed present a favorable view towards the financial innovation occurring in the blockchain space and enable nationally chartered banks to maintain blockchain nodes and offer stablecoin-related services. Learn more.
Congress overrides veto of National Defense Authorization Act. On January 1, the Senate joined the House of Representatives in voting to override President Trump’s veto of HR 6395, the National Defense Authorization Act for Fiscal Year 2021. The Act also takes the following actions with respect to blockchain and digital assets:
- Amends the definition of “monetary instrument” in the Bank Secrecy Act (BSA) to include “value that substitutes for any monetary instrument” as prescribed by the Treasury Secretary.
- Requires a study by the Financial Crimes Enforcement Network (FinCEN) on the use of blockchain and other emerging technologies for analyzing and disseminating information and combatting money laundering.
- Tasks the Government Accountability Office (GAO) with studying the role of emerging technologies, including blockchain, virtual assets, and related exchanges, in assisting and enabling money laundering from trafficking proceeds.
- Tasks the Director of National Intelligence with studying the use of digital assets within payments systems and financial instruments in ways that seem legitimate but may be part of a strategy by illicit actors to weaken or undermine the economic security of the United States.
FinCen issues proposed rules on cryptocurrency recordkeeping. On December 18, the Financial Crimes Enforcement Network (FinCEN) published a Notice of Proposed Rulemaking (NPRM) which would impose new requirements for cryptocurrency exchanges and banks and money services businesses (MSBs) to submit reports, keep records, and verify the identity of customers in relation to certain transactions of convertible virtual currency (CVC) and legal tender digital assets (LTDA). FinCEN provided an accelerated 15-day comment period for the proposed rule, but such comment period was extended for an additional 15 days to address customer identity verification (January 19) and an additional 45 days for reporting (February 18).
SEC issues statement on custody of digital assets. On December 23, the Securities and Exchange Commission announced the issuance of a statement and request for comment regarding the custody of digital asset securities by broker-dealers in order to encourage innovation around the application of Securities Exchange Act Rule 15c3-3 to digital asset securities. The statement describes the SEC’s position that certain broker-dealers will not be subject to a Commission enforcement action on the basis that the broker-dealer has “obtained and maintained physical possession or control of customer fully paid and excess margin digital asset securities for the purposes of paragraph (b)(1) of Rule 15c3-3.” The statement requests comments within 60 days of publication in the Federal Register.
CFTC publishes Digital Assets Primer. On December 17, LabCFTC, the FinTech hub of the Commodity Futures Trading Commission (CFTC), announced the publication of the second Digital Assets Primer, which focuses on virtual currency, smart contracts and other digitized representations of value or ownership. This Digital Asset Primer builds on LabCFTC’s 2017 Primer on Virtual Currencies, which focused on virtual currencies like bitcoin.
CFPB taskforce recommends Congress clarify authority to grant federal charters to FinTechs. On January 5, the CFPB’s Taskforce on Federal Consumer Financial Law published a report providing recommendations to policy makers concerning consumer financial protection. The report concluded, in part, that competitive disadvantages are imposed on non-bank FinTech companies engaged in payments, remittances or lending services are subject to conflicting state laws and licensing requirements, as compared to federally chartered banks. The report recommends that the CFPB be empowered by Congress as a licensing agency for such FinTech companies, to grant charters for these non-depository providers of financial services. Alternatively, the report recommends that Congress clarify the OCC’s authority to issue federal charters to non-bank FinTech companies engaged in lending, payments or money transmission services.
Comptroller of the Currency asserts OCC has ability to issue FinTech charters. In response to the CFPB taskforce report, on January 6, Acting Comptroller of the Currency Brian Brooks issued a statement agreeing with the conclusion of the report and asserting the OCC’s authority to issue federal charters to companies engaged in lending, payments, money transmission or deposit-taking. He noted, “Congress in the Dodd-Frank Act separated chartering and prudential supervision from consumer protection enforcement, assigning chartering authority to the OCC and specific consumer protection enforcement authority to the CFPB.”
OCC conditionally approves conversion of Anchorage Digital Bank. On January 13, the OCC announced conditional approval of the conversion of Anchorage Trust Company, a South Dakota chartered trust company, to become Anchorage Digital Bank, National Association. The OCC granted a national trust bank charter to Anchorage after thorough review of the company and its current operations. As an enforceable condition of approval, the company entered into an operating agreement which sets forth, among other things, capital and liquidity requirements and the OCC’s risk management expectations. See our prior report on the bank’s application.
SEC disapproves proposed rule change to record equity securities listing and trading on blockchain. On December 28, the SEC disapproved the proposed rule change of BOX Exchange LLC, as amended, to allow issuers and members of the National Market System (NMS) to list and trade NMS stock comprising uncertificated securities by participating on the Boston Security Token Exchange (BSTX) trading system to record and publicly disseminate end-of-day securities ownership balanced to the Ethereum blockchain. Box’s proposal asserted that the information recorded on the Ethereum blockchain would be “ancillary” to the official ownership records maintained by participants at the securities depository and would not convey legal ownership of securities. The SEC found that Box did not meet its burden to demonstrate that the proposal is consistent with Sections 6(b)(1), 6(b)(5), and 6(b)(8) of the Exchange Act, noting that “there are a variety of circumstances in which the publicly disseminated information reflected on the Ethereum blockchain would not represent true holdings” and Box “has not demonstrated whether or how it would surveil for, reconcile, or address these inaccuracies.” The SEC found a significant risk that this inaccurate information would confuse and mislead investors.
Proposed FBAR filing requirement for virtual currency. US individuals who are an owner, nominee, or can control the distribution of the funds in one or more foreign accounts are required to file a Foreign Bank Account Report (FBAR, a/k/a FinCEN Form 114) if the combined balance of all such foreign accounts is more than $10,000 at any point during the calendar year. The FBAR exists to combat tax evasion, specifically by requiring reporting of money and assets in foreign banks. The FBAR is filed not with the IRS, but rather with FinCen at the US Treasury Department. Failure to file can result in significant penalties.
Currently, the FBAR regulations do not define a foreign account holding virtual currency as a type of reportable account. For that reason, at this time a foreign account holding virtual currency is not reportable on the FBAR (unless it is otherwise a reportable account because it holds reportable assets besides virtual currency). However, in a short notice issued at the end of 2020, FinCEN announced its intention to propose to amend the regulations to include virtual currency as a type of reportable account.
This action is not unexpected, particularly given (i) the recent revisions to IRS Form 1040 to include, in a prominent position, a question regarding virtual currency (which we discussed in our last newsletter), and (ii) FinCEN’s recent notice of proposed rulemaking on convertible virtual currencies and digital assets with legal tender status. However, the terse FBAR-related announcement leaves many questions unanswered, such as:
- How will the definition of “foreign account” apply in the context of virtual currency, since an account is treated as “foreign” if located in a foreign country, which is defined to include all geographical areas located outside the United States?
- While the announcement indicates that virtual currency itself is a type of reportable account, would it make more sense to treat a wallet holding virtual currency as the relevant account?
- How will proposed rules apply to virtual currency held in “self-custody” (for example, on a hard drive, or even a handwritten note) as opposed to assets held on an exchange?
- Given the characteristic volatility of virtual currency values, how will the proposed rules address valuation of these accounts for purposes of the $10,000 threshold?
NYDFS grants charter to Japanese stablecoin issuer. On December 29, the New York Department of Financial Services (DFS) announced it granted a charter under New York Banking Law to GMO-Z.com Trust Company, Inc., a Japanese cryptocurrency firm. With DFS approval, GMO is authorized to issue, administer and redeem Japanese Yen and US dollar-pegged stablecoins in New York.
Digital asset marketplace to become publicly traded company via merger. On January 11, Bakkt Holdings LLC (Bakkt), a digital asset marketplace launched by Intercontinental Exchange, announced it has entered into a definitive agreement for a business combination with VPC Impact Acquisition Holdings (VIH). The agreement will result in Bakkt becoming a publicly traded company with an enterprise value of approximately $2.1 billion. Bakkt will be renamed and will be listed on the New York Stock Exchange.
Oyster Protocol founder charged with tax evasion. The SEC and the DOJ announced on December 9 that the agencies, with the assistance of the FBI and the IRS, have brought parallel criminal and civil actions against the founder of the blockchain protocol Oyster Pearl. The SEC complaint charges an unregistered securities offering of digital Oyster Pearl tokens, which raised approximately $1.3 million. The DOJ alleged that the defendant made millions of dollars from the sale of the Oyster Pearl tokens but evaded reporting that income to the IRS, including by filing a false tax return in 2017, failing to file a tax return in 2018, operating the business and owning assets through pseudonyms and shell companies, obtaining income through nominees, and dealing in gold and cash. The DOJ charged the defendant with two counts of tax evasion, each of which carries a maximum sentence of five years in prison.
SEC settles with ShipChain in unregistered ICO. On December 21, the SEC published a cease-and-desist order and settlement with ShipChain in connection with ShipChain’s $27.6 million initial coin offering (ICO) of SHIP tokens in 2017 and 2018. The order asserts that SHIP tokens “were offered and sold as investment contracts, and therefore securities, pursuant to SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and its progeny.” ShipChain agreed to pay a civil monetary penalty of $2.05 million; transfer all SHIP tokens in its possession to an SEC-appointed fund administrator; and request removal of SHIP tokens from digital asset trading platforms.
SEC obtains emergency asset freeze against crypto fund manager. On December 28, the SEC announced the filing of an emergency action and obtained an order imposing an asset freeze and other emergency relief against Virgil Capital LLC and its affiliated companies in connection with an alleged securities fraud relating to Virgil Capital's flagship cryptocurrency trading fund, Virgil Sigma Fund LP. According to the complaint, Virgil Capital and its owner have been defrauding investors in the Sigma Fund since at least 2018 by making material misrepresentations about the fund’s strategy, assets, and financial condition. The SEC seeks permanent injunctions, including conduct-based injunctions, disgorgement with prejudgment interest, and civil penalties.
SEC settles with Wireline for SAFT offering. On January 15, the SEC published a cease-and-desist order and settlement with Wireline, Inc., a blockchain-based platform for “microservices.” Wireline offered and sold Simple Agreements for Future Tokens (SAFTs), which the SEC held to be investment contracts. The SAFTs provided that, upon release of the Wireline platform, Wireline would distribute digital tokens to the investors. The SEC held that Wireline’s offering of the SAFTs and the promised digital tokens was not registered under the federal securities laws and did not qualify for an exemption. Additionally, the order found that Wireline violated the antifraud provisions of the federal securities laws by making materially false and misleading statements about the viability of its platform.
SEC Commissioner Hester Peirce issued a concurrence in the matter, arguing that the SAFTs and the digital tokens should have been independently evaluated.
OFAC settles with BitGo for violations of sanctions programs. On December 30, 2020, the Office of Foreign Assets Control (OFAC) announced that it entered into a $98,830 settlement with BitGo Inc., a technology company that offers platforms for digital assets and noncustodial digital wallet management services. OFAC asserted that, as a result of deficiencies in BitGo’s sanctions compliance procedures, BitGo failed to prevent persons in Ukraine, Cuba, Iran, Sudan and Syria from using its wallet services. OFAC also determined that BitGo failed to self-disclose these violations.
TSSB issues cease and desist actions. In a series of recent actions by the Texas State Securities Board (TSSB), the TSSB issued cease-and-desist orders to 15 firms related to alleged fraudulent schemes involving cryptocurrencies. The schemes all appear to have used social media platforms to perpetrate fraud involving various illegal activities, including illegal referral programs, false claims of licensure, registration violations, material misstatements and omissions, false claims, and other deceptive activities.
Court grants final judgment against Blockvest ICO. On December 10, the US District Court for the Southern District of California issued a final judgment granting the SEC's motion for permanent injunction and monetary relief against Blockvest, LLC and Reginald Ringgold for disgorgement and civil money penalties of $332,370.99. The motion was unopposed. The judgment found that Blockvest performed an ICO of unregistered securities in 2018, raising $2.5 million through sales of BLV digital tokens. See our June issue for more information.
Coronavirus: US federal and state governments work quickly to enable remote online notarization to meet global crisis
In case you missed it
Legal Developments in Categorising and Tracing Cryptoassets – DLA Piper FinBrief blog
Our analysis of the July 31, 2020, FCA policy statement PS19/22: Guidance on Cryptoassets, which sets out the FCA’s final guidance on whether dealings involving cryptoassets require authorisation under FSMA.
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Learn more about our Blockchain and Digital Assets practice by contacting any of our editors:
Margo H.K. Tank
Andrew W. Grant
Guy E. Flynn