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US developments
Congress members introduce legislation to define "digital tokens" under the Securities Laws
On December 20, 2018, two members of Congress introduced the "Token Taxonomy Act" (H. 7356) prior to the 115th Congress in an effort to define a "digital token" under federal securities laws. HR 7356 was introduced by representative Warren Davidson (R-Ohio) and representative Darren Soto (D-Florida) and seeks to clarify that the Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of 1934 (the "Exchange Act") would not apply to cryptocurrencies if they meet a new definition of "digital token" that HR 7356 would add to the Securities Act. The definition of "digital token" of HR 7356 includes decentralized tokens that are not a representation of a financial interest in a company (for example, equity, debt or revenue sharing).
Furthermore, HR 7356 makes several changes to the custody of "digital tokens". For example, HR 7356 adds the phrase "provides custody services" to the definition of "bank" under the Investment Advisers Act of 1940 ("Advisers Act") and the Investment Company Act of 1940, which in turn it could affect the potential "qualified custodians" of digital tokens under the Custody Rule (article 206, paragraph 4-2) of the law on consultants. HR 7356 also instructs the Securities & Exchange Commission ("SEC") of the United States to amend the law 15c3-3 on the law on trade, which deals with the custody of securities by broker-dealers, stating that the obligation to an intermediary to maintain a satisfactory control place for customers' digital assets is met through public key cryptography and following commercially reasonable information security practices. Finally, H. 7356 would direct the Internal Revenue Service to address the taxation of cryptocurrencies resulting from certain exchanges of virtual currencies.
H. 7356 has been referred both to the Commission of the Chamber for Financial Services and to the Committee for the Causes and Means of the Chamber; however, the 115th Congress will formally end on 2 January 2019 and any pending legislation will have to be reintroduced before the 116th Congress for a new consideration.
A press release from the Rep. Davidson office on H. 7356 can be found here.
FDIC issues a final rule for a & quot; limited exception for a limited amount of mutual deposits arising from the treatment as intermediated deposits
On 18 December 2018, the Federal Deposit Insurance Corporation ("FDIC") approved a new final rule implementing the changes created by Section 202 of the Law on Economic Growth, Regulatory Control and Consumer Protection (the "Law"), which became law on May 24, 2018. Prior to Section 202, only well-capitalized institutions could accept or solicit brokerage deposits without restrictions. With the passage of section 202, less well-capitalized institutions can now receive a limited number of mutual deposits without the funds being considered intermediated deposits. The final rule of the FDIC modifies its regulations to incorporate the statutory changes in section 202 of the law and specify the amount of the ceilings.
If smaller institutions were to be allowed to accept mutual deposits, a legislative and regulatory change was needed. Mutual deposits derive from a bank that makes a deposit with another bank so that customers receive insurance coverage for the full amount of their deposits. Through this practice, banks can meet the definition of "deposit intermediary" and ensure that deposits themselves become "intermediated deposits". Thus, without an exempt amount for smaller institutions, only well-capitalized institutions could clearly participate in mutual deposit networks. The new FDIC final rule also incorporates a second change related to interest rates. Section 202 confirmed that the current legal and regulatory restrictions on interest rates for minor institutions continue to apply to any deposit, including a mutual deposit.
On 18 December 2018, the FDIC also issued a regulatory proposal notice requesting a comment on all aspects of the deposit and interest rate regulation.
A link to the press release for both FDIC actions can be found here.
Official comments of SEC Digital Asset on the non-token action process
On December 14, 2018, at an event in New York, Valerie Szczepanik, Senior Advisor for Digital Assets and Innovation, spoke about the regulatory options for token issuers under federal securities laws. According to a report on his comments by CoindeskMs. Szczepanik explained that token issuers generally have three regulatory options when they issue a token: register under federal securities laws, seek an exemption or make sure that tokens are not security. However, Ms Szczepanik reported that coin issuers could also seek relief from the SEC staff. The relief from non-action is rare, it is not binding and only applies to a narrow set of facts specified in the request. To date, the staff of the SEC has not issued any provision of non-intervention in the context of digital assets.
A link to the Coindesk report can be found here.
CFPB proposes a new concept of sandbox and looks for comments on the politics of letters without action
On 13 December 2018, the Office for Consumer Financial Protection ("CFPB") asked for comments on a new policy of letters of non-intervention and a new proposed sandbox program. Firstly, as regards its policy on non-intervention letters, the CFPB explained that it is trying to comment on a series of proposed amendments because it issued only one non-intervention letter since it started its non-action policies in the 2016. In particular, the CFPB is seeking comments on how to simplify the application process and on how to expand the types of statutory and / or regulatory aid available. Secondly, the CFPB proposes to create the "Sandbox of the product". The Sandbox would include non-intervention interventions and two additional forms of relief: (a) approvals by order in statutory safe ports; and (b) exempt orders. Help for Sandbox participants will be provided for a limited period of time, such as two years. All written comments must be submitted by February 11, 2019.
A link to the proposed policy guide can be found here.
UCLA professor of jurisprudence publishes articles on ICO and the "Hinman paradox"
In a research paper dated December 10, 2018, James J. Park, a law professor at UCLA's law school, examined a series of questions related to the SEC's approach to regulating initial coin offerings ("ICO "), including when and how a blockchain project is functional.
Professor Park has closely examined Ether's SEC treatment based on federal securities laws to extract answers about how and when a token could change from a security token into a utility token. He identified some elements that could suggest a successful mutation: (a) a token became widely accepted in ICO transactions; (b) a token has become completely independent of its founders (to the extent that it is possible); and (c) a token has achieved a broad distribution. However, Professor Park claimed that a compliant token may still fall into a trap that coined the "Hinman Paradox. "In the words of Professor Park,"[F]or a token of utility to be distributed freely without regulation by the securities laws, must be functional. But many utility tokens are functional only if they are distributed enough in such a way as to create a decentralized system. "In addition, a successful token must reach its wide distribution without engaging in" sales tactics that encourage a speculative market "in the token.
Professor Park offers some ideas on how to potentially circumvent the Hinman paradox. For example, it suggests that a project could be so compelling that potential users are intrigued despite having no prospect of immediate financial gains. Smaller projects may be able to achieve a discreet target faster and thus achieve full functionality without the need for a large distribution.
A link to a rereading of Professor Park's research paper on the Corporate Governance blog on Harvard Law School is available here.
Vermont agencies launch a working group to study Blockchain technology
On December 10, 2018, four state agencies in Vermont announced that they were forming a working group to study blockchain technology. The working group will be composed of the State Attorney General's Office, the Financial Regulation Department, the Secretary of State and the Community Trade and Development Agency. According to the Attorney General of Vermont, the working group will meet to look for answers to these problems: "1) which opportunities, challenges and concerns may concern blockchain; 2) whether specific regulation or legislation for blockchain is necessary and, in in this case, which type, and 3) the best way to protect consumers who can use Blockchain technology or be influenced by it. "The working group will seek the input of stakeholders and industry experts and will start in January 2019 .
A link to a Vermont Attorney General press release can be found here.
International developments
Prosecutors of South Korea Indict Executives of the token trading platform
On December 21st 2018, Coindesk reported that three executives of UPbit, a South Korean cryptocurrency swap, were formally charged with fraud by the South Seoul District Attorney's Office. According to the report, the three executives would have carried out fraudulent transactions with a false company account in order to artificially inflate the volume of trading on the stock exchange. In addition, the three executives are accused of selling cryptocurrency to customers through fraudulent transactions. Reportedly, UPbit denied the allegations in a statement, even though he admitted that it was involved in some initial transactions.
A link to the Coindesk article can be found here.
UK Revenue & Customs issues a political document on the taxation of cryptoassets for individuals
On 19 December 2018, Her Majesty & # 39; s Revenue & Customs ("HMRC") published a political document on the taxation of criptoassets for individuals (the "Program Document"). The document updates Brief 9, the previous HMRC guide published in March 2014. The scope and content of the Policy Paper follow the framework in the Notice 2014-21, published by the Internal Revenue Service in the United States. However, it discusses updated topics that can help inform the US Treasury Department as it prepares further directions. Similar to the 2014-21 communication, the policy document only covers the tax implications for people who acquire or have "exchange tokens", a term that the document defines as "token to be used as a payment method" and that " includes "cryptocurrencies" as bitcoins. "
In general, the Policy Paper explains that in most cases where a person holds cryptoassets as a personal investment or to make particular purchases, the individual will be subject to a capital gains tax upon termination of his cryptoassets. The document does not define which "particular purchases" will trigger recognition, but the phrasing suggests that the tax will not apply universally to all barter transactions. The policy document also explains how individuals may be required to pay income tax and social security contributions on the cryptoassets they receive from employers as a form of non-cash payment, or withdrawal, transaction confirmation or aircraft. In several points, the Policy Paper provides more updated analyzes than Brief 9 or Notice 2014-21. The planning document provides an exemption for flights received from passive investors. The Policy Paper also recommends that taxpayers treat forks similar to a share division.
A link to the HRMC political document can be found here.
Two Hong Kong regulators express the hesitation regarding the IPO from cryptocurrency activities
On December 19, 2018, the South China Morning Post reported that the Hong Kong stock market regulatory entity and the Hong Kong stockbroker both hesitated about the initial public offering proposal ("IPO") by a & # 39; important company linked to the cryptocurrency that is outstanding in Hong Kong. The company, Bitmain Technologies, produces and assembles mining hardware. According to the report, both regulators have cited two general reasons for their hesitation. First, in Hong Kong they are waiting for new rules for cryptocurrency exchange platforms, and regulators have suggested that an 'IPO for a cryptocurrency-related business is not mature until they come promulgated new rules. Secondly, the report quoted a source explaining that the Hong Kong sandbox program is currently testing the rules for token trading platforms and that it would not be appropriate to approve an IPO related to a cryptocurrency-related activity. when rules and regulations may change after the sandbox expires. According to the report, the company's IPO application is scheduled to expire on March 26, 2019.
A link to the South China Morning Post article can be found here.
The European Parliament issued a resolution promoting the blockchain for trade policy
On December 13, 2018, the European Parliament issued a resolution entitled "Blockchain: a far-sighted commercial policy" (the "Resolution"). In the resolution, the European Parliament instructs the European Commission to proactively monitor developments in the blockchain sector, particularly as regards initiatives in the international supply chain. The resolution notes that there are at least 202 government blockchain initiatives in 45 countries related to the use of blockchain technology for international trade. The resolution calls on the European Commission to develop a set of guiding principles for the application of blockchains to international trade. The resolution also calls on the European Commission to set up an advisory group to develop a concept note for approved private pilot projects on the end-to-end use of blockchain in the supply chain, involving customs authorities and other authorities. border. The resolution recognizes some of the potential difficulties in the use of blockchain for commercial policy, including compliance with the general data protection regulation; however, he concludes by recalling that the European Union has the opportunity to become a major player in blockchain and international trade, despite the difficulties.
A link to the European Parliament resolution can be found here.
Issues of the Central Bank of Bahrain Draft for Token Trading Platforms
On 13 December 2018, the Central Bank of Bahrain issued new draft rules for "operators of crypto-asset platforms". The draft rules would provide a regulatory framework for licensing and supervision of crypto-asset roles that could be provided by a crypto-asset platform operator, such as a "principal, agent and … custodian." In general, the Central Bank of Bahrain explained that the drafts of the rules seek to protect customers by setting up reporting requirements and providing technological and information security standards. The Central Bank of Bahrain accepts feedback on the draft rules until 31 December 2018.
A link to the draft rules release can be found here.
Officer of the Central Bank of the United Arab Emirates, highlights the initiatives of Fintech
On December 12, 2018, Mubarak Rashed al-Mansouri, Governor of the Central Bank of the United Arab Emirates ("CBUAE"), spoke at the Arab Symposium #FinTex and highlighted several fintech initiatives undertaken by the CBUAE. According to Mr. Al-Mansouri, the CBUAE is developing a fintech roadmap to be able to proactively support development by incorporating up-to-date regulatory frameworks. As part of these initiatives, Mr. al-Mansouri highlighted four specific applications of technological innovation by the CBUAE:
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CBUAE is developing a national payment systems strategy that will be a payment ecosystem that supports "cash-free company goals" and creates "consumer-friendly, cost-effective and secure consumer electronic payment solutions".
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CBUAE has issued new standards for the assessed facilities that offer specific digital payment services.
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CBUAE is finalizing the new crowdfunding regulation.
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CBUAE is collaborating with the Saudi Arabia Monetary Authority to issue a common digital currency for cross-border transactions between the UAE and Saudi Arabia. The common digital currency would be supported by the legal currencies of both countries.
A link to Mr. al-Mansouri's speech can be found here.
Issues related to the monetary authority of the Cayman Islands in 2018 Guidance indications for compliance with the AML rules
In November 2018, the Cayman Islands monetary authority ("CIMA") issued new guidelines on the prevention and identification of money laundering and terrorist financing ("2018 orientation"). In particular, CIMA has tried to modify a number of provisions in its AML 2017 guidelines by updating its guidelines for financial service providers ("FSP"), such as regulated funds (eg mutual funds) and investment funds. unregulated investments (eg private funds).
The 2018 Guide generally provides updates in three areas. First, Guide 2018 provides an additional explanation of when and how an FSP can meet its Money Laundering Compliance ("AMLCO") obligations by delegation or custody. Secondly, Guide 2018 describes low-risk scenarios in which verification of a customer / applicant's identity is not necessary for the receipt of a payment, including by electronic means. Third, Guidance 2018 provides specific guidance for mutual funds and mutual fund administrators on how to comply with CIMA's Money Laundering Regulations (Revision 2018) ("AMLR 2018").
The 2018 AMLR applies to private funds domiciled in the Cayman Islands due to their status as "exempt companies" within the meaning of Article 4 (4) of the Cayman Islands Mutual Fund Act. The new 2018 Guide provides some explanations on how a private fund domiciled in the Cayman Islands might be able to accept subscriptions in digital tokens instead of fiat currency.
A link to the 2018 Guide can be found here.
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