FINRA’s New Regulatory Notice, A New Task Force Created by Executive Order, and Cryptocurrency Trading Companies Push Forward
The past week’s cryptocurrency enforcement news centers on continued scrutiny of the industry along with increased investor optimism following recent statements from SEC Division of Corporate Finance director Bill Hinman that the SEC does not consider Bitcoin and Ether to be securities. Here is a summary of the most significant and interesting enforcement-related news from the past week.
FINRA Issues Regulatory Notice. On Friday, July 6, 2018, the Financial Industry Regulatory Authority (FINRA) issued a regulatory notice requesting member firms submit details relating to their cryptocurrency activities. FINRA encouraged its members to “promptly notify it if it, or its associated persons or affiliates, currently engages, or intends to engage, in any activities related to digital assets, such as cryptocurrencies and other virtual coins and tokens.” In addition, until July 31, 2019, FINRA encouraged each of its member firms to keep its Regulatory Coordinator “abreast of changes in the event the firm, or its associated persons or affiliates, determines to engage in activities relating to digital assets not previously disclosed.”
The regulatory notice is not mandatory, but FINRA noted that its new efforts will supplement its existing efforts to ascertain the extent of FINRA member involvement related to digital assets. FINRA explained in the notice that it was increasing its outreach to members because the market for digital assets has grown significantly and that significant investor protection concerns exist. FINRA stated that the types of activities of interest if undertaken by a member, or associated person or affiliate, includes, among others: purchases, sales or executions of transactions in digital assets; purchases, sales or executions of transactions in a pooled fund investing in digital assets; purchases, sales or executions of transactions in derivatives tied to digital assets; participation in an ICO or pre-ICO; creation or management of a platform for the secondary trading of digital assets; acceptance of cryptocurrencies from investors; and mining of cryptocurrencies.
Bitcoin ETF Application Filed with SEC. Early last week it was announced that the SEC is examining an application for a Bitcoin ETF license from the Chicago Board Options Exchange (CBOE) Global Markets, who have proposed to partner with Van Eyck Investment and SolidX. The ETF is being offered through the VanEck SolidX Bitcoin Trust and is the Trust’s third attempt to obtain the ETF license. The first two attempts were rejected in early 2017 where the SEC stated that “the Commission believes that the significant markets for bitcoin are unregulated. Therefore, the Commission does not find the proposed rule change to be consistent with the Exchange Act.” Currently, there are about 10 Bitcoin-linked ETFs awaiting regulatory approval.
The SEC published the application, which was filed on June 26, 2018, to invite comments from the public. The CBOE plans to offer clients the opportunity to buy shares in SolidX, which are currently worth approximately 25 Bitcoin. The fund itself will acquire Bitcoin in OTC markets. If approved, accredited investors will be able to trade a Bitcoin ETF in the form of baskets of 5 SolidX shares on the CBOE exchange. To try to alleviate concerns over investor risk and overall security, CBOE plans to offer an insurance system backed by SolidX that will cover loss of Bitcoin by, among other things, theft, destruction, Bitcoin in transit, and computer fraud and other loss of the private keys necessary to access the Bitcoin. The insurance policy will carry initial limits of $25 million in primary coverage and $100 million in excess coverage. If the application is approved, the Bitcoin ETF would be open to client investment in the first quarter of 2019.
CBOE filed its application less than two weeks after, as we recently reported, SEC Division of Corporate Finance director Bill Hinman stated that the SEC does not consider Bitcoin and ether to be securities. Some predict that approval of Bitcoin ETFs would send potentially billions of dollars pouring into the cryptocurrency market. JP Morgan recently called bitcoin-based ETFs the “holy grail for owners and investors”. It will be interesting to see whether the SEC’s thinking about Bitcoin ETFs has changed as federal and state regulators have cracked down on the industry significantly in the past six months.
White House Announces New Task Force to Focus on Digital Currency Fraud. On Wednesday, July 11, 2018, the White House announced an executive order creating a task force to protect consumers from fraud, including digital currency fraud. The executive order, titled Executive Order Regarding the Establishment of the Task Force on Market Integrity and Consumer Fraud, establishes the Task Force on Market Integrity and Consumer Fraud. The order states that the Task Force will be led by the DOJ and will regularly convene meetings and will invite participation from a host of senior officials from executive departments and agencies, including the SEC, the CFTC, the FTC, and the CFPB. The function of the task force, in part, is to “provide guidance for the investigation and prosecution of cases involving fraud on the government, the financial markets, and consumers, including cyberfraud and . . . digital currency fraud.” The Task Force is also responsible for making recommendations to the President to enhance inter-agency cooperation in investigating and prosecuting fraud and other financial crimes.
Although the executive order creates a formal task force, the industry has seen numerous recent examples of state and federal agencies coordinating regulatory efforts. For example, as we have recently reported, the DOJ and SEC are coordinating enforcement efforts and state regulators are banding together to crack down on fraudulent ICOs. The new executive order is yet another warning shot to those in the industry that regulators will be looking to find those who are engaging in fraudulent activity.
U.S. Cryptocurrency Exchange Looking to Add 5 Additional Tokens. On Friday, July 13, 2018, the U.S.-based cryptocurrency exchange Coinbase, Inc. stated in a blog post that it is looking into adding 5 additional virtual tokens. Currently, Coinbase allows users to buy and sell four different digital coins – Bitcoin, Bitcoin Cash, Ether and Litecoin. It announced it is looking into listing Cardano, Basic Attention Token, Stellar, Zcash and Ox.
The post notes that Coinbase will be working with local banks and regulators to add the tokens in as many jurisdictions as possible, but did not guarantee that any of them will be listed for trading. Coinbase noted that some of the tokens may only be available in certain countries because of legal restrictions and that it was not representing that the tokens are not securities under a particular country’s laws.
The question for Coinbase and U.S. regulators will be whether the tokens Coinbase is looking into adding are considered by the SEC to be securities. Coinbase is not licensed with the SEC and therefore cannot facilitate trading of securities in the U.S. As we noted last month, SEC Division of Corporate Finance director Bill Hinman recently stated that the SEC does not consider bitcoin and ether to be securities, but was silent about other cryptocurrencies.