We are pleased to highlight below some key regulatory developments related to the regulation of cryptocurrencies and cryptoassets in various jurisdictions from the recent weeks.
|AML||The Financial Action Task Force (FATF) has published an updated guidance on Virtual Assets (28 October 2021). Among other things, the guidance: (i) clarifies the definition of virtual assets and virtual asset service providers (VASPs); (ii) provides guidelines on the application of FATF standards to stablecoins; (iii) provides additional guidance on the risks and the tools available to countries to address the money laundering and terrorist financing risks of peer-to-peer transaction; (iv) provides guidelines on the licensing and registration of VASPs; (v) provides additional guidelines for the public and private sectors on the implementation of the “travel rule”; (vi) includes principles of information-sharing and co-operation amongst VASP Supervisors.|
|The Securities and Exchange Commission (“SEC”) charged RvT token issuers and the CEO of the Cayman Islands-based token issuing entity with $18 million illegal securities offering (8 September 2021). The SEC filed a complaint in the District of Massachusetts, charging Rivetz Corp. (“Rivertz”),Rivetz International SEZC (“Rivertz International”), as well as the President of Rivetz and the CEO of Rivetz International (together “the Defendants”), with “conducting an illegal, unregistered offering of securities through an initial coin offering”. At the time of offering, allegedly, “Rivertz did not have an operational product and the RvT token had no use”. The SEC has alleged that the Defendants offered and sold RvT Tokens to the general public for the purpose of capitalizing Rivetz’s business. Furthermore, the SEC has alleged that RvT token was marketed as an investment opportunity by promoting its value to investors; highlighting potential tradability of the RvT tokens on digital asset trading platforms; describing places for resale of the RvT tokens; touting the CEO’s abilities and managerial skills, including his past experience; and making claims re. RvT’s potential increase in value as a result of Rivertz’s efforts. The SEC requests the court for injunctive relief, the return of allegedly ill-gotten gains or unjust enrichment, together with prejudgment interest, and a civil penalty.|
|SEC has charged three media companies with illegal offerings of stock and digital assets (13 September 2021). The SEC charged the U.S.-based companies GTV Media Group Inc. (“GTV”), Saraca Media Group Inc. (“Saraca”), and Voice of Guo Media Inc. for “conducting an illegal unregistered offering of GTV common stock.” The SEC also charged GTV and Saraca for “conducting an illegal unregistered offering of a digital asset security referred to as either G-Coins or G-Dollars.” The SEC and the companies have reached a settlement, which includes cease-and-desist orders, and payment of more than $539 million, without the companies admitting or denying the SEC’s findings.|
|Derivatives and Commodities||The Commodity Futures Trading Commission (CFTC) Commissioner Dawn D. Stump has published a clarification on CFTC regulatory authority applicable to digital assets (23 August 2021). Among others, it emphasizes the difference between CFTC’s regulatory and enforcement authorities under the Commodity Exchange Act (“CEA”), and stipulates that the CFTC does not regulate digital assets even if they are commodities (as opposed to futures contracts and other derivatives based on digital assets).|
|CFTC imposed $1.25 million civil penalty against Kraken for illegal offering of margined retail commodity transactions and for failing to register as Futures Commission Merchant (FCM) (28 September 2021). The CFTC has pressed and settled charges against Payward Ventures, Inc. d/b/a Kraken (“Kraken”) for “illegally offering margined retail commodity transactions in digital assets, including Bitcoin, and failing to register as a futures commission merchant (FCM).”|
|The CFTC has filed charges against 12 companies offering binary options based off the value of crypto for having failed to register as FCMs, and against 2 derivatives trading services companies for providing misleading information to the CFTC (29 September 2021). All complaints were filed in a single day, and seek cease and desist orders from committing the charged violations of the CEA and CFTC regulations.|
|The CFTC has issued two orders imposing on Tether and Bitfinex fines totaling $42.5 million (15 October 2021). The first order, filing and settling charges against Tether Holdings Limited, Tether Limited, Tether Operations Limited, and Tether International Limited (d/b/a Tether) concerned Tether’s untrue or misleading statements and omissions of material fact with regard to the USDT stablecoin’s reserves. The order imposed $41 million civil penalty and required Tether to cease and desist from further violation of the CEA and CFTC regulations.
The second order, filing and settling charges against Bitfinex in relation to its cryptocurrency trading platform, concerned iFinex Inc., BFXNA Inc., and BFXWW Inc.’s (d/b/a Bitfinex) engagement “in illegal, off-exchange retail commodity transactions in digital assets with U.S persons” on its platform, as well its operation as an unregistered FCM. The order imposed a $1.5 million civil penalty and required Bitfinex to “implement and maintain additional systems reasonably designed to prevent unlawful retail commodity transactions”.
The CFTC has mentioned the assistance of the following regulators: Securities Commission of The Bahamas, British Virgin Islands Financial Services Commission, Ontario Securities Commission, Superintendencia del Mercado de Valores de Panama, Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Commission), and the Financial Services Authority Seychelles.
|Sanctions||The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has included the first virtual currency exchange in the list of entities sanctioned by the U.S. (21 September 2021). OFAC designated SUEX OTC, S.R.O. (SUEX), a Moscow-based virtual currency exchange, for its involvement in facilitation financial transactions for ransomware actors.|
|OFAC has published Sanctions Compliance Guidance for the Virtual Currency Industry (15 October 2021). The guidance intends to provide virtual currency industry members with guidelines concerning compliance with OFAC sanctions. Furthermore, OFAC has also updated two sections of “Frequently Asked Questions” with regard to virtual currency (559 and 646).|
|Establishment of National Enforcement Team||The US department of Justice has established National Cryptocurrency Enforcement Team (NCET) (6 October 2021). NCET will, among others: (i) deal with complex investigations and prosecutions of cryptocurrency cases; (ii) develop, in consultation with other agencies, strategic priorities for investigations and prosecution involving cryptocurrency; (iii) identify areas for increased focus, from investigatory and prosecutor perspective; (iv) collaborate and build relationships with private sector with relevant expertise; (v) provide training and advise to federal and prosecutorial agencies; (vi) support information and evidence coordination and sharing among law enforcement offices; (vii) develop and maintain relationship with U.S. and international enforcement agencies involved in cryptocurrency cases.|
|Stablecoins||U.S. Presidents Working Group of Financial Markets, joined by the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency (OCC) has released its report and recommendations on stablecoins (1 November 2021). The report emphasizes that the potential for the increased use of stablecoins as a means of payments raises concerns with regard to the “potential destabilizing runs, disruptions in the payment system, and concentration of economic power”. The report outlines the gaps in the regulators’ authority required to properly address and reduce such risks. The report includes recommendations to enact legislation which would subject payment stablecoins to comprehensive federal framework, and would include the following: requiring stablecoin issuers to be insured depository institutions; requiring custodial wallet providers to be subject to proper federal oversight; requiring to meet risk-management standards from actors which are criticial to the functioning of stablecoins; imposing limitations on stablecoin issuers’ affiliation with commercial entities; allowing supervisors to implement standards for the promotion of interoperability between stablecoins.|
|Tax||The President of the U.S. has signed into law an Infrastructure Investment and Jobs Act, which extends certain tax information reporting requirements to actors involved in digital asset transactions (15 November 2021). The definition of transaction-reporting “broker” as per the Bill has been expanded to include “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets”, and therefore the Bill may potentially impose tax information reporting requirements on validators (including miners, stakers, lightning nodes), software developers of non-custodial wallets and services or protocols (such as DeFi swap platforms creators), and other actors, which do not have the ability to satisfy these requirements and do not possess the information the reporting of which is required.
Senator Lummis and others introduced a bill which aims to revise the language of the signed Infrastructure Bill and exclude from the tax reporting obligation the following actors: (i) validators of distributed ledger technology transactions; (ii) non-custodial hardware or software providers; and (iii) developers of “digital assets or their corresponding protocols for use by other persons, provided that such other persons are not customers of the person developing such assets or protocols”.
|Securities||State regulators and New York Attorney General in the U.S. order crypto lending platforms to cease unregistered operations (July-October 2021). In the recent months, state securities regulators in the U.S., including in Alabama, Kentucky, New Jersey, Vermont and Texas, have issued cease-and-desist orders against crypto lending platforms alleging that their interest-bearing accounts are in violation of state securities laws.|
New Legal Framework
|The law aimed at providing a legal framework and clarity for companies dealing in crypto assets has taken effect (1 September 2021). The bill relating to the control of virtual currency and the rights of purchasers who obtain control of virtual currency for purposes of the Uniform Commercial Code (Bill 4474), defines the term “virtual currency” and applies key commercial and business laws to cryptoassets.|
|Advertising||The Canadian Securities Authority (CSA) and Investment Industry Regulatory Organizations of Canada (IIROC) have published a guidance on advertising, marketing and use of social media, by crypto trading platforms (CTPs) (23 September 2021). The guidance focuses on CTPs which are subject to the requirement to register as a dealer under Canadian securities regulation, and includes examples of misleading statements in advertising and marketing, as well as outlines concerns related to use of improper gambling-style contests, schemes and promotions. Furthermore, the guidance presents regulators’ expectations for the use of social media by CTPs.|
|CySEC issues Policy Statement on the registration and operations of crypto-asset service providers (CASPs) (13 September 2021). The Policy Statement outlines CySEC’s approach on the principles set out in the Cypriot AML/CFT law concerning CASPs activities, and CySEC’s directive for the prevention and suppression of money laundering and terrorist financing (Register of Crypto Asset Service Providers) as amended. Furthermore, the Policy Statement sets out CySEC’s expectation for CASPs’ compliance with the applicable regulatory framework.|
|The Central Bank of Spain has issued a guidance on registry of VASPs under Spanish AML law (19 October 2021). The guidance applies to the providers of crypto-to-fiat exchange services and the providers of custodian wallet services in Spain.|
New Legal Framework
|The Dubai Financial Services Authority (DFSA) has introduced its new regulatory framework for Investment Tokens (25 October 2021). The framework constitutes the first phase of the DFSA’s Digital Assets regime. Under the new framework, Investment Token would either be a Security Token or a Derivative Token. The framework aims to regulate the operation of “persons interested to market, issue, trade or hold [of] Investment Tokens in or from the Dubai International Financial Centre (DIFC) and Authorised Firms wishing to undertake Financial Services relating to Investment Tokens, such as dealing in, advising on, or arranging transactions relating to, Investment Tokens, or managing discretionary portfolios or collective investment funds investing in Investment Tokens”.|
|The UAE Securities and Commodities Authority (SCA) and Dubai World Trade Centre Authority (DWTCA) have signed an agreement which establishes a framework for crypto activities authorization by DWTCA (22 September 2021). The framework established under the agreement allows DWTCA to issue licenses and approval for conducting various financial activities related to crypto assets. The oversight, monitoring and inspection of entities operating within DWTCA’s free zone will be handled by the SCA.|
|Thai SEC has ordered crypto exchange operator Huobi to halt its operations in Thailand for failure to comply with local laws (4 September 2021). Thai SEC has recommended the Minister of Finance of Thailand to revoke Huobi’s license, as its management structure and the work system are inadequate to ensure that Huobi’s operation is in accordance with applicable laws and regulations. Huobi was ordered by the SEC to halt its operation until its business license is revoked, and to return or buy back the customer’s property within a three months period. As a guarantee for Huobi’s clients, the SEC has ordered the company to provide a security deposit in case of failure to return the funds within such timeframe.|
|China has banned virtual currency-related activities (24 September 2021). The People’s Bank of China has issued a notice declaring all virtual currency-related activities as illegal financial activities. It has specifically emphasized that provision of services by foreign virtual currency exchanges to Chinese residents via internet is also considered as illegal financial activity. The list of the illegal activities is particularly broad and covers crypto-to-fiat and crypto-to-crypto exchange, activities related to virtual currencies derivatives, providing information for trading of virtual currencies, issuing tokens used as means to raise funds or as coupons, and more.|
|South Korea (Conflict of Interest)||South Korean Financial Services Commission has introduced a conflict of interest rule for VASPs (28 September 2021). The South Korean government has revised the Enforcement Decree of the Act on Reporting and Using Specified Financial Transaction Information, and it now imposes a prohibition on VASPs, as well as on operators and staff members of VASPs, to trade virtual assets “issued by their own platforms or by other specially related entities”. Failure to comply may put the VASPs at risk to either be suspended from business or be subject to a KRW100 million fine.|
|GameFi / Play-to-Earn||Valve restricts blockchain-based cryptocurrency and NFT games on Steam (October 2021). Under the updated “Rules and Guidelines” of Valve’s gaming store platform Steam, the publication of applications “built on blockchain technology that issue or allow exchange of cryptocurrencies or NFTs” is no longer permitted.|