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 second 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 review the new amendments to the Canadian Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations.
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.
Gems, coins, bells and bottle caps: Canadian AML regime amendments affect some video game and social media virtual currencies
Providers of interactive entertainment services and platforms are taking a careful look at key definitions under new amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Suspicious Transaction Reporting Regulations. These new amendments (the New Regulations) will come into force on June 1, 2021.
The purpose of these New Regulations is to close loopholes found in the existing regime and to adapt to commercial realities in an era of e-commerce, FinTech, and digital technology. In order to understand whether a particular provider of an interactive entertainment service or platform is operating a “money service business,” it is critical to understand what types of virtual currencies will subject a provider to the New Regulations. Read more.
- OCC conditionally approves conversion of Protego Trust Bank. On February 5, the Office of the Comptroller of the Currency (OCC) announced it issued a conditional approval to Protego Trust Company, a Washington state-chartered trust company, to become Protego Trust Bank, NA. Protego also issued a press release explaining its intent to form “a new kind of bank designed and built specifically for institutional clients seeking opportunities within the world of digital assets,” enabling its clients to “hold, trade, lend and issue digital assets.”
- FINCEN extends commend period for NPRM on cryptocurrency recordkeeping. On January 26, the Financial Crimes Enforcement Network (FinCEN) extended the reopened public comment period and set one deadline for all comments on its notice of proposed rulemaking (NPRM) regarding certain transactions involving convertible virtual currency or digital assets with legal tender status. All comments on the NPRM are due 60 days from the date of publication of the extension notice in the Federal Register, which deadline is expected to close on March 29, 2021. See our January edition for information on the NPRM.
- Library of Congress reports on taxation of block rewards. On February 3, the US Library of Congress released “Taxation of Cryptocurrency Block Rewards in Selected Jurisdictions.” The report was issued for Congress and surveys 31 countries’ tax treatment of new tokens obtained by cryptocurrency mining or staking, known as “block rewards.” The report also discusses for each of these countries the tax implications of cryptocurrency tokens acquired through airdrops and hard forks, known as “chain splits.” The report provides available published guidance for each country and where no explicit rules or guidance are available, the report provides general information from legal scholars and tax experts that may help in determining the tax treatment of these assets.
- SEC updates list of firms using inaccurate information to solicit investors. The Securities and Exchange Commission (SEC) on January 21, announced that it updated its list of unregistered entities that use misleading information to solicit primarily non-US investors, adding 28 soliciting entities, three impersonators of genuine firms, and six bogus regulators. The SEC’s list, known as the Public Alert: Unregistered Soliciting Entities (PAUSE) list , enables investors to better inform themselves and avoid being a victim of fraud. The latest additions are firms that SEC staff found were providing inaccurate information about their affiliation, location, or registration, approximately eight of which appear to target cryptocurrency investors.
- Hawaiian digital currency sandbox seeks second round participants. On January 25, the State of Hawaii’s Digital Currency Innovation Lab (DCIL) announced that it seeks new entities in the cryptocurrency space to join the second round of the program. The program facilitates digital currency companies to offer services within the state without a money transmitter license through June 30. Applicants are encouraged to apply through the HTDC website by February 26.
- NY DFS announces techsprint competition on Digital Regulatory Reporting in the Virtual Currency Industry. The New York Department of Financial Services (DFS) announced it will sponsor DFS’s first-ever techsprint to design a Digital Regulatory Reporting mechanism for virtual currency companies. The techsprint will convene virtual currency professionals, regulators and technologies during the first two weeks of March 2021 and culminates with a “Demo Day” on March 12. Each techsprint team will work to address one of several defined problem statements:
- How can DFS achieve real-time or more frequent access to company financial data from virtual currency licensees and receive early warning signs of financial risks to the companies or their customers?
- How can DFS obtain real-time transaction data from its licensees and automatically analyze the data to safeguard against illicit financing risks?
- How can DFS use tools such as natural language processing, machine learning, and artificial intelligence to identify risks by processing and analyzing supervisory reports that are submitted by licensees in a wide range of formats?
- How can DFS use technology to facilitate information-sharing among licensees to help them more quickly identify and stop scams, ransomware strikes, and other criminal enterprises that put licensees and their customers at risk?
Additional information, including registration instructions, can be found on the DFS website.
- BNY Mellon to offer digital asset custody services. On February 11, BNY Mellon reportedly announced it will begin offering custody solutions for bitcoin and other digital currencies to its asset-management clients.
- NIST issues report on blockchain networks. Earlier this February, the National Institute of Standards and Technology (NIST) released the report “Blockchain Networks: Token Design and Management Overview,” evaluating how “blockchain technology has enabled the new software paradigm for managing digital ownership in partial- or zero-trust environments.” The report discusses token categorization, wallet and key management, transaction management, infrastructure management, and deployment scenarios and use cases.
- Blockchain analytics companies report on cryptocurrency crime. Earlier this month, CipherTrace published its Cryptocurrency Crime and Anti-Money Laundering Report. The report showed that blockchain fraud continues exceed hacks and thefts in 2020, with bitcoin fraud comprising 73 percent of total 2020 cryptocurrency crime volume. Additionally, Chainalysis recently published its 2021 Crypto Crime Report detailing cryptocurrency crime trends for 2020. In 2019, criminal activity represented 2.1 percent of all cryptocurrency transaction volume, or roughly $21.4 billion worth of transfers. In 2020, the criminal share of all cryptocurrency activity fell to just 0.34 percent, or $10 billion in transaction volume.
- BIS releases third annual survey on central banks’ CBDC initiatives. On January 27, the Bank for International Settlements (BIS) released its third annual survey on CBDCs, reporting that central banks are progressing from conceptual research to practical experimentation, and certain central banks are likely to launch retail CBDCs in the next three years.
- BIS Innovation Hub announces 2021 work program and launches Innovation Network. On January 19, the BIS Innovation Hub (BISIH) announced its annual work program to focus on six key themes, such as cybersecurity, central bank digital currencies, next-generation financial market infrastructures, among others. As part of the program, the BIS launched the BIS Innovation Network, a network of experts drawn from the BIS’s member central banks, to support BISIH initiatives as well as foster cooperation in central bank tech projects and solutions.
- ABA updates its digital assets white paper. On January 20, the American Bar Association (ABA) released an update to its white paper entitled, Digital and Digitized Assets: Federal and State Jurisdictional Issues. Prepared by the ABA Derivates and Futures Law Committee, the white paper provides legal analysis and information on topics related to digital assets such as enforcement under the Commodity Exchange Act and CFTC regulation, the Securities Act and Exchange Act, the Investment Company Act and Investment Advisers Act, FINCEN regulation, international regulation and state laws. The January update addressed new issues arising in the cryptocurrency space.
FEDERAL ENFORCEMENT ACTIONS
- SEC charges three individuals with digital asset frauds. The SEC on February 1 announced it charged three individuals with defrauding hundreds of retail investors out of more than $11 million through two fraudulent and unregistered digital asset securities offerings. The SEC complaint alleged that Kristijan Krstic, founder of Start Options and Bitcoiin2Gen, and John DeMarr, a US-based promoter for the companies, fraudulently induced investors to buy digital asset securities through false marketing claims. Additionally, the defendants promoted Bitcoiin2Gen’s unregistered ICO of B2G tokens. The complaint seeks injunctive relief, disgorgement plus interest, penalties, and an officer-and-director bar against Krstic and DeMarr. The DOJ brought a parallel criminal action against DeMarr in the Eastern District of New York. See our March 2020 edition for information on related cases.
- Founder of cryptocurrency hedge fund pleads guilty to securities fraud. On February 4, the US Attorney’s Office for the Southern District of New York announced that Stefan He Qin, the founder of two cryptocurrency hedge funds, the Virgil Sigma Fund LP and the VQR Multistrategy Fund LP, pled guilty to one count of securities fraud for allegedly defrauding investors of nearly $100 million. The complaint alleged that Qin stole investor money from Virgil Sigma for personal use and, in December 2020, Qin tried to steal investor money from VQR to pay back his investors in Virgil Sigma. The charge carries a maximum term of 20 years in prison. See our January edition for additional information.
- San Francisco man ordered to return stolen cryptocurrency and cash to victims of cryptocurrency fraud. On January 26, the US Attorney’s Office for the Northern District of California and the FBI announced that Jerry Ji Guo was sentenced for his role in a scheme to defraud his clients of cash and cryptocurrency in connection with an initial coin offering. Guo had previously plead guilty to the charge, admitting he represented himself as an initial coin offering consultant and promised his clients he would perform marketing and publicity services. Rather than perform these services, Guo embezzled the clients’ cash and cryptocurrency. Guo was ordered to pay nearly $4.4 million in restitution and was sentenced to a term of six months in prison with three years of supervised release.
- Cryptocurrency trader charged with Ponzi scheme. On January 26, the US Attorney’s Office for the Southern District of New York and the FBI jointly announced the unsealing of a complaint in Manhattan federal court charging Jeremy Spence, a/k/a Coin Signals, a cryptocurrency trader who solicited funds for various cryptocurrency funds that he operated, with commodities fraud and wire fraud offenses. As alleged, Spence took cryptocurrency worth over $5 million from more than 170 individual investors after making false representations in connection with these cryptocurrency funds. Spence is charged with one count of commodities fraud, which carries a maximum sentence of 10 years in prison, and one count of wire fraud, which carries a maximum sentence of 20 years in prison.
- Ontario man pleads guilty to operating unlicensed bitcoin-cash exchange. On January 29, the US Attorney’s Office for the Central District of California announced it had charged Hugo Sergio Mejia with operating an unlicensed money transmitting business and money laundering and Mejia entered a plea agreement on the charges. The charges asserted that Mejia’s unlicensed money transmitting business exchanged at least $13 million in bitcoin and cash over a two-and-a-half-year period. Mejia agreed to forfeit all assets derived from the illegal conduct and faces a statutory maximum sentence of 25 years in federal prison.
- Serbian man extradited to US under fraud charges. On February 3, the US Attorney’s Office, Northern District of Texas, announced that Antonije Stojilkovic was extradited from Serbia to the US to face charges of conspiracy to commit wire fraud and conspiracy to commit money laundering in July 2020, based on allegations that he and six co-conspirators defrauded investors of more than $70 million in a scheme involving fraudulent investing platforms for binary options and cryptocurrency mining. If convicted, Stojilkovic and his codefendants face up to 20 years in federal prison.
- DOJ launches global action against NetWalker ransomware. On January 27, the US Department of Justice (DOJ) announced a coordinated international law enforcement action to disrupt a sophisticated form of ransomware known as NetWalker. NetWalker ransomware has impacted numerous victims, including companies, municipalities, hospitals, law enforcement, emergency services, school districts, colleges, and universities. Among high points of the NetWalker action so far are charges brought against a Canadian national in relation to NetWalker ransomware attacks in which tens of millions of dollars were allegedly obtained; seizure of approximately $454,500 in cryptocurrency ransom payments; and disabling of a dark web hidden resource used to communicate with NetWalker ransomware victims.
- OFAC enters into settlement with BitPay. On February 18, the US Department of the Treasury announced that the Office of Foreign Assets Control (OFAC) entered into a $507,375 settlement agreement with BitPay, Inc., a payment processing solution for digital currency, for violations of multiple sanctions programs. BitPay allowed persons apparently located in the Crimea region of Ukraine and in Cuba, North Korea, Iran, Sudan and Syria to transact with US merchants and others using approximately $129,000 worth of digital currency; before effecting the transactions, DoT said, BitPay had location information that showed these persons were in sanctioned jurisdictions. The enforcement release states, “The settlement amount reflects OFAC’s determination that BitPay’s apparent violations were not voluntarily self-disclosed and were non-egregious.”
STATE ENFORCEMENT ACTIONS
- Cryptocurrency trading platform faces charges of selling unregistered securities. On February 17, the attorney general of New York and the SEC filed complaints against Coinseed, Inc. and its founder and CEO Delgerdalai Davaasambuu alleging they sold unregistered securities, among other violations. The complaint filed in the Supreme Court of the State of New York charges Coinseed Inc., Davaasambuu and another top executive with selling unregistered securities in the form of digital tokens and acting as unregistered commodities broker-dealers. The complaint seeks restitution, disgorgement, permanent injunctions against the defendants, and a bar against the defendants prohibiting them from participating in any future securities offerings or as commodities broker-dealers. The SEC complaint accuses Coinseed and Davaasambuu of the offer and sale of unregistered tokens. The SEC seeks a permanent injunction, disgorgement and civil monetary penalties.
- SDNY rejects Virgil Griffith’s motion to dismiss. On January 27, Judge P. Kevin Castel of the US District Court for the Southern District of New York (SDNY) issued an opinion and order rejecting a motion to dismiss filed by Virgil Griffith, an Ethereum cryptocurrency developer, seeking dismissal of an indictment charging him with conspiring to violate the International Emergency Economic Powers Act (IEEPA), alleging a 15-month conspiracy to provide North Korea with digital currency services.
- NYDFS settles with Bitfinex and Tether. On February 23, the New York Attorney General announced it had entered into a settlement agreement with Bitfinex and Tether, and related entities, on February 18 regarding operation of the Bitfinex trading platform. The settlement agreement details the findings of the New York Office of the Attorney General (OAG) that Bitfinex and Tether misled the market about the tether stablecoin’s 1:1 backing with the US dollar, as well as the status of Tether reserves for such backing. Bitfinex and Tether neither admit nor deny these findings. The settlement agreement requires the respondents to pay the state a penalty of $18.5 million, submit to mandatory reporting requirements, and discontinue trading in New York state. For more information on the OAG’s investigation, see our September 2020 issue.
SPOTLIGHT ON INTERNATIONAL DEVELOPMENTS
- Canadian securities regulator approves Purpose Bitcoin ETF. On February 11, the Ontario Securities Commission approved the first publicly traded bitcoin exchange-traded fund (ETF) in North America. Asset manager Purpose Investment’s ETF reportedly seeks to replicate the performance of the price of bitcoin (BTC, -0.67 percent) minus fees and expenses.
- China’s Blockchain Service Network unveils roadmap for 2021. On January 14, the People’s Republic of China’s Blockchain Service Network (BSN) revealed its BSN 2021 Outlook, detailing a roadmap for key sectors through the year. In the report, BSN highlighted plans to build a digital currency payment network, standardizing digital currency transfer and payment with several companies and banks. BSN also highlighted plans to expand public city nodes, reaching 150 local cities in China as well as 50 countries internationally. BSN also reaffirmed their investment in the R&D of new infrastructure for China’s digital economy and social governance.
- Israeli securities regulator finds cryptocurrency subject to Israeli securities laws. On February 2, the Israeli Securities Authority reportedly issued an advance ruling paper, finding that cryptocurrency is a security subject to the Israeli Securities Law. The paper was issued in response to the request of a blockchain company for a determination that its token was a utility token allowing access rights only to the company’s services. The authority rejected the company’s arguments, finding that the company’s tokens may have a secondary market for investment purposes, the tokens are a significant asset of the company, and the company has a right to change the value of the tokens independently and allow their use for future developments.
- Bank of Korea publishes findings on CBDC. On February 8, the Bank of Korea reportedly published its findings on legal issues surrounding CBDC, and announced its intent to conduct an analysis of operational procedures for a CBDC rollout and a CBDC pilot. The Bank concluded, “Transformation from cash to digital currency could raise GDP by as much as 3 percent. Digitalization of currency would accelerate currency circulation and reduce maintenance costs. It would also be an efficient way to realize negative interest rates, overall enhancing the government’s monetary management.”
- Philippine central bank establishes guidelines on virtual asset service providers. On January 25, the Bangko Sentral Ng Pilipinas (BSP) announced approval by the Monetary Board of new guidelines on virtual asset services providers to cover new business models and activities. The new guidance is intended to conform to Financial Action Task Force (FATF) risk management standards.
In case you missed it
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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