Cryptoassets for investment and financing

Regulatory threshold

What attributes do the regulators consider in determining whether a cryptoasset is subject to regulation under the laws in your jurisdiction?

Currencies

The US Department of Treasury Financial Crimes Enforcement Network (FinCEN) regulates money services businesses (MSBs) and money transmitters. The US Bank Secrecy Act of 1970 and FinCEN regulations considers each of the following to be MSBs:

  • currency exchangers;
  • issuers, redeemers or cashiers of travellers’ cheques, cheques, money orders or similar instruments;
  • the United States Postal Service;
  • a person who engages as a business in the transmission of funds; and
  • any business or agency which engages in any activity determined by regulation to be an activity similar to, related to, or a substitute for these activities (FinCEN, 2013).

 

The term ‘money transmitter’ includes a person that engages in the acceptance of currency, funds or other value that substitute for currency from one person and the transmission of currency, funds or other value that substitutes for currency to another location or person by any means (Code of Federal Regulation, Chapter 31, section 1010.100(ff)). The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies.

A person accepting or transmitting anything of value that substitutes for currency (such as Bitcoin) will be viewed as a money transmitter and, therefore, must register as such with FinCEN. The failure to register a money transmitting business is a federal offence punishable by civil and criminal penalties.

 

Securities

The definitions of a ‘security’ under the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 are virtually identical and each is broad enough to include the various types of instruments that are used in commercial marketplaces that one might suspect to fall within the ordinary concepts of a security. This includes common instruments such as stocks, bonds and notes, as well as the various collective investment pools and common enterprises devised by persons seeking to generate profits from the efforts and investments of others (ie, investment contracts and instruments commonly known as securities).

The definition of a ’security’ under US securities law does not include blockchain technology. However, the SEC has argued that investments in Bitcoin-related schemes that make use of blockchain technology are investment contracts – a contract, transaction or scheme involving (1) an investment of money, (2) in a common enterprise, (3) with the expectation that profits will be derived from the efforts of the promoter or a third party (BTC Trading Corp and Howey).

Investor classification

How are investors in cryptoassets classified and treated differently?

The same classifications (eg, retail, institutional, accredited and qualified institutional buyers) used for investors in traditional securities are used for investors in cryptoassets.

Initial coin offerings

What rules and restrictions govern the conduct of, and investment in, initial coin offerings (ICOs)?

Initial coin offerings are subject to the same rules and restrictions as any other offering of securities in the United States. If a cryptoasset is deemed a security, it is subject to the provisions of US securities laws. Specifically, the registration provisions of the Securities Act that require the offer or sale of securities to the public must be (1) issued pursuant to a registration statement filed with the SEC or (2) offered pursuant to an exemption (eg, Regulation D offering or Regulation A offering).

Security token offerings

What rules and restrictions govern the conduct of, and investment in, security token offerings (STOs)?

Security token offerings are subject to the same rules and restrictions as any other offering of securities in the United States. In other words, if a cryptoasset is deemed a security, it is subject to the provisions of US securities laws.

Stablecoins

What rules and restrictions govern the issue of, and investment in, stablecoins?

To the extent a stablecoin is deemed a security, it is subject to the same rules and restrictions as any other offering of securities in the United States under the jurisdiction of the SEC. If a stablecoin is deemed a commodity, it is subject to the same rules and restrictions as any other commodity under the jurisdiction of the Commodity Futures Trading Commission (CFTC).

Airdrops

Are cryptoassets distributed by airdrop treated differently than other types of offering mechanisms?

No.

Advertising and marketing

What laws and regulations govern the advertising and marketing of cryptoassets used for investment and financing?

If the cryptoasset is deemed a security, the same laws and regulations governing the advertising and marketing of securities would apply to the cryptoasset being offered. If a cryptoasset is a commodity future, swap or option, the sale of the cryptoasset will be subject to regulation by the CFTC and the same laws and regulations governing the advertising and marketing of CFTC-regulated products.

Trading restrictions

Are investors in an ICO/STO/stablecoin subject to any restrictions on their trading after the initial offering?

Yes, if the cryptoasset is considered a security, investors are subject to the same applicable restrictions on secondary trading as non-digital asset securities.

Crowdfunding

How are crowdfunding and cryptoasset offerings treated differently under the law?

Crowdfunded cryptoassets that are securities are subjected to regulation by the SEC and must be conducted in compliance with the Securities Act and Regulation Crowdfunding.

Transfer agents and share registrars

What laws and regulations govern cryptoasset transfer agents and share registrars?

Firms that act as a transfer service for digital assets that are securities are subject to regulation by the SEC. As noted by former SEC Commissioner Kara Stein, ‘creative uses of blockchain are still in their infancy . . . [and] a lot of questions will need to be answered.’ Echoing Commissioner Stein’s comments, former SEC Chair Mary Jo White noted that: ‘[b]lockchain technology has the potential to modernize, simplify, or even potentially replace current trading and clearing and settlement operations.’ However, as White noted in the same speech:

 

One key regulatory issue is whether blockchain applications require registration under existing [SEC] regulatory regimes, such as those for transfer agents or clearing agencies. We are actively exploring these issues and their implications. [The SEC’s] Advanced Notice of Proposed Rulemaking and Concept Release on transfer agent regulations... asked for public comment on the use of blockchain technology by transfer agents and how such systems fit within federal securities regulations.

 

A key component of the SEC’s supervision of the securities clearance and settlement system is its authority to regulate clearing agencies. Before performing clearing agency functions, including trade comparison, netting, matching and settlement activities, intermediaries must either register with the SEC or apply for an exemption from registration.

 

Clearing corporations

A blockchain technology platform could be required to register as a clearing corporation if it compares the trades of users of the platform, clears the trades and prepares instructions for automated settlement of the trades. The platform could also be required to register as a clearing corporation if the platform acts as the common counterparty and guarantees the completion of trades.

 

Depositories

A blockchain technology platform that retains custody of digital assets that are deemed securities could be deemed to be acting as a depository. In the BTC Trading Corp case, the SEC concluded the defendants had custody and control of customer funds by virtue of controlling the digital wallet in which the assets were stored. Similarly, a blockchain technology platform could be deemed to be acting as a depository if it effects deliveries of securities between participants via the blockchain (a book entry system that transfers ownership electronically), without the need for the physical movement of securities.

Even if a blockchain technology platform is not deemed to be acting as a depository, it could be deemed to be acting as a transfer agent.

 

Transfer agents

A blockchain technology platform could be required to register as a transfer agent if it monitors the issuance of securities or registers the transfers of securities. While it is unlikely a blockchain technology platform would countersign securities, platforms such as a distributed autonomous organisation could be deemed to be monitoring the issuance of securities with a view of preventing unauthorised issuance (ie, a registrar, registering the transferring of such securities). Other blockchain platforms could be deemed to be registering the transfer of securities, exchanging or converting securities, or transferring record ownership of securities by a bookkeeping or ledger entry without physical issuance of securities certifications.

Anti-money laundering and know-your-customer compliance

What anti-money laundering (AML) and know-your-customer (KYC) requirements and guidelines apply to the offering of cryptoassets?

To the extent a firm offers or transmits cryptoassets and is therefore subject to the US Bank Secrecy Act of 1970 (BSA), the same AML, KYC and know your business, and Customer Identification Program requirements that exist are applicable to that firm as firms that deal solely in fiat currencies.

Sanctions and Financial Action Task Force compliance

What laws and regulations apply in the context of cryptoassets to enforce government sanctions, anti-terrorism financing principles, and Financial Action Task Force (FATF) standards?

To the extent a firm offers or transmits cryptoassets and is therefore subject to the BSA, the same laws and regulations enforcing government sanctions, anti-terrorism efforts and FATF standards apply to cryptoasset and fiat firms.