Introduction

Are digital tokens issued by blockchain companies securities under U.S. law? Much of the industry, including several prominent law firms, has taken the position that they are not. The Securities and Exchange Commission (SEC) has consistently stated that many or even most are securities. It recently issued a “Framework” that laid out a host of criteria that will guide the agency’s analysis. With the framework and its first blockchain no-action letter, the SEC has now articulated three scenarios where a digital token may not be a security: 1) if the token is merely a store of value like Bitcoin; 2) pursuant to its no action letter, if the token exists in essentially a closed system designed for consumptive use only and has a fixed value pegged to the dollar; or 3) where the “efforts of others” prong from the Howey test is not met. The framework focuses mostly on the third case.

We will review the framework, and suggest a way to strengthen the SEC’s standard to clarify how a digital token could transition to a non-security even if initially issued as a security. We believe that if a clear and workable regime is not adopted soon, the U.S. risks being left behind in the race to unlock blockchain’s transformative potential.

Continue Reading Improving upon the SEC’s Blockchain “Framework”: Toward a Reasonable Regulation of Digital Tokens

Last week the SEC offered its clearest guidance yet on when blockchain tokens and other digital assets would be classified as “securities” under U.S. securities law and subject to SEC regulation.

Specifically, the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) issued its first-ever “Framework for ‘Investment Contract’ Analysis of Digital Assets.

Continue Reading SEC Clarifies Application of Securities Regulation to Blockchain Tokens, ICOs

As they say, everything’s bigger in Texas, including initial coin offerings. A Texas federal court recently unsealed a complaint filed by the Securities and Exchange Commission (SEC) against a Texas-based company (the “Company”) that presents itself as the “world’s first decentralized bank” and claims to have provided “the largest ICO to date.”1 Among other things, the Company is accused of engaging in the offering of securities without properly registering with the SEC and defrauding investors in the process.

Continue Reading Texas-Sized Initial Coin Offering Faces Multiple Allegations in SEC Lawsuit

CU Ledger, a consortium of U.S. credit unions, announced on Monday, March 11, that it will work with IBM to develop blockchain solutions to improve services such as identity authentication and know-your-customer (KYC) compliance. CU Ledger also indicated it is looking to blockchain to improve payments and lending.

Marie Wieck, General Manager, IBM Blockchain explained that through their collaboration, “credit unions will be able to cooperate and receive shared value from quickly exchanging sensitive data in a permissioned, individually controlled, and transparent way. This decentralized approach using blockchain helps put the customer in control of their own identity.”

CU Ledger is a credit union-owned CUSO (credit union service organization), formed in 2017 by a consortium of U.S. credit unions interested in exploring and developing blockchain solutions for their business needs.

CU Ledger expects its blockchain network to be available to credit unions beginning later in 2019.

On August 30, 2018, Andrew MacArthur and Ralph Dengler published “How to conduct a blockchain IP audit” in World Intellectual Property Review. Here is an excerpt:

The rise of blockchain technology and its many applications, including banking and supply chain, continues to disrupt business. Blockchain provides the benefits of being immutable and decentralized, among others. It integrates distributed networks, cryptography, and consensus algorithms in potentially new and complex ways, forcing companies to reconsider how IP—patents, trade secrets, trademarks, trade dress, and copyright—should be optimized.

Continue Reading How to Conduct A Blockchain IP Audit

While industry watchers in Washington, DC eagerly await the next fintech charter pronouncement from the Office of the Comptroller of the Currency (OCC), the Federal Trade Commission (FTC) has quietly established itself as one of the main federal fintech regulators. The FTC was not the first federal agency active in the space—that was the Bureau of Consumer Financial Protection (Bureau) with Project Catalyst; and it has not been the splashiest either—the OCC probably has that honor. But with a combination of enforcement actions, industry outreach, and strategic appointments and initiatives, the FTC has developed a consistent fintech presence.

Continue Reading Is the FTC the Federal Fintech Regulator to Watch?

Companies involved in global supply chain services are becoming increasingly interested in blockchain technology and how the use of this technology can enhance efficiency and security within the supply chain. Blockchain-based applications have enormous potential to transform transportation and logistics operations in the United States and worldwide.

Last month at Transparency 18 in Atlanta, approximately 40 companies performed demonstrations for supply chain stakeholders from around the world exhibiting how software using blockchain and other disruptive technologies could enhance supply chain efficiency. In addition to private stakeholders, government agencies, such as various customs authorities, have expressed interest in using blockchain technology as a foundational element for more robust trusted trader programs and improved risk management systems.

Continue Reading GDPR’s Impact on the Use of Blockchain to Facilitate International Trade

Blockchain is a transformative technology that already is altering the way business is done across many industries. The name “blockchain” refers to digital, decentralized and distributed ledger technology that provides a means to immutably record information (i.e., a “block”) and share and maintain the records of that information (i.e., a “chain”) within a public or private community. The underlying digital ledger technology relies on cryptographic principles and acts as a secure repository for the information being recorded and shared. For a simple example (and real-world application), consider the deed to a parcel of land. Under the traditional method of recording ownership, a centrally maintained, manual ledger of entries and volumes of related documents reflect the history of the property as it was owned and transferred over time. Using blockchain technology, a decentralized, digital ledger permanently records all such transactions, building upon the prior transactions, and remains accessible to anyone with the cryptographic “key.”

Continue Reading Intellectual Property Law Considerations in the Brave New World of Blockchain

The SEC Division of Investment Management recently published a letter to the Securities Industry and Financial Markets Association (SIFMA) addressing the interest among sponsors in offering registered funds that would hold cryptocurrencies and cryptocurrency-related products. The Division emphasized that flexibility to innovate is a key feature of the Investment Company Act of 1940 (the “1940 Act”) and reiterated that the Division seeks to “foster innovation that benefits investors and preserves the important protections that Congress established in the 1940 Act.”1 The Division noted, however, that cryptocurrencies and related products are in many ways unlike the types of investments typically held by registered funds, and, as a result, there are a number of investor protection issues that need to be addressed before sponsors begin offering investments in cryptocurrency-holding funds to retail investors.

Continue Reading SEC Addresses Cryptocurrency Holdings by Registered Funds

The Office of Foreign Assets Control (“OFAC”), responsible for enforcing U.S. economic sanctions, has taken its first steps to tackle the exploding use of digital currencies. On March 19, 2018, OFAC released a digital currency-related FAQ indicating that OFAC may include digital currency addresses on its Specially Designated Nationals (“SDN”) list of blocked persons, companies and entities.

In its guidance, OFAC defines digital currency broadly to include “sovereign cryptocurrency, virtual currency (non-fiat), and a digital representation of fiat currency.” This definition covers typical cryptocurrencies (Bitcoin, Litecoin, Ethereum, etc.) and the purportedly oil-backed “petro-gold” token issued by the government of Venezuela.

Continue Reading Cryptocurrency Addresses on OFAC Sanctions List