Technology facilitates legal and illicit transactions alike. Advances in payments technologies and cryptocurrencies such as Bitcoin, Monero, and Zcash allow criminal enterprises to dissect, route, and reaggregate small transactions to evade detection by regulatory and enforcement agencies. This is particularly true with international transactions where, for example, the exchange from cryptocurrency to fiat currency takes place outside U.S. financial supervision.

To address these challenges, the Federal Reserve Board and the Financial Crimes Enforcement Network (FinCEN and together, Agencies) issued a joint notice of proposed rulemaking (Proposed Rule) on October 23, 2020, to amend the Recordkeeping Rule and Travel Rule under the Bank Secrecy Act (BSA) and to define “money” as it applies to both rules. Specifically, the Proposed Rule:

  1. Lowers the threshold for collecting, retaining, and transmitting information on international funds transfers and transmittals of funds from $3,000 to $250. The threshold for domestic transactions would remain unchanged at $3,000; and
  2. Defines money to extend the Recordkeeping Rule and Travel Rule to digital assets used for legal tender and convertible virtual currency (CVC).

Written comments on this proposed rule are due November 27, 2020.


Continue Reading BSA Alchemy: While Lowering the Recordkeeping and Travel Threshold, FinCEN and the Fed Turn Virtual Currency into Real Money

On July 23, 2020, the Office of the Comptroller of the Currency (OCC) released Interpretive Letter #1170 (Letter) confirming that safekeeping and custody of cryptocurrency and crypto-assets (collectively, cryptocurrency) are traditional banking services and, therefore, are permissible activities for national banks and federal savings associations. The Letter also provides the usual admonition that banks may provide permissible services as long as they manage the risks and comply with applicable law, which, for cryptocurrency-related services, involves additional technological and practical challenges.

Banks have long provided safekeeping and custody services for their customers, and, over time, these services evolved along with the business of banking to now include safekeeping and custody of various physical and electronic assets. There is a well-established body of laws, regulations, and guidance supporting banks acting in both fiduciary and nonfiduciary capacities when performing such safekeeping and custody activities. The Letter recognizes this evolution, and states that safekeeping and custody of cryptocurrency is a logical outgrowth of national banks’ existing authority.

Key Takeaways

Custody services for cryptocurrency generally involve holding the unique cryptographic keys used to access units of cryptocurrency in “hot” or “cold” wallets and providing related services, including facilitating the customer’s cryptocurrency and fiat currency exchange transactions, transaction settlement, trade execution, record keeping, valuation, tax services, and reporting. While there is a well-developed body of law for custody services, the OCC found that the uniqueness of cryptocurrency-related services requires banks to pay particular attention to certain practices.


Continue Reading Crypto Custody: OCC Confirms That National Banks Can Provide Custody Services for Cryptocurrency

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

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

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 U.S. Department of Justice (DOJ) recently announced a shift in its policies for enforcing federal marijuana laws in states where marijuana has been decriminalized or legalized. Notwithstanding this shift, however, the DOJ is unlikely to begin prosecuting marijuana growers and distributors who are operating in compliance with state law. So where will the feds go now? The DOJ will likely prosecute the most egregious violators of state law which means that the stakes are higher for those individuals and companies. The worst offenders of the state regimes now face not only state penalties, but the risk of enforcement by federal authorities, who have more investigative resources and can seek much more extensive and severe penalties.

Continue Reading What Is the Significance of the DOJ’s Change in Marijuana Enforcement Policies?