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.
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.
The Subcommittee on Capital Markets, Securities, and Investment held a hearing, “Examining Cryptocurrencies and ICO Markets,” this past Wednesday, March 14, 2018.
The stated goal of the hearing was to achieve greater regulatory clarity in the cryptocurrency and ICO markets, especially as these markets continue to grow and attract attention from investors and enterprises in pursuit of capital. Members of the subcommittee indicated that achieving this regulatory clarity would be critical to ensuring that investors are protected without unduly stifling innovation.
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.
The Wall Street Journal reported on Wednesday, February 28, 2017, that the Securities and Exchange Commission (SEC) has issued “scores of subpoenas and information requests to technology companies and advisers” in a sweeping probe of the Initial Coin offering (ICO) and Token Sale industry.
By way of background, ICOs or “Token Sales” typically involve the offer and sale of digital assets utilizing distributed ledger or blockchain technology. According to the report, the SEC is seeking information on the structure of these sales, including pre-sales under the “simple agreements for future tokens” (“SAFT”) framework.