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Georgia Department of Banking and Finance issues cease and desist over licensing violation involving bitcoin
On July 26, the Georgia Department of Banking and Finance (Department) announced the issuance of a cease and desist order against a bitcoin trading platform. According to the Department, the company allegedly engaged in the sale of payment instruments and money transmissions without first acquiring a valid license or applicable exemption in violation of the state’s financial institutions code. Licensure requirements in the state apply to persons engaged in transactions involving virtual currency.
House Financial Services Committee holds hearing on potential regulation of cryptocurrencies and ICOs
On March 14, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing entitled “Examining Cryptocurrencies and ICO Markets” to discuss recommendations for Congress concerning the regulation of cryptocurrencies and initial coin offering ("ICO") markets. Subcommittee Chairman Bill Huizenga, R-Mich., opened the hearing by stating that “[c]ryptocurrencies and ICOs provide an innovative vehicle for startups to potentially access capital and grow their businesses,” and emphasized that potential regulation of this market should not stifle innovation in the area of digital currencies and capital formation.
The hearing’s four witnesses offered numerous insights into the shaping of regulation in the crytopcurrency and ICO markets. The witnesses discussed emphasizing the potential of ICOs for U.S. investors, disclosures in the ICO market, and the need for regulation to be clear with definitive classification guidelines. Additionally, witnesses commented on the unanticipated negative consequences of regulation, including the risk associated with developing a regulatory framework around the cryptocurrency market since the market is still emerging. The hearing included discussion on the functions of cryptocurrency and the ICO market, including distinguishing an ICO offering from a traditional Initial Public Offering (IPO) and the different uses of “scarce tokens,” such as bitcoin, which would impact whether cryptocurrencies were regulated as commodities or securities.
CFTC offers large reward to “pump-and-dump” scheme whistleblowers
On February 15, the Commodity Futures Trading Commission (CFTC) issued a Consumer Protection Advisory on virtual currency “pump-and-dump” schemes, which offers eligible whistleblowers between 10 and 30 percent of enforcement actions of $1 million or more, which result from the shared information. The notice cautions consumers against falling for the fraudulent “pump-and-dump” schemes, which capitalize on consumers’ fear of missing the potentially lucrative—yet volatile—cryptocurrency market. The advisory warns consumers that many of the perpetrators of these schemes use social media to promote false news reports and create fake urgency for consumers to buy the cryptocurrency immediately. Then, after the price reaches a certain level, the schemers sell their virtual currency and the price begins to fall.
Chair Giancarlo outlines CFTC approach to virtual currency regulation
On January 4, the Chair of the CFTC, J. Christopher Giancarlo, issued a statement emphasizing the CFTC’s commitment to effectively regulating virtual currency and reiterated the CFTC’s view that virtual currency is a “commodity,” as defined by the Commodity Exchange Act (CEA), and thus is subject to CFTC regulation. Giancarlo noted that it would be irresponsible to ignore virtual currency and that the CFTC is following steps to effectively and responsibly regulate the risks, specifically, “consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators.” Giancarlo’s statement also noted an upcoming meeting of the CFTC Technology Advisory Committee to discuss virtual currencies on January 23.
The CFTC also published a backgrounder on the oversight of the virtual currency futures market, which describes the “heightened review” for the self-certification process as applied to virtual currency futures products, and explains the extent to which the CFTC “not only has clear legal authority, but now also will have the means to police certain underlying spot markets for fraud and manipulation.”
FSOC Publishes 2017 Annual Report, Highlights Cybersecurity and Financial Innovation Risks
On December 14, the Financial Stability Oversight Council (FSOC) released its 2017 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. Highlights include:
- Cybersecurity. The report notes that financial institutions need to work with regulators to improve cybersecurity resilience and better understand risks. FSOC encourages the creation of a private sector council of senior executives to work with government officials and focus on ways cyber incidents may affect business operations.
- Marketplace Lending. FSOC acknowledges that marketplace lending is still an evolving model with potential risks, such as the misalignment of incentives. However, the report notes the platform’s potential to reduce costs and expand access to credit.
- New Technology. The report discusses challenges for supervision and regulation of virtual currencies and distributed ledger technology. FSOC observes that current regulatory practices were designed for more centralized systems, in comparison to the decentralization of data storage in this new landscape.
CFTC Issues Proposed Interpretation of “Actual Delivery” in Virtual Currency Transactions; Launches Virtual Currency Resource Page
On December 15, the Commodity Futures Trading Commission (CFTC) announced a proposed interpretation concerning its authority over transactions involving virtual currency, which includes its view regarding the term “actual delivery” in the context of retail virtual currency transactions. According to the proposed interpretation, the CFTC claims that it has “explicit oversight authority” over “retail commodity transactions” under Section 2(c)(2)(D) of the Commodity Exchange Act. Applying a broad definition of the term virtual currency, the CFTC believes that these type of currencies are commodities, which means that certain transactions in virtual currencies are subject to CFTC oversight.
The proposed interpretation sets forth two primary factors that market participants must demonstrate to prove “actual delivery” of virtual currency in connection with retail commodity transactions:
- a customer has the ability to “(i) take possession and control of the entire quantity of the commodity, whether it was purchased on margin, or using leverage, or any other financing arrangement, and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction”; and
- “the offeror and counterparty seller (including any of their respective affiliates or other persons acting in concert with the offeror or counterparty seller on a similar basis) does not retain any interest in or control over any of the commodity purchased on margin, leverage, or other financing arrangement at the expiration of 28 days from the date of the transaction.”
Comments on the proposed regulation must be received on or before March 20, 2018.
In October, the CFTC’s LabCFTC released “A CFTC Primer on Virtual Currencies,” which discusses potential use-cases for virtual currencies, outlines the agency’s role and oversight of virtual currencies, and highlights the risks associated with virtual currencies. The CFTC also launched its own webpage with virtual currency resources and a customer advisory warning of the risks of virtual currency trading.
CFTC Issues Primer on Virtual Currencies, Claims Certain Virtual Tokens Fall Under Its Oversight
On October 17, the U.S. Commodity Futures Trading Commission (CFTC) announced the release of “A CFTC Primer on Virtual Currencies” (Primer) issued by its LabCFTC division. As previously discussed in Infobytes, the LabCFTC initiative rolled out in May of this year to engage innovators in the financial technology industry to promote responsible fintech innovation within regulated CFTC markets. In this Primer—a first in a series—the CFTC discusses potential use-cases for virtual currencies and outlines the agency’s role and oversight of virtual currencies. The Primer also highlights the risks associated with virtual currencies, such as (i) the susceptibility of “digital wallets” to cybersecurity hacks; (ii) inadequate safeguards and other customer protection related systems on virtual currency exchanges; and (iii) the susceptibility of virtual currencies to Ponzi schemes and other types of frauds.
The CFTC noted that there’s no inconsistency between the SEC’s analysis that Initial Coin Offerings or Token Sales may be subject to federal securities law (see previous InfoBytes coverage here) and CFTC’s determination that virtual currencies are commodities and virtual tokens “may be commodities or derivatives contracts, depending on the particular facts and circumstances.” Last month, as discussed in InfoBytes, the CFTC also filed its first-ever antifraud enforcement action for activities involving Bitcoin investment solicitations.
Russia Weighs Risks of Cryptocurrencies; President Putin Seeks Regulations
On October 10, the First Deputy Governor of Russia’s Central Bank reportedly announced plans to block websites selling bitcoin and other forms of cryptocurrency. Citing unreasonably high risks and the need to protect investors from the “dubious” currencies, the Central Bank’s concerns were echoed by President Vladimir Putin who reportedly stressed that risks associated with the use of cryptocurrencies include money laundering, tax evasion and funding for terrorism. However, President Putin issued a call for cryptocurrency regulation rather than a broad ban and stressed the need to utilize international experience when establishing rules.
Last September, as previously reported in InfoBytes, several Chinese regulators reportedly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies in the country.
CFTC Files Anti-Fraud Enforcement Action Against New York-Based Corporation Concerning Bitcoin Investments
On September 21, the U.S. Commodity Futures Trading Commission (CFTC) filed a complaint in the U.S. District Court for the Southern District of New York against a New York-based corporation and its CEO (defendants) for allegedly engaging in fraudulent acts and practices in violation of the Commodity Exchange Act and CFTC Regulations by issuing false account statements in connection with Bitcoin investment solicitations. According to the complaint, the “Bitcoin Ponzi scheme” solicited more than $600,000 from approximately 80 customers to be placed in a pooled fund, executed by the defendants’ computer program called “Jigsaw,” which traded the virtual currency. The CFTC alleges that defendants’ strategy was fake and the “purported performance reports” were false in that they created the appearance of positive Bitcoin trading increases, but the gains were “illusory.” The CFTC further asserts that the “payouts of supposed profits to [pool participants] in actuality consisted of other customers’ misappropriated funds.” In addition, the CFTC alleges that defendants orchestrated a “fake computer ‘hack’” to conceal the scheme. The suit seeks, among other things, disgorgement of profits, civil monetary penalties, restitution, and a ban on commodities trading for the defendants.
China Bans Commercial Trading of Initial Coin Offerings
On September 4, the People’s Bank of China and several Chinese regulators reportedly jointly announced plans to ban the commercial trading of bitcoin and other cryptocurrencies. This measure, announced in a statement issued by the Ministry of Industry and Information Technology of the People’s Republic of China, will outlaw all fundraising Initial Coin Offerings (ICOs), and declares ICOs and the sale of virtual currency as unauthorized illegal financing behavior, suspected of illegal sale tokens, illegal securities issuance, and illegal fund-raising, including financial fraud, pyramid schemes and other criminal activities. The statement reportedly stresses that virtual currency in China will not be recognized as a legal form of currency and must not be circulated as currency when financing activities. Furthermore, going forward, all cryptocurrency trading platforms are prohibited in China from acting as central counterparties to facilitate the exchange of tokens for virtual currencies. Additionally, one of China’s bitcoin exchanges reportedly published an announcement on its website saying it will close its bitcoin currency trading platform in the country on September 30.
The SEC recently released an investor bulletin about ICO investment risks and offered fraud prevention guidance. (See previous InfoBytes summary here.) ICO sales are often used to raise capital, and the SEC is monitoring companies who use this method for fraudulent purposes.