The United States District Court for the Southern District of California recently changed course in an enforcement action brought by the U.S. Securities and Exchange Commission (SEC) against cryptocurrency company Blockvest, LLC and its founder. In doing so, the court granted the SEC’s request to preliminarily enjoin the defendants from violating the securities laws and
Risks and considerations when storing crypto-assets
Following the sudden death of its co-founder and CEO, Gerald Cotten, in December 2018, Quadriga, Canada’s largest cryptocurrency exchange, is unable to gain access to about $145 million of bitcoin and other digital assets. Quadriga reports that Cotton stored the digital assets in a “cold wallet” on his encrypted laptop and repeated attempts by his…
Germany: Berlin court holds that bitcoin is not a financial instrument contrary to the practice of the financial regulator
The German regulatory practice has been to treat bitcoin as a unit of account and thus a financial instrument. Consequently, commercial services involving bitcoin and other cryptocurrencies (including trading, brokerage, operating exchanges, investment advisory ) are regulated activities, requiring the relevant authorisation of Germany’s Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, or BaFin). On 25 September…
The dawn of crypto-asset regulation
Last month (September 2018), the House of Commons Treasury Committee issued a report on its inquiry into the regulation of crypto-assets. The inquiry examined, amongst other subjects, the role of digital currencies in the UK; the impact of distributed ledger (blockchain) technology; and how these should be regulated. The report recommends improvements to consumer and anti-money laundering protections (AML) when dealing in crypto-assets. The improvement will be achieved in part by extending the Financial Services and Markets Act (Regulated Activities) Order 2000 (RAO) to crypto-assets and associated activities.
‘Crypto-assets’, not ‘cryptocurrencies’
As a point of protocol, the report employs the term ‘crypto-assets’ instead of the more commonly used ‘cryptocurrencies’ on the basis that they do not demonstrate the functions of a conventional currency, such as a medium of exchange or store of value.
The report also identifies a number of inherent problems with crypto-assets. It identifies the inherent risks to investments due to volatile crypto-asset markets, when compared to conventional fiat currencies. Related to this is the vulnerability of crypto-assets to market manipulation given that the exchanges currently sit outside of market abuse regulations.
There is also increased scope for hacking, which would inevitably lead to the theft of the crypto-assets. The Committee suggests that such risks were exacerbated by the lack of a deposit insurance scheme (such as the UK Financial Services Compensation Scheme) to compensate investors in the event of a hack. Investors themselves have also caused losses, particularly where they have lost their passwords and have, therefore, been barred from accessing the exchange.
The Committee believes that investors and consumers are further let down by the irresponsible nature of promoters, whose advertisements are often misleading (and in some cases initial coin offerings have used celebrities to advertise the offering). The Financial Conduct Authority (FCA) is powerless in mitigating this, as crypto-assets, conveniently (!) fall outside of its remit.
Crypto-asset platforms were widely considered to provide opportunities for money laundering and other criminal enterprises because exchanges allow anonymous access and are not governed by the AML regulation.
Each of the above concerns is underpinned by the absence of a secure regulatory environment that affords investors and consumers sufficient safeguards.…
Digital token ruled a security under the Howey Test, for now
With the plaintiffs’ bar setting its sights on initial coin offerings, a body of precedent will soon develop analyzing digital tokens under U.S. securities laws. Last week, United States Magistrate Judge Andrea M. Simonton began developing that body of law in Rensel v. Centra Tech, Inc., No. 17-CV-24500, 2018 BL 227097 (S.D. Fla. June…
Anticipating Risks From and Responding to Cryptocurrency Theft
On November 20-21, 2017, Tether, the company behind USDT, a digital token backed by fiat currencies like the dollar and euro, disclosed that a hack resulted in the loss of $30.95 million worth of tokens. The Tether hack illuminates the privacy, reputational, financial and recovery risks associated with issuing, owning and storing digital currencies. These…