Blockchain Blog

Blockchain & The Law: 12/08/17 Update

By Alexandra Levin Kramer and Marina Fyrigou-Koulouri

During the week ending December 8, 2017, apart from bitcoin breaking the milestone price of $10,000, the blockchain industry faced a new series of official actions and statements concerning bitcoin and cryptocurrencies around the world.

U.S.A

-       On November 28, the San Francisco District Court,[1] ordered Coinbase, one of the world’s largest digital currency exchanges, to disclose to the U.S. Internal Revenue Service (the “IRS”) information on more than 14,000 customer accounts. After a one-year dispute, the court found that “the Government has met its minimal burden to show…a legitimate investigative purpose,”[2] and ordered Coinbase to produce “(1) the taxpayer ID number, (2) name, (3) birth date, (3) address, (4) records of account activity…and (5) all periodic statements of account or invoices” for accounts “with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period.”[3]

-       During a press conference on November 30, White House Press Secretary Sarah Huckabee Sanders, without any specific announcements, revealed that cryptocurrencies and particularly bitcoin are “being monitored” by the White House.[4]

-       On December 1, the US Commodity Futures Trading Commission (the “CFTC”) announced that it will allow bitcoin futures trading for three U.S. exchanges. Indeed, the CBOE Futures Exchange (the “CFE”) and the Chicago Mercantile Exchange Inc. (the “CME”) self-certified new contracts for bitcoin futures products, with each planning to launch its own bitcoin futures contracts on December 10 and 18, respectively.[5] The Cantor Exchange (the “Cantor”) self-certified a new contract for bitcoin binary options.

Bitcoin futures will give the opportunity to investors to “bet on bitcoin prices without buying the cryptocurrency [as] [b]oth CBOE and CME have said their bitcoin futures products will settle in cash.”[6]

The CFTC Chairman J. Christopher Giancarlo stated that “[b]itcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past,” and as a result “CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets.” [7] Additionally, they “have set an appropriate standard for oversight over these bitcoin contracts given the CFTC’s limited statutory ability to oversee the cash market for bitcoin.”[8]

European Union

During a CNBC interview on Wednesday, November 29, Vitor Constancio, the vice president of the European Central Bank (the “ECB”), stated, that bitcoin is a “very particular,” “speculative asset” and that investors are taking the “risk of buying at such high prices” as central banks do not have any responsibility for cryptocurrencies.[9] According to Constancio, the significant price volatility of bitcoin and other virtual currencies would not create financial instability, nor spread to other markets. Additionally, he supported the opinion that virtual currencies are just commodities, “not really currencies that would be widely used as medium of exchange” and, in any case, in his opinion, they could not be characterized as money.

France

In the same spirit, Francois Villeroy de Galhau, the Governor of the Bank of France, stated on Friday, December 1, that, “bitcoin is in no way a currency, or even a cryptocurrency.” [10] He also supported that it is a “speculative asset,” which is “nobody’s responsibility.” Accordingly, the Bank of France warns that investors buying bitcoin are doing so “entirely at their own risk.”[11]

Russia

On November 28, the Central Bank of Russia warned investors about the “high risks” and the “potential ‘bubble’” with respect to cryptocurrencies. Cryptocurrencies can be used for “money laundering” and “financing terrorism”, according to the Central Bank, whereas a cryptomarket bubble could result in “substantial loses for consumers.”[12] Additionally, “[t]he task of national and supranational regulators is to minimize those risks via developing a coordinated approach to regulation of the cryptocurrencies market and restricting the potential of high-risk investments and transactions.”[13] 

India

On December 1, India’s Finance Minister, Arun Jaitley talked about the country’s position with respect to bitcoin and cryptocurrencies.[14] Although the Indian government has been working, during the last months, on regulating bitcoin and other cryptocurrencies, the Reserve Bank of India (the “RBI”), has still not issued any licenses for cryptocurrency operations within its jurisdiction. Indeed, according to Jaitley, “[t]he government’s position is clear, [India] do[es]n’t recognize [bitcoin] as legal currency as of now.”[15]

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This week, ending today Friday, December 8, was quite exciting too. Starting with the news about fraud charges filed by the Securities and Exchange Commission (the “SEC”) against an Initial Coin Offering (“ICO”) and ending with new bitcoin all-time highs and significantly varying prices with differences amounting to more than $2,000 among some of the largest bitcoin exchanges, the blockchain industry has once again a lot to report.

Fraud Charges against PlexCoin

On December 1, the SEC’s Cyber Unit, the agency’s recently created arm aiming, among others, at policing ICOs, filed in federal court in Brooklyn, New York, charges against “a recidivist securities law violator in Canada”, Dominique Lacroix (“Lacroix”), his partner Sabrina Paradis-Royer (“Paradis-Royer”) and his company PlexCorps (collectively, the “Defendants”). The SEC alleges that the Defendants violated anti-fraud and registration provisions of the U.S. securities laws when, by selling unregistered securities and making fraudulent and misleading statements, they raised up to $15 million from thousands of investors. 

According to the complaint, “[t]he ICO for the PlexCoin Tokens was an illegal offering of securities because there was no registration statement filed or in effect during its offer and sale, and no applicable exemption from registration. The PlexCoin ICO was a general solicitation made using statements posted on the Internet and distributed throughout the world, including the United States, and the securities were offered to the general public and have been sold to a large number of investors, including many in the United States.”[16] Additionally, the Defendants made false statements regarding the PlexCorps’ team, the identity of the executives, the use of the proceeds and, at the same time, they were promising, in some cases, “returns as high as 88,000%.”[17]

Robert Cohen, the head of Cyber Unit commented on the case: “This first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing. We acted quickly to protect retail investors from this initial coin offering's false promises.”[18]

The complaint requests reliefs of injunctions, disgorgement of ill-gotten gains plus interests, penalties as well as the permanent barring of Lacroix “from serving as an officer or director of any public company” [19] and the prohibition of the Defendants “from participating in any offering of digital securities.”[20]

On December 4, the SEC obtained a court order to freeze the Defendants’ assets. 

Australia

On December 7, the Australia Securities Exchange (the “ASX”) announced its plans to use distributed ledger technologies (“DLT”) developed by Digital Asset (the “DA”) for the clearing and settlement of financial transactions. ASX took the decision to replace the traditional Clearing House Electronic Subregister System (“CHESS”) after two years of DLT software building and extensive testing.

The ASX system will operate on a “secure private network” with “known, ‘permissioned’ to have access” participants who “must comply with ongoing and enforceable obligations.” [21]  It is expected to be launched at the end of March 2018.

Dominic Stevens, ASX Managing Director and CEO, said: “[W]e believe that using DLT to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets. While we have a lot more work still to do, today’s announcement is a major milestone on that journey.”[22]

Additionally, the Commonwealth Bank of Australia (the “CBA”) will probably be the first to issue a bond on a blockchain, possibly early next year. CBA has already been working on blockchain possibilities for over four years while acknowledging that the technology presents both “a significant opportunity” and “a threat for the financial services industry.”[23]

On Tuesday, December 5, Sophie Gilder, CBA’s head of blockchain stated, without further details, that, while noting the inefficiencies of the markets today due to “a lot of friction,” CBA is “investing in the possibility of a single transaction that has the asset moving, and the payment for that asset secured, within the blockchain.”[24]

Finally, on Thursday, December 7, the Australian Senate passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2017[25] enabling the Australian Transaction Reports and Analysis Centre (the “AUSTRAC”) to monitor cryptocurrency exchanges. According to the amended bill, exchanges will need to register with AUSTRAC and, similarly to banks, adopt identification and verification procedures for their customers as well as programs to detect and mitigate money laundering and terrorism financing.

Indonesia

On Tuesday, December 5, the Bank of Indonesia (the “BI”) announced a new regulation prohibiting cryptocurrency transactions, including bitcoin. Onny Widjanark, BI’s head of transformation, said that “[c]urrently, there is no single regulation for those who carry out transactions using Bitcoin” and advised merchants not to accept bitcoin because “the bank would not be responsible for any losses incurred through transactions.”[26] Widjanark noted that cryptocurrencies can be used for violations of existing regulations on “terrorism, money laundering, prostitution and drug trafficking.”[27]

Venezuela

Nicola Maduro, the Venezuelan President, announced, during a holiday television show, that “Venezuela will create a cryptocurrency.” According to Maduro, the Venezuelan “petro,” an oil-backed cryptocurrency, will enable the country to “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.”[28] The political opposition is questioning the credibility of his statements and even the creation of petro. It seems that the Venezuelan President wants to use blockchain to solve the country’s economic crisis and particularly react to the U.S. sanctions, which further isolated the country from the international banks. 

Please contact Alexandra Levin Kramer, the Chair of CKR Law’s Blockchain Technology & Digital Currency practice group if you have any questions. She can be reached at akramer@ckrlaw.com or +1 (212) 259-7300.



[2] Id., at 9.

[8] Id.

[11] Id.

[13] Id.

[15] Id.

[17] Id. at 3.

[19] Supra note 18, at 34.

[20] Id. at 35.

[22] Id.

[27] Id.