By Alexandra Levin Kramer and Marina Fyrigou-Koulouri
During the week ending Friday, December 15, 2017, the blockchain industry worldwide reported a number of interesting news.
- On Monday, December 11, the Securities and Exchange Commission (the “SEC”) initiated cease-and-desist proceedings against Munchee Inc., halting the company’s token sale after finding that it constituted an offer and sale of unregistered securities. On the same day, the SEC Chairman, Jay Clayton, issued a statement on Cryptocurrencies and Initial Coin Offerings (“ICOs”).
- On December 11, the Commodity Futures Trading Commission (the “CFTC”) Chairman J. Christopher Giancarlo endorsed SEC Chairman Jay Clayton’s statements and stated that “virtual currencies are unlike any commodity that the CFTC has dealt with in the past.” The CFTC Chairman referred to the cooperation between the CFTC and the SEC on the issued and highlighted once again that CFTC has “limited statutory authority” over cryptocurrencies.
Additionally, on December 15, the CFTC issued a proposed interpretation regarding its authority over virtual currency retail. Section 2(c)(2)(D) of the Commodity Exchange Act (the “CEA”) provides direct authority to CFTC over retail commodity transactions. However, under a CEA exception, the Section does not apply in contracts with “actual delivery” of the commodity within 28 days. Accordingly, the agency issued the following interpretation regarding the “actual delivery” exception concerning virtual currency transactions suggesting two key factors to determine whether an actual delivery took place;
“(1) a customer having 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
(2) 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) not retaining 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.”
The rule is not final and will be open for public comments for 90 days from its publication to the Federal Register.
- On December 13, during her final press conference, the Federal Reserve chair Janet Yellen talked about bitcoin. In a question about the Federal Reserve’s concerns about current market valuations in light of bitcoin’s rocket rise in value, Yellen stated that “bitcoin at this time plays a very small role in the payment system” suggesting that it does not impose a significant threat to the stability of the financial system. Nevertheless, according to Yellen, bitcoin “is not a stable source of store value, and it doesn’t constitute legal tender. It is a highly speculative asset, and the Fed doesn’t really play any…regulatory role.” Additionally, she commented on the recent statements made by William Dudley of the New York State Federal Reserve about the potential issuance of the Federal Reserve’s own cryptocurrency or digital currency. Yellen, after distinguishing between digital currency and cryptocurrency, stated that “this is not something the Federal Reserve is seriously considering at this stage,” and according to her view, there are “limited benefits,” “limited need” and “some substantial concerns” in taking such an action.
- On December 13, the US Treasury’s Financial Stability Oversight Council published its annual report talking inter alia about the challenges created by financial innovation. According to the report, the use of virtual currencies and distributed technologies is “small but growing” and their impact, at least currently, on financial stability is “limited.” However, “[a]s with any new development, virtual currencies and distributed ledger technologies can create risks and vulnerabilities that call for continued regulatory monitoring and coordination… [whereas they] may raise challenges for supervision and regulation, as current regulatory practices were designed for more centralized systems.”
- On December 13, a new class action was filed against a token sale (“TS”) in the United States District Court for the Southern District of Florida. Jacob Zowie Thomas Rensel (the “Plaintiff”) filed a complaint on behalf of the class against Centra Tech, Inc., Sohrab Sharma, Raymond Trapani, Robert Farkas and William Hagner (collectively the “Defendants”). The Centra TS was endorsed by celebrities such as the boxing champion Floyd Mayweather. The Plaintiff alleges that the Centra TS, which raised approximately $30 million between July 30, 2017, and October 5, 2017, was an offer and sale of unregistered securities and, therefore, directly violated the U.S. Securities Act of 1933. According to the complaint, the Defendants made an attempt to avoid compliance with the securities laws by characterizing the TS as a sale of “utility tokens,” however, “[w]hen determining whether a security has been offered and sold, the focus must be on the economic realities underlying the transaction.” Further, the Plaintiff argued, the Centra’s TS economic realities, its marketing and the promise of profits suggested by the Defendants indicated that CTR Tokens are securities. The Plaintiff asks for the rescission of the investments, compensatory damages, as well as the imposition of a constructive trust over the funds and assets lawfully belonging to the Plaintiff and the class.
This lawsuit came on the same day of the fourth class action against the Tezos TS filed in the Northern District of California. The complaint contains, similarly to the previous ones, allegations of securities and anti-fraud violations.
On December 11, the Securities and Futures Commission (the “SFC”) of Hong Kong issued a circular on bitcoin futures contracts and other cryptocurrency-related investment products. Following the launching of bitcoin future contracts by future and commodities exchange in the U.S., the SFC announced that “Hong Kong investors may be able to trade in Bitcoin Futures through an intermediary which is a member of these exchanges.”
The SFC stated that, even though bitcoin is not regulated under the Securities and Futures Ordinance (the “SFO”), bitcoin futures have the “conventional features of a ‘futures contract’” and, therefore, fall under the SFO. Accordingly, parties participating in such business activities “are required to be licensed for Type 2 regulated activity (dealing in futures contracts) under the SFO unless an exemption applies.” A party is required to have such license if it markets its business to the Hong Kong public, whether it is located in Hong Kong or not.
Also, the SFC warned that “some cryptocurrency-related investment products may be regarded as ‘securities’” under the SFO and, therefore, parties participating in such activities would need to comply with the SFO’s requirements or they may face criminal consequences.
Andrew Bailey, head of the UK’s Financial Conduct Authority (the “FCA”), warned bitcoin investors about the risk of “los[ing] all their money.” In contrast with fiat currency, which “is backed by the state and… preserves [its] value…through the actions that central banks take,” Bailey indicated that bitcoin “is not a currency.” On the contrary, it is “not regulated in its Bitcoin form,” it is a “very volatile commodity” and “not a secure investment” as governments and central banks are not behind it.
The French government, as part of its general efforts to become the center of financial innovation in Europe, adopted new rules allowing instant trading of unlisted securities eliminating the need of intermediaries such as brokers or banks.
According to Finance Minister Bruno Le Maire, “[t]he use of this new technology will allow fintech firms and other financial actors to develop new ways of trading securities that are faster, cheaper, more transparent and safer.”
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 firstname.lastname@example.org or +1 (212) 259-7300.
 See also, CKR Client Alert at https://www.ckrlaw.com/our-voices/2017/12/14/sec-chairman-issues-statement-on-cryptocurrencies-sec-halts-munchee-token-sale/
 See also, Statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others, https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos
 See also, https://www.ckrlaw.com/blockchain-blog/2017/12/08/blockchain-and-the-law-update/