Blockchain Blog

U.S.A. - Blockchain & The Law: 01/05/18 Update

By Marina Fyrigou-Koulouri and Alexandra Levin Kramer

The end of 2017 and the start of 2018 were marked by an intense activity in the blockchain industry. The legal news noted in the U.S.A. over the last two weeks ending January 05, 2018, report as follows:


On January 4, 2018, the Commodity Futures Trading Commission (the “CFTC”) issued the “CFTC Backgrounder on Oversight of and Approach to Virtual Currency Futures Markets.” (the “CFTC Backgrounder”)[1]

To begin with, the CFTC Backgrounder discusses the jurisdictional issue of virtual currency regulations providing insight into federal and state oversight of virtual currencies. The CFTC has developed a “multi-regulatory approach”, as “U.S. law does not provide for direct, comprehensive Federal oversight of underlying Bitcoin or virtual currency spot markets.” Accordingly, individual U.S. State banking regulators “oversee certain US and foreign virtual currency spot exchanges” mainly through state money transfer laws;  the Internal Revenue Service (the “IRS”) “treats virtual currencies as property subject to capital gains tax”; the Treasury’s Financial Crimes Enforcement Network (the “FinCEN”) “monitors Bitcoin and other virtual currency transfers for anti-money laundering purposes”; and the Securities and Exchange Commission (the “SEC”) monitors and takes action against unregistered or non-compliant token sales. Additionally, the CFTC has oversight authority on virtual currency futures markets as it considers virtual currencies to be a “commodity.”

The CFTC also promulgates an approach to a “responsible regulation of virtual currencies.” This approach includes: (1) consumer education, (2) asserting legal authority supporting the agency’s anti-fraud and anti-manipulation provisions, (3) market intelligence empowering the market oversight “through the gathering of trade and counterparty data,” (4) robust enforcement via the agency’s authority to “police fraud and manipulation in cash or spot markets” and “prosecute fraud, abuse, manipulation or false solicitation in markets for virtual currency derivatives and underlying spot trading,” (5) government-wide coordination through the agency’s coordination with other federal bodies including the SEC, the Federal Bureau of Investigation (the “FBI”), the Justice Department and the Financial Stability Oversight Council (the “FSOC”) as well as state entities like State Attorney Generals and even policymakers, the White House, Congress, etc.

The CFTC Backgrounder also discusses virtual currency self-certifications following the self-certification of bitcoin futures by the Chicago Mercantile Exchange Inc. (the “CME”) and by the CBOE Futures Exchange (the “CFE”) as well as the self-certification of bitcoin binary options by the Cantor Exchange.[2] The structure of self-certification was formulated by Congress in order to incentivize designated contract markets (“DCMs”) “to certify new products.” The CFTC, which must work within that structure, developed a “heightened review” for self-certifications related to virtual currencies. “Virtual currency self-certification under heightened review means that 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.” The CFTC Backgrounder sets certain requirements that an entity aiming to launch a virtual currency derivative should follow including, amongst others, a “high initial and maintenance margin for cash-settled Bitcoin futures,” “regular coordination with CFTC surveillance staff on trade activities, including providing the CFTC surveillance team with trade settlement data upon request” or enabling the CFTC to “carefully monitor minute-by-minute developments.”

Finally, the CFTC Backgrounder presents the constituencies impacted by virtual currency futures that, according to the CFTC, include market participants and consumers, public interest and derivatives clearing organizations (“DCOs”).

It should be noted that the CFTC has requested additional resources in its 2018 Congressional budget request in order “to strengthen its technological and econometric resources to support its ability to oversee virtual currency derivatives.”

Additionally, on January 4, 2018, the CFTC Chairman, J. Christopher Giancarlo, issued a statement[3] on virtual currencies supporting the meetings scheduled by the CFTC’s advisory committees for this month. Indeed, according to Giancarlo, on January 23, 2018 the CFTC’s Technology Advisory Committee (the “TAC”), “will consider the related challenges, opportunities, and market developments of virtual currencies,” whereas on January 31, 2018, the CFTC’s Market Risk Advisory Committee (the “MRAC”) will hold a meeting to discuss “the process of self-certification of new products and operational rules by Designated Contract Markets (DCMs) under the Commodity Exchange Act (CEA) and CFTC regulations.”


On January 4, 2018, the North American Securities Association (the “NASAA”) issued a statement advising caution concerning cryptocurrencies and token sales.[4]

Joseph P. Borg, the NASAA President and Director of the Alabama Securities Commission said that “[i]nvestors should go beyond the headlines and hype to understand the risks associated with investments in cryptocurrencies, as well as cryptocurrency futures contracts and other financial products where these virtual currencies are linked in some way to the underlying investment.” Borg believes that cryptocurrencies, unlike traditional fiat currencies, are not backed by tangible assets nor a sovereign authority and are “subject to little or no regulation.”

According to a NASAA survey, 94% of North American state and provincial securities regulators believe that there is a “high risk of fraud” in cryptocurrencies and they unanimously agree that “more regulation is needed for cryptocurrencies to provide greater investor protection.”

Additionally, the NASAA considers TS and cryptocurrency related investments as “emerging investor threats for 2018” since most tokens do not have an underlying value at the time of purchase.


On January 4, 2018, SEC Chairman Jay Clayton and Commissioners Kara M. Stein and Michael S. Piwowar endorsed the NASAA release encouraging investors to read it and consider its warnings. As the NASAA informs in securities offerings and sales, investors “are entitled to the benefits of state and federal securities laws, and…sellers and other market participants must follow these laws.” The SEC stressed that many TS and cryptocurrency-related investment promoters are not complying with related rules, creating the need for the SEC and state securities regulators to pursue enforcement.


On January 4, 2018, the Idaho Finance Department issued a news release[5] restating the warnings of the NASAA notice and reminding Idahoans to act with caution in cryptocurrency-related investments. Additionally, the release identifies common cryptocurrency concerns which should be considered before making any investment decisions. These include, amongst others, “minimum regulatory oversight,” “cybersecurity breaches or hacks,” lack of backing or insurance, high volatility. “In Idaho, cryptocurrency ‘exchangers’ are regulated as money transmitters, but such regulation only relates to the sending and receiving of normal currencies to and from the exchanger and is no guarantee that the exchanger isn’t subject to many of the same risks as non-licensed entities.” Finally, the release puts forth red flags of fraud such as “guaranteed high investment returns,” “unsolicited offers,” “too good to be true,” “pressure to buy immediately,” “unlicensed sellers.”


In the same context, the state of Alaska also issued the same statement[6] urging caution in cryptocurrency investments. Kevin Anselm, the director of the state Division of Banking and Securities, stated that cryptocurrencies “aren’t typical investments” and underlined that “[p]eople need to understand what it is they’re really investing in and what they can expect – and what the offerer is offering – as a return.”[7]


[8] As reported[9] on January 2, 2018, the Executive Council of “Economically Needed Diversity Options for Wyoming” submitted their preliminary findings and recommendations to “Chart New Course for WY’s Economy” to Wyoming Governor Matthew Mead and the Wyoming State Legislature. The report puts forth the four main focus areas for “consideration, discussion and action by Governor Mead and the Wyoming Legislature during the 2018 Legislative Session… [which include] infrastructure, education and workforce training, entrepreneurial development, and other areas for immediate action that include establishing in-state contractor preferences and authorizing virtual currency.” Indeed, the report presents ten main recommendations for policy changes and funding requests from the state’s Legislative Stabilization Reserve Account, which include establishing a “Wyoming Research and Innovation Fund,” an “In-State Contractor Preference for State Technology Contracts,” and authorization for “Virtual Currency Businesses to Operate in Wyoming.” The Executive Council expressly supports and encourages Blockchain-related efforts, “which are considered to have high potential for diversification and differentiating Wyoming’s economy.” It should be noted that the final report will be issued on August 1, 2018.

Giga Watt Class Action

On December 28, 2017, Stormsmedia, LLC (the “Plaintiff”) initiated a class action lawsuit[10] against Giga Watt, Inc. (the “Defendant”) in the United States District Court in Eastern Washington.  The Defendant is a start-up aiming to build a cryptocurrency mining facility that conducted a token sale (“TS” or “ICO”) in July and August 2017, selling Giga Watt tokens, which would provide a range of mining services to the holders.

The Plaintiff, on behalf of the relevant class (the “Class Members”), which collectively contributed more than $20 million in cryptocurrency and fiat currency, alleges violations of securities laws. The complaint, as we have seen in previous similar lawsuits, states that “the thing for which Plaintiff and each Class Member invested his/her/its valuable assets looks like a security, functions like a security, and fits the definition of a security.” The Plaintiff and Class Members “relied on, and are dependent upon, the expertise and efforts of Defendants for their investment returns” and “expected that they would receive profits…in Defendants’ efforts.” In fact, the filing states that “several GIGA WATT representatives ha[d] overtly and unmistakably stated to investors that between the time of the ICO and the date on which each investor would be issued his/her/its Giga Watt tokens, the value/price of each Giga Watt token was anticipated to increase significantly,” however, token purchasers are “at Defendants’ mercy” regarding the time that the tokens and machinery will be delivered to them.

Accordingly, the complaint claims that Giga Watt tokens are subject to federal securities laws. Further, the Plaintiff alleges, even though the Defendant may have consulted a law firm prior to the TS regarding the status of the tokens as not securities, the Giga Watt TS did not comply with any registration requirements nor with the relevant exemptions, in Plaintiff's opinion.[11] Therefore, the Plaintiff alleges that Defendant violated the securities laws by conducting an unregistered securities offering. The Plaintiff asks for “rescission of [its] investments…, restoration of the status quo ante, and return to Plaintiff and the Class Members all cryptocurrency or fiat currency paid to Defendants” as well as any additional damages.

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 or +1 (212) 259-7300.