By Odelia Nikfar and Alexandra Levin Kramer
The following is a survey of recent global developments significant to the blockchain industry in the past week.
The G20 confirmed on June 9,2019, that it will align with standards set by the Financial Action Task Force (“FATF”) for anti-money laundering and countering the funding of terrorism. The standards will set tough requirements for the operation of cryptocurrency exchanges. According to the FATF, current rules that most cryptocurrency exchanges abide by, including “know your customer” rules, are inadequate. New standards would require cryptocurrency exchanges to pass customer information to each other when transferring cryptocurrencies funds, just as banks do with fiat. Members of the G20 claim that they understand the risks of crypto-assets while believing in the significant benefits they can bring to financial systems.
On June 4, 2019, the U.S. Securities and Exchange Commission (the “SEC”) filed a complaint in the Southern District of New York against Kik Interactive Inc. (“Kik”), a Canadian social media messaging company for violating the U.S. Securities Act of 1933 by failing to state, in its $100 million initial coin offering (“ICO”) in 2017, including to U.S. token buyers, that its token, “Kin” was a security and therefore constituted an unregistered offer and sale of securities. The SEC is not contending there was any fraud committed by Kik. The SEC is alleging a direct violation in failing to register the offering of Kin, which in effect Kik sold in the ICO via a Simple Agreement for Future Tokens (a “SAFT”). It is likely that Kik anticipated the complaint as they created a crowdfunding campaign for its legal defense last week and in 2018 responded to its receipt of a “Wells Notice” from the SEC, in which Kik claimed that its token, Kin, is a currency and therefore exempt from the definition of security under federal securities laws. Interesting to note is that as Kik is a Canadian corporation, it had been previously informed by the Ontario Securities Commission that under Canadian law, the sale of Kin was considered a sale of securities. Ultimately, Kik decided to exclude Canadians from its ICO. The ultimate outcome of this case may bring more regulatory clarity to the industry, as it may be the first token issuer committed to challenge the SEC’s determination that its token, when offered, was a security, though it may take years if the case goes to trial. In the interim, anyone considering issuing and selling a token in the United States or elsewhere should consult with a law firm, such as CKR Law, and consider communicating with the regulators in advance of such issuance and sale.
On June 7, 2019, a series of transactions were detected from a wallet that previously held funds stolen in the 2016 Bitfinex hack. Bitfinex claims no involvement in these transactions. This recent news comes after the New York State Attorney General (“NYAG”) filed suit against Bitfinex this past April for, among other things, allegedly misleading their clients about an apparent loss of $851 million. The Bitfinex theft is the largest loss of bitcoins by a cryptocurrency exchange after Japan’s infamous Mt Gox loss. Bitfinex issued an official response claiming the NYAG‘s court filings were written in bad faith and “riddled with false assertions.” On May 22, 2019, Bitfinex won on a partial block on demands for information from the NYAG while it seeks to dismiss the suit. A hearing date for the two sides to appear for arguments is set for July 29, 2019.
As the use of cryptocurrencies in the Philippines continues to grow, the Bangko Sentral ng Pilipinas (“BSP”), the central bank of the Philippines, warned of the related risks according to a Philippino news report dated June 10, 2019. Virtual currency transactions in the Philippines have been steadily rising in the past few years. The latest data from BSP’s Technology Risk and Innovation Supervision Department showed the value of transactions involving virtual currencies nearly doubling, from approximately $189.18 million in 2017 to $390.37 million in 2018. In response to this rise in use, BSP issued a circular in February 2017 requiring cryptocurrency exchanges to register with BSP as remittance and transfer companies. In attempting to counter financing of terrorism and money laundering, BSP also instituted requirements for cryptocurrency exchanges to set up safeguards to ensure consumer protection and counter illicit transactions. BSP does not endorse any cryptocurrency but aims to regulate it when used for the delivery of financial services. There are currently 10 cryptocurrency exchanges that have been registered with BSP.
In a press release published on May 8, 2019, the Lichtenstein government announced that the Lichtenstein Token and Trusted Technologies Law (“TTTL”), creating a friendly regulatory atmosphere for crypto and blockchain projects, had passed a first reading (with the second reading expected to follow in the Fall). TTTL aims to create certainty within a token economy by bridging the gap between the online and offline worlds. TTTL does this by avoiding categorizing tokens into pre-existing classifications. Instead, it maintains a neutral definition of tokens. In such a framework, a token serves as a vessel with the ability to hold rights of all kinds. TTTL aims to clarify the token economy by providing basic definitions of its elements. It provides for a physical validator to ensure that the physical objects and associated rights to be tokenized on the TT system actually exist. Additionally, TTTL provides guidelines for when a user loses access to its token as well as mechanisms for burning invalid tokens.
Australia may soon crack down on major tax avoidance schemes using cryptocurrencies. The Australian Taxation Office is working on 12 tax avoidance cases involving crypto-assets, according to a recent report dated June 6, 2019. This is part of a larger global crackdown including Australia, the United States, the United Kingdom, the Netherlands, Japan (see below) and Canada in response to growing tax avoidance and cryptocurrency abuse.
Japanese tax authorities are planning to take action on the under-reporting of cryptocurrency-based profits. A report dated June 5, 2019 claims that around 50 traders and 30 firms did not accurately declare their cryptocurrency income over the span of a few years. This lack of accuracy was probably due to the high rate that crypto-earnings are taxed, which can be up to 55 percent. This move by Japanese tax authorities follows a global crackdown trend into tax avoidance schemes involving cryptocurrencies.
Bit of Gold, a cryptocurrency exchange, won an Israeli Supreme Court case on June 3, 2019, allowing it to continue to access banking services. Back in 2017, Bank Leumi moved to bar Bits of Gold from accessing its banking services, considering the cryptocurrency exchange to be a gambling company. The cryptocurrency exchange considers this a big win for the company and the cryptocurrency community in general.
According to the European Union, Malta needs to improve their anti-money laundering policies to keep up with the cryptocurrency sector. Malta has recently received attention for attempting to create a clear and efficient regulatory regime for the blockchain and cryptocurrency industry. The European Commission said on June 5, 2019, that these steps must be coupled with greater anti-money laundering policies to effectively combat suspect activity in this sector.
 Palmer, Daniel, “G20 Reaffirms It Will Apply Expected Tough New FATF Rules on Crypto,” Coindesk, (Jun 10, 2019), https://www.coindesk.com/g20-reaffirms-it-will-apply-expected-tough-new-fatf-rules-on-crypto
 “Communiqué,” G20 Finance Ministers and Central bank Governors Meeting (June 8-9, 2019), https://www.mof.go.jp/english/international_policy/convention/g20/communique.htm
 “Complaint,” U.S. SECURITIES AND EXCHANGE COMMISSION (June 4, 2019), https://www.sec.gov/litigation/complaints/2019/comp-pr2019-87.pdf
 De, Nikhilesh, “The SEC Case Against Kik’s ICO Appears Strong, Experts Say,” Coindesk, (June 5, 2019), https://www.coindesk.com/the-sec-case-against-kiks-ico-appears-strong-experts-say
 “Wells Response: In re Kik Interactive (HO-13388),” U.S. SECURITIES AND EXCHANGE COMMISSION (Nov. 16, 2018), https://www.kin.org/wells_response.pdf
 Brownell, Claire, “Kik Bans Canadians from Investing in New Crypto-token, Cites 'Weak Guidance' From Regulators,” Financial Post, (Sept. 8, 2017), https://business.financialpost.com/technology/kik-bans-canadians-from-investing-in-new-crypto-token-cites-weak-guidance-from-regulators
 Whale Alert, https://twitter.com/@whale_alert
 Canellis, David, “Bitfinex Denies Role in Spooky Transfer of $1.37 million in Stolen Bitcoin,” Hard Fork, (June 7, 2019), https://thenextweb.com/hardfork/2019/06/07/bitfinex-bitcoin-hack-transfer-move-denies-role-transaction-hackers/
 “NYAG Filing,” (April 25, 2019), https://iapps.courts.state.ny.us/fbem/DocumentDisplayServlet?documentId=vIexA1b0spKOnK_PLUS_ZUGTJ3A==&system=prod
 Higgins, Stan, “The Bitfinex Bitcoin Hack: What We Know (And Don’t Know),” Coindesk, (June 20, 2018), https://www.coindesk.com/bitfinex-bitcoin-hack-know-dont-know
 “Bitfinex Responds to New York Attorney General's Actions,” Bitfinex, (Aug. 26, 2019), https://www.bitfinex.com/posts/356
 Kharif, Olga and Dolmetsch, Chris, “Crypto Exchange Bitfinex Wins Partial Stay on N.Y. Info Demands,” Bloomberg, (May 22, 2019), https://www.bloomberg.com/news/articles/2019-05-22/crypto-exchange-bitfinex-wins-partial-stay-on-n-y-info-demands
 Agcaoili, Lawrence “BSP to Public: Be Wary of Cryptocurrencies,” The Philippine Star, (June 10, 2019), https://www.philstar.com/business/2019/06/10/1925041/bsp-public-be-wary-cryptocurrencies
 “Circular,” (Jan. 19, 2017), http://www.bsp.gov.ph/downloads/regulations/attachments/2017/c944.pdf
 Salzgeber, Ramona, “Liechtenstein Adopts Blockchain Act to Create Regulated Token Economy,” ICO.li, (May 13, 2019), https://www.ico.li/liechtenstein-adopts-blockchain-act/
 Wright, Shane, “Australia targets cryptocurrencies in international tax crackdown,” The Sydney Morning Herald, (June 6, 2019), https://www.smh.com.au/politics/federal/australia-targets-cryptocurrencies-in-international-tax-crackdown-20190606-p51v0a.html
 Alibasa, Benedict, “Australia to Crack Down on Crypto Tax Avoidance Schemes,” Coindesk, (June 7, 2019), https://www.coindesk.com/australia-to-crack-down-on-crypto-tax-avoidance-schemes
 Hanano, Yuta, “Making Mad Gains on Crypto? Tax Agents Say You Owe Them,” The Asahi Shimbun, (June 5, 2019), http://www.asahi.com/ajw/articles/AJ201906050064.html
 Kimberley, David, “Court Rules Bank Leumi Should Serve Crypto Exchange Bits of Gold,” Finance Magnates, (June 3, 2019), https://www.financemagnates.com/cryptocurrency/regulation/court-rules-bank-leumi-should-serve-crypto-exchange-bits-of-gold/
 Vella, Mathew, “Malta Told to Beef up Police Units with Rise in Gaming and Crypto Fraud,” Malta Today, (June 5, 2019), https://www.maltatoday.com.mt/news/europe/95488/malta_told_to_beef_up_police_units_with_rise_in_gaming_and_crypto_fraud#.XP_bf_ZFzcu
 “Consultation Paper on the Financial Instrument Test,” file:///C:/Users/ON/AppData/Local/Packages/Microsoft.MicrosoftEdge_8wekyb3d8bbwe/TempState/Downloads/20180413_FITest%20(1).pdf
 “European Semester 2019 Spring Package and EU budget 2020,” (June 5, 2019), https://ec.europa.eu/commission/news/european-semester-2019-spring-package-and-eu-budget-2020-2019-jun-05_en