Mr. Marcus Goes to Washington; European Updates

By Odelia Nikfar and Alexandra Levin Kramer

The following is a survey of recent legal developments globally that are significant to the blockchain industry.

United States

Libra

• Senate Hearing - This week was a big week for cryptocurrency and blockchain technology on Capitol Hill. With both Senate and Congressional hearings on July 16 and 17 respectively, lawmakers expressed their concerns with Facebook’s Libra while questioning Calibra’s CEO, David Marcus. There was undeniably one common challenge addressed in both hearings – trust. At the Senate hearing, Senator Mike Crapo (R-ID), Chairman of the Senate Committee of Banking, Housing and Urban Affairs, began by stating that Libra’s goal to provide the underbanked with access to the financial system is commendable but expressed concern that Congress needs to establish clear regulations to protect people’s data. Other Senators expressed concerns with Facebook’s past breaches of consumer trust, citing the 2016 presidential election interference by Russians and the Cambridge Analytica scandals. Many Senators expressed concerns over the size and power that Facebook would have with a global currency under its governance. Marcus responded to these concerns by explaining that the very structure of the Libra Association does not allow for Facebook to have more power than any other member of the Libra Association, which will have up to 100 members. Facebook’s subsidiary, Calibra, will be one of the members. Marcus also assured the Senators that Libra would cooperate with regulators like FinCEN, OFAC, the FTC, and state financial regulators. Marcus also warned Senators that if the United States does not take the lead in this an endeavor, other countries will. The Senators also questioned Marcus about issues including the decision to choose Switzerland for Libra’s headquarters, the risks of money laundering and hacking on its platform, and the potential discriminatory treatment of conservative voices.[1]
• Congressional Hearing - At the congressional hearings on July 17, 2019, lawmakers continued to express concerns similar to its colleagues’ at the Senate the day before. House Financial Services Committee Chairwoman, Rep. Maxine Waters (D-CA) pressed Marcus for a commitment to halt all developments until Congress creates adequate legislation, to which Marcus vaguely responded with assurance that Libra would cooperate with regulators, while he did not commit to halt development. Other concerns raised by members of Congress included how Libra would structure governance and control over the Libra Association, fearing a concentration of power in Facebook’s hands. Rep. Waters mentioned her involvement with the “Keep Big Tech Out Of Finance Act” which has been reported to be circulating among lawmakers.[2] Following testimony provided by Marcus, the Committee was offered testimony by a second panel of expert witnesses, namely Georgetown University Law Center Professor Chris Brummer, Columbia Law School Professor Katharina Pistor, MIT Media Lab Director and Former CFTC Chairman Gary Gensler, Public Citizen President Robert Weissman and CoinShares Chief Strategy Officer Meltem Demirors, all of whom agreed that Libra should not be launched until all the concerns raised are resolved. Gensler commented that he believes Libra is a security and Demirors opined that Libra is not a cryptocurrency. In a further discussion, Rep. Warren Davidson (R-OH), a member of the Congressional Blockchain Caucus and a co-author, with Rep. Darren Soto (D-FL) of the proposed bi-partisan Token Taxonomy Act, repeated the phrase, “there’s bitcoin and then there’s shitcoin”, indicating that there is support among members of Congress for bitcoin and blockchain technology generally.
• U.S. Treasury – On July 15, 2019, U.S. Treasury Secretary Steven Mnuchin held a press conference to address Libra. Secretary Mnuchin expressed concerns about cryptocurrency misuse, cyber-crime, extortion, ransom wear, human trafficking and national security. Secretary Mnuchin stated that with respect to Libra and development of cryptocurrencies, the goal of the Treasury is to protect the integrity of the U.S. financial system. Secretary Mnuchin also stated that the Treasury takes very seriously the role of the U.S. dollar as the world’s reserve currency and will continue to serve and protect U.S. and global financial systems. With respect to Libra, Secretary Mnuchin stated that it has a lot of work to do before it get him comfortable.[3] On July 19, 2019, Secretary Mnuchin said on CNBC’s Squawk Box that his executive agency was in line with the G7’s view on Facebook entering the cryptocurrency world. “There was a clear agreement from all G7 finance ministers and central bank governors that Libra in particular raises some very significant concerns, and cryptocurrencies more broadly,” said Secretary Mnuchin. He added, “Before any of us let these go through, we’re going to make sure those concerns are satisfied.” Some of these concerns include the opportunity for cryptocurrencies to be used for money laundering and terrorist financing. [4]

New Jersey

N.J. State Attorney General Gurbir S. Grewal and the N.J. Bureau of Securities within the Division of Consumer Affairs announced, on July 19, 2019, that the State has filed a three-count lawsuit against Pocketinns, Inc., a Princeton-based blockchain-driven online rental marketplace, and its president Sarvajnya G. Mada. The lawsuit alleges that Pocketinns and Mada offered and sold more than $400,000 of unregistered securities from New Jersey in the form of a cryptocurrency called “PINNS Tokens” in exchange for Ethereum in January 2018.[5]

CFTC

According to a July 19, 2019 report, the U.S. Commodity Futures Trading Commission is investigating cryptocurrency exchange BitMEX. The investigation if focused on whether BitMEX allowed Americans to trade on the platform without registering with the CFTC. In an interview in January, BitMEX CEO, Arthur Hayes, said that the exchange bars U.S. residents and nationals. However, traders may have tricked filters to mask their location. BitMEX is registered in the Seychelles, while its main office is in Hong Kong. It also has an office in San Francisco.[6]

United Kingdom

On July 12, 2019, the U.K. government announced the Economic Crime Plan,[7] which “draws together actions to overhaul the approach to tackling economic crime, with greater partnering between the government, law enforcement and the private sector.”[8] The plan includes action on cryptoassets to ensure these are not being used for money laundering and other illicit activity. The plan aims to do this by “establishing a new cryptoassets regime with the Financial Conduct Authority, going beyond international standards to create one of the most comprehensive global responses to the use of cryptoassets in illicit activity.”[9]

France

France is set to approve businesses involved in cryptocurrencies, under new legislation. Under new rules, crypto-related firms will abide by consumer protection, tax, and legal requirements in exchange for approval from the French regulator. Anne Marechal, Executive Director for Legal Affairs at the Financial Markets Authority, said on July 18, 2019 that the Authority is in talks with three or four candidates for initial coin offerings.[10]

Malta

The Malta Financial Services Authority (MSFA), the single regulator of financial services in Malta, launched a Consultation Paper[11] on Security Token Offerings on July 19, 2019. This action aims to provide a better regulatory environment for financing private sector innovation, investment and growth. The Authority is seeking to bridge the gap between traditional securities offerings and technology-enabled securities offerings and trading. The consultation is open to comments from the public until August 20, 2019.[12]