Blockchain Blog

THE LIBRA HEARINGS’ AFTERMATH; VENEZUELA AVOIDS U.S. SANCTIONS WITH BITCOIN; INDIA OPEN TO BANNING CRYPTOCURRENCY USE

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

SEC – The U.S. Securities and Exchange Commission (the "SEC") issued a no-action letter[1] on July 25, 2019 to Pocketful of Quarters ("PoQ"), a gaming startup seeking to issue tokens ("Quarters") on the ethereum blockchain. According to the POQ’s incoming letter[2] to the SEC, the goal of the token issuance is to solve one of the biggest problems that players of online video games face – the inability to use gaming credits in other online games. In the no-action letter, the SEC Division of Corporation Finance stated that it would not recommend enforcement action if according to the counsel’s opinion that Quarters are not securities, they do not register Quarters under Section 5 of the U.S. Securities Act of 1933, as amended, or register them as a class of equity securities under Section 12(g) of the U.S. Exchange Act of 1934, ad amended. The SEC also highlighted that PoQ will not use any funds from Quarter sales to build the Quarters Platform, which is operational, and Quarters will be immediately usable for their intended purpose at the time they are sold. POQ sold another investment token in a prior private placement.  Quarters are the first ERC-20 tokens to receive U.S. regulatory approval.[3]  

U.S. Treasury – On July 24, 2019, Treasury Secretary Steven Mnuchin said in an interview[4] that he will not be talking about bitcoin in 10 years. "I can assure you I will personally not be loaded up on bitcoin," said the Secretary. These statements come after the Secretary’s press conference last week where he expressed concern about cryptocurrency misuse, cyber-crime, extortion, ransom wear, human trafficking and national security (see CKR Blockchain Law Blog).

Facebook – On July 23, 2019, in response to a question about Visa’s involvement in the Libra Association, Alfred F. Kelly Jr., the CEO of Visa, said “we have signed a nonbinding letter of intent to join Libra. We're one of – I think it’s 27 companies that have expressed that interest. So no one has yet officially joined… We're in discussions and our ultimate decision to join will be determined by a number of factors, including obviously the ability of the association to satisfy all the requisite regulatory requirements.”[5] According to Libra’s website, Visa is listed under an initial group of organizations who “will work together to finalize the Libra Association's charter and will become the association's Founding Members upon its completion.” Additionally, according to a statement by the Swiss data privacy regulator, the Swiss Federal Data Protection and Information Commissioner (the “FDPIC”), the Libra Association has not responded to a letter they sent to Libra dated July 17, 2019. The letter noted comments made by Mr. Marcus that data protection would be regarded as a fundamental element of the project. In the letter, the FDPIC also wrote that he “had not received any indication on what personal data may be processed [and] the Libra Association should inform him of the current status of the project so that he could assess the extent to which his advisory competences and supervisory powers would apply.”[6]

U.S. Senate – The Senate Committee on Banking, Housing and Urban Affairs will host a hearing on July 30, 2019, entitled “Examining Regulatory Frameworks for Digital Currencies and Blockchain”. The witnesses will be: Mr. Jeremy Allaire, Co-Founder, Chairman and CEO Circle, on behalf of The Blockchain Association; Ms. Rebecca M. Nelson, Specialist in International Trade and Finance, Congressional Research Service; and Ms. Mehrsa Baradaran, Professor of Law, University of California, Irvine School of Law.[7] This will be the first time a congressional committee has dedicated a hearing solely to the topic of cryptocurrencies and blockchain technology.[8] Circle has recently decided to move a majority of its Poloniex crypto-exchange operations offshore to Bermuda because of the regulatory pressures in the United States, as 70 percent of itsusers hail from beyond the U.S.[9]

Bank of America – Bank of America has registered another blockchain patent using Ripple for a new interbank communication and settlement system. The goal of the new application is facilitating real-time settlements and communications between banks, which it claims will allow for faster cross border transactions.[10]

Internal Revenue Service – On May 16, 2019, IRS Commissioner Charles P. Rettig, responding to a letter from Congress, in which he stated that that guidance would be issued soon to provide taxpayers clarity on the taxation of virtual currency transactions . Two weeks later at a conference on May 30, 2019 the Commissioner assured that guidance would be coming soon. However, as of yet, no new guidance has been issued. According to documents recently released by the IRS, the IRS was aware that the one piece of guidance issued in 2014 was insufficient in many regards. In response to this lack of guidance from the IRS, Congress is attempting to improve the government’s policy on cryptocurrency taxation. One effort is a bill introduced by Representative Tom Emmer (R-IN) on July 9, 2019, the “Safe Harbor for Taxpayers with Forked Assets Act”[11] which would create a safe harbor from penalties for taxpayers who make a good faith effort to comply with the current murky tax policy. [12] 

Venezuela

The Venezuelan government is reportedly avoiding U.S. sanctions through the use of bitcoin in its airports. According to a report[13], President Nicolas Maduro has authorized the use of an app which collects aeronautical taxes and converts them to Bitcoin. The funds are then deposited as fiat dollars in government controlled bank accounts. Currently, airlines serving Venezuela have difficulty making aircraft refueling payments because of U.S. sanctions. Maduro plans to sign an agreement to apply this plan to those payments as well. Interestingly, Venezuela’s own digital currency, Petro, has is not involved in this scheme.[14]

India

A panel reporting to India’s Finance Ministry suggested that the country’s regulators have an “open mind” about a government-issued cryptocurrency while also proposing fines and up to ten years of prison for  private cryptocurrency use. The panel was created by the Ministry of Electronics and Information Technology, the Securities and Exchange Board of India, and the Reserve Bank of India. One of their complaints was the claim that all cryptocurrencies have been created by non-sovereigns. The committee did see value in using distributed ledger technology to prevent errors and frauds in property markets.[15]


[1] Letter from Division of Corporation Finance, SEC, to Pocketful of Quarters Inc. (July 25, 2019), https://www.sec.gov/corpfin/pocketful-quarters-inc-072519-2a1.

[2] Letter from Lewis Rinaudo Cohen, DLX Law, to Office of Chief Counsel of Division of Corporation Finance, SEC (July 25, 2019),  https://www.sec.gov/divisions/corpfin/cf-noaction/2019/pocketful-of-quarters-inc-072519-2a1-incoming.pdf.

[3] Nikilesh De, In First, SEC Clears Blockchain Gaming Startup to Sell Ethereum Tokens, Coindesk (July 26, 2019), https://www.coindesk.com/sec-clears-blockchain-gaming-startup-to-sell-quarters-tokens

[4] Squawk Box (@squawkCNBC), Twitter (July 24, 2019), https://twitter.com/SquawkCNBC/status/1154004308947591168.

[6] FDPIC expects official response from the Libra Association, The Federal Council (July 23, 2019), https://www.admin.ch/gov/en/start/documentation/media-releases.msg-id-75872.html.

[7] Examining Regulatory Frameworks for Digital Currencies and Blockchain, United States Committee on Banking, Housing, and Urban Affairs, https://www.banking.senate.gov/hearings/examining-regulatory-frameworks-for-digital-currencies-and-blockchain.

[8] Colin Harper, U.S. Senate to Hold Hearing on Crypto, Blockchain Regulation Next Week, Bitcoin Magazine (July 24, 2019). https://bitcoinmagazine.com/articles/u-s-senate-to-hold-hearing-on-crypto-blockchain-regulation-next-week.

[9] Leigh Cuen, Circle Moves Exchange Operations Offshore With New Bermuda Office, Coindesk (July 22, 2019), https://www.coindesk.com/circle-moves-non-us-poloniex-customers-to-new-bermuda-entity.

[10] Scott Cook, Bank of America To Utilize Ripple Blockchain For Interbank Communication Application, CryptoNewsZ (July 22, 2019), https://www.cryptonewsz.com/bank-of-america-to-utilize-ripple-blockchain-for-interbank-communication-application/32681/.

[12] James Foust, FOIA documents reveal cryptocurrency guidance has not been a priority for the IRS, Coin Center (July 9, 2019), https://coincenter.org/entry/foia-documents-reveal-cryptocurrency-guidance-has-not-been-a-priority-for-the-irs.

[13] Victor de Abreu, Maduro usa las tasas aeroportuarias para burlar las sanciones de EE.UU., ABC Internacional (July 22, 2019), https://www.abc.es/internacional/abci-maduro-tasas-aeroportuarias-para-burlar-sanciones-eeuu-201907212232_noticia.html.

[14] William Suberg, Venezuelan Gov’t Reportedly Dodges US Sanctions With Crypto in Airports, Cointelegraph (July 25, 2019), https://cointelegraph.com/news/venezuelan-govt-reportedly-dodges-us-sanctions-with-crypto-in-airports.

[15] John Biggs, Indian Panel Proposes Fines and Jail Time for Cryptocurrency Use, Coindesk (July 23, 2019), https://www.coindesk.com/indian-panel-proposes-ban-and-jail-time-for-cryptocurrency-use.