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District Court allows case exploring whether cryptocurrency acquisitions are “cash-like” to proceed
On August 1, the U.S. District Court for the Southern District of New York allowed breach of contract and clear and conspicuous disclosure claims brought by a proposed class of consumers against a national bank to proceed, finding that ambiguity exists over whether credit card cryptocurrency purchases are “cash-like transactions.” The plaintiffs claimed that the bank breached their cardholder agreements when it changed the classification of cryptocurrency acquisitions from “purchases” to “cash advances” between January 23 and February 2, 2018. Plaintiffs contended that this change subjected cardholders to higher interest rates and transaction fees in violation of their cardholder agreements. Moreover, the plaintiffs claimed that the bank’s failure to clearly and conspicuously disclose the different types of transactions and varying rates, as well as its failure to provide advance notice of significant changes in its account terms and accurate disclosures in periodic account statements, violated TILA and Regulation Z.
The bank countered that no breach of contract occurred because cryptocurrency acquisitions are “cash-like transactions” that, under the cardholder agreement, are properly classified as cash advances. Specifically, the bank stated that because cryptocurrency can be a “medium of exchange, a measure of value, or a means of payment” under the definition of “cash,” it is therefore “cash-like.”
The court concluded that the plaintiffs offered a reasonable argument that purchases of cryptocurrency did not constitute cash advances. Plaintiffs argued that the contractual term “cash-like”—which was used in the cardholder agreement to describe a cash advance—referred only to financial instruments formally tied to physical, government-issued “fiat” currency, such as checks, money orders, and wire transfers. “Because, as plaintiffs plausibly allege, cryptocurrency does not imbue its holder with a legal right to any government-issued currency, acquisitions of cryptocurrency could not be classified as a cash-like transaction,” the court stated. As such, “[b]ecause plaintiffs have identified a reasonable interpretation of ‘cash-like transactions’ that would exclude purchases of cryptocurrency, the breach of contract claim survives the motion to dismiss.” The court also allowed plaintiffs’ “clear and conspicuous” disclosure claim under TILA to survive because the contract was not clear that purchases of cryptocurrency would result in cash advance fees. However, the court dismissed the plaintiffs’ remaining TILA claims, finding that (i) the bank did not change the contract terms themselves, but rather their application; and (ii) the periodic account statements did not inaccurately convey what the plaintiffs owed to the bank for those particular periods of time.
SEC, FINRA address digital asset securities compliance requirements
On July 8, the SEC and the Financial Industry Regulatory Authority (FINRA) issued a joint statement in response to compliance questions received from broker-dealer participants who handle digital asset securities. While recognizing that the application of federal securities law and FINRA rules to digital asset securities, as well as related innovative technologies, “raise novel and complex regulatory and compliance questions and challenges,” the joint statement encourages “reasonably practicable” efforts to address these issues. Among other things, the guidance emphasizes that broker-dealer participants who try to maintain custody of clients’ digital asset securities must comply with the SEC’s Customer Protection Rule to safeguard customers’ assets and prevent investor loss or harm. In situations involving noncustodial digital asset securities activities, relevant laws, rules, and requirements must also be followed, even if these activities generally do not raise the same level of concern. The SEC and FINRA also acknowledge that compliance with these rules may be challenging as technological enhancements and situations unique to digital asset securities continue to develop, and emphasize that they will continue to engage with broker-dealer participants as the marketplace evolves.
FATF establishes binding measures on virtual currency regulation
On June 21, the Secretary of the U.S. Department of the Treasury issued a statement confirming that FATF members agreed to regulate and supervise virtual asset financial activities and related service providers. On the same day, FATF issued a statement noting that it “adopted and issued an Interpretive Note to Recommendation 15 on New Technologies (INR. 15) that further clarifies the FATF’s previous amendments to the international Standards relating to virtual assets and describes how countries and obliged entities must comply with the relevant FATF Recommendations to prevent the misuse of virtual assets for money laundering and terrorist financing and the financing of proliferation.” As previously covered by InfoBytes, in October 2018, FATF urged all countries to take measures to prevent virtual assets and cryptocurrencies from being used to finance crime and terrorism and updated The FATF Recommendations to add new definitions for “virtual assets” and “virtual asset service providers” and to clarify how the recommendations apply to financial activities involving virtual assets and cryptocurrencies.
According to FATF announcement, INR. 15 establishes “binding measures,” which require countries to, among other things, (i) assess and mitigate risks associated with virtual asset activities and service providers; (ii) license or register service providers and subject them to supervision; (iii) implement sanctions and other enforcement measures when service providers fail to comply with an anti-money laundering/combating the financing of terrorism (AML/CFT) obligation; and (iv) ensure that service providers implement the full range of AML/CFT preventive measures under the FATF Recommendations, including customer due diligence, record-keeping, suspicious transaction reporting, and screening all transactions for compliance with targeted financial sanctions.
SEC charges issuer with conducting sale of unregistered digital tokens
On June 4, the SEC announced it had filed a lawsuit in the U.S. District Court for the Southern District of New York against a tech company issuer for allegedly raising approximately $100 million through an unregistered initial coin offering. According to the complaint, the issuer failed to provide required disclosures to investors and did not register the offer or sale of its digital tokens with the SEC, as required by Section 5 of the Securities Act of 1933. The SEC contends that the issuer marketed the digital tokens as an investment opportunity and told investors that they could earn future profits from the issuer’s efforts to create, develop, and support a digital “ecosystem.” According to the SEC, “[f]uture profits based on the efforts of others is a hallmark of a securities offering that must comply with the federal securities laws.” The SEC’s suit seeks a permanent injunction, disgorgement of profits plus interest, and a civil penalty.
Florida establishes blockchain task force
On May 23, the Florida governor signed SB 1024, which establishes the “Florida Blockchain Task Force” within the Department of Financial Services to “explore and develop a master plan for fostering the expansion of the blockchain industry in the state, to recommend policies and state investments to help make this state a leader in blockchain technology, and to issue a report to the Governor and the Legislature.” Within 90 days of signing, the bill requires that a majority of the 13 required members of the task force must be appointed and the task force must hold its first meeting. The task force is required to, among other things, study blockchain technology and submit a report to the Governor and the Legislature with recommendations for implementing blockchain technology in the state and recommendations for specific implementations to be developed by relevant state agencies. The bill took effect on May 23.
New York charges virtual currency operators with fraud
On April 25, the New York Attorney General announced that operators of a virtual currency trading platform and “tether” virtual currency issuer, along with their affiliated entities, are enjoined from engaging in activities that may have defrauded investors trading in cryptocurrency. The AG’s investigation found that the operators allegedly “engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled client and corporate funds.” Under the terms of the court order, the operators and companies must, among other things, (i) immediately end the further dissipation of U.S. dollar assets that back “tether” tokens; (ii) are prohibited from making any distributions to executives, employees, or agents, investors, or associates from “funds that that have been loaned, extended, or pledged, or otherwise taken from the U.S. dollar reserves held by the operator”; and (iii) are prohibited from destroying or deleting potentially relevant documents and communications.
Washington state recognizes distributed ledger technology
On April 26, the Washington state governor signed SB 5638, which recognizes the validity of distributed ledger technology. Intending to expand the scope of the existing federal ESIGN Act, the bill adds a new chapter to the Revised Code of Washington, defining distributed ledger technology as “any distributed ledger protocol and supporting infrastructure, including blockchain, that uses a distributed, decentralized, shared, and replicated ledger.” The bill prohibits an electronic record from being denied “legal effect, validity, or enforceability solely because it is generated or stored using distributed ledger technology.” The bill is effective July 28.
Arkansas defines blockchain technology
On April 16, the Arkansas governor signed HB 1944, which defines blockchain technology under the state’s Uniform Electronic Transactions Act (UETA). Under the act, “blockchain technology” is defined as “a shared, immutable ledger that facilitates the process of recording one or more transactions and tracking one or more tangible or intangible assets in a business network.” The act also provides definitions for “blockchain distributed ledger technology” and “smart contract” under the UETA. The act takes effect 90 days after adjournment of the legislature.
SEC issues no-action letter, permitting offering and selling of “tokens” without registration
On April 3, the SEC issued a no-action letter to a Delaware-based airline chartering services company not recommending enforcement action for offering and selling “tokens” without registration under the SEC Act. According to the letter, the SEC relied upon the company’s counsel’s opinion, which assured that consumers are purchasing the tokens solely for prepaid “air charter services and not for investment purposes or with an expectation to earn a profit,” in determining that the “tokens” were not securities. Additionally, the SEC’s relief considered numerous other factors such as: (i) the platform for conducting the sale of the tokens will “be fully developed and operational” at the time any tokens are sold and funds derived from token sales will not be used to develop the platform; (ii) consumers will be able to immediately use the tokens for their intended functionality (i.e., to purchase air charter services) at the time of sale; (iii) the company will restrict the transfer of tokens to company wallets only and not to external wallets; (iv) the tokens will be sold for one dollar to be used solely on the platform to purchase air charter services, and will be treated as having a value of one dollar; (v) if the company offers to repurchase tokens, it will do so at a discount to the face value of the tokens that the holder seeks to resell to the company, unless a court orders the company to liquidate the tokens; and (vi) the tokens will not be marketed in such a way that there is a perceived potential for an increase in the token’s market value.
Utah says blockchain tokens are not money transmissions
On March 26, the Utah governor signed SB 213, which, among other things, defines and clarifies blockchain technology-related terms and exempts from the state’s Money Transmitter Act certain persons who facilitate the “creation, exchange, or sale of certain blockchain technology-related products.” Specifically, the amendments state that blockchain tokens are not money transmissions. The amendments take effect 60 days after adjournment of the legislature.