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On February 6, SEC Commissioner Hester M. Pierce announced her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. Pierce suggested that not only would the rule provide regulatory flexibility “that allows innovation to flourish,” but it would also protect investors by “requiring disclosures tailored to their needs” while still maintaining anti-fraud safeguards, allowing investors to participate in token networks of their choice. Proposed Securities Act Rule 195 would allow companies to sell or offer tokens without being subject to the Securities Act of 1933, and without the tokens being subject to the registration requirements of the Securities Act of 1934. In order to qualify for these exemptions, the proposed rule requires that a company developing a network must, among other things, (i) “intend for the network on which the token functions to reach network maturity…within three years of the date of the first token sale”; (ii) disclose key information on a freely accessible public website,” including applicable source code and descriptions of how to search and verify transactions on the network; (iii) offer and sell its tokens in order to allow access to or development of its network; (iv) make “good faith and reasonable efforts to create liquidity for users”; and (v) “file a notice of reliance” with the SEC’s EDGAR system within 15 days of the company’s first token sale made in reliance on the safe harbor. Pierce suggested that the three-year grace period for qualifying companies would allow time for the development of decentralized or functional networks, and, at the end of the three years, a successful network’s tokens would not be regulated as securities.
On January 21, the SEC announced that it filed suit in the U.S. District Court for the Eastern District of New York against a blockchain company and the company’s founder (defendants) for allegedly “conducting a fraudulent and unregistered initial coin offering (ICO).” The SEC alleges, among other things, that from 2017 until 2018, the defendants raised $600,000 from nearly 200 investors through promoting an ICO of digital asset securities called “OPP Tokens,” using material misrepresentations to create the false impression that the defendants’ platform was creating notable growth in the company. The defendants marketed the tokens by making misstatements to potential investors, greatly exaggerating the numbers of providers that were “willing to do business on, and contribute content to, [defendants’] blockchain-based platform.” The complaint also alleges that in marketing the ICO, the defendants provided a catalog of small businesses eligible to use the defendants’ platform that numbered in the millions, in order to create the false impression that the platform had a huge base of users. In reality, the catalog was not compiled by the defendants, but was simply acquired from a vendor. Additionally, the SEC alleges that the defendants provided numerous customer reviews in its promotions to create the impression that the platform had many users creating content, which were actually reviews stolen from a third-party website. The SEC charges that in addition to the above allegations, the defendants misrepresented that they had filed an SEC registration statement for the ICO. The SEC seeks injunctive relief, disgorgement of profits, civil money penalties, and a permanent bar preventing the founder from serving as officer or director of any public company.
On October 11, the SEC announced it obtained a temporary restraining order through an emergency action filed against two offshore entities that allegedly raised more than $1.7 billion of investor funds. According to the complaint, the entities sold approximately 2.9 million digital tokens worldwide, including more than 1 billion tokens to 39 U.S. purchasers. The entities promised that the tokens would be delivered upon the launch of its own blockchain by the end of October 2019. The SEC alleges the entities violated Sections 5(a) and 5(c) of the Securities Act by failing to register its offers and sales of securities with the SEC. In addition to the emergency relief, the SEC is seeking a permanent injunction, disgorgement, and civil penalties against the offshore entities.
On August 23, the Illinois governor signed HB 3575 to create the Blockchain Technology Act. Under the Act, “blockchain” is defined as “an electronic record created by the use of a decentralized method by multiple parties to verify and store a digital record of transactions which is secured by the use of a cryptographic hash of previous transaction information.” Among other things, the Act specifies permitted uses of blockchain technology in transactions and proceedings, such as in smart contracts, electronic records and signatures, and provides several limitations, including a provision stipulating that if a law requires a contract or record to be in writing, the legal enforceability may be denied if the blockchain transaction cannot later be accurately reproduced for all parties. Moreover, local government units are prohibited from imposing taxes or fees for the use of blockchain technology, and cannot require a person or entity to obtain a certificate, license, or permit in order to use a blockchain or smart contract. HB 3575 takes effect January 1, 2020.
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.
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.
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.
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.
On February 19, the Wyoming Governor signed HB 57, which creates a fintech sandbox program in the state for companies to test innovative financial products and services. Wyoming is the second state to introduce a regulatory sandbox program, following Arizona’s sandbox introduction last March. (Previously covered by InfoBytes here.) Under the “Financial Technology Sandbox Act” (the Act), the state’s sandbox will be open to innovative financial products and services, including those focused on blockchain and cryptocurrencies, and will allow testing of these products for up to two years with the possibility of an additional 12 month extension before requiring participants to apply for formal licensure. Additionally, under certain conditions, the Act—which grants various supervisory and enforcement power to the state banking commissioner and the secretary of state, including revocation and suspension rights—will authorize (i) limited waivers of specified statutes or rules, and (ii) reciprocity agreements with other regulators. The Act takes effect January 1, 2020.
On February 11, the District of Columbia Department of Insurance, Securities and Banking announced the formation of the District of Columbia Financial Services Regulatory Sandbox and Innovation Council. The Council, which will examine the feasibility of implementing a financial services regulatory sandbox in the District, will also “develop a blockchain and innovation regulatory framework to facilitate financial services innovation in the District.” D.C. Mayor Bowser, who established the Council in January, has directed the advisory group to review barriers that fintech, insurtech, regtech, and other technology companies face when attempting to bring innovative services to the District, and to evaluate how these impediments can be mitigated or eliminated to foster innovation, including making recommendations for ways to reduce the regulatory burden on financial services providers that impede innovation. Among other things, the Mayor also has tasked the Council with studying the potential dangers regulatory sandboxes pose to consumers and the possible safeguards to such dangers. The Council—whose membership will include a cross section of professionals from the insurance, securities, banking, and lending industries; consumer representatives; technology industry members; and individuals specializing in financial services regulation and the captive insurance industry—will report legislative, programmatic, and policy recommendations to the Mayor within the first six months after its initial meeting.
- Daniel P. Stipano to moderate "Washington update" at the Puerto Rican Symposium of Anti Money Laundering
- Melissa Klimkiewicz to discuss "Private flood insurance updates" at the Mortgage Bankers Association Servicing Solutions Conference & Expo
- Jonice Gray Tucker and H Joshua Kotin to discuss regulatory compliance issues in the fintech industry at Protiviti's Risk & Compliance Innovation Roundtable
- APPROVED Checkpoint Webcast: CFL overview
- Amanda R. Lawrence and Sherry-Maria Safchuk to discuss "California privacy rule" on an NAFCU webinar
- Sasha Leonhardt to discuss "MLA & SCRA" on a NAFCU webinar
- Daniel P. Stipano to discuss "Pathway of the SARs: Tracking trajectories of suspicious activity reports from alerts to prosecution" at the ACAMS International AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Which bud’s for you? A deep-dive into evolving marijuana laws" at the ACAMS International AML & Financial Crime Conference
- Brandy A. Hood to discuss "RESPA 8 (TRID applied compliance)" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- John P. Kromer to discuss "Navigating the multi-state fintech regulatory regime" at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Jonice Gray Tucker to discuss "Leveraging big data responsibly" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Hank Asbill to discuss "Critique of direct examination; Questions and answers" at the American Bar Association Section of Litigation Anatomy of a Trial: Murder Trial of Ziang Sung Wan
- Hank Asbill to discuss "What judges want from trial lawyers" at the American Bar Association Section of Litigation Anatomy of a Trial: Murder Trial of Ziang Sung Wan
- Steven R. vonBerg to speak at the "Conference super session" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference