IRS Proposes to Revise the Treatment of Nonperiodic Payments

On May 8, 2015, the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) issued proposed and temporary regulations (the “Regulations”) relating to the treatment of notional principal contracts (“NPCs”) with nonperiodic payments.[1] The Regulations are designed to resolve questions that have arisen with the enactment of Dodd-Frank. The Regulations are a fundamental change in the treatment of NPCs. The rules apply to NPCs entered into on or after November 4, 2015, but taxpayers may apply the rules to NPCs entered into before November 4, 2015. The Regulations package also includes regulations under section 956 of the Internal Revenue Code of 1986 (the “Code”).

While the Regulations are designed to resolve issues, many unanswered questions remain.

 

CFTC Issues Proposed Rule Reducing Trade Option Obligations for End-Users

On May 7, 2015, the Commodity Futures Trading Commission (“CFTC”) published in the Federal Register a proposed rule (the “Proposed Rule”) that would reduce the reporting and recordkeeping burdens of end-users engaging in commodity trade options.[1]

Under the Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“CEA”), the definition of “swap” includes commodity options.[2]  However, the CFTC issued an interim final rule in April 2012 exempting qualifying commodity options (“trade options”) from most swap regulations, subject to certain specified conditions (the “Trade Option Exemption”).[3]  For a commodity option to qualify for the Trade Option Exemption, the commodity option must involve a nonfinancial commodity (i.e., either an exempt commodity, such as energy and metals, or an agricultural commodity) and the parties to the option must satisfy the following three-part test: (i) the offeror of the option is either an “eligible contract participant” (generally, a non-financial entity entering into a swap for purposes of hedging or mitigating commercial risk) or a commercial participant (a producer, processor, commercial user of, or merchant handling, the underlying physical commodity that is entering into the option solely related to its business as such); (ii) the offeree of the option is a commercial participant; and (iii) the parties intend to physically settle the option so that, if exercised, the option would result in the sale of a nonfinancial commodity for immediate (i.e., spot) or deferred (i.e., forward) shipment or delivery.

A commodity option that meets the foregoing test nevertheless may remain subject to certain regulatory requirements under the CEA, including: reporting and recordkeeping; large trader reporting; position limits; certain recordkeeping, reporting, and risk management duties applicable to swap dealers (“SDs”) and major swap participants (“MSPs”); capital and margin for SDs and MSPs; and any applicable antifraud and anti-manipulation provisions.

Under the Trade Option Exemption, trade options must be reported to a registered swap data repository if either: (i) one of the counterparties is registered as an SD or MSP; or (ii) both parties to the trade option are end-users but at least one of the parties has been required to report non-trade option swaps during the 12 months prior to the trade option being entered into.  If neither end-user party has had to report non-trade options during this 12-month period, then each end-user must: (i) file by March 1 a Form TO reporting each trade option entered into in the previous calendar year; and (ii) notify the CFTC, through an email to TOreportingrelief@cftc.gov, no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year.  Under CFTC No-Action Letter No. 13-08 (“No-Action Letter 13-08”), however, even an end-user that has had to report non-trade options during the 12 months prior to the trade option being entered into generally need not comply with the reporting requirements, provided that such end-user complies with the foregoing items (i) and (ii).[4]

The Trade Option Exemption also requires an end-user to keep basic business records (i.e., “full, complete and systematic records, together with all pertinent data and memoranda, with respect to each swap in which they are a counterparty”[5]) and potentially requires counterparties to create and maintain “unique swap identifiers” and “unique product identifiers” for each swap and to record the “legal entity identifier” of each counterparty.[6]  However, No-Action Letter 13-08 generally clarified that an end-user need not create and maintain “unique swap identifiers” and “unique product identifiers” for each swap and record the “legal entity identifier” of each counterparty, provided that: (i) if the end-user’s counterparty is an SD or MSP, the end-user obtains and provides to its counterparty a legal entity identifier; and (ii) the end-user notifies the CFTC, through an email to TOreportingrelief@cftc.gov, no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year.

The Proposed Rule would relax reporting and recordkeeping obligations under the Trade Option Exemption and No-Action Letter 13-08 by no longer requiring end-users to file a Form TO in connection with otherwise unreported trade options.[7]  End-users would continue to be required to notify the CFTC no later than 30 days after entering into trade options having an aggregate notional value in excess of $1 billion during any calendar year, but could reduce their monitoring burden by providing an “alternative notice” that they reasonably expect to exceed this $1 billion threshold.[8]  End-users would continue to be subject to basic recordkeeping requirements and be required to obtain and provide to a counterparty a legal entity identifier if that counterparty is an SD or MSP.[9]  However, under the Proposed Rule, end-users would not be required to identify their trade options in all recordkeeping by means of either a unique swap identifier or unique product identifier.[10]


[1] Trade Options, 80 Fed. Reg. 26,200 (May 7, 2015).

[2] See CEA Section 1a(47)(A)(i) (defining “swap” to include “[an] option of any kind that is for the purchase or sale, or based on the value, of 1 or more . . . commodities . . . .”

[3] Commodity Options, 77 Fed. Reg. 25,320 (April 27, 2012).

[4] CFTC No-Action Letter No 13-08 (April 5, 2013) (available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-08.pdf).

[5] 17 CFR § 45.2(a).

[6] See id. at 3-4.

[7] Proposed Rule at 26,203.

[8] Id. at 26,203-04.

[9] Id. at 26,204.

[10] Id.

NYDFS Finalizes BitLicense Regulations

On June 3, 2015, the New York Department of Financial Services (“NYDFS”) released its final BitLicense regulations, which Superintendent Benjamin Lawsky described as “the first comprehensive framework for regulating digital currency firms.”[1]  As previously reported, the NYDFS originally released proposed BitLicense regulations on July 17, 2014.[2]  After receiving thousands of public comments, primarily voicing concern over the possible scope of regulation, the NYDFS made major revisions and released re-proposed BitLicense regulations on February 4, 2015.[3]

The final BitLicense regulations contain relatively few changes to the February 2015 re-proposed version, which we previously summarized.[4]  Such changes include, for example: (i) with respect to the requirement that a licensee obtain the NYDFS’s written approval before offering any materially new product, service, or activity involving New York or New York residents, the final BitLicense regulations added language clarifying the meaning of “materially new product, service, or activity”; (ii) with respect to the requirement that a person seeking to acquire control of a licensee must obtain approval from the NYDFS Superintendent, the final BitLicense regulations added that a person will not be deemed a “control person” solely by reason of being an officer or director; and (iii) with respect to the requirement that a licensee must report to the NYDFS virtual currency transactions exceeding $10,000 in an single day, the final BitLicense regulations clarified that such reporting is required only for virtual currency to virtual currency transactions that are not subject to reporting requirements under federal law.

Generally, the BitLicense regime applies various requirements to persons engaged in specified “Virtual Currency Business Activities.”[5]  These requirements include, but are not limited to: paying a $5,000 application fee and obtaining a license; maintaining capital in an amount and form as the Superintendent determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to a licensee; protecting customer assets, including maintaining a surety bond or trust account in U.S. dollars for the benefit of licensee customers in such form and amount as is acceptable to the Superintendent; submitting certain periodic reports to the Superintendent; being subject to examination by the Superintendent at least once every two years of the licensee’s financial condition, safety and soundness of its business conduct, management policies, and other matters; and establishing and maintaining written, board-approved compliance policies addressing anti-fraud, anti-money laundering, cyber security, privacy and information security.

Superintendent Lawsky made the following points in announcing the release of the final BitLicense regulations “in order to allay various concerns [the NYDFS] heard during the public comment period”:[6]

  • Companies will not need prior approval for standard software or app updates, but only for material changes to their products or business models. An example of a material change would be if a firm that was licensed as a wallet service decided to begin offering exchange services.
  • The NYDFS intends to regulate only financial intermediaries, not software developers. For example, software developers that do hold customer funds will not be required to apply for a BitLicense.
  • Firms will be able to “cross-satisfy” many of the licensing requirements under BitLicense and the federal money transmitter regulations.
  • Companies that file suspicious activity reports with federal regulators such as the United States Department of the Treasury Financial Crimes Enforcement Network (FinCEN) will not be required to file duplicate reports with the NYDFS.
  • Companies will not need prior approval from the NYDFS for every new round of venture capital funding. Generally, a company will need prior approval only if an investor would become a “control person,” i.e., would direct the management and policies of the company.

The final BitLicense regulations will not take effect until published in the New York State Register. Upon such publication, a person conducting Virtual Currency Business Activity will have a 45-day transitional period to apply for a license, at which point it will be deemed to be in compliance with the BitLicense requirements until notified by the Superintendent that its application has been denied. If a person is so notified by the Superintendent, then it must immediately cease operating in New York and doing business with any New York State Resident.

Various other U.S. states have followed New York’s lead in pursuing virtual currency regulation. Significant state proposals are highlighted below.

In June 2015, the California State Assembly approved a bill that would impose on virtual currency businesses operating in California licensing requirements similar to those under the BitLicense regime. The bill is currently under review by the California Senate. Features of the bill include, among others, a $5,000 licensing fee and capital standards for virtual currency businesses. Similar to BitLicense, the California proposal would not subject firms that use virtual currencies only to buy or sell goods or services to its various requirements.

In May 2015, the Connecticut House of Representatives passed a bill that would allow the Connecticut Banking Department to deny a money transmission license to an otherwise-qualified applicant that has a virtual currency business model, based on potential consumer risks. This bill also includes surety bond requirements for money transmitters in virtual currency that differ from those that ordinarily apply to money transmitters. The bill is now before the Connecticut Senate.

In June 2015, the “Digital Currency Jobs Creation Act” was introduced in the New Jersey Legislature. In addition to imposing requirements relating to cybersecurity, risk disclosure, and recordkeeping, the bill would provide certain tax breaks to digital currency companies in New Jersey. For example, the bill would exempt from New Jersey’s sale and use tax the sale of energy to virtual currency miners. The bill also would allow New Jersey to accept tax payments in bitcoin.

In March 2015, the North Carolina House of Representatives approved a bill that would clarify that virtual currency transmission–except for certain “business-to-business” transmission activity–would require licensing and regulation under the existing North Carolina Money Transmitters Act. The bill is now under review by the North Carolina Senate.

In March 2015, a bill was introduced in the General Assembly of Pennsylvania that would, among other changes, add virtual currencies to the definition of “money” in Pennsylvania’s statute providing for the licensing and regulation of money transmission businesses.


[1] NYDFS Announces Final Bitlicense Framework for Regulating Digital Currency Firms (June 3, 2015) (available at: http://www.dfs.ny.gov/about/speeches/sp1506031.htm); New York State Department of Financial Services, New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200 (June 3, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf).

[2] New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200 (July 17, 2014) (available at: http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf); previous postings of Derivatives in Review (available here) also reported on Bitcoin developments.

[3] http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf; New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200 (February 4, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf).

[4] This summary may be found here: http://blogs.orrick.com/derivatives/2015/03/09/nydfs-releases-revised-bitlicense-proposal/

[5] “Virtual Currency Business Activity” is defined as an activity that falls under the BitLicense requirements if it involves New York or a New York Resident.  “New York Resident” means, generally, an individual or entity, however organized, that resides, is located, has a place of business, or is conducting business in New York.

[6] NYDFS Announces Final Bitlicense Framework for Regulating Digital Currency Firms (June 3, 2015) (available at: http://www.dfs.ny.gov/about/speeches/sp1506031.htm).

CFTC Exempts Certain Wholly-Owned Securitization SPVs from Mandatory Clearing

On May 4, 2015, the Division of Clearing and Risk of the Commodity Futures Trading Commission (the “CFTC”) issued a no-action letter (the “Letter”)[1] clarifying that securitization special purpose vehicles (“SPVs”) that are wholly-owned by, and consolidated with, a “captive finance company” are eligible for the “end-user exception” in connection with clearing determinations issued by the CFTC under Section 2(h) of the Commodity Exchange Act, as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“CEA”).  The auto securitization industry, including Ford Motor Credit Company LLC, has been particularly focused on the interpretive relief provided by the Letter.[2]

In a typical auto securitization, a captive finance company sells a pool of receivables (including from auto leases) to an SPV, which then sells debt securities to investors.  In some cases, swaps may be employed to manage interest rate exposure between fixed rate receivables and floating rate obligations to investors.  In December 2012, the CFTC made its first clearing determination, which required that certain classes of interest rate swaps and credit default swaps must be cleared by a central clearing counterparty registered with the CFTC.[3]

However, under Section 2(h)(7)(A) of the CEA, an entity may elect not to clear a swap that is subject to a mandatory clearing requirement by the CFTC if that entity: (i) is not a “financial entity”; (ii) uses the swap to hedge or mitigate commercial risk; and (iii) reports certain information to the CFTC (either directly or through a registered “swap data repository”).  Captive finance companies are explicitly excluded from the definition of “financial entity.”[4]  To qualify as a captive finance company, an entity must satisfy a test that, inter alia, requires that the entity’s “primary business” is to provide financing.[5]  A traditional captive finance company makes loans to auto customers, and so, would satisfy this requirement.  However, securitization SPVs of captive finance companies—which are the actual swap counterparties—are only indirectly involved in the financing of these loans, although they facilitate the loans.  The adopting release implementing the end-user exception did not directly address this prong of the captive finance company test.[6]

The Letter clarifies that it is appropriate to consider the business of such an SPV to be part of the business of the related captive finance company, because: (i) the SPV is wholly-owned by the captive finance company; (ii) the SPV’s financial statements are consolidated with those of the captive finance company; and (iii) the SPV’s sole activity is facilitating financing undertaken by the captive finance company.[7]  Therefore, a qualifying SPV may elect to use the end-user exception to a clearing determination in the same way as its parent captive finance company.


[1] CFTC Letter No. 15-27 (May 4, 2015) (available at http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/15-27.pdf).

[2] The Letter was in response to requests for clarification made by the automobile industry, including a letter from Ford Credit, dated November 24, 2014, and a letter from a group of nine automotive captive finance companies, dated December 3, 2014.  See Letter at fn 1.

[3] Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74,284 (Dec. 12, 2012).

[4] See CEA Section 2(h)(7)(C)(iii).

[5] The other requirements are that: (i) the entity uses derivatives for the purposes of hedging underlying commercial risks related to interest rate and foreign currency exposures; (ii) 90% or more of which arise from financing that facilitates the purchase or lease of products; and (ii) 90% or more of which are manufactured by the parent company or another subsidiary of the parent company.  See id.  These requirements were not addressed by the Letter.

[6] See End-User Exception to the Clearing Requirement for Swaps, 77 Fed. Reg. 42,560, 42,564 (July 9, 2012).

[7] Letter at 4.  The CFTC further supported its position by noting that the third prong of the captive finance company test, which establishes a minimum percentage of business that must arise from financing that facilitates the purchase or lease of products, is to be assessed “on a consolidated basis” across the company, its parent company, and other affiliates of the parent company.  Id. at 3-4.  The CFTC also highlighted an exchange between certain U.S. senators in the legislative history suggesting that a wholly-owned subsidiary of a captive finance company should be able to use the end-user exception.  Id. at 4.

SEC Proposal on Security-Based Swaps Arranged, Negotiated, or Executed in the United States

On May 13, 2015, the Securities Exchange Commission (“SEC”) proposed a rule and rule amendments relating to certain security-based swaps[1] arranged, negotiated, or executed by U.S. personnel (the “Proposed Rule”).[2]

This proposed rule governs, among other things, the SEC regulation of a security-based swap that is (i) entered into between two non-U.S. persons but (ii) “arranged, negotiated, or executed by personnel located in a U.S. branch or office or in a U.S. branch or office of an agent.”  The proposed SEC security-based swap regime generally would apply to such a security-based swap in the following manner:

  • Dealing activity in the security-based swap would count toward the threshold for the de minimis exemption from security-based swap dealer registration.
  • If either party is a registered security-based swap dealer, the SEC’s external business conduct requirements would apply to the security-based swap.
  • The reporting requirements—but, notably, not the clearing or trade execution requirements—would apply to the security-based swap.  Together with the SEC’s various other cross-border rules (some of which remain in proposed form and others of which have been finalized), the Proposed Rule indicates how the “reporting side” (i.e., the counterparty that has the duty to report) to a security-based swap would be determined, as summarized by the following table:[3]

SECProposal_SecurityBasedSwaps

Additionally, the reporting requirements would apply to any security-based swap executed on a platform having its principal place of business in the United States or effected by or through a registered broker-dealer (including a registered security-based swap execution facility).


[1] “Security-based swaps” are defined under the Wall Street Transparency and Accountability Act of 2010 to include, inter alia, swaps based on any of: (i) a narrow-based security index, including any interest therein or on the value thereof; (ii) a single security or loan, including any interest therein or on the value thereof; or (iii) the occurrence, nonoccurrence, or extent of the occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition, or financial obligations of the issuer.

[2] Application of Certain Title VII Requirements to Security-Based Swap Transactions Connected with a Non-U.S. Person’s Dealing Activity That Are Arranged, Negotiated, or Executed By Personnel Located in a U.S. Branch or Office or in a U.S. Branch or Office of an Agent, 80 Fed. Reg. 27,444 (May 13, 2015).

[3] The parties specified in the table, more specifically, are: a registered security-based swap dealer; a U.S. person (other than a registered security-based swap dealer); a counterparty (other than a registered security-based swap dealer or U.S. person) that arranges, negotiates, or executes the swap using personnel located in U.S. branch or office; and a non-U.S. person (other than a registered security-based swap dealer or counterparty that arranges, negotiates, or executes the swap using personnel located in U.S. branch or office).

[4] Such a security-based swap is not required to be reported by either party unless: (i) executed on a platform having its principal place of business in the United States; or (ii) effected by or through a registered broker-dealer (including a registered security-based swap execution facility).  Regarding (i), if the security-based swap will not be submitted to central clearing, the platform would have no reporting obligation, and so, it appears that the reporting side would be selected by the parties.  By contrast, if the security-based swap will be submitted to central clearing, the SEC has not yet articulated which party would have the reporting obligation. Regarding (ii), the registered broker-dealer would be responsible for reporting.

NYDFS Releases Revised BitLicense Proposal

On February 4, 2015, the New York State Department of Financial Services (“NYDFS”) released a revised version of its proposed virtual currency regulations (commonly referred to as “BitLicense”), originally released in July 2014. Nearly 4,000 formal comment letters were submitted by advocacy groups, financial service providers, law firms, individuals and others on the original proposal.  A 30-day public comment period began upon publication of the revised proposal in the New York State Register on February 25, 2015.  Section I below summarizes significant changes that the revised version of the BitLicense proposal made to the original, and Section II provides an outline of the overall proposed BitLicense regime, as amended.

  1. Revisions to the Original BitLicense Proposal

The revised BitLicense proposal includes several significant changes to the original.  As expected, several of these revisions are designed to accommodate startups or other small companies operating, or wishing to operate, in the virtual currency space.  Specifically, the NYDFS superintendent (the “Superintendent”) may grant a conditional license to an applicant that is not in full compliance with the BitLicense requirements.  In issuing a conditional license, the Superintendent may impose upon an applicant any reasonable conditions that the Superintendent determines.  A conditional license will expire two years after issuance, unless the Superintendent either removes its conditional status or renews it.  In determining whether to issue, renew or remove the conditional status of, or impose or remove any specific conditions on, a conditional license, the Superintendent may consider any relevant factors, including without limitation:  the nature, scope and anticipated volume of the applicant’s or licensee’s business, and the nature and scope of the risks that the applicant’s or licensee’s business presents to consumers, virtual currency markets, financial markets and the general public; registration of the applicant or licensee with the United States Department of the Treasury Financial Crimes Enforcement Network (FinCEN); licensing, registration, or other authorization of the applicant or licensee by any governmental or self-regulatory authority to engage in financial services or other business activities; the applicant’s or licensee’s financial services or other business experience; and the licensee’s history as a holder of a conditional license.

NYDFS clarified or provided additional guidance on several additional points in the revised BitLicense proposal, including the following:

  • Software development and dissemination, in and of itself, does not constitute “Virtual Currency Business Activity,” i.e., an activity that falls under the BitLicense requirements if it involves New York or a New York Resident;[1]
  • Transmission of virtual currency for non-financial purposes that involves only nominal amounts also does not constitute Virtual Currency Business Activity;
  • Merchants and consumers utilizing virtual currency solely for investment purposes were included in the exemption from the BitLicense requirements originally available only to merchants and consumers utilizing virtual currency solely for the purchase or sale of goods or services;
  • A licensee may seek clarification from NYDFS regarding the materiality of any proposed change to an existing product, service, or activity involving New York or New York residents prior to making that change;
  • $5,000 is specified as the BitLicense application fee;
  • The books and records of licensees must be preserved in their original form or native file format for seven years, rather than ten years;
  • The capital requirements have been somewhat relaxed such that a licensee may hold required capital “in the form of cash, virtual currency, or high-quality, highly liquid, investment-grade assets, in such proportions as are acceptable to the [NYDFS] superintendent;”[2] and
  • Background reports are required only for employees of an applicant who have access to customer funds, rather than for all employees.

II. Outline of the BitLicense Regime

The BitLicense regime, as currently proposed, would apply various requirements to persons engaged in any of the following Virtual Currency Business Activities: (i) receiving virtual currency for transmission or transmitting virtual currency (except where the transaction is undertaken for non-financial purposes and does not involve the transfer of more than a nominal amount of virtual currency), (ii) storing, holding or maintaining custody or control of virtual currency on behalf of others; (iii) buying and selling virtual currency as a customer business; (iv) converting or exchanging virtual currency as a service; or (v) controlling, administering or issuing a virtual currency. Merchants and consumers utilizing virtual currency solely for the purchase or sale of goods or services or for investment purposes are specifically excluded. Requirements applicable to persons conducting Virtual Currency Business Activities include the following:

  • obtaining a license from NYDFS;
  • payment of a $5,000 BitLicense application fee;
  • submission to NYDFS of voluminous information related to the applicant, such as biographical information and background reports for the applicant’s principal officers, principal stockholders, principal beneficiaries, and employees with access to customer funds; organizational charts and financial statements; details of banking arrangements; and other items;
  • designating a qualified individual (or individuals) as a compliance officer;
  • maintaining written, board-approved compliance policies addressing anti-fraud, anti-money laundering, cyber security, privacy and information security, and other requirements;
  • capital requirements in an amount and form as the Superintendent determines is sufficient to ensure the financial integrity of the licensee and its ongoing operations based on an assessment of the specific risks applicable to a licensee;
  • protecting customer assets, including maintaining a surety bond or trust account in U.S. dollars for the benefit of licensee customers in such form and amount as is acceptable to the Superintendent;
  • obtaining prior written approval from the Superintendent before introducing or offering a new, or making a material change in an existing, product, service, or activity involving New York or New York residents;
  • obtaining prior written approval from the Superintendent before taking any action that may result in a merger or acquisition of all or substantially all or a substantial part of the assets of a licensee;
  • maintaining certain books and records, including but not limited to a general ledger meeting certain specifications and records of the names and addresses of the parties to each transaction that are customers or accountholders of the licensee and, “to the extent practicable,”[3] those that are not customers or accountholders;
  • examination by the Superintendent at least once every two years of the licensee’s financial condition, safety and soundness of its business conduct, management policies, and other matters;
  • periodic submission to the Superintendent of certain reports and financial disclosures, including quarterly and audited annual financial statements;
  • establishing and maintaining the following programs, in each case satisfying various specifications: (i) anti-money laundering based on the legal, compliance, financial, and reputational risks associated with the licensee’s activities, services, customers and counterparties, and geographic location; (ii) cyber-security to ensure the availability and functionality of the licensee’s electronic systems and to protect those systems and any sensitive data stored on those systems from unauthorized access, use, or tampering; and (iii) business continuity and disaster recovery to ensure the availability and functionality of the licensee’s services in the event of an emergency or other disruption to its normal business activities;
  • certain restrictions relating to advertising and marketing, including that advertisements must include a legend that the licensee is “Licensed to engage in Virtual Currency Business Activity by the New York State Department of Financial Services”;
  • disclosure to customers of various virtual currency-related material risks and terms and conditions; and
  • establishing and maintaining written policies and procedures to fairly and timely resolve complaints. 

A person conducting Virtual Currency Business Activities at the time the BitLicense requirements take effect would have a 45-day transitional period to apply for a license, at which point it will be deemed to be in compliance with the BitLicense requirements until notified by the Superintendent that its application has been denied. If a person is so notified by the Superintendent, then it must immediately cease operating in New York and doing business with New York State Residents.[4]

[1] “New York Resident” is defined to mean, generally, an individual or entity (however organized) that resides, is located, has a place of business, or is conducting business in New York.

[2] In the original BitLicense proposal, each licensee was “permitted to invest its retained earnings and profits in only the following high-quality, highly liquid, investment-grade permissible investments with maturities of up to one year and denominated in United States dollars: certificates of deposit issued by financial institutions that are regulated by a United States federal or state regulatory agency, money market funds, state or municipal bonds, United States government securities, or United States government agency securities.”  New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200, Section 200.8(b) (July 17, 2014) (available at: http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf).

[3] New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200, Section 200.12(a) (February 4, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf).

[4] New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23, Chapter 1, Part 200, Section 200.21 (February 4, 2015) (available at: http://www.dfs.ny.gov/legal/regulations/revised_vc_regulation.pdf).

CFTC Subcommittee Recommends Timeline for Clearing of Non-Deliverable Forwards

On December 5, 2014, the Global Markets Advisory Committee, Foreign Exchange Markets Subcommittee (the “Subcommittee”) of the Commodity Futures Trading Commission (“CFTC”) submitted its recommendation to the Global Markets Advisory Committee on the timing of mandated clearing of foreign exchange non-deliverable forward (“NDF”) transactions.[1]

Parties to an NDF agree to settle on a pre-agreed date based on the difference between an exchange rate for a specified currency pair agreed on the trade date and the spot rate for the same currency pair at maturity.  At the time of settlement, one party delivers a payment to the other in the deliverable currency, which is usually U.S. dollars.  NDFs are expected to be the next type of swap that the CFTC will require to be centrally cleared through a derivatives clearing organization.[2]

Specifically, the Subcommittee recommended the following timeline for clearing NDFs:

  • Category 1 participants (i.e., swap dealers, major swap participants, or “active funds”) would be subject to the NDF clearing mandate on February 1, 2016. An “active fund” has been defined by the CFTC generally as any private fund under section 202(a) of the Investment Advisers Act of 1940, that is a not a third-party subaccount, and that executes 200 or more swaps per month based on a monthly average over the 12 months preceding the publication of the relevant clearing requirement determination in the Federal Register;[3]
  • Category 2 participants (i.e., commodity pools, private funds other than “active funds,” employee benefit plans, or persons predominately engaged in activities that are in the business of banking or “financial in nature,” excluding third-party subaccounts) would be subject to the NDF clearing mandate on May 1, 2016; and
  • Category 3 participants (i.e., third party subaccounts and non-financial commercial end users) would be subject to the NDF clearing mandate on August 1, 2016.

For a swap between counterparties in different Categories, the later of the two dates applies.

The Subcommittee intended its recommended timeline to align broadly with the clearing dates that the European Securities and Markets Authority (“ESMA”) may mandate for its jurisdiction,[4] despite slight divergences between the Categories of participants for the two regulators. In February 2015, however, ESMA stated that it is not planning to impose a clearing obligation with respect to NDFs for the time being.[5] The CFTC has not yet publicly indicated its official position in the wake of ESMA’s announcement.

 

[1] CFTC Global Markets Advisory Committee, Foreign Exchange Markets Subcommittee, Memorandum re: Response to request for recommendation on an FX NDF mandate, December 5, 2014 (available at http://www.cftc.gov/ucm/groups/public/@aboutcftc/documents/file/gmac_fxndfmandate122214.pdf).

[2] To date, the CFTC has issued a single clearing determination, requiring certain credit default swaps and interest rate swaps to be cleared.  Clearing Requirement Determination Under Section 2(h) of the CEA, 77 Fed. Reg. 74,284 (December 13, 2012).  A previous posting in Derivatives in Review (available here) reported on this clearing determination by the CFTC.

[3] Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship Documentation Requirements for Swap Dealers and Major Swap Participants, 77 Fed. Reg. 55,903, 55,940 (September 11, 2012).

[4] See, e.g., European Securities and Markets Authority, Consultation Paper, Clearing Obligation under EMIR (no. 3), October 1, 2014 (available at: http://www.esma.europa.eu/system/files/esma-2014-1185.pdf).

[5] European Securities and Markets Authority, Feedback Statement, Consultation on the Clearing Obligation for Non-Deliverable Forwards, February 4, 2015 (available at http://www.esma.europa.eu/system/files/2015-esma-234_-_feedback_statement_on_the_clearing_obligation_of_non_deliverable_forward.pdf).

ISDA Webinar Addresses Development of a “Standard Initial Margin Model”

In February 2015, the International Swaps and Derivatives Association, Inc. (“ISDA”) released a webinar on various issues related to the margin requirements for uncleared swaps.[1]  Specifically, the webinar: (i) covered the organizational structure of ISDA’s Working Group on Margin Requirements Implementation Initiative and each of the Initiative’s “workstreams” responsible for tasks associated with the margin rules (i.e., the Portfolio Integrity Workstream, the Margin & Collateral Workstream, the Risk Classification & Methodology Workstream, the Data Sources Workstream, the Dispute Resolution Workstream, and the Legal & Documentation Workstream); (ii) provided an update on ISDA’s efforts to develop, and obtain regulatory approval for, its “standard initial margin model” (“SIMM”), which is a standardized method for calculating  initial margin on uncleared swaps; and (iii) discussed significant legal and operational issues related to the implementation of the recently re-proposed uncleared swap margin regulations.[2]

ISDA is currently developing a single SIMM intended for broad use by market participants under their credit support documentation.  The margin regulations that the prudential regulators and the CFTC re-proposed in 2014 (along with similar proposals in Europe and Japan) generally allow market participants to calculate initial margin amounts using either: (i) standard look-up tables set forth in the relevant regulations; or (ii) an “internal model” approved by regulators.  One of the reasons the SIMM was created was to reduce initial margin requirements (for example, unlike the standard look-up tables, the SIMM is intended to provide relief for off-setting positions or risks).  Additionally, the SIMM should provide increased transparency for market participants, establishing a “recipe” for how calculations and inputs should be structured and implemented, and allowing market participants to resolve disputes more easily.  Finally, the SIMM should allow market participants to run pro forma calculations for purposes of managing and forecasting liquidity and understanding the impact of contemplated trades, novations, and similar events on funding.[3]

The webinar also provided an overview of the legal and operational challenges posed by the re-proposed uncleared swap margin rules and ISDA’s efforts to facilitate compliance.  The following points, among others, were addressed:

  • Credit Support Annexes and other collateral documentation will need to be revised or replaced. ISDA plans to publish a new suite of boilerplate credit support documents under New York law, English law, and Japanese law. Further, custodial agreements (i.e., tri-party agreements) will need to be established or modified to provide for the segregation of initial margin consistent with the SIMM. Additionally, new or updated netting and collateral opinions may be necessary for market participants in certain jurisdictions. ISDA will commission such opinions once the final rules are in place.
  • Each counterparty relationship will need to be analyzed to determine which, if any, margin regulations apply. For that analysis, a market participant will likely need to know, among other things, its and its counterparty’s status and average aggregate notional amount under the relevant margin regulations. ISDA is in the process of developing a self-disclosure form for this purpose.
  • Market participants will need to determine the cross-border applicability of the margin regulations. Regulators have yet to specify how the margin regulations will apply in the cross-border context.
  • The re-proposed margin rules in all three relevant jurisdictions have an implementation date of December 1, 2015, at which time: (i) all covered firms would be required to exchange variation margin; and (ii) a four-year phase-in for posting initial margin would commence. Many market participants have expressed concern about the short timeframe before the implementation date. Although CFTC Chairman Timothy Massad recently expressed a potential willingness to delay the implementation date in order to facilitate compliance, the CFTC to date has made no definitive announcement of any such delay.[4]

[1] ISDA WGMR Implementation Overview, February 2015 (available at: http://services.choruscall.com/links/isda150129.html).

[2] A recent posting in Derivatives in Review (available here) addressed the re-proposed margin rules.

[3] In more technical terms, the SIMM framework takes a “sensitivity based approach” that divides uncleared swaps into four asset classes (i.e., interest rate and foreign exchange, credit, equities, and commodities), aggregates risk separately into each asset class, and provides pre-defined inputs such as sensitivities on certain risk factors.

[4] See, e.g., Jerry Grant, “US Considers Delay to OTC Swap Rules,” Financial Times, January 23, 2015 (available at: http://www.ft.com/intl/cms/s/0/93f21702-a2e6-11e4-ac1c-00144feab7de.html#axzz3TTUGSFU8).

Exploring Temporary Stays of Early Termination Rights

Under the Bankruptcy Code (Title 11, U.S.C., §§ 101 et seq., the “Bankruptcy Code”) non-debtor counterparties to qualified financial contracts generally are not subject to the automatic stay under section 362 and the prohibition on ipso facto clauses under section 365(e).  As a result, upon the commencement of a bankruptcy case under the Bankruptcy Code, counterparties are able to exercise their contractual right to cause the liquidation, termination or acceleration of the transactions under qualified financial covenants.

The same is not necessarily true when a bank, insurance company or other similar regulated entity becomes insolvent.  Such entities are not eligible to be debtors under the Bankruptcy Code.[1] While the insolvency regimes for such entities do not provide for an automatic injunction barring creditor remedies, the insolvency regime will provide a brief stay preventing counter-parties to qualified financial contracts with such entity from terminating, liquidating or accelerating a qualified financial contract during such period.

The American Bankruptcy Institute recently released its Chapter 11 Reform Report.  The Reform Report proposed a number of revisions to Chapter 11 related to confirmation, valuation, financing and asset sales, among others.  The Reform Report also proposed a number of revisions to the safe harbor protections, which were discussed in Part II of Orrick’s Restructuring Team’s summary and analysis of the Reform Report.  As mentioned in the summary of the proposed changes to the safe harbor protections,  the Commission considered, but rejected, incorporating a temporary stay on the exercise by a non-debtor counterparty of its contractual rights to terminate and liquidate qualified financial contracts.  Read More.

The Bitcoin Marketplace and Regulatory Environment: An Overview

In the fourth quarter of 2014, bitcoin’s volatile price generally fluctuated between $300 and $400, about one-third of its all-time peak of around $1,200 from one year before. Despite this price drop during 2014, startup companies and financial products focused on bitcoin continue to burgeon, and, in turn, various regulators have recently proposed regulations, made pronouncements, and taken enforcement actions related to bitcoin. Section I below outlines significant companies and products in the bitcoin space, and Section II summarizes the state of bitcoin regulation.[1]

       1.  The Bitcoin Marketplace

Bitcoin derivatives

A number of companies currently offer bitcoin derivatives. However, TeraExchange has launched the first CFTC-regulated swap execution facility (“SEF”) for bitcoin swaps. Specifically, TeraExchange allows users to trade “TeraExchange bitcoin forwards,” U.S. dollar-denominated bitcoin currency forwards. A proprietary bitcoin price index developed by TeraExchange, the “Tera Bitcoin Price Index,” underlays these swaps. Parties to a swap calculate the U.S. dollar-denominated settlement payment on the settlement date based on the difference between the contracted rate agreed to on the trade date and the prevailing Tera Bitcoin Price Index at the time of settlement on an agreed notional amount. The swap is not centrally cleared.

TeraExchange self-certified the swap with the CFTC pursuant to CFTC regulation 40.2(a). The contract qualifies as a “swap,” as defined under the Commodity Exchange Act, as amended (“CEA”) and, therefore, is available only to “eligible contract participants” (i.e., a financial institution, an insurance company, commodity pool, or other entity based upon its regulated status or the amount it invests on a discretionary basis) that are permitted to enter into swaps off-exchange. Additionally, LedgerX, a startup backed by Google Ventures, has applied for registration with the CFTC as both a “swap execution facility” and a “derivatives clearing organization” (i.e., a clearinghouse) that will list physically-settled bitcoin (and other digital currency) option contracts. The CFTC recently opened a public comment period for that application.

Several other companies currently offer bitcoin derivatives. For example, ICBIT facilitates the trading of bitcoin options and futures, providing margin with upper and lower limits similar to a traditional futures exchange. Although labeled as “futures,” such contracts physically settle in bitcoins. OKCoin offers bitcoin futures for U.S. dollars. BTC Oracle and Trade Rush each offer bitcoin binary options as a broker. Bitfinix offers total return swaps in which one party exchanges an interest rate to obtain synthetic exposure to the return of bitcoin. BTC.sx offers bitcoin-denominated margin trading.

Separately, the Winklevoss Bitcoin Trust ETF remains under review by the SEC. Notably, in early 2014 the Winklevoss entrepreneurs also launched a bitcoin price index, Winklevoss Index (also known as WinkDex), on which the ETF will be based. The Winklevoss Index is calculated by blending the trading prices in U.S. dollars for the top three (by volume) qualified bitcoin exchanges through a proprietary formula. Tyler Winklevoss, one of the entrepreneurs behind the ETF, recently suggested that the launch remains on-track.[2]

Other bitcoin companies

Bitcoin startups are operating in many areas in addition to bitcoin derivatives. For example, significant bitcoin payment processors (i.e., generally, companies that process bitcoin payments to enable merchants to accept bitcoin), include, among others, BitPay, Coinbase and GoCoin, each of which has been integrated into PayPal. Bitcoin startups also include: bitcoin exchanges; bitcoin mining operations; companies offering bitcoin wallet, payment, and exchange services; bitcoin business incubators; messaging applications that allow users to send bitcoins; bitcoin debit cards; and others.

Large, major retailers and other companies currently accepting bitcoin in some capacity include Dell, Dish Network, EBay, Expedia.com, Microsoft, Overstock, and Zynga.

Other virtual currencies

Many other virtual currencies exist, which eventually may compete to overtake bitcoin for market dominance. For example, “ripple,” which has substantially appreciated over 2014, currently has a market capitalization of around 15% of that of bitcoin. “Litecoin,” which, like bitcoin, has substantially depreciated during the past year, currently has a market capitalization of about 2% of that of bitcoin. Many of the regulations and pronouncements discussed in Section II below would apply not only to bitcoin but also to other virtual currencies.

       2.  Bitcoin Regulation

New York’s “BitLicense” proposal

The New York Department of Financial Services (“NYDFS”) published proposed “BitLicense” regulations in July 2014.[3] The comment period has concluded but the proposed regulations have not yet been finalized. Under the proposed regulations, licensing is required of businesses engaging in (i) bitcoin (or other virtual currency) activities, such a performing retail conversion services or holding bitcoin on behalf of others (but excluding merchants or consumers using bitcoin solely for the purchase or sale of goods or services), (ii) with New York customers or otherwise operating in New York. Requirements under the proposed BitLicense regulations span the following areas: BitLicense application and revocation, consumer protections, safeguarding assets, cyber-security programs, anti-money laundering, and exams, reports and oversight.

Based on the comments received and industry feedback, NYDFS Superintendent Benjamin Lawsky recently suggested that the NYDFS may offer a “transitional” BitLicense, with lighter regulatory requirements for startup companies. He also indicated that the regulations might be finalized by early 2015.

Commodity Futures Trading Commission (the “CFTC”)

The CFTC has regulatory responsibility over bitcoin derivatives to the extent that bitcoin constitutes a “commodity” under the CEA. The CFTC has not yet made a formal determination in this regard, but, among other statements by CFTC officials, Chairman Timothy Massad recently stated the following in testimony before the U.S. Senate Committee on Agriculture, Nutrition & Forestry: “The CFTC’s jurisdiction with respect to virtual currencies will depend on the facts and circumstances pertaining to any particular activity in question. . . . [However,] the agency’s authority extends to futures and swaps contracts in any commodity. . . . Derivative contracts based on a virtual currency represent one area within our responsibility.”[4] He then cited the CFTC’s recent approval of the TeraExchange SEF, discussed above.

Bitcoin appears very likely to constitute a commodity, and so, the CFTC should have regulation over bitcoin derivatives just as it does over other kinds of commodity derivatives. Accordingly, bitcoin swaps would be subject to the various requirements under Title VII of the Dodd-Frank Act, including, among others, reporting and recordkeeping, business conduct standards, margin requirements, and, if eventually mandated by the CFTC, central clearing and exchange trading requirements. Additionally, bitcoin swap trading generally would only be available to eligible contract participants, and exchanges and clearinghouses involved in bitcoin swaps would be subject to applicable CFTC regulations.

Significantly, the CFTC also generally has authority over price manipulation of futures, swaps and cash commodities. Certain individuals are believed to hold large portions of the entire existing supply of bitcoins, leading to concern that they could manipulate or otherwise cause extreme, sudden movements in the bitcoin price. Depending on the extent to which such individuals dominate the bitcoin supply and whether such power has caused, and was intended to cause, an artificial price, the CFTC could potentially regulate this market risk. In this regard, Commissioner Mark Wetjen has stated that bitcoin’s apparent status as a commodity “gives [the CFTC] authority to bring enforcement against any type of manipulation.”[5]

Financial Crimes Enforcement Network (“FinCEN”)

FinCEN, a bureau of the U.S. Treasury Department, has issued guidance providing that virtual currency “exchangers” and “administrators” may be subject to its regulations governing money services businesses (“MSBs”).[6] Such regulations impose registration, know-your-customer, risk mitigation, recordkeeping, transactional monitoring, reporting, and other requirements. The same guidance confirmed that virtual currency users are not MSBs.

Securities and Exchange Commission (the “SEC”)

The SEC’s authority over securities offerings and public companies includes virtual currency-related securities.[7] For example, as discussed above, the SEC is currently reviewing the Winklevoss Bitcoin ETF. Additionally, the SEC’s enforcement authority likely extends to fraud involving virtual currency-related securities transactions. The SEC also may regulate registered broker-dealers accepting or holding virtual currencies, as well as investment advisers recommending virtual currencies or virtual-currency-related securities.

Internal Revenue Service (the “IRS”)

In March 2014, the IRS released guidance stating that bitcoin (and other virtual currencies) should be treated as property, rather than currency.[8] As a result, the long-term capital gains rate would apply to bitcoins held for more than a year. Moreover, technically, purchases of goods or services with bitcoin would constitute a taxable disposition of the bitcoins. If the IRS had, instead, treated bitcoin as currency, then the ordinary income rate would have applied to any foreign currency gains. With respect to bitcoin mining, the fair market value of bitcoins on the date of their receipt is generally includible in gross income.

Consumer Financial Protection Bureau (the “CFPB”)

The CFPB, which has broad consumer protection responsibilities over various consumer financial products and services, including taking deposits and transferring money, issued in August 2014 a consumer advisory warning of risks to consumers posed by virtual currencies.[9]

Prudential banking regulators

The prudential banking regulators (i.e., the Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Administration and the Office of the Comptroller of the Currency) are responsible for providing guidance and oversight ensuring that depository institutions with accounts for virtual currency exchanges or other MSBs have adequate anti-money-laundering controls for those accounts.

Conference of State Bank Supervisors (the “CSBS”)

On December 16, 2014, the CSBS issued a “Draft Model Regulatory Framework” for state virtual currency regulatory regimes and requested public comment.[10] The CSBS stated that the model framework is intended to promote consumer protection, anti-money laundering protections and data security among virtual currency companies.

Law enforcement agencies

Law enforcement agencies, including the Department of Homeland Security and the Department of Justice, have taken enforcement actions in numerous cases involving bitcoin. Most notably, in 2013 and 2014, U.S. and foreign agencies took actions against “Silk Road,” a black market website that accepted bitcoin. Also, in May 2013, U.S. agencies seized the accounts of a U.S.-based subsidiary of Mt. Gox, a former virtual currency exchange based in Tokyo, for operating an unlicensed money services business.[11] Moreover, in April 2013, U.S. agencies filed a civil asset forfeiture complaint against Tcash Ads Inc., an online payment processor that enabled users to make purchases anonymously from virtual currency exchanges, for operating an unlicensed money services business.

Foreign jurisdictions

Various foreign regulators, including those in Europe, Canada and Australia, have made pronouncements regarding bitcoin. Additionally, a number of foreign countries appear to have substantially restricted—or outright banned—bitcoin transactions. These include, among others, Bangladesh, Bolivia, Ecuador, Kyrgyzstan and Ukraine. Moreover, financial institutions in China are prohibited from handling bitcoin transactions, and Russia is considering fining bitcoin users.

[1] A previous posting in Derivatives in Review (available here) also reported on bitcoin developments.

[2] Winklevoss Twins: Bitcoin Trust Is Alive and Well, Bloomberg TV, November 4, 2014 (available at: http://www.bloomberg.com/video/winklevoss-twins-bitcoin-trust-is-alive-and-well-SracRWQuQ~GqLdGsFEU84w.html).

[3] New York State Department of Financial Services, Proposed New York Codes, Rules and Regulations, Title 23 Department of Financial Services, Chapter I Regulations of the Superintendent of Financial Services, Part 200 Virtual Currencies (available at: http://www.dfs.ny.gov/about/press2014/pr1407171-vc.pdf).

[4] Testimony of Chairman Timothy Massad before the U.S. Senate Committee on Agriculture, Nutrition & Forestry, December 10, 2014 (available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-6) (emphasis added).

[5] Michael J. Casey, CFTC Commissioner Says Agency Has Authority Over Bitcoin Price Manipulation, Wall Street Journal, November 17, 2014 (available at: http://www.wsj.com/articles/cftc-commissioner-says-agency-has-authority-over-bitcoin-price-manipulation-1416265016?mobile=y).

[6] FinCEN, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001, March 18, 2013. An “exchanger” is defined as a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency.  Id. An “administrator” is defined as a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency. Id. An administrator or exchanger that (1) accepts and transmits a convertible virtual currency, or (2) buys or sells convertible virtual currency for any reason is a “money transmitter” potentially subject to FinCEN’s regulations for MSBs. Id. “Convertible” virtual currency means a type either having an equivalent value in real currency or that acts as a substitute for real currency.

[7] See, e.g., Securities and Exchange Commission v. Shaver et al., No. 4:13 CV 416 (E.D. Tx. 2014) (holding that bitcoin is “money” and that a scheme involving bitcoin investment can be considered to be a security under the Securities Act of 1933).

[8] Internal Revenue Service, Notice 2014-21 (available at: http://www.irs.gov/pub/irs-drop/n-14-21.pdf).

[9] Consumer Financial Protection Bureau, Consumer Advisory, Risks to Consumers Posed by Virtual Currencies, August 2014 (available at: http://files.consumerfinance.gov/f/201408_cfpb_consumer-advisory_virtual-currencies.pdf).

[10] Conference of State Bank Supervisors, State Regulatory Requirements for Virtual Currency Activities, CSBS Draft Model Regulatory Framework and Request for Public Comment, December 16, 2014 (available at: http://www.csbs.org/regulatory/ep/Documents/CSBS%20Draft%20Model%20Regulatory%20Framework%20for%20Virtual%20Currency%20Proposal%20–%20Dec.%2016%202014.pdf).

[11] Mt. Gox was a Tokyo-based bitcoin exchange that in 2013 was handling about 70% of all bitcoin trading. The company filed for bankruptcy in early 2014 and announced that 850,000 bitcoins, valued at almost $500 million, had gone missing.