Christine Hanley

Managing Associate

Seattle


Read full biography at www.orrick.com

Christine is recognized by her clients for her unique ability to distill complicated concepts into powerful and persuasive narratives that put their interests front and center.

She has experience working on multi-jurisdictional litigations and regulatory investigations that involve a complex combination of securities law, shareholder litigation, and regulatory compliance. Christine dives into new cases and areas of law fearlessly and has a talent for quickly getting up to speed and crafting strategies to stop the opposition in its tracks.

Christine has a strong interest in the intersection of financial litigation and regulation and emerging fintech, and she has written articles on the intersection of securities law and cryptocurrency, which are featured below. As technology advances beyond the traditional language of the law, Christine understands that clients need a cohesive strategy to move their business forward while avoiding legal pitfalls.

Christine also maintains a pro bono practice centering on immigration and prisoners' rights.

Posts by: Christine Hanley

In Case You Needed A Reminder – AML/CFT Regulations Apply to Transactions in Cryptocurrencies

Earlier this month, the leaders of the U.S. Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and the U.S. Securities and Exchange Commission released a joint statement reminding individuals engaged in transactions involving digital assets of their obligations under the Bank Secrecy Act (BSA) to guard against money laundering and counter the financing of terrorism.

Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regulations apply to all entities that the BSA defines as “financial institutions,” including futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the SEC. To comply with AML/CFT regulations, financial institutions are required to, among other things, implement anti-money laundering programs and comply with recording keeping and reporting requirements, including suspicious activity reporting (SAR) requirements.

The joint statement emphasized that AML/CFT regulations apply to financial institutions engaged in activities involving “digital assets,” including instruments that may qualify under applicable U.S. laws as securities, commodities, and security- or commodity-based instruments such as futures or swaps. Because digital assets and financial transactions in digital assets are referred to by many names – including “cryptocurrencies,” “digital tokens,” “virtual assets” and “initial coin offerings” – the regulators issuing the joint statement reminded financial institutions that commonly used labels may not necessarily align with how an asset, activity or service is defined under the BSA or under laws and rules administered by the CFTC and the SEC. The nature of the digital asset, activity or service, including underlying “facts and circumstances” and the asset’s “economic reality and use,” determines how it is regulated under federal laws and regulations.

By reminding industry participants that the nature of a digital asset and the manner in which it is used – and not industry lingo – determines how the digital asset is regulated, the CFTC, FinCEN and the SEC signaled that they are adopting the same framework courts already use to determine how to classify other types of assets under the federal securities laws. The joint statement indicates that regulators are continuing to take steps toward applying existing federal securities laws and regulations to digital currencies.

SEC/FINRA Joint Statement on Digital Asset Securities Does Not Address Regulatory Log Jam

Last week, the Staffs of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) (collectively, the Staffs) released a Joint Statement concerning the application of the SEC’s Customer Protection Rule and other federal laws and regulations to transactions in digital asset securities. The Joint Statement is the result of months of dialogue among the Staffs and industry participants regarding the practical application of the federal securities laws to emerging digital technologies. Nonetheless, it gives no indication as to when FINRA expects to begin working down its backlog of applications from broker-dealers seeking to facilitate markets in digital asset securities.

The Customer Protection Rule

The Joint Statement primarily addresses the application of SEC Rule 15c3-3, the Customer Protection Rule, to federally registered broker-dealers taking custody over their customers’ digital asset securities. The Customer Protection Rule requires broker-dealers to segregate customer assets in specially protected accounts, thereby increasing the likelihood that customers will be able to withdraw their assets even if the broker-dealer becomes insolvent. To comply with the rule, broker-dealers must either physically hold customers’ fully paid and excess margin securities or deposit them at the Depository Trust Company, a clearing bank, or other “good control location” free of any liens or encumberments. This infrastructure additionally protects customers by allowing mistaken or unauthorized transactions to be reversed or canceled.

While the Customer Protection Rule applies to both traditional and digital asset securities, the Staffs advised that broker-dealers taking custody over digital asset securities may need to take additional precautions to respond to unique risks presented by these emerging technologies. For instance, there may be greater risk that a broker-dealer maintaining custody of digital asset securities could become the victim of fraud or theft or could lose the “private key” required to transfer a client’s digital asset securities. Further, another party could hold a copy of the private key without the broker-dealer’s knowledge and transfer the digital asset security without the broker-dealer’s consent. The Staffs noted that an estimated $1.7 billion worth of digital assets was stolen in 2018, of which approximately $950 million resulted from cyberattacks on bitcoin trading platforms. These risks could cause customers to suffer losses and create liabilities for the broker-dealer and its creditors.

The Staffs noted that broker-dealer activities that do not involve custody functions do not trigger the Customer Protection Rule. Examples of such activities include the facilitation of bilateral transactions between buyers and sellers similar to traditional private placements or “over the counter” secondary market transactions. These transactions do not “raise the same level of concern among the Staffs” as do transactions in which the broker-dealer assumes custody over the securities.

Other Federal Regulations

The Staffs advised broker-dealers to consider how distributed ledger technology may impact their ability to comply with broker-dealer recordkeeping and reporting rules. Because transactions in digital asset securities are recorded on distributed ledgers such as blockchains rather than traditional ledgers, broker-dealers may find it more difficult to evidence the existence of these digital asset securities on financial statements and to provide sufficient detail about these assets to independent auditors.

Finally, the Staffs discussed the application of the Securities Investor Protection Act (SIPA) to broker-dealers exercising custody over digital assets. In the event a broker-dealer is liquidated, SIPA gives securities customers first-priority claims to securities and cash deposited with the broker-dealer. However, the Joint Statement notes that SIPA’s definition of “security” is different than the federal securities laws definitions. For example, the definition in SIPA of “security” excludes an investment contract or interest that is not the subject of a registration statement with the Commission pursuant to the provisions of the Securities Act of 1933. Consequently, customers whose digital assets are subject to the Customer Protection Rule and other federal regulations may only have an unsecured general creditor claim against their broker-dealer’s estate in the event their broker-dealer fails. The Staffs found that such outcomes are likely inconsistent with the expectations of investors in digital assets that do not qualify for SIPA protection.

Waiting Game

Absent from the Joint Statement is a clear answer to the question at the forefront of many industry participants’ minds: When will FINRA begin approving the dozens of applications of existing broker-dealers and new registrants seeking authority to offer a variety of custodial and non-custodial services with respect to digital assets? Applicants seeking to engage only in non-custodial activities, such as market-making, may be encouraged that the Staffs have indicated that those activities pose the least concern to federal regulators, and, presumptively, may be more readily approved. Nonetheless, the Staffs have given no indication that FINRA will prioritize processing applications seeking authority to provide only non-custodial services currently in its backlog, or when such applications will once again be approved.

Meanwhile, the Joint Statement underscores that considerable uncertainty remains regarding the application of existing laws and regulations to broker-dealer activities involving the custody of digital assets. While the Staffs invite broker-dealers and other industry participants to continue to engage with federal regulators to develop workable methodologies for securely carrying customers’ digital assets, industry participants hoping to get a firm answer as to when secondary market trading in digital asset securities will gain federal regulators’ seal of approval will have to keep waiting.

 

NY AG Accuses Bitfinex and Tether of Covering Up $851 Million Loss in Investor Funds

On April 25, 2019, New York’s Attorney General secured a preliminary injunction against Bitfinex, a cryptocurrency trading platform, and Tether, the company behind tether (USDT), one of the world’s most popular cryptocurrencies. In papers filed with the court last Wednesday, the state AG accused the companies of misleading investors about their financial well-being while using Tether’s bank account to prop up Bitfinex with $700 million in undisclosed loans. The injunction requires Bitfinex and Tether to temporarily cease drawing down Tether’s cash reserves and to turn over detailed information about their finances and client accounts to the state AG as it investigates them for financial fraud.

As we have discussed in previous blog posts, courts and regulators have determined that some virtual currencies are securities or commodities that are subject to state and federal laws and regulations. Last week’s developments serve as a reminder to cryptocurrency exchanges and token distributors alike that they may be subject to the laws and regulations of any jurisdiction in which they operate. In this case, although Bitfinex purportedly no longer permits U.S. traders to use its platform and is not a licensed exchange in New York, the state AG’s office argued that it and Tether are subject to New York law because some New York residents still use the platform, just as some New York residents own USDT. The companies’ connections to New York subject them to scrutiny under the Martin Act, New York’s powerful “blue sky” securities law that gives the state AG the authority to investigate and prosecute securities fraud regardless of fraudulent intent.

In papers submitted to the court, New York’s AG alleged that Bitfinex dipped into Tether’s cash holdings to prop itself up after $851 million was seized from one of its bank accounts. Bitfinex had deposited the cash with an entity called Crypto Capital Corp., who was engaged by Bitfinex to process its clients’ withdrawals. In late 2018, Crypto Capital reported to Bitfinex that it could no longer process withdrawals or return Bitfinex’s funds to it because they had been seized by authorities in Portugal, Poland, and the U.S. To cover up the loss, Bitfinex allegedly caused Tether to extend it a $900 million line of credit, of which Bitfinex has accessed approximately $700 million. Neither Bitfinex nor Tether publicly disclosed these transactions. The state AG alleges that Bitfinex was able to borrow the funds from Tether because the two companies are operated by the same individuals and share the same parent company.

The New York AG has accused Bitfinex and Tether of misleading investors about the security of their investments and of engaging in self-dealing by causing Tether to transfer hundreds of millions of dollars to Bitfinex, taking on enormous amounts of risk without receiving anything of value in return. Tether has long represented that it holds one U.S. dollar in reserve for each of the 2.6 billion outstanding USDT, and that holders of USDT can redeem them at any time for U.S. dollars at a rate of one USDT to one U.S. dollar. Although Tether has recently disclosed that outstanding USDT may be backed by “other assets and receivables” in addition to U.S. dollars, the state AG is investigating, among other questions, whether Tether’s transactions with Bitfinex have rendered Tether’s public statements misleading. The New York AG has also accused the companies of misleading state investigators by purporting to cooperate in the AG’s investigation while secretly transferring funds from Tether to Bitfinex.

Bitfinex responded on Friday with a forcefully worded denial of the allegations brought against it and Tether and reiterated that the companies “are financially strong – full stop.”

Although the New York AG has stated that it does not want its investigation to harm Tether investors or Bitfinex clients, it’s possible that information revealed during the investigation could affect confidence in the companies or in cryptocurrency markets generally. Bitcoin’s price fell seven percent immediately following the announcement of the AG’s investigation on Thursday, perhaps providing a window into the volatility that will come if Bitfinex’s assurances that it and Tether are financially sound are found to be misleading.