Posts by: Editorial Board

Swiss FINMA Publishes ICO Guidelines

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In guidelines published on February 16, the Swiss Financial Market Supervisory Authority (“FINMA“) sets out how it intends to apply financial market legislation in handling enquiries from initial coin offering (ICO) organizers. The guidelines also define the information FINMA requires to deal with such enquiries and the principles upon which it will base its responses, creating clarity for market participants.

In particular, the guidelines contain very helpful definitions of (i) “Payment Tokens,” which are synonymous with cryptocurrency and have no further functions or links to other development projects, (ii) “Utility Tokens,” which are tokens which are intended to provide digital access to an application or service, and (iii) “Asset Tokens,” which represent assets such as participations in real physical underlyings, companies, or earning streams, or an entitlement to dividends or interest payments — in terms of their economic function, Asset Tokens are analogous to equities, bonds or dividends. That being said, FINMA noted that “hybrid forms are possible”. Release.

US CFTC and UK FCA Sign Arrangement to Collaborate on FinTech Innovation

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On February 19, The US Commodity Futures Trading Commission (“CFTC“) and the UK’s Financial Conduct Authority (“FCA“) signed an arrangement that commits the regulators to collaborating and supporting innovative firms through each other’s financial technology (“FinTech“) initiatives — LabCFTC and FCA Innovate. This is the first FinTech innovation arrangement for the CFTC with a non-U.S. counterpart.

The Cooperation Arrangement on Financial Technology Innovation (“FinTech Arrangement“) focuses on information-sharing regarding FinTech market trends and developments. It also facilitates referrals of FinTech companies interested in entering the others’ market, and sharing information and insight derived from each authority’s relevant sandbox, proof of concept, or innovation competitions. Release.

SEC OCIE Examinations Announces 2018 Examination Priorities

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On February 7, the Securities and Exchange Commission’s (“SEC”) Office of Compliance Inspections and Examinations (“OCIE”) announced its 2018 examination priorities. OCIE publishes its exam priorities annually “to improve compliance, prevent fraud, monitor risk, and inform policy.”

According to the Press Release publishing the examination priorities, “of particular interest this year will be matters involving critical market infrastructure, duties to retail investors, and developments in cryptocurrency, initial coin offerings, and secondary market trading.”  Orrick believes that the focus on “developments in cryptocurrency, initial coin offerings, and secondary trading market” is significant. READ MORE →

Securities and Exchange Commission Adopts Final Rule That Provides New Exemptions From Investment Adviser Registration for Advisers to Small Business Investment Companies

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On January 5, 2018, the SEC adopted amendments to Rule 203(l)-1 under the Investment Advisers Act of 1940 (the “Advisers Act“) that defines a “venture capital fund” and Rule 203(m)-1 under the Advisers Act that implements the private fund adviser exemption under the Advisers Act. These amendments were adopted to reflect changes made by title LXXIV, sections 74001 and 74002 of the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act“). That legislation amended sections 203(l) and 203(m) of the Advisers Act. The amendments are effective on March 12, 2018.

In particular, Title LXXIV, section 74001 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to one or more “venture capital funds” in Advisers Act section 203(l) by deeming “small business investment companies” to be “venture capital funds” for purposes of the exemption. Accordingly, the SEC amended the definition of a “venture capital fund” in Rule 203(l)-1 to include “small business investment companies.”

Title LXXIV, section 74002 of the FAST Act amended the exemption from investment adviser registration for any adviser solely to “private funds” with less than $150 million in assets under management in Advisers Act section 203(m) by excluding the assets of “small business investment companies” when calculating “private fund assets” towards the registration threshold of $150 million. Accordingly, the SEC amended the definition of “assets under management” in Rule 203(m) to exclude the assets of “small business investment companies.”

SEC Division of Investment Management Letter on Cryptocurrency Related Investment Products; Joint Statement by SEC and CFTC Enforcement Directors Regarding Virtual Currency Enforcement Actions

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On January 18, 2018, in a letter to the Investment Company Institute and SIFMA, Dalia Blass, Director of the SEC’s Division of Investment Management, warned market participants against the risks of creating and marketing investment products to retail investors that hold “substantial amounts” in “cryptocurrencies and related products.” The risks/concerns posed by cryptocurrency ETFs and funds, including transparency of information, trading, valuation and custody, were highlighted.

Also, on January 19, 2018, SEC Co-Enforcement Directors Stephanie Avakian and Steven Peikin and CFTC Enforcement Director James McDonald issued the following Statement:

“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.” Release.

 

FINRA’s 2018 Regulatory and Examination Priorities Letter Includes Initial Coin Offerings and Cryptocurrencies

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On January 8, 2018, the Financial Markets Regulatory Authority (“FINRA“) published its 2018 Regulatory and Examination Priorities Letter which identifies topics that FINRA will focus on in the coming year.

Included for the first time are Initial Coin Offerings and Cryptocurrencies. Specifically, the Priorities Letter states: “Digital assets (such as cryptocurrencies) and initial coin offerings (“ICOs“) have received significant media, public and regulatory attention in the past year. FINRA will closely monitor developments in this area, including the role firms and registered representatives may play in effecting transactions in such assets and ICOs. Where such assets are securities or where an ICO involves the offer and sale of securities, FINRA may review the mechanisms—for example, supervisory, compliance and operational infrastructure— firms have put in place to ensure compliance with relevant federal securities laws and regulations and FINRA rules.”

The full letter is available here

Chairman Giancarlo Statement on Virtual Currencies

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On January 4, 2018, the Commodity Futures Trading Commission (CFTC) Chairman, J. Christopher Giancarlo, issued a statement on virtual currencies. “The CFTC’s Market Risk Advisory Committee (MRAC), sponsored by CFTC Commissioner Rostin Behnam, has announced that it will hold a meeting on January 31, 2018 to consider the process of self-certification of new products and operational rules by Designated Contract Markets (DCMs) under the Commodity Exchange Act (CEA) and CFTC regulations . . . . The MRAC meeting is scheduled to take place the week after a January 23, 2018 meeting of the CFTC Technology Advisory Committee (TAC), sponsored by CFTC Commissioner Brian Quintenz, which will consider the related challenges, opportunities, and market developments of virtual currencies. Both the MRAC and TAC January meetings are timely and have the support of the full Commission. My fellow Commissioners and I look forward to thorough and thoughtful discussions.”

The Statement is of particular significance because on December 1, 2017, the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE) self-certified new contracts for bitcoin futures products, and the Cantor Exchange (Cantor) self-certified a new contract for bitcoin binary options. At that time, CFTC Chairman Giancarlo stated that “we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets. The Statement also emphasized that “the Commission will continue to assess whether further changes are required to the contract design and settlement processes . . . These activities include monitoring and analyzing the size and development of the market, positions and changes in positions over time, open interest, initial margin requirements, and variation margin payments, as well as stress testing positions.” Press release.

SEC Chairman Statement on Cryptocurrencies and Initial Coin Offerings

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On December 11, SEC Chairman Jay Clayton issued his own statement (“Statement”) concerning cryptocurrencies and “initial coin offerings”  (“ICOs”).  The Statement provides a thorough review of the primary securities regulatory issues and urges caution on the part of issuers and market participants. To view the full statement, click here.

CFTC Statement on Self-Certification of Bitcoin Products by CME, CFE and Cantor Exchange

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On December 1, 2017, the Commodity Futures Trading Commission (“CFTC“) issued a Statement on the Self-Certification of Bitcoin Products by the Chicago Mercantile Exchange (“CME“), the CBOE Futures Exchange (“CFE“) and the Cantor Exchange (“Cantor“).

CFTC Chairman J. Christopher Giancarlo stated that “we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets. The Statement also emphasized that “the Commission will continue to assess whether further changes are required to the contract design and settlement processes . . . These activities include monitoring and analyzing the size and development of the market, positions and changes in positions over time, open interest, initial margin requirements, and variation margin payments, as well as stress testing positions.” Release.

DFS Grants Virtual Currency License To bitFlyer USA, Inc.

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On November 28, 2017, the New York State Department of Financial Services (“DFS“) announced that it has approved the application of bitFlyer USA, Inc., for a virtual currency license.”  Pursuant to this license bitFlyer USA is “approved to offer an online digital currency exchange and trading platform as well as provide custodial wallet services for the Bitcoin digital currency.”  The announcement emphasizes that DFS “has conducted a comprehensive review of bitFlyer USA’s application, including the company’s anti-money laundering, capitalization, consumer protection, and cyber security policies.”  DFS further stated that its “rigorous application ensures only the most safe and compliant firms can operate in New York . . .” Release.