LGO Regulatory Update–Week of July 29, 2019
By: Lisa Lefever
Tags: Regulation, Bitcoin

In this update, we discuss the Senate hearing this week discussing virtual currency regulation, the first ERC-20 token no-action letter, and the NYDFS’s new crypto division.

Senate Meets to Discuss Broader Cryptocurrency Regulation

On July 30, the Senate Banking Committee held a meeting, “Examining Regulatory Frameworks for Digital Currencies and Blockchain,” in order to discuss outstanding issues related to the federal oversight of the space. The meeting followed the consecutive Senate and House hearings earlier in July where congressmen questioned David Marcus, the head of Facebook’s Calibra wallet development, on the implications of the Libra currency.

The witnesses on Tuesday included Circle CEO Jeremy Allaire, Rebecca M. Nelson from the Congressional Research Service, and law professor Mehrsa Baradaran.

Allaire, whose company Circle just opened a Bermuda office citing domestic regulatory uncertainty, pointed out that clear definitions and an accommodating framework are needed to inform industry participants of their obligations as it applies to digital assets, which he believes mix the elements of traditional financial instruments and offer unprecedented functionalities.

Baradaran disagreed in that while the technology is new, the essence of the assets remain the same. Instead, she decided to focus on high-level banking policy issues and the need for an accessible public payment systems. She asserts that cryptocurrencies are not the solution to this larger issue.

Nelson furthered Allaire’s comments in that other countries, like France, have done more in “actively fostering” a regulatory environment for cryptocurrencies. Her testimony promoted the harmonization of international crypto regulatory standards, but exactly how to go about this was not discussed during the hearing.

Overall, Congress and the witnesses had an opportunity to discuss the substance of a regulatory framework that could be developed at the federal level and missed the mark. Questions were overshadowed by continued discussion of Libra and data privacy (one congressman asked about data privacy in purchasing a washing machine online). Hopefully federal discussion will continue on this topic to pave the way for reasonable and informed action.

Recent Comments from Treasury Secretary

This congressional meeting comes after U.S. Treasury Secretary Steven Mnuchin recent public comments expressing his “very serious concern” regarding virtual currencies and Facebook’s Libra. In a press conference, he stated that Libra is a “national security issue” and could permit money laundering and terrorist financing.

The Ripple Letter

On Sunday before the hearing, Ripple CEO Brad Garlinghouse published “Our Open Letter to Congress,” in which he asked Congress to “not paint us with a broad brush.” The letter promoted that many in the blockchain and digital currency space are “responsible actors” serving the greater good “in partnership” with regulated financial institutions. The letter goes on to request clearer regulations that do not disadvantage U.S. innovators.

SEC Issues First No-Action Letter to an ERC-20 Token

On July 25, the U.S. Securities and Exchange Commission (SEC) granted no-action relief for the first time to a company, Pocketful of Quarters (PoQ), with plans to sell ERC-20 tokens. PoQ’s “Quarters” token is described as an in-game currency that can be used across at least 30 different video games at launch. The SEC deemed Quarters to not constitute securities under federal securities laws based on the 16-page letter submitted on behalf of PoQ by Lewis Cohen from the DLX Law. Although not part of the requested relief, PoQ raised funds to develop the platform through its “Q2 Tokens,” which are securities.

In the letter, Cohen put forth the argument that Quarters should not be treated as securities because:

The platform will be fully functional and operational at launch;

Quarters will provide “the sole benefit” of consumptive use for gaming entertainment purposes;

There will be an unlimited amount issued at a fixed price; and

They will not be transferable outside the platform or trade in a secondary market.

As noted in TurnKey no-action letter issued in April of this year, the lack of transferability of the token indicates that purchasers hold no reasonable expectation of profits from the ownership.

The letter made clear that only “Approved Accounts” (“Developers” who develop the games and “Influencers” who market them to their established audiences) will be able to transfer their Quarters to the Quarters Smart Contract in exchange for ETH at predetermined rates. Per the letter, opening an Approved Account will require initial and ongoing KYC/AML checks.

NYDFS Launches New Division to Oversee Crypto Businesses

Last week, the New York Department of Financial Services (DFS) announced the launch of its new Research and Innovation Division, which will handle licensing and supervising virtual currency business activities in the state. Superintendent Linda A. Lacewell stated that there is a need for an evolution in the financial services regulatory landscape. She expressed hope that the Division will promote adaptation and position the DFS as “the regulator of the future.”

In addition to overseeing BitLicense applicants and recipients, it will assess how new technology can “address financial exclusion, identify and protect consumer data rights, and encourage innovations in the financial services marketplace.”

The news comes just a few days after the DFS announced the grant of its 20th BitLicense since the legislation was enacted in 2015.

Other News

The information provided is for informational purposes only. It does not constitute legal or investment advice.