Weekly Focus:
- BitClave Settles with SEC
- Telegram Withdrawals Appeal
- First Meeting of Wyoming Select Committee on Blockchain
- Louisiana Takes a Step Towards Establishing a Crypto License Regime
- India Permits Banking for Cryptocurrency Related Businesses
- Antigua and Barbuda Cryptocurrency Regulation
- Switzerland Denies Crypto Valley Bailout
U.S. Developments
BitClave Settles with SEC
On May 28, 2020 the Securities and Exchange Commission (the “SEC”) announced that a settlement has been reached with BitClave PTE Ltd. (“BitClave”) relating to BitClave’s 2017 initial coin offering where it raised over $25 million through the sale of Consumer Activity Tokens (“CAT”). As discussed in the official SEC order, “BitClave offered and sold securities in the form of digital tokens to fund the development of a blockchain-based search platform for targeted consumer advertising.” CAT, a token run on the Ethereum network, was intended to be used to compensate consumers who interact with targeted ads on the BitClave Active Search Ecosystem (“BASE”).
Per the SEC, the 2017 sale and subsequent activities constituted an unregistered security offering in violation of Section 5(a) and 5(c) of the Securities Act of 1933. The SEC found that BitClave’s activities, including the promotion of the CAT presale and initial coin offering, efforts to commercialize and establish secondary trading of CAT, and shared profits with investors, were sufficient to constitute an investment contract under the Howey Test.[1]
Under the settlement, BitClave has agreed to (1) transfer all remaining $1.32 billion CAT in its control to a fund administrator selected by the SEC; (2) pay disgorgement of $25,500,000, prejudgment interest of $3,444,197, and a penalty of $400,000 to the SEC; (3) publish a notice of the order on BitClave’s website and social media channels; and (4) make a reasonable effort to get trading platforms to drop CAT. However, under the settlement, BitClave did not admit or deny the SEC’s finding that the initial coin offering and subsequent conduct constituted an unregistered security offering.
SEC Press Release – May 28, 2020
BitClave Settlement Announcement
Telegram Withdrawals Appeal
In its May 22, 2020 filing with the United States Court of Appeals for the Second Circuit, Telegram Group Inc. and TON Issuer Inc. (together “Telegram”) notified the court that it has reached an agreement with the SEC to withdraw its appeal to the March 24, 2020 preliminary injunction without prejudice. This preliminary injunction has prevented Telegram from distributing Gram tokes (“Grams”) to high net worth individuals and entities (“Initial Purchasers”) that purchased the right to receive Grams under presale agreements in 2018. On April 1, 2020, Judge P. Kevin Castel clarified that this injunction precluded Telegram from issuing Grams to both individuals and entities in and outside the United States. Under this withdrawal procedure, Telegram reserves the right to appeal the injunction again at a later time. Although Telegram has already started to issue partial refunds to U.S. investors and Telegrams’ Chief Executive Officer, Pavel Durov has made it clear in a May 12, 2020 blog post “…that Telegram’s active involvement with TON is over,” the SEC enforcement action has not yet concluded, and Telegram may still face disgorgement and other penalties in connection with its offering of Grams.
What Was TON and Why It Is Over – Pavel Durov’s May 12, 2020 Blog Post
First Meeting of Wyoming Select Committee on Blockchain
On May 17, 2020 the Wyoming State Legislature announced the formation of a Select Committee on Blockchain, and on May 22, 2020 the committee held its first meeting via video conference. This committee, which was formed by the Wyoming Blockchain Task Force (a bi-partisan legislatively chartered group), has the actual authority to sponsor its own legislation in the Wyoming State Legislature. This four and a half hour initial meeting was attended by leaders from Wyoming’s Division of Banking, representatives from the Wyoming Secretary of State, liaisons from representing the Governor, and industry experts. The meeting covered an array of topics, and among other discussions, focused on digital custody, the opportunities blockchain technology offers in light of the COVID-19 crisis, and the ability for Wyoming to lead the way in establishing a permissive regulatory framework.
Louisiana Takes a Step Towards Establishing a Crypto License Regime
Louisiana House Bill 701, “[p]rovides for the licensing and regulation of virtual currency businesses,” was passed by the Louisiana House of Representatives unanimously and has been referred to the Louisiana State Senate Committee on Commerce and the Consumer Protection and International Affairs. This legislation, which is in part based on the Virtual Currency Business Act licensure regime developed by the Uniform Law Commission, if passed would establish a process for crypto businesses to apply for a license from the Louisiana Office of Financial Institutions.
Virtual Currency Business Act (VCBA)
International Developments
India Permits Banking for Cryptocurrency Related Businesses
On May 22, 2020, India’s central bank – the Reserve Bank of India (“RBI”) – has clarified that banks in India are permitted to provide banking services to cryptocurrency companies, exchanges, and traders. This announcement clarified uncertainty left by the Indian Supreme Court’s March 4, 2020 ruling, which struck down a ban on cryptocurrency trading put into place by the RBI in April 2018. There is now legal certainty on this matter, and it is anticipated that the clarification will reinforce the growth of the cryptocurrency in India.
Antigua and Barbuda Cryptocurrency Regulation
The House of Representatives of Antigua and Barbuda has passed the Digital Assets Business Bill 2020, which is “an act to regulate persons carrying on digital asset business and for the protection of the interests of clients or potential clients of persons carrying on digital asset business and to provide for other matters connected and related thereto.” This act would establish a licensing regime for business who will be “(a) issuing, selling or redeeming virtual coins, tokens or any other form of digital asset; (b) operating as a payment service provider business utilizing digital assets which includes the provision of services for the transfer of funds; (c) operating as an electronic exchange; (d) providing custodial wallet services; [or] (e) operating as a digital asset services vendor.” The bill, if passed, would also implement penalties for operating business subject to license requirements without a license, which includes both fines and potential imprisonment.
Antigua and Barbuda – Digital Assets Business Bill, 2020
Switzerland Denies Crypto Valley Bailout
In April 2020, the Zuger finance director, Heinz Tännler, proposed that a 100 million Swiss Franc sovereign wealth fund be established to bailout distressed blockchain businesses in Zug, Switzerland, commonly known as “Crypto Valley.” Director Tännler proposed this bailout to assist blockchain start-ups in the Crypto Valley as a supplementary measure to the 154 million Swiss Franc credit facility that was established by the Swiss central government to assist all Fintech start-ups.
The recent economic crisis resulting from the ongoing COVID-19 pandemic has hit Swiss based blockchain start-ups especially hard. In a Swiss Blockchain Federation survey that was published in April, it was reported that nearly 90% of the crypto start-ups surveyed predicted bankruptcy in the near future unless bailed out by the Swiss government. Of the start-ups surveyed, almost 70% stated that they had applied for a loan under the 154 million Swiss franc credit facility and were rejected.
Swiss Blockchain Federation Study
[1] SEC v. W. J. Howey Co., 328 U.S. 293 (1946)