On April 3, 2019, staff of the Securities and Exchange Commission released (1) a framework providing principles for analyzing whether a digital asset constitutes an investment contract, and thus a security, as defined in SEC v. W.J. Howey Co. and (2) a no-action letter permitting TurnKey Jet, Inc., without satisfying registration requirements under the Securities

On January 22, the Financial Industry Regulatory Authority (“FINRA”)[1] released its 2019 Risk Monitoring and Examination Priorities Letter (the “Letter”).  The Letter highlights material new priorities for FINRA examinations in the coming year, as well as priorities in areas of ongoing concern.  The topics highlighted in this year’s Letter reflect FINRA’s increasing focus on its members’ interaction with, and adoption of, innovative financial technologies, as well as its implicit acknowledgement of the ability for such innovations to assist in regulatory compliance.  The new priorities highlighted in the Letter include several related to FinTech, including online distribution platforms, use of regulatory technology (or “RegTech”), and supervision of digital asset businesses.  In priority areas of ongoing concern, the Letter confirmed that FINRA will continue to focus on reviewing the adequacy of firms’ cybersecurity programs.  Below we detail FINRA’s discussion of these priorities and analyze them in the context of other recent guidance and enforcement actions.
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Continuing its efforts to engage with FinTech innovators and market participants in the adoption of new technologies, the Commodity Futures Trading Commission (“CFTC”) and its LabCFTC[1] released a Primer on Smart Contracts (the “Primer”) on November 27. The Commission focused its Primer on (1) detailing the technical aspects of smart contract technology; (2) examining potential benefits and risks connected to their widespread adoption; and (3) the CFTC’s role in regulating the adoption of the technology within those markets under its jurisdiction.

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On November 28, 2018, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) identified for the first time digital currency addresses associated with sanctioned persons.  The newly sanctioned individuals, Iran-based Ali Khorashadizadeh and Mohammad Ghorbaniyan, were accused of converting digital currency payments into Iranian rial as part of a widespread ransomware scheme.  Since 2015, the ransomware scheme (known as “SamSam”) has infected the data networks of corporations, hospitals, universities, and government agencies.  According to OFAC’s announcement, the identified bitcoin addresses were used with over 40 digital currency exchangers to process more than 7,000 illicit transactions in bitcoins worth millions of U.S. dollars.
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On November 16, 2018, the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance (“Corp. Fin.”), Division of Investment Management, and Division of Trading and Markets issued a joint public statement on “Digital Asset Securities Issuance and Trading.”  The public statement is the latest in the Divisions’—and the Commission’s—steady efforts to publicly outline and develop its analysis on the application of the federal securities laws to initial coin offerings (“ICOs”) and certain digital tokens.  These efforts have combined a series of enforcement proceedings with public statements by Chairman Jay Clayton and staff, including a more detailed statement of the SEC’s analytical approach in Corp. Fin. Director William Hinman’s speech on digital assets in June 2018.
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On September 27, 2018, the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) filed parallel actions in federal court against an internet dealer that sold “contracts for difference” (CFD) based on securities and commodities margined with bitcoin.  The actions, which were assisted by the Federal Bureau of Investigation and the Department of Justice, signal continued coordination among federal agencies to police market activity involving financial transactions in cryptocurrencies.
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On September 26, 2018, a federal court in the District of Massachusetts found that virtual currencies are a commodity under the Commodity Exchange Act, 7 U.S.C. § 1 et seq, (“CEA”). This marks the second time that a court has accepted the Commodity Futures Trading Commission’s (“CFTC”) position and upheld the agency’s authority to regulate unleveraged and unmargined spot transactions in virtual currency under the agency’s anti-fraud and manipulation enforcement authority.  Most notably, however, the reasoning behind its decision potentially expands the scope of the CFTC’s oversight of the market.
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Over the past year, the U.S Securities and Exchange Commission (“SEC”) has increasingly scrutinized initial coin offerings (“ICO”) and certain digital assets.  On September 20, 2018, the SEC’s Enforcement Division co-Director, Stephanie Avakian, gave a speech in which she addressed the Division’s approach to dealing with these new forms of tradeable assets.  This speech came only days after the SEC settled its first case charging an unregistered broker-dealer for facilitating the sale of digital tokens from several ICOs since the 2017 DAO Report.  In her speech, Avakian provided three key insights into the Division’s enforcement strategy.
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On Tuesday, September 11, 2018, Judge Raymond J. Dearie of the Eastern District of New York issued a decision holding that Initial Coin Offerings (“ICO”) may qualify as securities offerings and therefore be subject to the criminal federal securities laws.  This ruling came as two U.S. regulators—the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”)—announced separate actions under securities laws against companies engaged in the cryptocurrency marketplace, including the sale of digital tokens.  As the popularity of cryptocurrencies grows and businesses and entrepreneurs increasingly turn to ICOs to raise capital, these developments may serve as guideposts for how cryptocurrencies and ICOs will be viewed by courts and federal regulators in cases to follow.
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Over recent months, numerous state regulators, including in Massachusetts, Texas, and New Jersey, have been exercising greater oversight of cryptocurrency businesses.[1]  On April 17, 2018, the office of the New York Attorney General Eric Schneiderman (“NYAG”) launched the Virtual Markets Integrity Initiative, which will seek information from various platforms that trade cryptocurrencies to better protect consumers.  The initiative responds to concerns that cryptocurrency trading platforms may not provide consumers with the same information available from traditional exchanges.  As part of the initiative, the NYAG’s Investor Protection Bureau sent thirteen major cryptocurrency trading platforms questionnaires relating to internal policies, controls, and best practices.  The Bureau intends to consolidate and disseminate to consumers the information it receives.
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