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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.
Continue Reading Federal Court, SEC, and FINRA Scrutinize Cryptocurrencies and ICOs

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.
Continue Reading New York Attorney General Becomes Most Recent State Regulator To Foray Into Cryptocurrency Oversight

On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud.  These orders follow a growing line of state enforcement actions aimed at ICOs.

This was not Massachusetts’s first foray into regulating ICOs.  On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”Continue Reading Massachusetts Orders Five Companies to Halt ICOs as States Step Up Enforcement Efforts

This past week, we received further evidence that U.S. federal regulators will continue to scrutinize potential compliance issues in virtual currency trading and initial coin offerings (“ICOs”) under existing law. However, the key takeaway is that the U.S. regulators, so far, are doing so under established interpretations of their existing authority. In our view, none…

On January 30, 2018, the U.S. Securities and Exchange Commission (SEC) announced[1] that it had obtained an order from a U.S. District Court in Dallas, Texas, halting an allegedly fraudulent initial coin offering scheme.  The SEC’s complaint alleges that defendants AriseBank and AriseBank founders Jared Rice Sr. and Stanley Ford violated the anti-fraud and registration provisions of the U.S. federal securities laws, including by falsely claiming that AriseBank’s customers’ accounts and transactions were FDIC insured, falsely claiming that AriseBank’s customers could spend 700 different virtual currencies using AriseBank’s Visa card, and failing to disclose the criminal history of two of AriseBank’s officers.  Among other relief, the district court has granted the SEC’s request to freeze the defendants’ assets, and for the first time in a cryptocurrency enforcement case has appointed a receiver over those assets, including the cryptocurrencies purportedly held by AriseBank.
Continue Reading SEC Freezes Allegedly Fraudulent “Decentralized Bank” ICO

On Monday, December 11, 2017, SEC Chairman Jay Clayton waded into the ongoing debate surrounding cryptocurrencies, initial coin offerings, and the regulation of both.  In a statement urging potential investors to exercise caution and market professionals to focus on their responsibility to help protect investors, the Chairman warned of the susceptibility of the burgeoning crypto markets to manipulation and fraud.
Continue Reading SEC Chairman Offers Views on Initial Coin Offerings

On Monday, December 4, 2017, the U.S. Securities and Exchange Commission (SEC) obtained an emergency order from a U.S. District Court in New York to enjoin an allegedly fraudulent initial coin offering scheme.  The SEC’s complaint alleges that Dominic Lacroix, a recidivist securities law violator, and his company PlexCorps violated the anti-fraud and registration provisions of the U.S. federal securities laws in collecting up to $15 million in investor funds purportedly in exchange for digital tokens and promised returns in excess of 1,000% in 29 days.  The complaint also charges Lacroix’s partner Sabrina Paradis-Royer with securities fraud.  Among other relief, the district court has granted the SEC’s request to freeze the defendants’ assets.
Continue Reading Newly Created SEC Cyber Unit Takes First Action Against Allegedly Fraudulent ICO

Last Friday, December 1, 2017, the U.S. Commodity Futures Trading Commission (CFTC) announced that three futures exchanges—the Chicago Mercantile Exchange Inc. (CME), the CBOE Futures Exchange (CBOE) and the Cantor Exchange (Cantor)—self-certified that they will be listing futures contracts (CME and CBOE) and options (Cantor) referencing bitcoin.  Trading in bitcoin futures will commence at the CBOE on December 10 and on CME on December 18, with Cantor’s options trading to follow.  Listing these contracts will allow both institutional and retail investors to obtain long or short exposure to bitcoin without buying or selling the underlying bitcoin itself.
Continue Reading Bitcoin’s Future: CME and Other Exchanges Self-Certify Bitcoin Futures and Options with the CFTC