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Regulatory and Compliance Updates: May 20–31

As part of our ongoing efforts to help our community stay on top of all relevant developments, below are updates on regulatory and compliance issues in the blockchain and cryptocurrency industries for the period between May 21 and May 31.

🇺🇸 United States “Operation Cryptosweep”

At the annual meeting of the North American Securities Administrators Association umbrella group, local US state and Canadian securities regulators announced that they had undertaken a coordinated crackdown on cryptocurrency-related scams. The sweep involves at least 70 investigations, with 35 cases pending or already completed. The Securities and Exchange Commission (“SEC”) released a statement applauding the local regulators’ effort.

https://www.washingtonpost.com/news/the-switch/wp/2018/05/21/state-regulators-unveil-nationwide-crackdown-on-suspicious-cryptocurrency-investment-schemes/?utm_term=.ba94da19afe0

https://www.sec.gov/news/public-statement/statement-nasaas-announcement-enforcement-sweep-targeting-fraudulent-icos-and

In the days since the sweep was announced, various local regulators have announced their specific crackdowns. For example, South Carolina’s securities regulator issued a cease and desist order against ShipChain, requiring them to cease activities in the state (ShipChain has disputed the allegations) and Alabama’s regulators issued similar orders against three ICO issuers.

https://www.coindesk.com/south-carolina-sanctions-startup-unregistered-token-sales/

https://mailchi.mp/3c70c06afb8e/shipchain-public-statement https://www.coindesk.com/alabama-securities-watchdog-hits-3-icos-with-cease-and-desists/

Meanwhile, in New York, the legislator moved towards establishing a cryptocurrency task force to study various potential effects of cryptocurrencies on the state. The task force would, among other things, determine the number of digital currencies and exchanges operating in New York, gather information about large investors, examine energy consumption issues relating to mining and study the effect of current regulation (including the BitLicense) on the industry in the state.

https://cointelegraph.com/news/new-york-state-legislature-proposes-creation-of-cryptocurrency-task-force

Regulatory Agencies

On May 21, the Commodity Future Trading Commission (“CFTC”) issued guidance for exchanges and clearinghouses dealing with cryptocurrency derivatives. The CFTC’s guidance requires the derivative clearinghouses and exchanges to subject cryptocurrency-related derivatives to extra scrutiny. Notably, clearinghouses and exchanges are required to have arrangements with the underlying cryptocurrency exchanges that will allow them to review trade-level data to make sure there is no manipulation of cryptocurrency prices that effects the price of the derivatives. The guidance also requires the derivative exchanges to share data with the CFTC, including by making reports on large transactions. This approach could give the CFTC increased access to the day-to-day activities of cryptocurrency traders.

https://www.cftc.gov/PressRoom/PressReleases/7731-18

The CFTC also announced that it is entering into an information-sharing arrangement with the NASAA (discussed above), which, combined with the guidance discussed above, could potentially give local securities regulators increased access to information regarding trading on cryptocurrency exchanges.

https://www.cftc.gov/PressRoom/PressReleases/7730-18

Following on the heels of the CFTC’s other activities, it was reported on May 24 that the CFTC was joining with the Department of Justice (“DOJ”) to investigate manipulation of bitcoin prices. The agencies are reportedly looking into instances where traders were involved in spoofing (making large numbers of fake orders that are never completed) and doing transactions with themselves, in an effort to increase demand and trick other traders into make moves that would benefit the manipulators.

https://www.bloomberg.com/news/articles/2018-05-24/bitcoin-manipulation-is-said-to-be-focus-of-u-s-criminal-probe?utm_content=crypto&utm_campaign=socialflow-organic&utm_source=twitter&utm_medium=social

The SEC brought another case against an allegedly fraudulent ICO, this time against a company called Titanium Blockchain Infrastructure Services. In addition to arguing that the tokens at issue were securities, the SEC also alleged the issuer of engaging in various forms of fraud, including claiming that it had business relations with the U.S. Federal Reserve (!), PayPal, Verizon and Disney.

https://www.sec.gov/news/press-release/2018-94

Token IPO?

In what appears to be one of the first attempts to do a registered public offering of cryptocurrency in the U.S., Monster, Inc. (who initially partnered with Interscope records and Dr. Dre to create the popular Beats headphones before ultimately being largely cut out of the business), made an initial filing on Form S-1 with the SEC to conduct an IPO for its tokens. While the preliminary prospectus doesn’t have a lot of detail on how the tokens will be traded once issued (current cryptocurrency exchanges are generally not registered with the SEC, which is required to provide a platform for trading securities), this represents one of the first instances in which the SEC will have the opportunity to comment directly on disclosures about the blockchain and cryptocurrency business.

https://cointelegraph.com/news/us-inventor-of-beats-headphones-applies-to-sec-for-300-mln-ico

The U.S. Department of Defense is considering whether holding bitcoins or other tokens constitutes risky personal behavior that should block job applicants from getting a security clearance.

https://www.bloomberg.com/news/articles/2018-05-22/bitcoin-a-shadowy-new-realm-as-u-s-weighs-security-clearances

🇮🇱 Israel

Israeli courts seized bitcoins held by an accused money launderer. Prosecutors seized a bitcoin wallet controlled by the defendant and transferred 1,071 bitcoins to a wallet held by the police. The prosecutor left the question of what will be done with the bitcoins in the event of a conviction open.

https://www.calcalist.co.il/local/articles/0,7340,L-3738458,00.html

🇰🇷 South Korea

Local news outlets reported that the National Assembly has begun to discuss legislation to permit ICOs (the country banned them in September), so long as investor protections are provided.

http://www.businesskorea.co.kr/news/articleView.html?idxno=22613

🇸🇬 Singapore

Singapore’s central bank proposed changes to regulations that would make it easier for decentralized exchanges to operate. Under the suggested regulatory framework, a new tier of smaller exchanges (which would include peer-to-peer and decentralized exchanges) would be permitted to operate in addition to the large institutions that current regulations cover, subject to new rules appropriate to these smaller exchanges.

https://www.coindesk.com/singapore-proposes-regulatory-boost-for-decentralized-exchanges/

At the same time, the regulator warned exchanges operating in the country to avoid serving as a platform for cryptocurrencies that constitute “securities” under local law.

https://www.coindesk.com/singapore-warns-8-exchanges-over-unregistered-securities-trading/

🇯🇵 Japan

Japan’s Financial Services Agency issued orders to 12 cryptocurrency exchanges requiring them to improve their practices, particularly their compliance with anti-money laundering laws.

https://cointelegraph.com/news/japan-financial-watchdog-probes-crypto-exchanges-over-aml-compliance

🇨🇳 China

Chinese prosecutors charged four individuals for being involved with a cryptocurrency pyramid scheme, OneCoin, which has also been the subject of prosecutions in Italy, India and Bulgaria. The report further indicates that 98 people have been prosecuted for related crimes since September 2017.

https://www.coindesk.com/china-prosecutes-98-over-alleged-2-billion-onecoin-pyramid-scheme/

🇮🇳 India

India is considering imposing a tax on cryptocurrencies. Under the proposal, cryptocurrencies would be considered as supply of goods, and activities facilitating transactions, such as supply, transfer and storage would be considered services. Both would be taxed at approximately 18%.

https://www.bloombergquint.com/gst/2018/05/23/india-mulls-gst-on-trading-of-virtual-currencies#gs.ztCc9yE

At the same time, India’s central bank faces additional lawsuits from the cryptocurrency industry, challenging its rule that bars regulated banks from accepting cryptocurrency related deposits. The country’s supreme court is scheduled to hold a hearing on these petitions in July.

https://www.coindesk.com/indias-supreme-court-hold-crypto-lawsuit-hearing-july/

🇩🇪 Germany

German authorities in Bavaria have sold $14 million in bitcoin and other cryptocurrencies that were seized in criminal investigations, in an “emergency” sale. Usually, emergency sales are done when the seized item is perishable (e.g., food). The German authorities conducted the sale due to the volatility in the crypto markets, which created the risk that the seized cryptocurrencies would be rendered worthless. The profits were deposited into a fund that is generally used for police resources.

http://fortune.com/2018/05/29/germany-seized-bitcoin-emergency-sale/

🇦🇹 Austria

Austria’s Financial Markets Authority froze the business of INVIA GmBH, a mining form, claiming that the company did not follow banking laws. This is the first action this regulator has taken

https://www.fma.gv.at/en/fma-prohibits-business-model-of-invia-gmbh-in-conjunction-with-cryptocurrency-mining/

🇪🇸 Spain

On May 30, Spain’s congress unanimously agreed on a draft initiative that would provide favorable regulations to blockchain technology and cryptocurrency. The initiative would involve a review of existing regulations and the creation of a regulatory sandbox to encourage innovation.

https://cointelegraph.com/news/spain-innovation-aimed-crypto-regulation-wins-cross-party-support-in-congress

🇲🇹 Malta

Malta’s parliament presented the country’s Virtual Financial Assets Bill for a second reading. The innovative bill provides a new regulatory framework for virtual assets that do not fit existing securities laws. The framework includes requirements for information that must be included in a white paper, the appointment of an agent to be responsible for updating regulators with respect to decentralized networks, as well as other regulations specifically designed for virtual and decentralized assets.

http://www.mondaq.com/x/703952/fin+tech/Second+Reading+In+Parliament+For+Blockchain+Bills+The+Virtual+Financial+Assets+Act+And+The+Legal+Framework+For+Virtual+Financial+Asset+Exchanges

🇬🇧 United Kingdom

Like its North American counterparts, the UK’s Financial Conduct Authority opened investigations into 24 cryptocurrency businesses to determine whether they were complying with financial regulations.

https://cointelegraph.com/news/uk-financial-regulator-opens-24-investigations-into-crypto-businesses-for-compliance

🇵🇱 Poland

Continuing the largely negative environment for cryptocurrencies in the country, Poland’s largest crypto exchange announce that it is suspending its activity in the country due to local banks being unwilling to provide services. The exchange will relocate to Malta.

https://cointelegraph.com/news/bank-shutout-forces-major-polish-crypto-exchange-to-move-to-malta

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