NASAA State Regulators Watching ICOs “Threat”

The NASAA (North American Securities Administrators Association) is an organization composed of 67 administrators from the territories, districts, and states of Canada, Mexico, the Unite  States, Puerto Rico, and the U.S. Virgin Islands. They just released their 2017 Annual Enforcement Report which includes responses from 50 jurisdictions throughout the U.S. Aside from the customary account of enforcement actions taken the previous year and other securities regulators’ issues, the report includes a clause identifying Cryptocurrency and ICOs as a “threat.”

In a section titled Investor Threats Stemming from Emerging Financial Technologies, the NASAA described Binary Options and Blockchain-based virtual currency as the use of internet and technology to create investment scams. They listed Cryptocurrency Trading in particular “likely to pose a significant risk to investors.” Categorizing ICOs as a threat to investors is not surprising after the SEC involvement with cryptocurrency this year and charging Maksim Zaslavskiy and his two ICOs for defrauding investors las month.

National and State level regulations have been flooding headlines regarding ICOs and blockchain, but now the NASAA, a regional, cross-border organization is also monitoring Cryptocurrency trading. In the 2017 report the securities regulators group stated that, “NASAA members are closely watching this emerging market.” This echoes the proclamations from securities regulators around the world, most notably China banning ICOs and Token Fundraising as a financing model. Korea also restricted ICO and cryptocurrency trading this year after the SEC announced ICO may fall within securities jurisdiction under federal law.

Joseph P. Borg, NASAA president and Director of the Alabama Securities Commission, showed confidence in the report by saying, “State securities regulators continue to serve a critical role in protecting investors and holding securities law violators responsible for the damage they cause to individual investors as well as to the integrity of our capital markets.” According to the regional organization, state securities regulators serve as the gatekeepers in screening bad actors before they can cause harm to investors.

NASAA Regional Regulatory Efforts

The NASAA is the oldest international investor protection organization. Their model reads, The voice of state and provincial securities regulators.  Putting investors first. Part of their proceedings includes the license of firms and their agents, investigating violations of state and provincial law, file enforcement actions when appropriate, and educate the public about investment fraud. The 2017 report said that state securities regulators take more enforcement actions against registered securities individuals or firms than non-registered ones. Out of 4,341 investigations, 2,017 enforcement actions were taken which led to more than $231 million in restitution to be returned to investors and fines of $682 million. A total of 2,843 securities licenses were withdrawn by state actions last year, and 657 licences were suspended or revoked. In the U.S securities regulators brought 620 actions against registered firms and individuals compared to 604 actions against unregistered individuals. Citing its report, the NASAA press release concludes,

The report also shows that NASAA members:

  • are routinely sharing information with other state and federal regulators and are coordinating enforcement efforts to increase efficiency and eliminate duplication of efforts;

  • are committed to protecting vulnerable senior investors through both enforcement actions and legislative improvements; and

  • are working to counter the threat posed by emerging financial technologies, such as binary options and speculative cryptocurrency trading, through both enforcement and education efforts.

The regional organization of state security regulators are convinced trading in cryptocurrency and ICOs are a threat to investors deriving from recent reports of fraud using such blockchain technologies.

2017 Enforcement Report Based on 2016 Data


ICOs, Regulations, and Litigation

Initial Coin Offering (ICO) is a financing method that is currently pulling in billions of dollars from amateur investors. Regulatory agencies are taking notice of it and making extensive efforts to enforce oversight over them. Policy analysts and commercial litigators predict that this combination of events will lead to a barrage of lawsuits.

Like initial public offerings (IPOs), ICOs are a way to raise money in forms of shares.. The main difference is that the money come in form of digital tokens or coins. The tokens are usually traded against other digital assets, or used to be redeemed for a service.

Lawsuits that involve token issuance can truncate the implementation of ICOs. This can also create new practice areas for law firms as many investors might be seeking for indemnification for the tokens they were issued. Moreover, entities who have these offerings in the future might consider to seek for legal means to lessen the risk of facing regulatory penalties.

The year, 2017, is known by many as the year of the ICO. Throughout this year, ICOs have accumulated over $1.6 billion in venture capital. Of that amount, Tezos Foundation, a company working on a new blockchain platform, raised $230 million worth of token. Millions of individuals are starting to participate in the offerings in hopes to make a quick buck. Many invest without adequate knowledge in what they’re investing in. This induces high market speculation and volatility among those tokens.

Government Oversight

Government agencies, like the Securities and Exchange Commission (SEC), are putting in effort to establish oversight over ICOs and other digital tokens in hopes to improving investor understanding of how individual tokens can be classified.

A minority of the ICOs do offer innovative services to all sorts of industries. However, many sneakily commit fraud by misguiding investors about their technology and token distribution. The United States SEC gave out warnings and memorandums cautioning consumers about the risk involving ICOs. The People’s Bank of China utterly banned ICOs in the country September 4.

Investors can file lawsuits against ICO companies, however these cases are very intricate considering the lack of current virtual currency regulations. It is difficult to determine the general characteristics of ICOs or other digital tokens, because many of them function differently. Hence, many companies might not be in compliance with regulations including state money transmitter laws, AML rules, and registration under the SEC.

The nascent market is experiencing a drastic change right now. It is heavily unregulated and participants are ill-informed about the risks involved in the market.

Money Transmitter Law and Blockchain Technology

Financial service industries have come a long way by adopting decentralized ledger technology (DLT), or more frequently termed blockchain. This is only the beginning. With blockchain technology entities can avoid many of the traditional hurdles. At the same time, jurisdictional regulations are attempting to keep up with the exponential spread of blockchain technologies throughout a multitude of industries. These attempts to revamp corporate law, securities regulations, or state legislations are helping the blockchain implementation become more legitimate.

As of 2015, many U.S. states passed legislation to regulate virtual currencies. States with strict crypto laws, like New York, placed virtual currency under the appropriate state laws and require virtual currency exchanges to obtain money transmitter licenses. As of today, there are significant variations in state laws that regulate entities that deal with cryptocurrencies. Some exchanges close their operations in certain states because they don’t have the appropriate resources to keep up with gradually implemented regulations.

Furthermore, on July 19, 2017, the Uniform Law Commission (ULC) approved a Uniform Regulation of Virtual Currency Business Act (Uniform VCBA), which took over two years to draft. States can use this Uniform VCBA as a model to enact virtual currency legislation. Even though it is unlikely that we will see the same exact legislations, regarding virtual currency, in every state, it is propitious that states will implement a similar framework. This will be beneficial to entities that provide services that deal with money transmission and those that need special licenses to operate.

Uniform VCBA would demand companies to have comprehensive compliance programs and AML procedures to prevent any machinations, fraud, or money laundering. Moreover, Uniform VCBA would rely on the Financial Crimes Enforcement Network (FinCEN) to look out for anti-money laundering problems.

Cryptocurrencies and their corresponding decentralized technologies are gaining solid ground in our financial system. Government participation gradually removes the stigma of how illegitimate this emerging market is viewed as. Efforts from both, the private and public sector, is giving blockchain technology a more mainstream role in current and future industries.

New Washington State Cryptocurrency Regulations

As we gradually witness the rise of the nascent cryptocurrency market, the government is becoming more curious. Currently, the cryptocurrency market is so volatile that the government believes it is imperative to assign stricter regulations on these new instruments.

Recently, the state of Washington passed regulations on cryptocurrencies with an intention of protecting consumers. This has induced mixed reactions from the digital currency community. Moreover, some Bitcoin-related businesses, reluctant to comply with the new regulations, were forced to shut down their Washington operations.

The bill applies to digital exchanges and other similar function mediums where people can trade and store their cryptocurrencies. These exchanges have to comply with Washington’s money transmitter laws and have to obtain specific licenses pertinent to the state’s Department of Financial Institutions.

Moreover, exchanges have to agree to specific security audits and post surety bonds, which would act as a sort of insurance for the exchanges’ customers.

A few prominent cryptocurrency exchanges – including Bitfinex, Kraken, Bitstamp, and Poloniex – ended their operations in Washington states. For them, the new regulations are too restrictive and demanding. According to Kraken, the regulations induced “high operating costs” and imposed an insurmountable amount of compliance requirements. These exchanges prescribe that Washington customers do business in other jurisdictions, where the law is retrospective to Washington state.

The new policies were discussed by cryptocurrency industry entities and government agencies. Neil Bergquist, CEO of Coinme, a company that provides Bitcoin ATMs and other related services in Washington state, thinks that these new policies aren’t going to significantly change cryptocurrency market activities in Washington.

Nevertheless, the digital currency industry has created new jobs and opportunities for Washington State residents. The real concern is how government officials view the market and how they will approach the market’s progression in the future. It’s important that the government’s relationship with cryptocurrency experts is symbiotic.


Washington State Senate Bill 5031

New Hampshire Exempted Bitcoin from Money Transmission Regulation

Concord, NH – New Hampshire exempted bitcoin from money transmission regulation by a bill signed into law by Governor Chris Sununu. The bill states that individuals “who engage in the business of selling or issuing payment instruments or stored value solely in the form of convertible virtual currency or receive convertible virtual currency for transmission to another location” are exempted from the state’s money transmission regulations.

Rep. Barbara Biggie, a former employee of Western Union, introduced the bill. Rep. Keith Ammon, one of the bill’s co-sponsors, said the bill’s intentions represent those who swap virtual currency for U.S. dollars. Ammon asserts that this bill is very important as earlier attempts to legislate a similar bill weren’t coordinated well. During a 2015 attempt to institute a regulation, cryptocurrency businesses succumbed to state banking authorities leaving currency markets like Poloniex out of operations in certain jurisdictions.

The bill will protect consumers when using virtual currencies, implying that cryptocurrency companies would be able to operate without adhering to stringent AML and KYC regulations.

Policy analysts and proponents of cryptocurrencies are enthusiastic about such and similar political progress, as it opens up various perspectives for the cryptocurrency industries. One of those proponents is Coin Center’s Jerry Brito. He says it is a “great step in the right direction.” Right now, Brito is working with the Uniform Law Commission in hopes to have every state adopt virtual currency friendly laws.

New Hampshire is one of a few States that have these exemptions

In the U.S., most states haven’t introduced cryptocurrency exemption bills. Consequently, bitcoin and other cryptocurrencies are subject to money transmission regulations. In those states, cryptocurrency businesses such as digital currency exchanges have to adhere to a distinct licensing arrangement, which results in compliance and lawyer fees. For example, New York has a chain of laws that hinder cryptocurrency business in the state. Some of the barriers that stand in the way are 51 distinct money transmitter licenses.

Signed Law:


CFPB Takes Action Against Intercept Corporation

WASHINGTON, D.C. —Today, the Consumer Financial Protection Bureau (CFPB) brought action against Intercept Corporation, a payment processor and two of its executives, Craig Dresser and Bryan Smith for the illegal authorization of withdrawals from consumer accounts by their clients.  The lawsuit was filed in federal district court in which the CFPB asserts that Intercept ignored warning signs that its client engaged in fraudulent and unlawful activities. In addition to permanently eliminating all illegal practices carried by Intercept, Smith, and Dresser, the lawsuit is also seeking relief for consumers as well as imposing penalties against the defendants.

Director of the CFPB, Richard Cordray stated that “Intercept and its executives Bryan Smith and Craig Dresser ignored clear signs of brazen fraud, including illegal withdrawals from consumer accounts, and need to clean up their act. Companies cannot turn a blind eye to wrongdoing when they process payments from consumer banking accounts on behalf of clients that are breaking the law.”

Intercept Corporation, Fargo, N.D. based third-party payment processor is owned by Smith and Dresser- each own 50 percent of the company. Intercepts systems are used to transmit electronic funds transfers on behalf of clients through the Automated Clearing House. Financial transactions, such as payroll deposits, and loan and bill payments were all processed through this system. Business and individuals are linked by payment processes to banks through the network. Intercept’s clients include, among others, payday lenders, auto-title lenders, debt collectors and sales financing companies.

By processing payments for clients without sufficient investigating, monitoring, or responding to red flags indicated some clients were breaking the law or deceiving customers. The CFPB claims that Intercept, Smith, and Dresser acted in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Intercept, Smith, and Dresser played a key role in this unlawful conduct by giving their clients access to the banking system and the means to extract money from consumers’ bank accounts. The defendants allegedly:

  • Turned a blind eye to glaring indications of potential fraud: Forewarning of fraud included returned payments for insufficient funds or unauthorized debits  indicating that consumers did not consent to the withdrawal or were misled about the terms. An estimation of the CFPB indicates that Intercept assisted clients withdraw millions of dollars in unauthorized and other illegal charges from consumer accounts. Several Intercept clients have run up yearly return rates ranging between 20 to 40 percent for network transactions, exceeding the 1.5 percent industry average. Little effort was made by Intercept to determine the cause of these unconscionable rates and, despite the red flags, continued  processing transactions for these clients. Intercept ignored other warning signs such as state and federal enforcement actions against clients, including a Federal Trade Commission action against Scott Tucker and his payday lending operation.
  • Disregarded complaints from banks and consumers: Warnings and complaints from banks and consumers pertaining to high return rates and initiating unauthorized debits, including for payday lenders in states where the practice is illegal were blatantly ignored by Intercept. 

According to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is authorized to act against institutions or individuals engaged in unfair, deceptive, or abusive acts or practices or that otherwise violate federal consumer financial laws. The complaint filed against Intercept Corporation, Bryan Smith, and Craig Dresser seeks injunctive relief, penalties, and monetary relief.

CFPB’s complaint is available here:


Money Transmitter Law Updated by Washington to Include Virtual Currency

A law enacted on April 17 by the state of Washington, that among other things, formally made provision for the inclusion of virtual currency to its money transmitter laws. The new law that will officially go into effect in July this year will include virtual currency within the definition of money transmission. According to the new law, virtual currency is defined as “a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government.”  The new definition does not include “the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.”

Third party security audits will be required for business models that store virtual currency on behalf of others. Virtual currency companies will also be allowed to hold “Like-kind virtual currencies” to fulfill permissible investment requirements. A schedule of fees and services have to be disclosed to consumers irrespective of whether the products or services are insured, if the transfer is irrevocable, the liability of errors as well as any further disclosures. Additional provisions of the new law include:

  • The definition of “Licensee”  to apply to any person inside or outside Washington that fails to obtain a required license.
  • Exclusion from its definition of “money transmission” the “provision solely of connection services to the internet, telecommunications services, or network access; units of value that are issued in affinity or rewards programs that cannot be redeemed for either money or virtual currencies; and units of value that are used solely within online gaming platforms that have no market or application outside of the gaming platforms.”
  •  Exemptions to those under federal law pertaining to money transmitters and new exemptions regarding both payroll service providers accountants.
  • The burden of proving the applicability of an exclusion or exception placed on the person claiming the exclusion or exception.
  • Incorporation of a new section that applies to fiat online currency exchangers.
  • Civil penalties of $100 per violation per day incurred for each day the violation is outstanding.

Please click here for the official order.

Kansas Regulatory Agency Issues Guidance on Cryptocurrencies 

The Kansas Office of the State Bank Commissioner (“OSBC”) recently issued guidance on whether the Kansas Money Transmitter Act (”KMTA”) covers transactions involving cryptocurrencies.  OSBC has concluded that decentralized cryptocurrencies such as Bitcoin are not considered “money” or “monetary value” under the KMTA, and thus are not subject to regulation under the KMTA.  The guidance, however, does indicate that if “the transmission of virtual currency include[s] the involvement of sovereign currency (i.e., the U.S. dollar) in a transaction, it may be considered money transmission depending on how such transaction is organized.”

OSBC provided the following guidance concerning specific transaction structures:

1) Exchange of cryptocurrency for sovereign currency between two parties is not money transmission under the KMTA, but constitutes a simple sale of goods between two parties.

2) Exchange of one cryptocurrency for another cryptocurrency is not money transmission under the KMTA because cryptocurrencies are not considered “money” or “monetary value” under the KMTA.

3) Exchange of cryptocurrency for sovereign currency through a third party exchange is generally considered money transmission.  Thus, a site acting as an escrow-intermediary to facilitate the exchange of Bitcoin would have to register as a money transmitter in Kansas.

4) Exchange of cryptocurrency for sovereign currency through an automated machine may not be money transmission depending on the facts and circumstances of its operation and the flow of funds between the operator of the automated machine and the customer.  The question OSBC asks is whether the machine involves a third party, or instead only facilitates a sale or purchase of cryptocurrency by the machine’s operator directly with the customer.  If the transaction involves a third party, such as a Bitcoin exchange site, the operator of the machine receives money (for example, U.S. dollars) with the intent to transfer that money to the seller of the cryptocurrency.  This type of transaction, according to OSBC, constitutes money transmission under the KMTA.


California Bill to Legalize Bitcoin Awaits Signing By Governor

California Assembly Bill 129 will make digital currencies, which include Bitcoin, Dogecoin, and others, legal in the state of California.

California Governor Edmund Brown must sign for the bill to pass.

An archaic Corporation law called Section 107 barred the usage of forms of money not considered legal US tender. Bill 129 would confirm digital currencies as legitimate and ultimately help foster digital currency businesses that have cropped up in California.