Category: Legal and Regulatory

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


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.