Welcome to Shearman & Sterling’s FinTech Blog, where we provide you with insight on key trends in the FinTech ecosystem. Here you can find relevant information with the latest on digital banking, FinTech regulation, digital assets, blockchain, AI, and more.
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SEC Order Freezes Alleged Unregistered Digital Token Offering
10/21/2019Earlier this month, the Securities and Exchange Commission (SEC) obtained a temporary restraining order freezing an alleged unregistered digital token offering by a messaging service. The SEC alleged that the defendants violated the registration requirements of the Securities Act of 1933 by conducting a securities offering through a sale of digital tokens, without registering the offer and sale of the digital tokens (or relying on an exemption from the registration requirements).
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SEC Stays Active in the Digital Asset Enforcement Space, Delays Bitcoin ETF Decisions
08/22/2019In the first three weeks of August, the Securities and Exchange Commission (SEC) commenced or settled three enforcement actions related to digital assets and delayed rule change decisions on three separate bitcoin exchange-traded fund (ETF) applications. The enforcement actions reflect the SEC’s continued commitment to applying all aspects of the federal securities laws in the digital asset space. Meanwhile, the delay of resolving the ETF rule change applications suggests that the SEC is likely still collecting information to evaluate whether certain of the agency’s previous concerns regarding bitcoin ETFs, such as those related to potential market manipulation and liquidity, have been addressed.
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U.K. Regulator Provides Guidance on Regulatory Perimeter and Crypto-Assets
08/05/2019The U.K. Financial Conduct Authority (FCA) has published a Policy Statement and final Guidance on Crypto-assets. The Policy Statement summarizes the feedback received to the FCA's consultation on draft Guidance and sets out the FCA's response to that feedback. The final Guidance is, for the most part, the same as that on which the FCA consulted, except the FCA has made some drafting changes to provide further clarity and has added some guidance on stablecoins and airdrops. In addition, the FCA has revised the taxonomy by making a distinction between: (i) unregulated tokens, which are exchange tokens and utility tokens; and (ii) regulated tokens, which are security and e-money tokens.
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ESMA Publishes Report on the Licensing of FinTech Business Model
07/22/2019Fulfilling its mandate under the European Commission's FinTech Action Plan to map the current authorization and licensing approaches for innovative FinTech business models in Europe, the European Securities and Markets Authority (ESMA) has published a report on the licensing of FinTech business models. The report sets out the key conclusions identified from the information collected from national regulators through two surveys that ESMA conducted in the last two years, and some of the actions that have been taken to address the emerging challenges. The report does not make any recommendations, but instead refers to previous advice and reports that make recommendations for an EU-level response to the issues.
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Financial Services Regulation for FinTech Companies
06/19/2019Partner Nathan Greene and Associate Justin Reda (both New York-Investment Funds) have published a two-part article in Law360 titled "Financial Services Regulation For FinTech Companies." Part 1 of the article uses relevant case studies to examine the ways that FinTech entrepreneurs can best anticipate and navigate financial services regulations, and Part 2 of the article focuses on the regulatory environment in the financial services sector and reviews key regulations surrounding various types of financial and investment products and services.
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SEC Sues Kik Interactive for Conducting Unregistered ICO
06/10/2019On June 4, 2019, the Securities and Exchange Commission (SEC) sued Canadian mobile messaging company Kik Interactive, Inc. (Kik) for allegedly conducting an unregistered securities offering in connection with the sale of digital tokens called “Kin.”
Kik offered and sold more than one trillion Kin and raised over $100 million through its initial coin offering (ICO) that took place between May and September 2017. The SEC in late 2018 sent a Wells Notice to the company alerting them that SEC staff had made a preliminary determination to file an enforcement action. Kik in response claimed, among other things, that Kin is not a security, but is rather more akin to a digital currency, such as bitcoin and ether.
Despite Kik’s response, the SEC said that through the agency’s interpretation of the Howey analysis, it has determined that the ICO constituted an offer and sale of securities. Therefore, by failing to register the offering with the agency, the SEC alleges that Kik was in violation of federal securities laws.
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ABA White Paper Offers Roundup of Global Digital Asset Regulations
03/22/2019Last week, the American Bar Association (ABA) published a white paper surveying the regulation of digital assets in a number of global jurisdictions. The most space is devoted to how digital assets fit in U.S. regulatory frameworks under the jurisdiction of certain federal regulators, including the Commodity Futures Trading Commission, Securities and Exchange Commission and the Treasury Department’s Financial Crimes Enforcement Network. The paper also details certain U.S. state legislation, such as New York’s BitLicense, and surveys digital asset regulatory environments in all 50 states. The paper also explores how digital assets fit in international regulatory frameworks, including those in the EU, the U.K., Switzerland, Japan, South Korea, Australia and China, among several others. It highlights guidance from international standard-setting bodies as well, such as the International Organization of Securities Commissions, the Group of Twenty Nations and the Financial Stability Board.
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SEC Chairman Clayton Addresses Application of Federal Securities Laws to Digital Assets
3/20/2019Earlier this month, Securities and Exchange Commission (SEC) Chairman Jay Clayton responded to a letter from Congressman Ted Budd (NC) regarding the application of federal securities laws to digital assets. Chairman Clayton reiterated the SEC’s “facts and circumstances” position as to whether a digital asset transaction involves the offer and sale of a security and highlighted the agency’s balanced regulatory approach, which “fosters responsible innovation in this area, while also protecting investors and markets.”
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SEC Settles Unregistered ICO without Penalty after Company Self-Reported to SEC
02/26/2019On Feb 20, 2019, the Securities and Exchange Commission (SEC) charged a company with conducting an unregistered initial coin offering (ICO), which the company self-reported to the SEC. Because the company self-reported the conduct, agreed to compensate investors and will register the tokens, the SEC did not impose a penalty.
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SEC Commissioner Peirce Calls for Thoughtful Application of U.S. Securities Laws to Digital Assets
02/15/2019In a February 8, 2019 speech, Securities and Exchange Commission (SEC) Commissioner Hester Peirce suggested that the regulators should “tread carefully” when applying the Howey test to token offerings. Even though the Howey test generally makes sense in this context, she said, “token offerings go not always map perfectly into traditional securities offerings.” She urged the regulators to apply U.S. securities laws to digital assets thoughtfully, balancing the objectives of investor protection and market efficiency with fostering innovation in the financial industry.
Commissioner Peirce, who has been a vocal proponent of innovation and at times critical of the SEC’s approach to digital asset regulation, argued that regulators must “tread carefully” to avoid misapplication or overextension of existing U.S. securities laws with respect to digital assets and that they should take steps to provide much-needed clarity to market participants.
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Kik Interactive and Kin Ecosystem Foundation Respond to Wells Notice Alleging Violation of Securities Laws
02/12/2019In late 2018, the Securities and Exchange Commission (SEC) sent a Wells Notice to Kik Interactive Inc. and the Kin Ecosystem Foundation (together, the “Respondents”) providing that SEC staff had made a preliminary determination to recommend that the SEC file an enforcement action against them for alleged violations of Sections 5(a) and 5(c) of the Securities Act in connection with the issuance and sale of a digital currency, Kin. In sending this Wells Notice, the Respondents were given the opportunity to make a Wells Submission, which allows them to present facts and legal arguments to convince the SEC that no such enforcement action should be brought. In a somewhat unusual move, the Respondents published their Wells Submission on the company’s website, indicating that they would fight the proposed enforcement action.
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European Securities and Markets Authority Publishes Recommendations on Crypto-Assets and Initial Coin Offerings
01/18/2019The European Securities and Markets Authority has published a report on the application and suitability of the EU securities regulatory framework to crypto-assets, including Initial Coin Offerings. The report is in response to the European Commission's request in its FinTech Action Plan 2018. Like the European Banking Authority, which published a report on the same day in relation to banking sector issues, ESMA found that EU activities related to crypto-assets are fairly low and do not present any financial stability risks.
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Two Celebrities Charged in Connection with ICO Promotions
12/05/2018On November 29, 2018, the Securities and Exchange Commission (SEC) announced that it has filed and settled separate charges against professional boxer Floyd Mayweather Jr. and musical artist Khaled Khaled (known as DJ Khaled) for their failure to disclose payments they received in connection with promoting investments in initial coin offerings (ICOs). Without admitting or denying the charges, Mayweather agreed to pay $300,000 in disgorgement, a $300,000 fine and $14,775 in interest, while Khaled agreed to pay $50,000 in disgorgement, a $100,000 fine and $2,725 in interest. Mayweather also agreed not to promote “any securities, digital or otherwise,” for three years, and Khaled agreed to the same ban for a period of two years.
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SEC Settles Charges Against Two Companies that Sold Digital Tokens in ICOs
11/29/2018For the first time, on November 16, 2018, the Securities and Exchange Commission (SEC) sanctioned two companies with civil penalties for violating the securities laws in connection with issuing digital tokens in an initial coin offering (ICO). Interestingly, the Division of Corporation Finance, Investment Management and Trading & Markets issued a joint statement in support of the Division of Enforcement’s actions. Without admitting or denying the findings, the two companies consented to the SEC orders finding that they violated Section 5(a) and 5(c) of the Securities Act of 1933 for failing to register the tokens as securities. The companies agree to $250,000 penalties and to cease and desist from future violations.
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EU Supervisory Authority Reports on ICO and Crypto-Asset Risks and Potential Regulation
10/19/2018The European Securities and Markets Authority (ESMA) has published an own-initiative report prepared by its Securities and Markets Stakeholder Group (SMSG). The purpose of the report is to provide advice to ESMA on steps it might take to contain the risks of initial coin offerings (ICOs) and crypto-assets, on top of existing regulation.
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SEC Halts Fraudulent ICO that Claimed Regulatory Approval
10/17/2018On Oct 11, 2018, the Securities and Exchange Commission (SEC) announced that it halted a planned initial coin offering (ICO) and related pre-ICO sales by Blockvest LLC and its founder, Reginald Buddy Ringgold, III. In seeking an emergency court order, the SEC alleged that Blockvest had falsely claimed that it and its affiliates received regulatory approval from various agencies, including the SEC and a fake agency called the “Blockchain Exchange Commission.” Blockvest and Ringgold also allegedly used the National Futures Association (NFA) seal in making false claims about their regulated status, even after the NFA sent them a cease-and-desist letter for doing so.
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Congressman Davidson Hosts Roundtable on Digital Asset Regulation
10/01/2018At a roundtable hosted lasted week by Ohio Congressman Warren Davidson, lawmakers sought feedback from market participants on flaws and inefficiencies in the current digital asset regulatory framework. The roundtable, titled “Legislating Certainty for Cryptocurrencies,” included 48 representatives from a variety of digital asset and financial services firms, who pressed Congress for greater regulatory clarity in respect of digital assets.
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UK Parliamentary Committee Calls For Urgent Regulation of Crypto-Assets
09/21/2018The U.K. House of Commons Treasury Committee has published a report calling for crypto-assets to be regulated in the U.K. as a matter of urgency. The Treasury Committee considers that the current "ambiguity of the UK Government and regulators' position is clearly not sustainable" and is recommending that an amendment be made to the Regulated Activities Order to bring crypto-assets within the U.K. regulatory perimeter, supervised by the Financial Conduct Authority. The Committee does not specify in the report the activity related to crypto-assets that should go into the RAO, but recommends that it should at least include the issuance of crypto-assets through Initial Coin Offerings and the provision of crypto-exchange services. This will, according to the Committee's report, address anti-money laundering risks and consumer protection, aligning investor protections with those adopted in the U.S.
The Committee is also seeking the certain action be taken by the Government and the U.K. regulators.
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Agencies Issue Multiple Digital Asset-Related Enforcement Orders
09/20/2018The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) last week issued three digital asset-related enforcement orders, and the SEC also suspended trading in two securities that track the value of digital assets. The orders mark an uptick in digital asset enforcement from previous months and suggest that regulators and self-regulatory organizations are still keeping a close eye on the nascent digital asset investment industry.
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SEC Order Shows Free Tokens Do Not Get a Free Pass From Securities Laws
09/07/2018The Securities and Exchange Commission cracked down on another initial coin offering, despite the fact that the parties were unable to raise any money. The SEC found that the efforts to fund oil exploration and drilling in California through the issuance of digital tokens called “Tomahawkcoins” or “TOM,” by Tomahawk Exploration LLC and David T. Laurance constituted an illegal securities offering in which they made materially false claims about the exploration prospects, the firm and Mr. Laurance’s background.
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FINRA Requests that Firms Disclose Digital Asset Activity
07/24/2018Earlier this month, the Financial Industry Regulatory Authority called on its members to notify FINRA if they, or any associated persons or affiliates, engage, or plan to engage, in any activities related to digital assets. In the notice to members, FINRA also asked firms to inform their regulatory coordinators up until July 31, 2019, if they, or any associated persons or affiliates, begin to engage in activities related to digital assets that have not been previously disclosed.
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CFTC Issues Customer Advisory on Purchasing Digital Assets
07/19/2018On July 16, 2018, the Commodity Futures Trading Commission issued a customer advisory on the risks of purchasing digital assets. The advisory, titled “Use Caution When Buying Digital Coins or Tokens,” recommends that customers thoroughly research any potential purchases of digital assets without regard to how those digital assets are described (e.g., utility tokens or consumption coins).
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Senior SEC Official Clarifies Whether and When Digital Assets Are Securities
07/05/2018
In wide-reaching remarks at the Yahoo Finance All Markets Summit: Crypto on June 14, 2018, William Hinman, the director of the SEC’s Division of Corporation Finance, affirmed that lawyers and promoters should focus on to the economic substance of a digital transaction, rather than to the label in analyzing whether the U.S. securities laws apply.
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NASAA Cracks Down on Fraudulent ICOs and Enters into Information Sharing Agreement with the CFTC
5/30/2018At the North American Securities Administrators Association Conference on May 21, 2018, NASAA, an association of state and provincial securities administrators in the United States, Canada and Mexico, announced a joint effort among its members to halt fraudulent initial coin offerings and virtual currency-related investment products. The so-called “Operation Cryptosweep,” which was launched this past April, consists of NASAA members from 44 jurisdictions in the United States and Canada and has to this point led to nearly 70 inquiries and 35 pending and completed enforcement actions, with more expected in the coming months.
Read MoreCATEGORIES: CFTC, Cryptocurrencies/Virtual Currencies, Enforcement, ICOs, SEC, State Regulation, US Federal Regulation -
Federal Reserve Board Governor Speaks on Cryptocurrencies, Digital Currencies, and Distributed Ledger Technologies
5/18/2018On May 15, 2018, Federal Reserve Board Governor Lael Brainard delivered a speech at the Decoding Digital Currency Conference, sponsored by the Federal Reserve Bank of San Francisco, outlining some of her own thoughts on cryptocurrencies, digital currencies, and distributed ledger technologies.
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SEC Commissioner Pushes for Hands-Off Approach to Token Regulation
05/02/2018Securities and Exchange Commission Commissioner Hester Peirce spoke on the agency’s oversight of tokens and initial coin offerings before the Medici Conference on May 2, 2018. In her speech, she pushed for a hands-off approach to token regulation and noted the importance of regulators keeping an open mind when regulating the space.
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Senior SEC and CFTC Officials Support Balanced Approach to Token Regulation
04/26/2018
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Baris Authors Article on Blockchain for Investment Managers
03/21/2018Jay Baris co-authored the article on “Blockchain Basics for Investment Managers: A Token of Appreciation,” published in the March 21, 2018 issue of The Review of Securities & Commodities Regulation. The article discusses the background and current uses of blockchain and the responses of regulators, most notably the SEC and CFTC, with a focus on implications of these changes for investment funds and investment advisers.
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Government of Gibraltar Publishes Outline of Forthcoming Token Regulatory Framework
03/14/2018On March 14, 2018, the Government of Gibraltar published a white paper outlining forthcoming proposals to regulate token sales, secondary token market platforms and token investment services.
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Top Federal Securities and Commodities Regulators Testify on Virtual Currency Regulation Before Senate Committee
02/07/2018A cross-functional team of partners including Jay Baris and Nathan Greene of the Investment Funds group, Donna Parisi and Geoffrey Goldman of the Derivatives group, Lona Nallengara of the Capital Markets group, and Reena Sahni of the Financial Institutions Advisory and Financial Regulatory group authored an article entitled, “Top Federal Securities and Commodities Regulators Testify on Virtual Currency Regulation Before Senate Committee.” The article highlights the February 6 SEC and CFTC discussion with a Senate committee regarding the role of their respective agencies in regulating virtual currencies and virtual currency-related activities.
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