Crypto Regulatory Updates August 2021

Dear clients and friends,

We are pleased to highlight below some key regulatory developments related to the regulation of cryptocurrencies and cryptoassets in various jurisdictions from the recent weeks.

We have identified several key recent trends in the global crypto regulatory environment. First of all, we have witnessed a significant rise in the amount of enforcement actions taken, and important statements made, by the U.S. federal and state regulators operating in the crypto sphere, concerning mainly securities, commodities derivatives, and anti-money laundering matters (arising from centralized and decentralized finance alike). Furthermore, we have identified a particular focus made by the Ontario Securities Commission on enforcement of local securities laws against foreign crypto exchanges operating in Ontario. In addition, we have identified an increased activity of the Thai Securities and Exchange Commission (SEC) in the crypto sphere. Lastly, we expect to see a further establishment of clear rules concerning the advertisement of cryptoassets (e.g. Spanish proposal and the changes made to Google’s ads policy).

We will be happy to further review and elaborate on each of these updates, their implications and any other questions you may have.

Kind regards,

Ariel Yosefi, Partner
Head of Technology & eCommerce Regulation
And the Herzog Crypto Regulatory Team

US Federal

Securities SEC has charged Coinschedule for unlawfully touting digital asset securities (14 July 2021). According to the charges, Blotics Ltd., f/d/b/a Coinschedule Ltd. (“Coinschedule”). Coinschedule.com profiled digital token offerings and presented certain information on the profiled digital token on its website. Among other things, for each profiled token, Coinschedule presented a “trust score” that Coinschedule claimed to be reflecting its evaluation of the “credibility” and “operational risk” for each digital token offering based on a “proprietary algorithm”. However, Coinschedule failed to disclose that token issuers paid Coinschedule to profile their token offerings. Without admitting or denying the SEC’s findings, Coinschedule has agreed to cease and desist from committing or causing any future violations of the anti-touting provisions of the federal securities laws, and to pay $43,000 in disgorgement, plus prejudgment interest, and a penalty of $154,434.
SEC Chairman has stated that stock tokens or stablecoins backed by securities might fall under the U.S. securities laws (21 July 2021). According to the SEC Chairman Gensler such logic applies to any virtual product that provides synthetic exposure to underlying securities, whether in the decentralized or centralized finance space.
SEC Chairman has expressed his view on ICOs, generally agreeing with a statement that ‘every ICO is a security’ (3 August 2021). SEC Chairman Gary Gensler has agreed with his predecessor who said that “every ICO I have seen is a security”.
SEC has charged decentralized finance lender and top executives for raising $30 million through fraudulent offerings in a case described by the SEC as “Agency’s first involving securities using DeFi technology”. (6 August 2021). According to the SEC’s order, Blockchain Credit Partners and its executives offered and sold securities in unregistered offerings through DeFi Money Market. The order finds that they used smart contracts to sell two types of digital tokens: mTokens that could be purchased using specified digital assets and that paid 6.25 percent interest, and DMG “governance tokens” that purportedly gave holders certain voting rights, a share of excess profits, and the ability to profit from DMG governance token resales in the secondary market. The order finds that after publicly unveiling DeFi Money Market, the respondents realized that DeFi Money Market could not operate as promised, yet failed to notify its users of this roadblock and misrepresented how the company was operating. Ultimately, the order finds that the mTokens were notes and were also offered and sold as investment contracts, that the DMG governance tokens were offered and sold as investment contracts, and that the respondents violated the securities antifraud provisions. The respondents consented to a cease and desist order that includes disgorgement totaling $12,849,354 and penalties of $125,000 each for the executives.
SEC has charged Poloniex for operating unregistered digital asset exchange (9 August 2021). Poloniex LLC has agreed to pay more than $10 million to settle charges for operating an unregistered online digital asset exchange which facilitated, inter alia, buying and selling of digital assets that were investment contracts and therefore securities.
Commodities CFTC Commissioner has stated that unlicensed DeFi markets for derivative instruments could be illegal under the Commodity Exchange Act (CEA) (8 June 2021). The Commissioner has stated that he does “not see how they are legal under the CEA”. The Commissioner has also emphasized that the CEA does not include any exception from registration for digital currencies, blockchains or “smart contracts”.
Federal Court has permanently banned from US and imposed a $374,864 penalty against foreign trading platform PaxForex for offering unregistered leveraged trades in Ether, Litecoin, Bitcoin and precious metals (30 June 2021). The order, which stems from a CFTC complaint, has imposed permanent trading, solicitation, and registration bans against St. Vincent and the Grenadines-based Laino Group Limited d/b/a PaxForex (PaxForex) entering into transactions involving commodity interests and has prohibited it from violating provisions of the Commodity Exchange Act (CEA), as charged. The order found that PaxForex had violated the CEA by failing to follow the rules of a board of trade that had been designated or registered with the CFTC as a contract market. Furthermore, the order found that PaxForex, through its employees and agents, had acted as a future commission merchant.
AML FinCEN has included virtual currencies considerations in the first anti-money laundering and countering the financing of terrorism (AML/CFT) ‘National Priorities’ list (30 June 2021). “Cybercrime, including relevant cybersecurity and virtual currency considerations” has been listed as one of 8 AML/CFT national priorities, which reflect longstanding and continuing concerns identified by FinCEN. According to the Priorities document, the U.S. Department of the Treasury is particularly concerned about “cyber-enabled financial crime, ransomware attacks, and the misuse of virtual assets that exploits and undermines their innovative potential, including through laundering of illicit proceeds”.
AML and Commodities FinCEN and CFTC have announced $100 million enforcement actions against unregistered futures commission merchant (FCM) BitMEX (10 August 2021). FinCEN have found that BitMEX willfully violated the provisions of Bank Secrecy Act (BSA), and stated that “for 6 years, BitMEX failed to implement and maintain a compliant anti-money laundering (AML) program and a customer identification program, and it failed to report certain suspicious activity”. This action is FinCEN’s first enforcement action against an FCM, and represents a close collaboration between FinCEN and the CFTC.

The CFTC has agreed to a separate consent order with five companies charged with operating BitMEX for violating the Commodity Exchange Act (CEA) “by operating a facility to trade or process swaps without being approved as a Designated Contract Market (DCM) or a Swap Execution Facility (SEF)”. The order also found that BitMEX has operated as unregistered FCM, and therefore violated the CEA.

Tax The U.S. Senate passed a Bipartisan Infrastructure Investment and Jobs Act, which extends certain tax information reporting requirements to actors involved in digital asset transactions (10 August 2021). The definition of transaction-reporting “broker” as per the Bill has been expanded to include “any person who (for consideration) is responsible for and regularly provides any service effectuating transfers of digital assets”, and therefore the Bill could potentially impose tax information reporting requirements on validators (including miners, stakers, lightning nodes), software developers of non-custodial wallets and services or protocols (such as DeFi swap platforms creators), and other actors, which do not have the ability to satisfy these requirements and do not possess the information the reporting of which is required.

US State

Securities

(New Jersey; Vermont; Alabama; Texas; Kentucky)

Securities regulators in New Jersey, Vermont, Alabama, Texas and Kentucky have alleged that BlockFi’s crypto lending operation is in violation of local securities laws (July 2021). The regulators have alleged that BlockFi’s Interest Account (“BIA”) is a security and its unregistered or unpermitted offering is in violation of the local securities laws.
Unclaimed Property (Delaware) Delaware has adopted Senate Bill 103 which adds “virtual currency” to the definition of “property” subject to the reporting and remitting requirements of the unclaimed property law of Delaware (30 June 2021). The bill has become effective on 1 August 2021.

EU

EU-level

AML

(Package of Legislative Proposals)

The EU Commission has presented a package of legislative proposals intended to strengthen the EU’s AML rules (20 July 2021). The package consists of four legislative proposals: (i) a regulation establishing a new EU AML/CFT Authority; (ii) a regulation on AML/CFT, containing directly-applicable rules, mainly in the areas of customer due diligence and beneficial ownership; (iii) a sixth Directive on AML/CFT (“AMLD6”), replacing the existing Directive 2015/849/EU (“AMLD5“); and (iv) a revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU).

With respect to crypto, the notable proposed provisions include:

1. Traceability requirements: crypto asset transfers of over €1,000 will be subject to traceability requirements.

2. All crypto assets service providers will be obliged entities: at present, only certain categories of crypto-asset service providers are included in the scope of EU AML/CFT rules, under the state laws transposing the AMLD5. The proposed reform will extend these rules to the entire crypto sector, obliging all service providers to conduct due diligence on their customers.

3. “Anonymous” crypto assets will be prohibited: the provision and the custody of anonymous crypto-asset wallets by crypto-asset service providers will be prohibited.

EU State-level

AML

(France)

The AMF has clarified when a foreign digital asset service provider can have French clients without being considered as “providing services in France” and without triggering the registration requirement (7 June 2021). According to the recently modified AMF guidelines, such operation would be possible “when the digital asset service provider does not directly or indirectly solicit customers residing or established in France and the service is not provided in France.” In its guidelines, AMF has set out situations where it would be considered that the digital asset service provider has taken the initiative to provide the service to clients resident or established in France.
Ads

(Spain)

Spanish Securities Market Commission (CNMV) has opened a public consultation on proposed crypto-asset advertising regulations (14 June 2021). The proposed regulations apply to any advertising activity of crypto assets to current or potential Spanish-based buyers, in those cases when the crypto assets are advertised as a type of investment. The regulations impose obligations such as the inclusion of disclaimers and risk disclosures, notification to CNMV in case of mass advertising campaigns, and keeping a register of past promotions.

Canada

Securities

(Ontario)

Ontario Securities Commission (OSC) have brought proceedings to hold crypto trading platforms KuCoin, Bybit and OKEx accountable for alleged failure to comply with the registration and prospectus requirements under Ontario securities law (7 and 21 June; 18 August 2021). OSC has published a statement of allegations against Seychelles-incorporated Mek Global and Singapore-incorporated PhoenixFin (collectively, KuCoin), a statement of allegations against British Virgin Islands-incorporated Bybit Fintech Limited (Bybit), and a statement of allegations against Seyechelles-based Aux Cayes (OKEx) for offering crypto assets which are securities and derivatives to Ontario residents without complying with registration and prospectus requirements.

Asia

AML

(India)

The Enforcement Directorate (ED) of India has issued Show Cause Notice to WazirX cryptocurrency exchange and its directors for alleged violations of Foreign Exchange Management Act (FEMA) (11 June 2021). The ED has alleged that WazirX has failed to comply with the anti-money laundering and combating of financing of terrorism requirements applicable to cryptocurrency exchanges as per FEMA guidelines by not collecting the requisite documents regarding certain types of transactions.
AML

(South Korea)

The South Korean Financial Services Commission (FSC) has clarified that foreign virtual assets service providers (VASPs) operating in Korea are also subject to the local registration and AML requirements (22 July 2021). The FSC has issued a statement clarifying that foreign VASPs that conduct business operation targeting South Koreans, are required to register their business with the Korea Financial Intelligence Unit (KoFIU) by September 24, 2021. The FSC has emphasized that foreign VASPs which will continue to operate without registration after the September 24 deadline, will be notified of their illegal activities by the FIU, and the FIU will take actions such as blocking access to their websites, and bring charges to investigative authorities.

Thailand

(Securities)

Thai Securities and Exchange Commission (SEC) has prohibited exchanges from offering meme tokens, fan tokens, NFTs, and tokens issued by exchanges (11 June 2021).
Thai SEC has filed a criminal complaint against Binance for operating digital asset business without license (2 July 2021). The SEC has found that the provision of the following services by Binance without obtaining a required license are in violation of the Thai Digital Asset Business Emergency Decree: provision of platform services for trading and exchanging digital assets by matching orders or arranging for the counterparties or providing the system or facilitating entry into an agreement or matching the order for persons who wish to trade or exchange digital assets Thai SEC has emphasized that Binance has solicited the Thai public and investors to use its services via its website and Facebook page, and mentioned that a warning was issued to Binance in April 2021, yet Binance has not submitted a written response within a specified timeframe.

Industry

Ads

(Google UK)

Google limits financial services ads in UK to FCA-Authorized Firms (30 June 2021). As of 30 August 2021, in order to show financial services ads in the UK, including showing ads to UK users who appear to be seeking financial services, the advertisers will be required to demonstrate that they are authorized by the UK Financial Conduct authority (FCA) or qualify for one of the exemptions.
Ads

(Google US)

Google permits cryptocurrency exchanges and wallets ads targeting the US with certain limitations (3 August 2021). Such ads may only be advertised if the advertiser is duly registered with FinCEN as Money Services Business and with at least one state as a money transmitter; or is registered with a federal or state chartered bank entity; and complies with relevant legal requirements. All prior cryptocurrency exchanges have been revoked on 3 August 2021, and new cryptocurrency exchanges and wallets certification with Google must be requested by the advertisers. Google does not allow the following: (i) ICO ads, DeFi trading protocols ads, or ads otherwise promoting the purchase, sale or trade of cryptocurrencies or related products; (ii) ad destinations that aggregate or compare issuers of cryptocurrencies or related products.

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