The Growth of the Cryptocurrency Market in 2017 Has Prompted Additional Regulatory Scrutiny from the SEC Resulting in Several Blockchain Legal Developments
The cryptocurrency market grew from nearly $18 billion to more than $450 billion in 2017. In addition, initial coin offerings (ICOs) raised $3.5 billion, compared to less than $300 million in all prior years combined.
The growth of the cryptocurrency market has prompted additional regulatory scrutiny from the Securities and Exchange Commission (SEC), as well as state regulators. Below are six key legal developments that took place in 2017:
(1) The Growth of Fintech
The financial technology (fintech) industry continued to grow in 2017. From robo advisers to digital-only banks to mobile payments, technology continues to revolutionize the financial industry and create a wealth of new business opportunities. However, as highlighted in a report by the Government Accountability Office (GAO), regulations are failing to keep pace. The Office of the Comptroller of the Currency (OCC) began the process of creating a special-purpose national bank charter for fintech companies in 2016; however, progress has been slowed by legal challenges. In the meantime, the OCC continues to process more and more applications from fintech companies seeking traditional bank charters, such as those issued to deposit-taking institutions and credit card providers.
(2) SEC DAO Report
ICOs have attracted SEC scrutiny because businesses are increasingly using them to raise capital. This summer, the SEC published a report detailing its investigation into whether an organization known as “The DAO” violated federal securities laws with unregistered offers and sales of DAO Tokens in exchange for “Ether,” a virtual currency. The SEC ultimately applied existing securities laws to conclude that DAO Tokens were securities. The agency also made it clear that issuers of the distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies.
(3) Corporate Blockchain Laws
The State of Delaware is paving the way when it comes to blockchain adoption. In 2017, lawmakers amended the Delaware General Corporation Law to authorize businesses to use distributed ledger technology to create and maintain corporate records, including their stock ledgers. New York is also the first state to require businesses to obtain a license, commonly referred to as a “BitLicense,” prior to engaging in any virtual currency business activity. Provided that these states’ corporate blockchain initiatives prove successful, they may later serve as a model for other states.
(4) SEC ICO Enforcement Actions
The SEC has brought several enforcement actions against companies that have allegedly perpetrated ICO fraud. The agency also published an Investor Alert warning that “new technologies and financial products, such as those associated with ICOs, can be used improperly to entice investors with the promise of high returns in a new investment space.”
(5) Countries Seek to Regulate Cryptocurrency
Several countries took steps to legitimatize and regulate Bitcoin in 2017. In April, Japan officially recognized virtual currency like Bitcoin as a legitimate payment method. The new law places virtual currency exchanges under the oversight of the Japanese Financial Services Agency. Australia adopted a law that will treat Bitcoin just like other forms of currency and exempt the cryptocurrency from the country’s goods and services tax.
(6) Wall Street Interest in Bitcoin
The SEC denied an application to create an exchange-traded fund tied to the price of Bitcoin, citing the lack of regulatory oversight capabilities for the cryptocurrency. Nonetheless, interest in cryptocurrency continues to grow among investors. CME Group, the world’s largest futures exchange, recently announced plans to introduce a Bitcoin futures contract. The plan must first be approved by the U.S. Commodity Futures Trading Commission. The Chicago Board Options Exchange, the largest U.S. options exchange, also plans to offer cash-settled Bitcoin futures by early 2018.
To learn more about the legal issues discussed above, we encourage you to click through to other relevant blog posts:
Do you have any feedback, thoughts, reactions or comments concerning this topic? Feel free to leave a comment below for Fernando M. Pinguelo. If you have any questions about this post, please contact me or the Scarinci Hollenbeck attorney with whom you work.
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