News Update: Cryptocurrency & Cryptocurrency Regulation
Unikrn Settles SEC Unregistered Initial Coin Offering Charges, Will Pay $6.1 Million Fine
September 15, 2020 – The U.S. Securities and Exchange Commission has announced Unikrn Inc. has settled with the SEC over charges Unikrn conducted an unregistered initial coin offering (ICO) of digital asset securities. Unikrn, an operator of an online eSports gaming and gambling platform headquartered in Seattle, Washington, agreed to settle the charges by paying a $6.1 million penalty. As set out in the SEC’s settlement order, between June and October 2017, Unikrn conducted a securities offering in two phases – a pre-sale and an initial coin offering – in which it raised $31 million through the sale of UnikoinGold, a digital token. Unikrn told investors “they would be able to access a variety of products and services with their UKG tokens, including placing bets on professional eSports and video game matches, and that over time Unikrn would make more features available.” Based on the facts and circumstances, the SEC concluded the tokens were offered and sold as investment contracts, and therefore securities, pursuant to SEC v. W. J. Howey Co., 328 U.S. 293 (1946) and its progeny. The SEC concluded “Unikrn violated Sections 5(a) and 5(c) of the Securities Act by offering and selling the[] securities without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration.”
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Cryptocurrency: Portion Of Digital Taxonomy Act Of 2019 Passes Full House Committee On Energy And Commerce
September 9, 2020 – A portion of the Digital Taxonomy Act of 2019 has been approved by the U.S. House of Representatives’ Committee on Energy and Commerce. Introduced in April 2019, the Digital Taxonomy Act, H.R. 2154, would have authorized funding for the Federal Trade Commission to prevent unfair or deceptive acts or practices relating to digital tokens and digital token transactions, and required the FTC to report to Congress on efforts to carry out that mission. During a full Energy and Commerce Committee markup session, an amendment in the form of a substitute was made to the bill, which added part of the original legislation to H.R. 8128, the AI for Consumer Product Safety Act. Specifically, only the portion of the Digital Taxonomy Act requiring the FTC to report to Congress on actions taken to prevent unfair or deceptive acts or practices relating to digital tokens was included. The amendment also added H.R.8153, the Blockchain Innovation Act, and renamed H.R. 8128 the Consumer Safety Technology Act. The bill was passed by the full committee and can now be sent to the full House for consideration.
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IRS Memo Says Virtual Currency Received In Crowdsourcing Labor Market Is Taxable Income
September 1, 2020 – The Internal Revenue Service has issued a memorandum on Taxation of Virtual Currency Received in the Crowdsourcing Labor Market. The memo addresses the question of whether convertible virtual currency received by an individual for performing a microtask through a crowdsourcing or similar platform is taxable income. IRS says the answer is yes – a taxpayer who receives convertible virtual currency in exchange for performing a microtask through a crowdsourcing platform has received consideration in exchange for performing a service, and the convertible virtual currency received is taxable as ordinary income.
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Over 10,000 Cryptocurrency ATMs Have Been Installed Worldwide
September 1, 2020 – According to the website coinatmradar.com, the number of cryptocurrency ATMs installed worldwide has surpassed 10,000. This is a significant increase in total crypto ATMs over the last nine months. The number of crypto ATMs in the world at the beginning of the year for the last four years is as follows:
2017 – 966
2018 – 2,069
2019 – 4,107
2020 – 6,366
Among other things, consumers can use crypto ATMs to buy or sell bitcoins and other cryptocurrencies for cash. Individuals also can send cash-to-cash payments to other individuals in other countries by using two bitcoin ATMs.
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ArCoin Becomes First SEC-Registered Fund Issuing Digital Securities
July 6, 2020 – Investment firm Arca has announced that the Arca U.S. Treasury Fund, an SEC-registered closed-end fund, is available for investment. Shares in the Arca Fund are issued as ArCoins – digital securities that are transferable using blockchain technology. Each ArCoin is one share in the Arca U.S. Treasury Fund. Accrued interest is paid directly to ArCoin holders each quarter. Arca describes itself as “an institutional grade financial services firm building products utilizing and investing in digital assets.” Arca says the Arca U.S. Treasury Fund will invest a minimum of 80% of its portfolio assets in in interest-bearing, short-duration U.S. Treasury securities. The Fund will seek to combine the regulatory standards applicable to an SEC-registered closed-end fund with the efficiencies of blockchain technology.
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DC Bar Association Oks Acceptance Of Cryptocurrency As Payment For Legal Fees
July 1, 2020 – The District of Columbia Bar Association has issued an ethics opinion stating it is not unethical for a lawyer to accept cryptocurrency in lieu of more traditional forms of payment, so long as the fee is reasonable. In Opinion 378, Acceptance of Cryptocurrency as Payment for Legal Fees, published in June 2020, the DC Bar concludes the following:
It is not unethical for a lawyer to accept cryptocurrency in lieu of more traditional forms of payment, so long as the fee is reasonable. A lawyer who accepts cryptocurrency as an advance fee on services yet to be rendered, however, must ensure that the fee arrangement is reasonable, objectively fair to the client, and has been agreed to only after the client has been informed in writing of its implications and given the opportunity to seek independent counsel. Additionally, a lawyer who takes possession of a client’s cryptocurrency, either as an advance fee or in settlement of a client’s claims, must also take competent and reasonable security precautions to safeguard that property.
Accordingly, attorneys in DC may accept payments for legal fees in the form of cryptocurrency as long as the fee is fair and reasonable. The DC Bar is now the fourth bar association to issue an ethics decision on the use of cryptocurrency as a form of payment for legal services.
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Fifth Circuit Says No Expectation Of Privacy In Bitcoin Blockchain Information Or Coinbase Transaction Records
June 30, 2020 – The U.S. Court of Appeals for the Fifth Circuit has issued a ruling on a motion to suppress evidence concerning digital currency transactions facilitated using Coinbase. The case is U.S. v Gratkowski, Case No. 19-50492. Mr. Gratkowski was charged with one count of receiving child pornography and one count of accessing websites with intent to view child pornography, after allegedly paying for access to an illegal website using Bitcoin. Federal agents used a grand jury subpoena to obtain information from Coinbase about users whose accounts had sent Bitcoin to certain Bitcoin addresses controlled by the illegal website. After agents identified Mr. Gratkowski as one of the Coinbase users, they used the information to obtain a search warrant for Gratkowski’s house. Mr. Gratkowski moved to suppress the evidence obtained through the search warrant, arguing that the Government violated his reasonable expectation of privacy in the records of his Bitcoin transactions on: (1) Bitcoin’s public blockchain and (2) Coinbase. The motion was denied, and Mr. Gratkowski appealed to the Fifth Circuit. There, the Court of Appeals affirmed the district court’s denial of the motion to suppress. The Court found the information on Bitcoin’s blockchain to be analogous to the bank records in U.S. v. Miller and the telephone call logs in Smith v Maryland. The Court stated that “Bitcoin users are unlikely to expect that the information published on the Bitcoin blockchain will be kept private, thus undercutting their claim of a ‘legitimate expectation of privacy.’” Similarly, the Court found that Coinbase records are more akin to the bank records in U.S. v. Miller. Accordingly, the Court determined Mr. Gratkowski “lacked a privacy interest in the records of his Bitcoin transactions on Coinbase.”
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Telegram Settles SEC Lawsuit, Will Refund Over $1.2 Billion To Investors And Pay $18.5 Million Fine
June 26, 2020 – The U.S. Securities and Exchange Commission has obtained court approval of settlements with Telegram Group Inc. and its wholly owned subsidiary TON Issuer Inc. to resolve charges that Telegram’s unregistered offering of digital tokens violated federal securities laws. Under terms of the settlement, Telegram will return more than $1.2 billion to investors and pay an $18.5 million civil penalty. Telegram is further required, for the next three years, to give notice to SEC staff before participating in the issuance of any digital assets. The SEC filed a lawsuit against Telegram in 2019, alleging Telegram failed to register its offer and sale of digital tokens called “Grams,” which are securities, in violation of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933.
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SEC Commissioner Outlines Regulatory Safe Harbor For Sale Of Digital Tokens
February 6, 2020 – U.S. Securities and Exchange Commission Commissioner Hester M. Peirce has outlined the details of a proposed regulatory safe harbor that would apply to the offer and sale of digital assets. Her safe harbor is intended to help address the uncertainty of the application of U.S. securities laws to the sale of digital tokens and initial coin offerings. Under the Commissioner’s proposal, the safe harbor would provide network developers with a three-year grace period within which they could facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws, so long as certain conditions are met. The proposal would exempt (1) the offer and sale of tokens from the provisions of the Securities Act of 1933, other than the antifraud provisions, (2) tokens from registration under the Securities Exchange Act of 1934, and (3) persons engaged in certain token transactions from the definitions of “exchange,” “broker,” and “dealer” under the 1934 Act. An entity seeking to avail itself of the safe harbor would need to meet the following conditions: the entity must intend for the network on which the token functions to reach network maturity within three years of the date of the first token sale and undertake good faith and reasonable efforts to achieve that goal; the entity would have to disclose key information on a freely accessible public website; the digital token must be offered and sold for the purpose of facilitating access to, participation on, or the development of the network; the entity would have to undertake good faith and reasonable efforts to create liquidity for users; and the entity would have to file a notice of reliance.
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Another Wireless Subscriber Files A SIM Swap Lawsuit Against AT&T
October 17, 2019 – A wireless subscriber is suing his service provider, AT&T Mobility, LLC, for the loss of $1.8 million in cryptocurrency. Plaintiff Seth Shapiro claims he was the victim of a SIM swap, which was facilitated by AT&T employees. A SIM swap occurs when a new SIM card is registered with a phone number – swap out the old SIM for the new. A SIM card – subscriber identity module or subscriber identification module – is a small, removable chip in a mobile device that allows it to connect to a wireless provider’s network. In his complaint, Mr. Shapiro claims that on at least four occasions in 2018 and 2019, AT&T employees obtained unauthorized access to his AT&T wireless account, viewed his confidential and proprietary personal information, and transferred control over his AT&T wireless number from his phone to a phone controlled by third-party hackers in exchange for money. He further claims hackers utilized their control over his AT&T wireless number to access his personal and digital finance accounts and steal more than $1.8 million in cryptocurrency. The suit was filed in U.S. District Court for the Central District Of California.
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SEC Files Suit Against Telegram For Alleged Unregistered Offering Of Digital Tokens
October 11, 2019 – The U.S. Securities and Exchange Commission has filed an emergency action and obtained a temporary restraining order against Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. for conducting an alleged unregistered, ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion of investor funds. In its complaint, the SEC alleges Telegram and TON “began raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger. Approximately 2.9 billion digital tokens called “Grams” were sold at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers. The SEC alleges Telegram failed to register its offers and sales of Grams, which are securities, in violation of the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The SEC is seeking certain emergency relief, as well as permanent injunctions, disgorgement with prejudgment interest, and civil penalties.
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SEC’s DAO Report Says Initial Coin Offerings Likely Involve The Offering And Sale Of Securities
July 25, 2017 – The U.S. Securities and Exchange Commission has issued an investigative report “cautioning market participants that offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.” The report of investigation, issued by the SEC’s Division of Enforcement, examines whether “The DAO” may have violated federal securities laws through the sale of DAO Tokens to investors. As explained by the SEC, “The DAO is one example of a Decentralized Autonomous Organization, which is a term used to describe a ‘virtual’ organization embodied in computer code and executed on a distributed ledger or blockchain.” The DAO was created to raise funds from the public, and then use those funds to “support charitable projects.” The SEC ultimately determined not to pursue an enforcement action, but issued the report to advise those who would use a Decentralized Autonomous Organization, or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws. Offers and sales of digital assets conducted by organizations using distributed ledger or blockchain technology have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” According to the SEC report, whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.
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