Media Centre

Crypto Regulatory Updates February 2021

11 February 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 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

& the Herzog Crypto Regulatory Team

US

Subject	Update
Money Transmission	Hawaii lets more crypto companies to join the digital currency sandbox and act without money transmitter license (26.1.2021). The State of Hawaii invites new entities within the crypto space to join the Digital Currency Innovation Lab (DCIL). The program allows digital currency issuers to do business in Hawaii without obtaining a state money transmitter license through 30 June 2022. The deadline for applications is 26 February 2021, and the applications could be made via Hawaii Technology Development Corporation’s website.
Banking	Banks can use blockchain and stablecoins to perform banking functions (4.1.2021). The Office of the Comptroller of the Currency (OCC) issued interpretive letter confirming that national banks and federal savings associations are permitted to use novel technologies, such as independent node verification networks (INVNs), and stablecoins (e.g., USDT), to perform payment activities and other bank-permissible functions. Put simply, banks may issue stablecoins, exchange stablecoins for fiat currency, and validate, store, and record payments transactions involving stablecoins by serving as a node on a blockchain (INVN).
AML	The National Defense Authorization Act passed into law (1.1.2021). Congress passed into law the NDAA, which implements certain reforms to the US AML regime. These include, among other things, amendments to bring crypto service providers under the scope of the BSA and obligations for US companies to report their UBOs to the FinCEN.
	FinCEN intends to classify foreign accounts holding virtual currencies as reportable accounts (31.12.20). The FinCEN announced its intentions to propose amendments to the Bank Secrecy Act (BSA) to include foreign accounts holding virtual currencies in the list of ‘reportable accounts’. Meaning, VCs holders who use foreign crypto exchanges would have to disclose holdings exceeding a $10,000 threshold.
	OFAC settlement with BitGO (30.12.20). The OFAC announced a settlement of US sanctions violations by BitGo. BitGO violated US sanctions by providing non-custodial digital wallet services for digital currency private keys to customers in sanction jurisdictions (e.g., Cuba, Iran, Sudan). OFAC determined a $183K penalty, which has been reduced to $93,830 based on a number of mitigating factors performed by BitGO (e.g., cooperation with OFAC and the adoption of a compliance program).
	The FinCEN proposed recordkeeping and reporting requirements (18.12.20). Proposed rules would require financial institutes and MSBs, including virtual asset service providers (e.g., crypto exchanges), to: (i) file a report with FinCEN, within 15 days, on transactions (or a group of transactions) exceeding $10,000 in a 24-hour period; and (ii) keep records and verify the identity of customers at transactions above $3,000. These requirements will apply to transactions of convertible virtual currency (e.g., Bitcoin) involving unhosted wallets (i.e., wallets from which users can conduct transactions without the involvement of the wallet provider) and otherwise covered wallets. Practically speaking, this means that users of centralized cryptocurrency exchanges who want to move their holdings to their private wallets (unhosted wallets) would need to provide personal information for transactions greater than $3,000, and the exchanges would need to report either individual or groups of transactions that add up to more than $10,000 to the FinCEN. The comment period for the FinCEN proposed recordkeeping and reporting requirements has been extended several times and is expected to end on 27 March 2021.
Securities	The SEC charges Ripple and two executives for conducting unregistered securities offering (22.12.20). These charges reflect SEC’s position that Ripple’s XRP is a security. They came fresh off the SEC’s cases against Kik, Telegram, and Block.One (EOS), who were similarly alleged to sale unregistered securities through their token offerings. In assessing whether and why the XRP is a security, and how it differs from Bitcoin (which is not a security, according to the SEC), the SEC noted, inter alia, that there was an identifiable actor who held itself out as responsible for making marketing efforts with respect to XRP. Following the charges, various cryptocurrency exchanges (such as, inter alia, Coinbase, Bittrex, OKCoin, Crypto.com, Binance.US, eToro, etc.), have suspended or delisted the XRP token. A virtual pretrial has been set to February 22, 2021. For comparative purposes, Japan’s FSA, the country’s securities regulator, has reportedly confirmed that it does not consider XRP as a security. Ripple has filed its response to the SEC’s allegations regarding XRP sales being an unregistered securities offering (29.1.2021). Ripple argues that XRP is not a security since it performs a number of functions that are distinct from the functions of securities, e.g. since it functions as medium of exchange – a virtual currency used today in international and domestic transactions. Ripple argues that SEC mischaracterized, misunderstood or ignored the economic reality of XRP, including: (1) that the XRP ledger is completely open-source, decentralized, and operates on a big scale outside of Ripple’s control; (2) that XRP is and long has been a digital asset with a fully functional ecosystem and utility as a bridge currency and other types of currency uses; and (3) that XRP’s price is not and has not been determined by Ripple’s activities – instead, the market has for many years priced XRP in correlation with other virtual currencies, most notably bitcoin and ether. Ripple has also filed a Freedom of Information Act request for more information about how the SEC determined the status of ether as a non-security (5.2.2021).
	XRP investor filed a class action lawsuit against Ripple, its CEO, and a subsidiary XRP II (25.1.2021). The lawsuit alleges the defendants failed to comply with Florida securities laws by failing to register the offers and sales of XRP with the Florida Office of Financial Regulation.
	The SEC’s settled enforcement action against Wireline for unregistered offering (15.1.2021): Wireline will pay the U.S. Securities and Exchange Commission (SEC) $650,000 to settle charges stemming from its $16.3 million crypto token offer and sale using a Simple Agreement for Future Token (SAFT) in late 2018. SEC Commissioner Hester M. Peirce, despite supporting the SEC’s action in this case, has raised concerns that approach that suggests the tokens are securities could complicate the development of crypto networks

EUROPE

Subject	Update
Estonia (Draft Legislation)	Stricter crypto laws are considered by the Estonian Parliament (21.1.2021). The Ministry of Finance published a draft legislation that establishes requirements for service providers that offer investment opportunities, in crowdfunding projects and crypto assets. The draft is used to make the proposal that the supervision of all service providers, established in Estonia, connected with virtual currencies, be placed under the competency of financial regulator – the Financial Supervision Authority, which will provide a stricter supervision of their business activities. Currently, the provider of virtual currency service has to receive an activity license from the Financial Intelligence Unit, which is part of police department.
Serbia (New Law)	Serbia’s government published the Digital Asset Law (29.12.2020). The law establishes a regulatory framework to activities involving crypto assets and, among other things, introduces a licensing requirement to crypto exchanges. It will apply from 29 June 2021, under the supervision of the Securities Commission and the National Bank of Serbia (NBS).

Subject

Update

Estonia

(Draft Legislation)

Stricter crypto laws are considered by the Estonian Parliament (21.1.2021). The Ministry of Finance published a draft legislation that establishes requirements for service providers that offer investment opportunities, in crowdfunding projects and crypto assets. The draft is used to make the proposal that the supervision of all service providers, established in Estonia, connected with virtual currencies, be placed under the competency of financial regulator – the Financial Supervision Authority, which will provide a stricter supervision of their business activities. Currently, the provider of virtual currency service has to receive an activity license from the Financial Intelligence Unit, which is part of police department.

Serbia

(New Law)

Serbia’s government published the Digital Asset Law (29.12.2020). The law establishes a regulatory framework to activities involving crypto assets and, among other things, introduces a licensing requirement to crypto exchanges. It will apply from 29 June 2021, under the supervision of the Securities Commission and the National Bank of Serbia (NBS).

UK

Subject	Update
Consultation	HM Treasury published consultation on cryptoassets and stablecoins (7.1.2021). The HM Treasury published a consultation paper (CP) on cryptoassets and stablecoins. The CP discusses UK approach to cryptoassets regulation and consults on bringing cryptoassets within the scope of financial promotions regulations. Responses are due by 21 March 2021.

GCC

Subject	Update
Dubai (Proposed Crypto Framework)	The Dubai Financial Services Authority (DFSA) is reportedly planning to introduce two consultation papers on its proposed crypto regulations in the first half of 2021 (19.1.2021). The plan to introduce a regulatory framework for a wide range of digital assets and the firms that provide relevant services, is part of DFSA’s 2021-2022 business plan released on 18 January 2021. The DFSA intends to take a regulatory approach that facilitates innovation while requiring strict adherence to the DFSA’s licensing, prudential and conduct requirements.

Subject

Update

Dubai

(Proposed Crypto Framework)

The Dubai Financial Services Authority (DFSA) is reportedly planning to introduce two consultation papers on its proposed crypto regulations in the first half of 2021 (19.1.2021). The plan to introduce a regulatory framework for a wide range of digital assets and the firms that provide relevant services, is part of DFSA’s 2021-2022 business plan released on 18 January 2021. The DFSA intends to take a regulatory approach that facilitates innovation while requiring strict adherence to the DFSA’s licensing, prudential and conduct requirements.

AFRICA

Subject	Update
Nigeria (Crypto ban)	Central Bank of Nigeria has banned banks from servicing crypto exchanges and other crypto businesses (5.2.2021). The Central Bank of Nigeria has placed a ban on all regulated financial institutions from providing services to crypto exchanges and other businesses transacting in cryptocurrencies in the country. It has also ordered banks to close down accounts of persons or entities transacting in or operating crypto exchanges.

Subject

Update

Nigeria

(Crypto ban)

Central Bank of Nigeria has banned banks from servicing crypto exchanges and other crypto businesses (5.2.2021). The Central Bank of Nigeria has placed a ban on all regulated financial institutions from providing services to crypto exchanges and other businesses transacting in cryptocurrencies in the country. It has also ordered banks to close down accounts of persons or entities transacting in or operating crypto exchanges.

ASIA

Subject	Update
India (Crypto ban)	India to ban private cryptocurrencies under the Government-introduced Proposed Legislation (29.1.2021). According to the Lok Sabha (i.e. India’s lower house of the Parliament) Bulletin, the Indian parliament will consider a government-introduced Cryptocurrency and Regulation of Official Digital Currency Bill that seeks to prohibit all private cryptocurrencies in India, and only allow for certain exceptions to promote the underlying technology of cryptocurrency and its uses. It also aims to create a facilitative framework for the creating of the official digital currency to be issued by the Reserve Bank of India. Since the ruling party controls both houses of the Parliament, the chances of the bill’s passage are considered good. Indian Minister of State for Finance has reportedly specified that the aim of the act would be to curb illicit cryptocurrency transactions and bar their use in payments. Reportedly, the government may take the ordinance route to pass the bill, bypassing the parliament. Ordinance law is put into effect by India’s president on the recommendation of the cabinet and would be equivalent to an act of parliament.
Philippines (New Guidelines)	Philippines Central Bank has issued Guidelines for Virtual Asset Service Providers [VASP] (21.1.2021). The guidelines are applicable to VASPs that offer their services or engage in VASP activities in the Philippines. The guidelines indicate that they are based, inter alia, on FATF standards on AML and CTFS. Under the guidelines, VASPs will, inter alia, be required to apply for a “certificate of authority” in order to operate as money sending business.
Kyrgyzstan (Draft Legislation)	Kyrgyzstan’s government published consultation on initiating a crypto regulatory framework (31.12.2020). The National Bank published a consultation on two bills that would establish a regulatory framework to govern crypto-related activities in Kyrgyzstan. Among other things, the new framework defines cryptocurrencies and imposes licensing and reporting requirements on crypto exchanges. Responses are due by February 10, 2021.