Media Centre

Crypto Regulatory Updates

8 June 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

And the Herzog Crypto Regulatory Team

 

US Federal

Commodities & Securities The House passed the Eliminate Barriers to Innovation Act (20 April 2021). The passed act requires the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to establish a working group with the goal of clarifying in which cases the jurisdiction over a certain token belongs to SEC and in which to CFTC.

 

Securities SEC’s Commissioner, Hester Peirce, has published an updated version of her Safe Harbor proposal for token offerings (13 April 2021). The updated Safe Harbor proposal updates Peirce’s 2020 proposal, which suggested a three-year grace period for network developers within which, under certain conditions, they can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws. The updated proposal reflects constructive feedback provided by the crypto community and includes a number of changes, most notably, (i) a requirement for companies to provide the SEC with semi-annual updates; and (ii) an exit report requirement, that is, a requirement to submit a report, made by an outside counsel, explaining whether and why the network is decentralized or functional, at the end of the grace period. The exit report requirement provides a guidance on the matters to be addressed while explaining that the network is decentralized.

 

The U.S. District Court of the Southern District of New York has dismissed a class action lawsuit against crypto exchange Bibox Alleging Unregistered Offering of Securities (16 April 2021). According to the lawsuit, Bibox has offered six tokens, which were allegedly securities:  EOS, TRX, OMG, LEND, ELF and the native token of the platform – BIX. The Court has found that the plaintiff lacks standing for bringing suit regarding tokens that were not purchased by him, and therefore his claims with regard to those tokens must be dismissed. Furthermore, the plaintiff’s claims related to the BIX token were dismissed since the action was filed more than one year after the last BIX transaction made by the plaintiff, while the claims must be filed within at most one year of their accrual and thus fall outside of the relevant limitations period.

 

The SEC filed an action against five individuals alleging that they promoted a global unregistered digital asset securities offering that raised over $2 billion from retail investors (28 May 2021). According to the SEC’s complaint, from approximately January 2017 to January 2018, BitConnect used a network of promoters to market and sell securities in its “lending program.” These promoters advertised the merits of investing in BitConnect’s lending program to prospective investors, including by creating “testimonial” style videos and publishing them on YouTube, and received commissions based on their success in soliciting investor funds, the complaint says. The SEC’s complaint alleges that these promoters offered and sold the securities without registering the securities offering with the Commission, and without being registered as broker-dealers with the Commission, as required by the federal securities laws.

 

Tax Kraken has been ordered to provide information on users who conducted crypto transactions exceeding the equivalent of $20,000 in a year (5 May 2021). A federal court in northern California authorized the Internal Revenue Service (IRS) to serve a “John Doe summons” on Payward Ventures Inc., and Subsidiaries d/b/a Kraken (Kraken) seeking information about US taxpayers who conducted at least the equivalent of $20,000 in transactions in cryptocurrency during the years 2016 to 2020.

 

Binance is under investigation by the IRS (13 May 2021). According to reports from Bloomberg, Binance Holdings Ltd. is under investigation by the Justice Department and the IRS. As part of the inquiry, officials who probe money laundering and tax offenses have sought information from individuals with insight into Binance’s business, according to the report.

 

US Treasury has proposed to impose on businesses (including crypto exchanges, custodians, payment providers, and financial institutions) an obligation to report to IRS crypto transactions over $10k (20 May 2021). The proposal was introduced as part of the US Treasury’s “The American Families Plan Tax Compliance Agenda“, according to which it is assumed that the proposal will become effective for tax year 2023.

 

US State

Crypto Gambling (Wyoming) Wyoming has passed a new law legalizing online sports betting in the state with gamblers able to fund their accounts with bookmakers using cryptocurrencies (5 April 2021). House Bill 133, which was signed into law on was passed into law on 5 April 2021 (with new guidelines expected to take effect from 1 September 2021), recognizes cryptoassets as suitable means of making deposits into online sports betting accounts.
Decentralized Autonomous Organizations

(Wyoming)

Wyoming has passed a new law recognizing decentralized autonomous organizations (DAOs) as limited liability companies (21 April 2021). The new law (Bill 38) will take effect on 1 July 2021 and will permit DAOs to incorporate as limited liability companies (LLCs) in Wyoming. Under the new law, Wyoming DAO LLCs must be domiciled in the state and its articles of organization must contain a statement that the company is a decentralized autonomous organization. The law further recognizes that DAO LLCs can either be “member managed” (managed by its members) or “algorithmically managed” (managed by smart contracts) and imposes certain provisions accordingly. For example, the law says that if the DAO LLC is algorithmically managed, the ability to update, modify or otherwise upgrade the underlying smart contract must be in place.
Enforcement Actions (New York) The New York Office of the Attorney General (OAG) seeks to immediately halt Coinseed operations (7 May 2021). In February, the OAG filed a lawsuit against Coinseed, claiming that it defrauded thousands of investors, but, since that time, Coinseed and its CEO have continued their fraud, said the OAG. On 7 May 2021, the OAG filed a motion asking the court for a temporary restraining order, a preliminary injunction, and the appointment of a receiver to immediately block Coinseed and its CEO from making any further unauthorized trades and safeguarding investors’ monies.
Banking

(Nebraska)

 

 

Nebraska has passed a law creating a digital asset banking charter (25 May 2021). The new law (Legislature Bill 649) authorizes digital asset depository entities and provides for the charter, operation, supervision, and regulation thereof.
New Legal Framework (Texas) Texas has passed a law, aimed at providing a legal framework and clarity for companies dealing with cryptoassets (5 June 2021). The bill relating to the control of virtual currency and the rights of purchasers who obtain control of virtual currency for purposes of the Uniform Commercial Code (House Bill 4474), defines the term “virtual currency” and applies key commercial and business laws to cryptoassets.
Mining

(New York)

A new bill seeks to ban crypto mining over environmental concerns (3 May 2021). Among other things, the New York Senate Bill 6486 seeks to establish a three-year moratorium on the operation of cryptocurrency mining centers and to require such mining centers to undergo an environmental impact review.

 

US Industry

Google Restrictions Starting from 3 August 2021, Google will only permit FinCEN-registered or chartered crypto exchanges and wallets to advertise on its network (2 June 2021). Google has updated its financial products and services policy such that, beginning 3 August 2021, companies seeking to advertise crypto exchange or wallet services to US customers will have to be registered with the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN“) as a Money Services Business and with at least one state as a money transmitter or a federal or state chartered bank entity. All prior certifications by Google will be revoked at that time.

 

Canada Province

Securities

(Ontario)

Ontario Securities Commission (OSC) took action against Seychelles-based cryptoasset trading platform Poloniex (25 May 2021). The OSC has published a statement of allegations against Polo Digital Assets, Ltd. (Poloniex) for failing to comply with Ontario securities law. The OSC has allegedly operated an unregistered cryptoasset trading platform, encouraged Canadians to use the platform, and allowed Ontario residents to trade cryptoasset products that are securities and derivatives. The OSC noted that the Seychelles Financial Services Authority has assisted in the matter.

 

EU – State Level

AML

(Ireland)

Irish law requiring crypto firms to comply with anti-money laundering (AML) regulation has entered into force (23 April 2021). The Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021, the law transposing the fifth Anti-Money Laundering Directive (AMLD 5), was entered into force. The law requires virtual asset service providers, such as wallet and exchange providers, to comply with various AML obligations and to register with the Central Bank of Ireland.
AML

(Spain)

Spain has adopted a law transposing the EU Fifth Anti-Money Laundering Directive (5AMLD) into its domestic legal system (27 April 2021). The Royal-Decree Law 7/2021 requires virtual asset service providers, such as wallet and exchange providers, to comply with various anti-money laundering duties as well as registration requirements on various virtual asset service providers.
AML

(Portugal)

Banco de Portugal issued a notice on the registration regime for entities carrying our crypto-related activities (23 April 2021). The notice (Notice no. 3/2021) defines the terms of registration.
AML

(France)

A new decree specifying AML/CFT rules which apply to digital assets has fully come into force (1 May 2021). The new Decree (Decree No. 2021-387) has introduced new provisions with regard to obligations of natural and legal persons subject to AML/CFT rules, and with regard to procedures for monitoring compliance with such rules. The decree inter alia clarifies the existence of a ban on the use of anonymous electronic money for the purchase of digital assets, introduces an obligation to conduct customer due diligence prior to any transaction and sets procedures with regard to remote identification and combating the anonymity of transactions carried out in virtual assets or electronic money. Furthermore, the degree extends the scope of the action of the supervisory authorities to the implementation of European measures to freeze assets and prohibit provision thereof, as well as sets organizational requirements for the subject entities in that regard.

 

UK

Securities

 

The Financial Conduct Authority is examining whether Binance’s offering of tokens representing fractions of shares complies with securities laws (22 April 2021). Binance has launched digital tokens designed to track the share performance of companies they represent (e.g., Tesla and Coinbase), but cost only a fraction of the price of the stock. Reportedly, the FCA is examining whether the launch of these tokens is subject to securities laws.
Advertisement The UK self-regulatory body, Advertising Standards Authority (ASA), has halted an advertising campaign by Luno, a cryptocurrency exchange, for being misleading and irresponsible (26 May 2021). Luno posted on the London Underground posters featuring a cartoon image of a Bitcoin with text saying “[i]f you’re seeing Bitcoin on the Underground, it’s time to buy”. The ASA said that consumers would interpret that statement as a call to action and that the simplicity of the statement gave the impression that bitcoin investment was straightforward and accessible. This is despite the fact that Bitcoin investment is complex, volatile, and could expose investors to massive losses, the ASA said. Consequently, the ASA ordered that Luno’s ads must not appear again in the form complained about and that Luno must ensure that their future marketing communications make sufficiently clear that the value of investments in Bitcoin could go down as well as up and the Bitcoin market is unregulated.
AML The FCA has extended the deadline for crypto businesses to register under its Temporary Registrations Regime (TRR) from 9 July 2021 to 31 March 2022 (3 June 2021). The TRR was established last to allow existing cryptoasset firms that applied for registration before 16 December 2020, and whose applications are still being assessed, to continue with their operations. In the extension notice, the FCA has expressed its concern that “a significantly high number of businesses” are not meeting its AML standards and noted that “this has resulted in an unprecedented number of businesses withdrawing their applications”.

 

Asia

Regulatory Guidance

(India)

The Reserve Bank of India (RBI) has clarified that certain prohibitions on regulated entities dealing with cryptoassets are no longer applicable (31 May 2021). The RBI announced that it’s 2018 circular—which prohibited regulated entities from dealing in virtual currencies or providing services to people or entities dealing in virtual currencies — is no longer valid. However, the RBI clarifies, banks and other regulated financial institutions can still carry out customer due diligence processes with respect to entities dealing with virtual currencies, under the Prevention of Money Laundering Act, (PMLA), 2002.
DeFi

(Thailand)

Thailand’s Securities and Exchange Commission Securities (SEC) notes that decentralized finance (DeFi) transactions might be subject to securities laws (30 May 2020). The SEC issued a statement noting that DeFi initiatives involving the issuance of a digital token (e.g., liquidity providers tokens, governance tokens or tokens are issued to those transacting in the DeFi project) might fall under the Royal Decree on Doing Digital Asset Business, meaning that such activities would require authorisation from the SEC and a license from the Minister of Finance.
Crypto Ban

(Mainland China)

China bans financial institutions and payment providers from conducting business or providing services related to virtual currency (18 May 2021). The prohibited services include, inter alia, trading, clearing, settlement, accepting virtual currency as a payment, issuing financial products related to virtual currency, and other services.
Crypto Mining Ban

(Mainland China – Inner Mongolia)

Inner Mongolia region has released draft guidelines on the planned ban of crypto mining (26 May 2021). According to the new guidelines, non-compliance with a ban may result in, among others, withdrawal from preferential policies granted by the government for big data centers and cloud computing companies, in the revocation of telecommunications business licenses, social credit blacklisting, etc.
Regulatory Announcements (South Korea) Regulators plan to join forces to combat illegal activities involving cryptoassets (19 April 2021). Financial regulators in South Korea have announced their intention to collaborate to strengthen the monitoring of crypto activities — e.g., transfers and withdrawal —with the goal of identifying signs of illegal activities.

Following that announcement, on 6 May 2021, it was reported that financial regulators have asked banks to provide information on their dealings with cryptocurrency firms, to determine how many cryptocurrency exchanges operate within the country’s borders; and on 27 May 2021, the Central Bank Governor pledged to closely monitor transactions of Korean financial institutions associated with leveraged cryptocurrency trading, due to their potential negative impact on the Korean financial system.

Crypto ban

(Turkey)

Turkey’s Central Bank has banned the use of crypto for payment purposes (16 April 2021). The ban, effective from 30 April 2021, prohibits “any direct or indirect usage of crypto in payment services and electronic money issuance”. Banks are excluded from the ban, meaning that users can still deposit Turkish lira on crypto exchanges using wire transfers from their bank accounts.
AML

(Turkey)

Turkey has published a presidential decree adding cryptocurrency trading platforms to the list of firms covered by AML regulations (1 May 2021). The presidential decree was published a day after the country’s ban on the use of cryptocurrency for payments had come into force. The presidential decree went into effect immediately.
Crypto exchanges with a presence in Turkey to be required to inform the Financial Crimes Investigation Board (MASAK) about any crypto transactions exceeding 10,000 Turkish liras (~$1,200) (7 May 2021). The new policy was announced by the Turkish Minister of Treasury and Finance, Lütfi Elvan, on a CNN Turk live broadcast. According to the announcement, the policy applies to crypto exchanges with a presence in Turkey and requires such exchanges to notify MASAK about any transactions worth over 10,000 Turkish liras in 10 days after the trading.
Crypto Trading Legalization

(Uzbekistan)

Uzbekistan plans to legalize crypto trading for its residents, amid 2019 ban on buying cryptoassets (29 April 2021). The National Agency for Project Management under the President of the Republic of Uzbekistan has proposed to allow the Uzbek residents to execute exchange trade with cryptoassets and tokens in exchange for national and foreign currency.

 

Africa

Regulatory Statement (Nigeria) Central Bank Governor has issued a statement noting that cryptocurrencies will be legal in Nigeria (May 26 2021). At a 279th meeting of the Monetary Policy Committee in Abuja, Central Bank of Nigeria Governor Godwin Emefiele expressed confidence that cryptocurrencies like Bitcoin will be legal in the country, according to reports by Business Insider. This statement comes amid the letter issued by the Central Bank of Nigeria in February 2021, which has been perceived as imposing a ban on the use of cryptocurrencies in the country.

 

Latin America

Tax

(Argentina)

Argentina’s tax authority has reportedly ordered crypto exchanges to file transaction data on their customers in monthly reports (May 14 2021). According to a report in a local newspaper, crypto exchanges will be required to list all accounts and identify clients, as well as income, expenses and monthly balance of accounts held. For each month, this information will need to be reported by the 15th of the following month.
Crypto Adoption

(El Salvador)

The President of the Republic of El Salvador has announced plans to introduce legislation adopting Bitcoin as a legal tender in the country (6 June 2021). The announcement was made during Bitcoin 2021 Conference in Miami.