SEC Chair Speaks About ICOs and Virtual Currencies

In a statement released on December 11, 2017, Jay Clayton, Chair of the U.S. Securities and Exchange Commission (SEC), offered his views about initial coin offerings (ICOs) and virtual currencies. Notably, the statement contained, among other things, the following insights:

ICOs:

• Adding a utility feature to a token does not necessarily make the token a non-security if the token can still appreciate in value based on the token sponsor’s efforts in creating a utility for that token.
• Chair Clayton has "asked the SEC’s Division of Enforcement to continue to police this area vigorously and recommend enforcement actions against those that conduct [ICOs] in violation of the federal securities laws."¹

Virtual Currencies:

• Chair Clayton questioned the assertion that virtual currencies, such as bitcoin, are not securities, emphasizing that "[w]hether this assertion proves correct with respect to any digital asset that is labeled as a cryptocurrency will depend on the characteristics and use of that particular asset."
• Brokers, dealers, and other market participants that permit payments in virtual currencies should be wary that such transactions do not undermine their anti-money laundering and know-your-customer obligations.

¹See our discussion of (1) the SEC’s investigative report in our July 26, 2017 WSGR Alert; and (2) the SEC’s halting of an ICO in our December 2017 WSGR Fintech Update.

This article was authored by Susan Gault-Brown and John Sullivan.

CFTC Proposes Guidance on Retail Virtual Currency Transactions

The U.S. Commodity Futures Trading Commission (CFTC) recently proposed interpretive guidance concerning its oversight of retail virtual currency transactions.¹ The CFTC takes the position that virtual currencies are commodities, and the Commodity Exchange Act (CEA) grants the CFTC authority to oversee retail commodity transactions that are entered into on a leveraged or margined basis.  There is an exception from CFTC jurisdiction, however, for transactions that result in "actual delivery" within 28 days from the original transaction date.

The proposed interpretive guidance sets forth two criteria for establishing "actual delivery" in the context of a retail virtual currency transaction:

• the buyer is able to take possession and control of the entire quantity of the virtual currency and use it freely in commerce no later than 28 days from the transaction date; and
• the seller does not retain any interest or control over any of the virtual currency purchased at the expiration of 28 days from the transaction date.

The proposed interpretive guidance also provides several examples to illustrate practical applications.

With respect to coins or tokens, the proposed guidance states that certain coins or tokens may be commodities and therefore subject to the guidance above. However, coins or tokens that are deemed securities are not subject to the retail commodity transaction definition or the proposed interpretive guidance.²

Comments on the proposed guidance are due March 20, 2018.

¹A retail virtual currency transaction is a transaction in which one or both of the parties to the transaction is not an “eligible contract participant,” as defined in CEA section 1a(18). Natural person eligible contract participants generally must have at least $10 million invested on a discretionary basis.

²See CEA section 2(c)(2)(D)(ii)(II).

This article was authored by Susan Gault-Brown, John Sullivan, and Aaron Friedman.