WSGR FinTech Update - December 2017

Wilson Sonsini Goodrich & Rosati is pleased to present the December 2017 issue of the WSGR Fintech Update. This latest edition features an article on the SEC's recent ICO enforcement action, an article on the anticipated listing of bitcoin futures and binary options, as well as an article on the Uniform Law Commission's recent efforts to harmonize state virtual-currency regulations.

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SEC Freezes PlexCoin ICO and Promises More to Follow

On December 4, 2017, the U.S. Securities and Exchange Commission (SEC) announced that it has obtained an emergency asset freeze against a Quebec based initial coin offering (ICO)—the PlexCoin ICO—in connection with violations of the anti-fraud and the registration provisions of the U.S. federal securities laws. Among other relevant facts, the SEC noted that the PlexCoin issuer claimed that "investments in PlexCoin would yield a 1,354 percent profit in less than 29 days." The charges are the first filed by the SEC's new Cyber Unit, which was created in September 2017 to focus on misconduct involving ICOs and blockchain, among other things.¹

The PlexCoin enforcement action is likely the beginning of a spate of ICO enforcement actions, judging from recent comments by William Hinman, director of the SEC's Division of Corporation Finance. Speaking with respect to ICOs, Hinman stated that, "I think you will see more of our guidance through enforcement actions we expect to bring." In other words, stay tuned for additional ICO enforcement actions.

For more information about the regulation of ICOs, please contact Robert H. Rosenblum (202-973-8808, rrosenblum@wsgr.com); Susan Gault-Brown (202-973-8809, sgaultbrown@wsgr.com);or any member of the fintech regulatory practice at Wilson Sonsini Goodrich & Rosati.

¹See our discussion of the recently formed SEC Cyber Unit in the October 2017 WSGR Fintech Update.

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

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Bitcoin Futures and Binary Options Set to Launch

The U.S. Commodity Futures Trading Commission (CFTC) announced on December 1, 2017, that the Chicago Mercantile Exchange (CME) and the CBOE Futures Exchange (CBOE), through the CFTC's self-certification process, will be listing new bitcoin futures contracts, and that the Cantor Exchange, also through self-certification, will be listing new bitcoin binary options. Once a designated contract market (DCM)—such as the CME, CBOE, and the Cantor Exchange—self-certifies a product for listing, the DCM can list that product no sooner than one full business day following the self-certification, unless the CFTC objects. The new contracts are anticipated to begin trading soon.

For more information about the regulation of virtual currencies, please contact Robert H. Rosenblum (202-973-8808, rrosenblum@wsgr.com); Susan Gault-Brown (202-973-8809, sgaultbrown@wsgr.com); or any member of the fintech regulatory practice at Wilson Sonsini Goodrich & Rosati.

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

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Uniform Law Commission Strives to Harmonize State Virtual-Currency Regulations

The Uniform Law Commission, which provides U.S. states with recommended legislation to adopt at the state level, recently released its Uniform Regulation of Virtual-Currency Businesses Act (VCBA) in an effort to promote uniformity among the sometimes disparate regulations faced by firms engaged in "virtual currency business activity." The VCBA defines this activity as, among others things, exchanging, transferring, or storing virtual currency (e.g., bitcoin or ether) or engaging in virtual-currency administration (e.g., issuing virtual currency with authority to redeem that currency for legal tender or another virtual currency).

Such businesses are sometimes subject to state and/or federal regulation as money transmitters, or, in certain states, like New York, to state-specific virtual-currency business laws. The VCBA seeks to standardize the multiple regulatory regimes encountered by these businesses. The recommended legislation generally consists of, among others things, licensing, security, net worth, disclosure, and compliance requirements. It also proposes exemptions, reciprocal licensing procedures, and alternatives to licensing in an effort to ease the regulatory burden of firms engaged in virtual-currency business activity. No state is required to adopt the VCBA. Some states might, and others might adopt their own versions of the VCBA.

Licensing

Before engaging in a virtual-currency business activity in a particular state, a firm would have to apply for a state license and provide the state with, among others things, a list of criminal convictions or proceedings against the applicant and its executive officers; a list of certain litigation, arbitration, or administrative proceedings involving the applicant and its executive officers; a summary of certain insurance policies maintained by the applicant; in certain cases, audited financial statements; and fingerprints of the applicant's executive officers and certain other managers.

A licensee would also be subject to an annual license renewal requirement. As part of the renewal process, the licensee would have to pay an annual fee and provide information, such as annual financial statements (in certain cases, audited ones); material litigation, federal or state investigation, and data security breaches involving the licensee; and transaction-related data involving state residents.

Security and Net Worth Requirements

The VCBA would require an applicant to deposit with the applicable state funds or investment property, a letter of credit, or surety bond for the benefit of claims against the applicant on account of its virtual-currency business activity in that state. An applicant would also have to satisfy a minimum net worth and unencumbered reserve requirement. The applicant would be able to include in its net worth the value of certain virtual currencies. If the license is granted, the licensee would have to comply with these security and net worth requirements on an ongoing basis.

Disclosures and Compliance Requirements

Under the VCBA, a licensee would be required to provide certain disclosures to a potential customer before establishing a relationship (e.g., a schedule of fees and charges, the extent to which a transfer or exchange is irrevocable, and the extent to which a customer may stop a pre-authorized payment or revoke authorization for a transfer). A licensee would also have to provide confirmation-related information to a customer at the conclusion of a virtual-currency transaction on behalf of that customer (e.g., fees charged, date and time of the transaction, and transaction amount). The licensee would also have to maintain compliance policies and procedures that address information security, business continuity, disaster recovery, anti-money laundering, and anti-fraud.

Exemptions for Banks, Money Transmitters, and De Minimis Activity

The VCBA exempts several businesses, including banks, state-licensed money transmitters that otherwise comply with certain of the VCBA's provisions and have authorization from the state to engage in virtual-currency business activity, and firms whose annual virtual-currency business activity among state residents is $5,000 or less.

Reciprocity Among States

If a would-be applicant is already licensed in one state to engage in a virtual-currency business activity, under the VCBA, it could seek, to be licensed in another state by undergoing an abbreviated application process, rather than the standard licensing process for that state.

Alternative to Securing a License

A potential licensee, whose volume of virtual-currency business activity in a state does not exceed $35,000 on an annual basis, would be able to register with the state for a two-year period, rather than seek a license. The registrant would be subject to a lighter form of VCBA regulation than a licensee, and the registration process would be less involved than the traditional licensing process. A business may prefer a two-year registration in lieu of a license if it would like to test its products in a particular state but is unsure if it intends to maintain that particular business in the state for a period beyond two years.

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

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