Abstract
We examine how the U.S. federal government, which initially was slow in examining and prosecuting violations of law brought about by the misuse of virtual currencies, has now taken aggressive action against parties who either deliberately or carelessly act in violation of the rights of users and customers. We examine the role of the U.S. Securities and Exchange Commission (SEC) and its initial prosecutions; the Commodity Futures Trading Commission, which together with the SEC, are the leading prosecutorial agencies with respect to the new currencies; the Financial Crimes Enforcement Network and its guidance to the financial industry; and additional agencies and their attempts to protect investors and consumers.
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Notes
- 1.
Sherisse Pham , North Korea is trying to amass a Bitcoin war chest (Sept. 12, 2017), CNN Tech, http://money.cnn.com/2017/09/12/technology/north-korea-hackers-Bitcoin/index.html. See also, Qin Chen, Bitcoin ‘mining’: A new way for North Korea to generate funds for the regime World Economy, Sept. 13, 2017, https://www.cnbc.com/2017/09/13/Bitcoin-mining-a-new-way-for-north-korea-to-generate-funds-for-the-regime.html
- 2.
North Korea’s Political Elite is Not Isolated, Insikt Group, July 25, 2017, https://go.recordedfuture.com/hubfs/north-korea-internet-activity.pdf
- 3.
Jason Bloomberg , Bitcoin: ‘Blood Diamonds’ of the Digital Era, Forbes, Mar. 28, 2017, https://www.forbes.com/sites/jasonbloomberg/2017/03/28/Bitcoin-blood-diamonds-of-the-digital-era/#13d1abf6492a
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Dan Boylan , Military, intelligence agencies alarmed in surge of Bitcoin value in ‘dark web’ fight, Washington Times, Aug. 10, 2017, https://www.washingtontimes.com/news/2017/aug/10/Bitcoin-value-surge-sign-of-criminal-activity/
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Olivia McCoy , Bitcoins for Bombs, Council of Foreign Relations, Aug. 17, 2017, https://www.cfr.org/article/Bitcoin-bombs
- 6.
Zachary K. Goldman , Ellie Maruyama , Elizabeth Rosenberg , Edoardo Saravalle , and Julia Solomon Strauss , Terrorist Use of Virtual Currencies: Containing the Potential Threat, CNAS, May, 2017, https://www.cnas.org/publications/reports/terrorist-use-of-virtual-currencies
- 7.
Mike Orcutt , Criminals Thought That Bitcoin Was the Perfect Hiding Place, But They Were Thought Wrong, MIT Technology Review, Sept. 11, 2017, https://www.technologyreview.com/s/608763/criminals-thought-Bitcoin-was-the-perfect-hiding-place-they-thought-wrong/
- 8.
Matthew J. Schwartz , Tougher to Use Bitcoin for Crime? Why Anonymous Use of the Cryptocurrency May Prove Difficult, Bank Info Security, Dec. 30, 2017, https://www.bankinfosecurity.com/tougher-to-use-Bitcoin-for-crime-a-7731
- 9.
One of a number of sites that discuss the issue is by J. Dax Hansen and Joshua L. Boehm , Treatment of Bitcoin Under U.S. Property Law, Perkins Coie, Mar. 2017,, https://www.virtualcurrencyreport.com/wp-content/uploads/sites/13/2017/03/2016_ALL_Property-Law
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U.S. Securities and Exchange Commission, Initial Coin Offerings Investor Bulletin (July 27, 2017), https://www.sec.gov/oiea/investor-alerts-and-bulletins/ib_coinofferings
- 12.
U.S. Securities and Exchange Commission, SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors, Press Release, Sept. 25, 2017, 2017–176, https://www.sec.gov/news/press-release/2017-176
- 13.
The foregoing discussion stating some of the articles discussing the issue is found in J. Dax Hansen , Carla L. Reyes , and Josh Boehm , Resources on Crypto-Tokens and Securities Law, June 5, 2017, Perkins Coie Virtual Currency Report, https://www.virtualcurrencyreport.com/2017/06/resources-on-crypto-tokens-and-securities-law/
- 14.
For a commentary, see Richard M. Martinez, Mark W. Rasmussen, Stephen J. Obie, Harriet Territt, and Brendan Ballou, Crackdown: SEC’s New Cyber Unit Targets Blockchain and ICO Abuses (Dec. 19, 2017), Mondaq, http://www.mondaq.com/unitedstates/x/657534/Securities/Crackdown+SECs+New+Cyber+Unit+Targets+Blockchain+And+ICO+Abuses
- 15.
SEC. v. REcoin Group Foundation , LLC. No. 17 Civ…. (E.D., N.Y. Sept. 29, 2017), https://www.sec.gov/litigation/complaints/comp-pr2017-185.pdf.
- 16.
David W. Adams and Edmund J. Zaharewicz , SEC Files First ICO Enforcement Action, Daily Journal, Oct. 6, 2017, cited by Carlton Fields, Mondaq, http://www.mondaq.com/unitedstates/x/643036/fin+tech/SEC+Files+First+ICO+Enforcement+Action
- 17.
Steve Gatti , Megan Gordon , and Daniel Silver , SEC Enforcement Against Initial Coin Offering, Harvard L.S. On Corporate Governance and Financial Regulation, Oct. 30, 2017, https://corpgov.law.harvard.edu/2017/10/30/sec-enforcement-against-initial-coin-offering/
- 18.
Herbert F. Koslov , Karl S. Larsen , Michael Selig and Matthew H. Kita , United States: SEC Enforcement Action Involving Coin Offering Muddles Jurisdictional Waters, Reed Smith, Oct. 4, 2017, https://www.reedsmith.com/en/perspectives/2017/10/sec-enforcement-action-involving-initial-coin-offering
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Pub.L. 73–22, 48 Stat. 74 (1933).
- 20.
Pub.L 112–106, 126 Stat. 306 (2012).
- 21.
U.S. Federal Register, Crowdfunding, 80 F.R. 71387. https://www.federalregister.gov/documents/2015/11/16/2015-28220/crowdfunding
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U.S. Securities and Exchange Commission , Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Release No. 81207 (July 25, 2017), https://www.sec.gov/litigation/investreport/34-81207.pdf.
- 23.
Id. at 11–15.
- 24.
Citing 15 U.S.C. §77b(a)(4).
- 25.
Citing Doran v. Petroleum Mgmt. Corp., 545 F.2d 893, 909 (5th Cir. 1977).
- 26.
U.S. Securities and Exchange Commission, supra, note 15 at 15–17.
- 27.
Id. at 5–8.
- 28.
U.S. Securities and Exchange Commission, SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities, Press Release, No. 2017-131, https://www.sec.gov/news/press-release/2017-131
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Klint Finley , A $50 Million Dollar Hack Just Showed That The DAO Was All Too Human, WIRED, June 18, 2016, https://www.wired.com/2016/06/50-million-hack-just-showed-dao-human/
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Matthew Leising , The Ether Thief, BLOOMBERG, June 13, 2017, https://www.bloomberg.com/features/2017-the-ether-thief/
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Munchee Inc., SEC Adm. Proc. No. 3-18304 (2017), https://www.sec.gov/litigation/admin/2017/33-10445.pdf
- 32.
Adam T. Ettinger , When Does Software Become Securities, Lexology, Dec. 12, 2017, (https://www.lexology.com/library/detail.aspx?g=87cce8ca-e51f-4b7e-8769-c67c63bd1455
- 33.
Jeffrey L. Robins , SEC Issues Cease and Desist Order Shutting Down ICO, Cadwalader News and Headlines, Dec. 11, 2017, https://www.findknowdo.com/news/12/11/2017/sec-issues-cease-and-desist-order-shutting-down-ico
- 34.
SEC Takes Aim at Initial Coin Offerings Again, Perkins Coie LLP, Jan, 11, 2018, https://www.perkinscoie.com/en/news-insights/sec-takes-aim-at-initial-coin-offerings-again.html
- 35.
Jay Clayton , Statement on Cryptocurrencies and Initial Coin Offerings, Public Statement, Dec. 11, 2017, https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11
- 36.
Id.
- 37.
Codified at 15 U.S.C. §80b-1 through 15 U.S.C. §80b-21.
- 38.
U.S. Securities and Exchange Commission, IM Guidance Update, No. 2014-04, Mar. 2014, https://www.sec.gov/investment/im-guidance-2014-04.pdf
- 39.
Emmie Martin , Jamie Foxx, Floyd Mayweather and other celebrities Who are hyping cryptocurrencies, CNBC, Dec. 20, 2017, https://www.cnbc.com/2017/12/20/celebrities-who-have-endorsed-or-invested-in-cryptocurrency.html
- 40.
U.S. Securities and Exchange Commission, Div. of Enforcement, Statement on Potentially of Unlawful Initial Coin Offerings and Other Investments by Celebrities and Others, Public Statement, Nov. 1, 2017, https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos
- 41.
15 U.S.C. §§41–58, as amended.
- 42.
U.S. Federal Trade Commission, FTC Staff Reminds Influencers and Brands to Clearly Disclose Relationship, Press Release, Apr. 19, 2017, https://www.ftc.gov/news-events/press-releases/2017/04/ftc-staff-reminds-influencers-brands-clearly-disclose
- 43.
Michael Sheetz , The SEC’s crackdown on cryptocurrencies is about to get serious, former chairman says, Yahoo Finance, Dec. 21, 2017, https://finance.yahoo.com/news/sec-apos-crackdown-cryptocurrencies-serious-233456948.html
- 44.
U.S. Securities and Exchange Commission, Release No. 34-80319, File No. SR-NYSEArca-2016-101, at 23–24, https://www.sec.gov/rules/sro/nysearca/2017/34-80319.pdf
- 45.
§6(b)(5) states: “(5) The rules of the exchange are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this title matters not related to the purposes of this title or the administration of the exchange.”
- 46.
Securities Exchange Act of 1934 , Pub.L. 73–291, 48 Stat. 881, (1934), codified at 15 U.S.C. §78a et seq.).
- 47.
Commodity Exchange Act , Ch. 545, 49 Stat. 1491 as amended, (1936).
- 48.
Stan Higgins , CFTC Aligns With SEC: ICO Token Can Be Commodities, CoinDesk, Oct. 17, 2017, https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocurrency-regulation/
- 49.
“DCMs” (Designated Contract Markets ) are trades or exchanges that operates under the authority of the CFTC. They are like traditional futures exchanges, which may allow access to their facilities by all types of traders, including retail customers. They may list for trading futures or option contracts based on any underlying commodity, index, or instrument. Designated Contract Markets, U.S. Commodity Futures Trading Commission, http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm
- 50.
LabCFTC, A CFTC Primer on Virtual Currencies, Oct. 17, 2017, http://www.cftc.gov/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf
- 51.
Coinflip, Inc. d/b/a/ Derivavit, CFTC Docket No. 15-29, Sept. 17, 2015, http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf
- 52.
§2(c)(2)(D) provides that such an agreement, contract, or transaction shall be subject to Sections 4(a), 4(b), and 4b of the Act “as if the agreement, contract, or transaction was a contract of sale of a commodity for future delivery.” 7 U.S.C. §2(c)(2)(D)(iii).
- 53.
In re BFXNA Inc. d/b/a BITFINEX, CFTC Docket 16-19, June 2, 2016, http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfbfxnaorder060216.pdf
- 54.
Ch. 545, 49 Stat. 1491
- 55.
U.S. Commodity Futures Trading Commission, Order of Registration of LedgerX, LLC, July 24, 2017, http://www.cftc.gov/idc/groups/public/@otherif/documents/ifdocs/ledgerxdcoregorder72417.pdf
- 56.
U.S. Commodity Futures Trading Commission, CFTC Grants DCO Registration to LedgerX LLC, July 24, 2017, http://www.cftc.gov/PressRoom/PressReleases/pr7592-17
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Camila Russo, Bitcoin Options Will Be Available This Fall, Bloomberg, July 24, 2017, https://www.bloomberg.com/news/articles/2017-07-24/Bitcoin-options-to-become-available-in-fall-after-cftc-approval
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About Ledger X, Ledger X, https://ledgerx.com/about-ledgerx/
- 59.
A NDF (non-deliverable forward) is a foreign exchange hedging strategy pertaining to the settlement of a profit or loss usually prior to the settlement date with respect to a foreign currency futures contract. Generally, it involves a thinly traded currency in emerging markets settled in major foreign currencies in offshore financial centers. Investopedia, http://www.investopedia.com/video/play/nondeliverable-forward-ndf/
- 60.
U.S. Commodity Futures Trading Commission, CFTC Grants Registration to 3 Swap Execution Facilities, May 26, 2016, http://www.cftc.gov/PressRoom/PressReleases/pr7375-16
- 61.
In re TeraExchange LLC, CFTC Docket No. 15-33 (Sept. 24, 2015), http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfteraexchangeorder92415.pdf
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U.S. Commdity Futures Trading Commission , CFTC Statement on Self-Certification of Bitcoin Products by CME, CFE, and Cantor Exchange, Press Release pr7654-17, Dec. 1, 2017. http://www.cftc.gov/PressRoom/PressReleases/pr7654-17
- 63.
The Futures Industry Association , founded in New York in 1955 under the then name of the Association of Commodity Exchange Firms , now encompasses offices through the globe, particularly in Europe and Asia, with its mission to “support open, transparent, and competitive markets; protect and enhance the integrity of the financial system, and promote high standards of professional conduct,” About FIA, https://fia.org/about-O
- 64.
Walt Lukken , Open letter to CFTC chairman Giancarlo regarding the listing of cryptocurrency derivatives, Futures Industry Association, Dec. 7, 2017, https://fia.org/articles/open-letter-cftc-chairman-giancarlo-regarding-listing-cryptocurrency-derivatives
- 65.
Blooming futures? The Economist, Dec. 16, 2017, at 67.
- 66.
Commissioner J. Christopher Giancarlo , Keynote Address J. Christopher Giancarlo Before SEFCON VII, Jan. 18, 2017, http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-19
- 67.
U.S. Commodity Futures Trading Commission , CFTC Issues Proposed Interpretation on Virtual Currency “Actual Delivery” in Retail Transactions, Dec. 15, 2017, Release No. Pr7664-17, http://www.cftc.gov/PressRoom/PressReleases/pr7664-17
- 68.
U.S. Commodity Futures Trading Commission , CFTC Backgrounder on Oversight of and Approach to Virtual Currency Futures Markets, Jan. 4, 2018, http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf
- 69.
Id.
- 70.
U.S. Commodity Futures Trading Commission , Chairman Giancarlo Statement on Virtual Currencies, January 4, 2018, http://www.cftc.gov/PressRoom/SpeechesTestimony/giancarlostatement010418
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U.S. Commodity Futures Trading Commission , CFTC Launches Virtual Currency Resource Web Page, Dec. 15, 2017, Release No. pr7665-17, http://www.cftc.gov/PressRoom/PressReleases/pr7665-17
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U.S. Treasury Department, Financial Crimes Enforcement Network , Guidance, Mar. 18, 2013, FIN 2013-G001, https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf
- 73.
An Act to amend the Federal Deposit Insurance Act to require insured banks to maintain certain records, to require that certain transactions in U.S. currency be reported to the Department of the Treasury, and for other purposes. Bank Secrecy Act, Pub.L. 91-508, 84 Stat. 1114-2.
- 74.
U.S. Department of the Treasury , Financial Crimes Enforcement Network , Application of FinCEN’s Regulation to Persons Administering, Exchanging, or Using Virtual Currencies, FIN-2013-G001, Mar. 18, 2013, https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering. A discussion of regulatory enactments of virtual currencies may be found in Latham & Watkins, The Other Side of the Coin: Bitcoin, Blockchain, Regulation & Enforcement, Mar. 24, 2016, https://lc.fia.org/events/other-side-coin-Bitcoin-blockchain-regulation-and-enforcement
- 75.
U.S. Office of the Comptroller of the Currency, Bank Secrecy Act, https://www.occ.treas.gov/topics/compliance-bsa/bsa/index-bsa.html
- 76.
The Act defines an “MSB” as “a person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States, in one or more of the capacities…” as stated in the Rule including any agent, agency, or branch or office in the United States. 31 CFR §1010.100(f).
- 77.
31 CFR§1010.100(ff)(1-7) and 31 CFR§1010.100(ff)(5)(i)(A). See supra, note 48 at 2–3.
- 78.
Id., 31 CFR §1010.100(ff)(5)(i)(A).
- 79.
Supra, Id., note 198.
- 80.
Id.
- 81.
Supra, note 165 at 13–14.
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U.S. Department of the Treasury, Financial Crimes Enforcement Network, Application of FinCEN’s Regulation to Virtual Currency Software Development and Certain Investment Activity, Jan. 30, 2014, FIN-2014-R002, https://www.fincen.gov/resources/statutes-regulations/administrative-rulings/application-fincens-regulations-virtual/
- 83.
Id.
- 84.
U.S. Department of the Treasury, Financial Crimes Enforcement Network, Request for Administrative Ruling on the Application of FinCEN’s Regulations to a Virtual Currency Trading Platform, Oct. 27, 2014, FIN-2014-R011.
- 85.
Id.
- 86.
U.S. Department of the Treasury, Financial Crimes Enforcement Network Financial Crimes Enforcement Network, Application of FinCEN’s Regulations to Virtual Currency Mining Operations, Jan. 30, 2014, FIN-2014-R001, https://www.fincen.gov/resources/statutes-regulations/administrative-rulings/application-fincens-regulations-virtual-0
- 87.
Id.
- 88.
31 U.S.C. §5318(h)(1)(D). The regulation is §103.125, Anti-money laundering programs for money services businesses, https://www.gpo.gov/fdsys/pkg/CFR-2004-title31-vol1/pdf/CFR-2004-title31-vol1-sec103-125.pdf
- 89.
For an excellent discussion of the regulation in connection with virtual currencies, see Peter Van Valkenburgh, The Bank Secrecy Act, Cryptocurrencies, and New Tokens: What is Known and What Remains Ambiguous, Coin Center, May, 2017, https://coincenter.org/entry/aml-kyc-tokens
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U.S. v. Lord , Cr. No. 15-00240-01/02 (W.D.La, Apr. 20, 2017), https://scholar.google.com/scholar_case?case=4687444852356921249
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Id.
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For a lengthy discussion of the Council and the ramifications attendant to a finding of “systemically important” financial firm, see Roy J. Girasa, The Rise, Risks, and Rewards of Non-Bank Financial Services, (2016), Palgrave Macmillan.
- 94.
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Id., at 4.
- 99.
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Girasa, R. (2018). Federal Regulation of Virtual Currencies. In: Regulation of Cryptocurrencies and Blockchain Technologies. Palgrave Studies in Financial Services Technology. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-78509-7_4
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