The ongoing and accelerating pace of developments in the realm of cryptoassets in multiple jurisdictions warrants continual review and monitoring. In a report issued earlier this month on the implications of cryptoassets, the international Financial Stability Board (FSB) stated that, while cryptoassets do not currently pose a material risk to global financial stability, vigilant monitoring is needed in light of the speed of market developments. The FSB believes that due to risks such as low liquidity and the use of leverage, market risks from volatility, and operational risks, cryptoassets lack the key attributes of sovereign currencies and do not serve as a stable store of value or a mainstream unit of account. The financial stability implications of these cryptoasset characteristics include an impact on confidence in, and reputational risk to, financial institutions and regulators; risks arising from financial institutions’ exposures to cryptoassets; and risks arising if cryptoassets were to become widely used in payments and settlement. Therefore, regulators are encouraged to “keep an eye on things” as cryptoassets continue to spread throughout the world economy.
As readers of our blog are aware, courts and regulators are playing catch-up when it comes to cryptocurrencies, and to interpreting existing laws and regulations as applied to these new and innovative offerings. One of these many important questions relates to whether virtual currencies are “commodities” within the meaning of the Commodity Exchange Act (CEA) and subject to regulation by the Commodity Futures Trading Commission (CFTC). A recent ruling by a US district court in Massachusetts held that a virtual currency (My Big Coin) is a commodity within the meaning of the CEA and is therefore subject to the anti-fraud authority of the CFTC, even though there currently is no futures contract on My Big Coin. My Big Coin is a Las Vegas-based creator of software that purportedly allows for the anonymous exchange of currency.
The UK Financial Conduct Authority (FCA) issued a press release on August 7 announcing that it has joined 11 other financial regulators from around the world to create the Global Financial Innovation Network (GFIN), building on its proposals earlier in the year to create a “global sandbox.” The network is intended to provide fintech firms a more efficient way to interact with regulators as they test new ideas across different markets and to create a new framework for regulators to cooperate on areas of innovation. This announcement continues a regulatory trend of being more hospitable to fintech innovation, as we have previously discussed.
We write frequently about the SEC’s and the CFTC’s focus on cryptocurrencies, but potential issuers should also be alert to other oversight, including possible enforcement actions, from other regulators as well. Indeed, state Attorneys General are playing a greater role in evaluating whether the mining and use of cryptocurrencies works to the disadvantage of consumers and small businesses. These state enforcement and regulatory officials are becoming ever more powerful. Furthermore, some of them may seek to expand the scope of their authority by pushing the “round peg” of “virtual” financial technology offerings into the “square hole” of outdated “physical only” state statutes and rules.
Meetings of the Conference of Western Attorneys General (CWAG) in New Mexico last week and of the Republican Attorneys General Association (RAGA) (Rule of Law Defense Fund) in California this week included panel discussions of cryptocurrency issues that are now before the Attorneys General and senior staff. Accordingly, fintech companies that intermediate cryptocurrencies should be aware of the increased risk in conducting these activities in particular states.