As we have been reporting, cryptocurrency, as an asset class, is currently taking the world financial markets by storm. Total market capitalization of cryptocurrency is estimated to be in the hundreds of billions of dollars and new initial coin offerings (ICOs) seem to crop up every other day, while the United States and other countries' governments have been left scrambling to figure out how to best regulate this new asset class and protect market participants and end users.

The US Securities and Exchange Commission (SEC) has been a leader in taking affirmative steps toward exercising some oversight of the fragmented cryptocurrency market. On January 18, the SEC’s Division of Investment Management published a staff letter detailing some of the Commission’s concerns about how cryptocurrency-related products will comply with the Investment Company Act of 1940, including specific issues relating to valuation, liquidity, custody, arbitrage, and potential manipulation.

Recent events in the cryptocurrency markets, including the wild swings in the trading prices of bitcoin, the growing incidence of initial coin offerings (ICOs) entailing the offer and sale of unregistered securities, and the launch of bitcoin futures trading, have encouraged the federal government to ratchet up its interest in virtual currencies. Not only have the Commodity Futures Trading Commission (CFTC) and the US Securities and Exchange Commission (SEC) made public announcements about virtual currencies and taken enforcement action against virtual currency companies or initial coin offerors in recent months, but Congress now is showing increased interest in bitcoin and other virtual currencies. A few very recent signals of heightened governmental interest in virtual currency are highlighted below:

  • The Senate Committee on Banking, Housing, and Urban Affairs (Senate Banking Committee) held two hearings in January during which virtual currencies were discussed in connection with strengthening anti-money laundering (AML) laws
  • Reports indicate that the Senate Banking Committee will hold a hearing in February to analyze the implications of cryptocurrencies. CFTC Chairman Christopher Giancarlo and SEC Chairman Jay Clayton will likely testify at the hearing
  • On January 19, Mr. Giancarlo called on the Futures and Derivatives Bar to “set the course for the future” of virtual currencies
  • In a January 22 speech, Mr. Clayton again cautioned market professionals and “gatekeepers” that they need to “do better” in their handling of ICOs, and said that the SEC staff will be on “high alert” for ICOs that may be “contrary to the spirit of our securities laws.”

US Attorney General Jeff Sessions has just issued a memorandum (AG Memo) rescinding prior US Department of Justice (DOJ) guidance on the federal prosecution of marijuana offenses, including the 2013 “Cole Memorandum” (Cole Memo) and subsequent guidance regarding marijuana-related financial crimes (Financial Crimes Memo). The Cole Memo, among other things, expressly acknowledged the legalization of marijuana in several states for medical and recreational purposes and directed federal prosecutors to focus their enforcement priorities and resources on activities that align with current DOJ enforcement priorities. In turn, these priorities emphasized the prevention of marijuana-related activities posing the most significant threats to public safety and welfare (such as preventing the sale of marijuana to minors, or preventing marijuana sales from benefiting criminal enterprises). The Cole Memo in substance encouraged federal prosecutors to take a “hands-off” approach on the prosecution of “low level” marijuana-related offenses in those states that have legalized in some form the possession or use of marijuana for medical or recreational purposes. The subsequent Financial Crimes Memo carried forward the Cole Memo principles to the prosecution of banks and other financial institutions participating in marijuana-related banking and financial activities.

The US District Court for the Southern District of New York (SDNY) has dismissed without prejudice the fintech charter lawsuit brought by New York Department of Financial Services (NYDFS) Superintendent Maria T. Vullo against the Office of the Comptroller of the Currency (OCC). As we have previously reported, in March 2017, the OCC issued draft guidelines for a special purpose national bank charter for financial technology companies, often referred to as the “fintech charter.” The NYDFS filed a lawsuit in May 2017 challenging the OCC’s authority under the National Bank Act to grant special purpose national charters to fintech companies.

The OCC moved to dismiss the lawsuit for lack of subject matter jurisdiction and failure to state a claim, arguing that the NYDFS lacked standing, the claims were not ripe for decision, and the claim regarding the OCC special purpose national bank regulations was time-barred. Further, the OCC argued there had been no final agency action for the SDNY to review under the US Administrative Procedures Act.

The rise of cryptocurrencies and initial coin offerings (ICOs) undoubtedly shows that we live in interesting times that regularly present us with new and innovative products, markets, and opportunities. When the words “new” and “innovative” come to mind, the federal government is usually not part of the conversation. But the US Securities and Exchange Commission (SEC) under Chairman Jay Clayton appears more than willing to challenge that stereotype and to use the SEC’s regulatory and enforcement authority to take on the complex legal and other issues arising from innovative ICOs and other cryptocurrency products. Throughout these efforts, the SEC’s message has been clear and consistent: it will apply established federal securities laws principles and use its regulatory authority over ICOs and other cryptocurrency products expansively when appropriate, and it expects “gatekeepers” to aid in that effort.

Recent SEC Enforcement Actions: Munchee and Plexcorps

Two SEC enforcement actions over the last few weeks represent just the latest attempt by the SEC to get its message across. Most recently, it announced on December 11 a settled enforcement action that halted an ICO by Munchee Inc., a California business that created an iPhone app for reviewing restaurant meals. In a remarkably quick action for the SEC, it brought the case just weeks after Munchee commenced its ICO. The SEC charged Munchee with violating Sections 5(a) and 5(c) of the Securities Act of 1933 (the Securities Act) by conducting an unregistered offering of securities, and is notable because the SEC did not allege that Munchee made any misrepresentations in connection with the offering. Bringing such a standalone unregistered offering case is unusual for the SEC and represents its intention to bring these cases quickly, even in the absence of fraud.

Targeted bipartisan financial regulatory reform legislation announced last month has been approved by the Senate Banking Committee after a markup session on December 5. The “Economic Growth, Regulatory Relief and Consumer Protection Act” (S. 2155) is sponsored by Senate Banking Committee Chair Mike Crapo (R-ID) and has 19 co-sponsors (nine Democrats, nine Republicans, and one Independent who caucuses with the Democrats), and makes some significant changes to parts of the Dodd-Frank Act. The markup session resulted in technical and other less significant, mutually agreed-upon changes to the bill.

S. 2155 would make targeted changes to Dodd-Frank Act requirements that are applicable to banks, mortgage companies, and other providers of consumer financial services, and that are primarily intended to ease regulatory burdens on regional and community banking organizations. Some of the more notable changes include the following:

On November 16, the US Senate confirmed by a 54–43 vote the appointment of President Donald Trump’s nominee Joseph Otting as the new Comptroller of the Currency. Mr. Otting will assume his new duties upon being sworn in, which is expected to occur at or near the end of November. Reportedly, current acting Comptroller Keith Noreika will return to the private sector.

Mr. Otting, who at one time in his career was chief executive officer of OneWest Bank Group, which acquired most of the business of the failed IndyMac Bank and which was headed by Secretary of the Treasury Steven Mnuchin, is expected to support the administration’s efforts to move bank regulation and supervision in a more deregulatory direction. During his confirmation hearing, Mr. Otting drew strong criticism from Senate Democrats, mostly for his industry ties and the mortgage foreclosure activities of OneWest in the aftermath of the financial crisis. Mr. Otting’s prior public statements suggest that, as comptroller, he will focus on matters such as regulatory relief for community banks and regulatory and supervisory actions that would promote bank lending. He also has expressed support, however, for the overall bank regulatory framework, suggesting that he may adopt a more measured approach to changes in bank regulation and supervision.