Practitioners, academics, and entrepreneurs joined SEC regulators at the 2019 FinTech Forum hosted by the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) on May 31 in Washington, DC. Panelists discussed a range of considerations on digital assets, including capital formation, trading and markets, investment management, and innovations in distributed ledger technology (DLT). In keeping with a positive trend that has emerged among the federal financial regulatory agencies, the forum demonstrated the SEC’s desire for industry engagement and the depth of its knowledge in the emerging technology.

The Financial Crimes Enforcement Network (FinCEN) recently issued guidance consolidating current FinCEN regulations, rulings, and guidance about cryptocurrencies and money services businesses (MSBs) under the Bank Secrecy Act (BSA). Along with the May 9 guidance, FinCEN issued an advisory to assist financial institutions in identifying and reporting suspicious activity or criminal use of cryptocurrencies.

Two years ago, we wondered in our blog post whether the staff of the US Securities and Exchange Commission (SEC) would have to further extend no-action relief to permit a broker-dealer to rely on an SEC registered investment adviser (RIA) to perform the broker-dealer’s customer identification program (CIP) requirements. And . . . here we are.

On December 12, the SEC staff issued the latest in a series of letters to the Securities Industry and Financial Markets Association (SIFMA). The letters conditionally extend no-action relief to allow a broker-dealer to rely on RIAs to perform some or all of the broker-dealer’s CIP requirements as well as the broker-dealer’s obligations under beneficial ownership requirements that went into full effect in May 2018.

The staff of the Securities and Exchange Commission’s (SEC) Division of Trading and Markets (Staff) issued a no-action letter on October 29 to the Financial Industry Regulatory Authority (FINRA), which, in effect extends the effective date of recent changes to FOCUS reporting by registered broker-dealers. In August 2018, the SEC adopted amendments regarding, among other things, broker-dealer reporting with respect to reporting of extraordinary gains, the cumulative effect of changes in accounting principles, and comprehensive income reported on broker-dealer annual reports (i.e., Rule 17a-5). The amendments are scheduled to become effective for all filings made on and after November 5, 2018.

On October 11, 2018, the Securities and Exchange Commission (SEC) will have an open meeting to consider whether to reopen the comment period and request additional comments (including potential modifications to proposed rule language) regarding the following:

(1) Capital, margin, and segregation requirements for security-based swap (SBS) dealers and major SBS participants, and amendments to Rule 15c3-1 for broker-dealers that were proposed in October 2012 (Financial Responsibility Proposal)

(2) Amendments proposed in May 2013 that would establish the cross-border treatment of SBS capital, margin, and segregation requirements (Cross-Border Proposal)

(3) An amendment proposed in April 2014 that would establish an additional capital requirement for SBS dealers that do not have a prudential regulator (Prudential Regulator Proposal)

It’s here. The Federal Reserve Board and the Federal Deposit Insurance Corporation have released a proposed rule (Proposed Rule) that would make important modifications to Section 13 of the Bank Holding Company Act, commonly known as “the Volcker Rule.” The Proposed Rule is intended to address the “complexity” of the Volcker Rule, which has created “compliance uncertainty” and, in the words of Fed Chairman Jerome Powell, to “allow firms to conduct appropriate activities without undue burden and without sacrificing safety and soundness.”

The remaining three agencies responsible for implementation of the Volcker Rule (Office of the Comptroller of Currency, the US Securities and Exchange Commission, and the Commodity Futures Trading Commission) are expected to release their proposals shortly. Other than agency-specific variations, the proposal released by each of the five agencies is expected to be the same. The comment period for the Proposed Rule will be 60 days from the date of publication of the proposal in the Federal Register.

Few topics in the financial news have gotten more attention recently than the rise of cryptocurrency and initial coin offerings (ICOs), which allow startups to raise money from users in exchange for digital currency. In 2017, ICOs raised more than $3 billion in funding, surpassing early-stage venture capital funding for internet companies, and solidifying ICOs as a financing strategy among tech entrepreneurs.

But with surging popularity comes increasing attention and scrutiny from regulators, most notably the US Securities and Exchange Commission (SEC or Commission). Previously, the SEC had adopted a more cautionary approach, advising potential investors to perform due diligence, and issuing trading suspensions for certain issuers that made questionable claims regarding ICO investments. As we have previously reported, however, the SEC has recently taken a more aggressive stance toward ICOs.

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.”

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.