As another initiative in Orbs’ effort to provide information to the blockchain industry as a whole, we will be providing a periodic roundup of regulatory and compliance updates that are relevant to the blockchain industry.

USA

SEC Regulation

Regulators from the Securities Exchange Commission (“SEC”) and the Commodities Futures Trading Committee met on May 7, and they were reportedly planning to discuss the status of Ethereum and Ripple and whether these tokens are “securities,” among other topics. Any ruling on this issue from the SEC in either direction will obviously be crucial for the industry, but there has not been any concrete information regarding what may have been discussed at the meetings, if anything.

https://www.bloomberg.com/news/articles/2018-05-07/dancing-badgers-draw-more-attention-than-sec-at-ethereum-meeting

State Law Developments

In a setback for mainstream adoption of cryptocurrency, Arizona’s legislature removed language from a tax reform bill that would have allowed individuals to pay their state taxes with digital currency. Instead, the softened version of the bill instructs the state’s department of revenue to conduct a study of alternative forms of payment.

https://cointelegraph.com/news/us-arizonas-cryptocurrency-tax-bill-sees-rollback-on-crypto-acceptance

Litigation to Watch

Investors in the XRP token issued by Ripple Labs sued Ripple Labs, its CEO and other participants for selling them unregistered securities and making misleading statements while doing so. This lawsuit gives a court the chance to rule on whether Ripple is a “security” or not. One smaller issue to note is the plaintiffs’ use of the fact that Ripple Labs sought to stabilize the market by placing many its reserve XRP tokens in an escrow wallet that automatically releases XRP tokens over a period of time. The plaintiffs argue that this action was evidence that XRP was a security because Ripple Labs made statements indicating that this action was intended to improve the XRP market, leading investors to expect profits from their investments. It will be interesting to see which strategies Ripple Labs uses to defend against this charge — there would appear to be a strong argument that by putting the XRP in a wallet that is not under its control, Ripple Labs gave up a significant amount of its power to control the ongoing market supply of XRP. Under this argument, this action would count against XRP being a security, because the supply is no longer under the discretionary control of the original issuer. Whether Ripple goes this way and how the courts react to this issue could have an impact on how other ICO issuers handle their reserve tokens.

https://www.bloomberg.com/news/articles/2018-05-04/ripple-hit-with-class-action-suit-over-never-ending-ico

A group of bitcoin (BTC) advocates organized a crowdfunding campaign to fund a class action lawsuit to sue the website bitcoin.com for blurring the distinction between BTC and bitcoin cash (BCH). A lawsuit between BTC and BCH over the use of the term “bitcoin” could have raised interesting questions regarding the status of forked blockchains running the same protocol or based on the same white paper. Alas, the crowdfunding effort fizzled out within a week.

https://cointelegraph.com/news/pro-btc-movement-scraps-lawsuit-against-vers-bitcoincom-citing-lack-of-funds

In another case involving cryptocurrency names, Alibabacoin (a Dubai-based token) successfully won an early round in the lawsuit brought by Alibaba Group (the Chinese e-commerce company), alleging that the token had misleadingly stolen the company’s name. Alibabacoin argued that their name comes from the Middle Eastern folklore character and is free for general use, and this argument was sufficient that the court will not block them from using it while the suit goes forward.

https://www.forbesmiddleeast.com/en/u-s-judge-rules-alibaba-cannot-block-dubai-based-cryptocurrency-developers-from-using-similar-name/

European Union

A group of Europe’s largest digital coin brokers such as eToro Europe and Bitpanda have asked regulators to issue rules that would clarify their compliance requirements. The exchanges pointed to Japanese regulators as a positive example of how such regulation could be accomplished.

https://www.bloomberg.com/news/articles/2018-05-07/brokers-push-for-crypto-transparency-before-rules-get-mandated

UK

On May 1, the UK parliament held a hearing regarding blockchain technology. Parliament members appeared to take a skeptical approach to the industry and subjected industry representatives (particularly from Ripple) to aggressive questioning. At the hearing, some non-advocates of blockchain made some colorful statements about the industry’s shortcomings.

https://www.coindesk.com/ripple-put-defense-uk-parliament-blockchain-hearing/

Belarus

The government of Belarus imposed a decree under which crypto exchanges operating in the country’s official high-tech park must provide information on their clients to the government.

https://cointelegraph.com/news/belarus-some-crypto-exchanges-will-be-required-to-hand-over-customer-data-report-says

Norway

Bitmynt AS, a cryptocurrency exchange, lost a case against its bank for closing its account. The bank argued that Bitmynt had insufficient anti-money laundering and counter-terrorism procedures. The court ruled that transactions involving bitcoin clearly increase the risk of criminal activities, and it is legitimate for banks to deny customers based on that risk.

https://cointelegraph.com/news/norwegian-crypto-exchange-loses-case-against-nordea-bank-for-closing-its-account

Japan

Japan’s Financial Services Authority has imposed new regulations on registered crypto exchanges that will require them to monitor customer accounts daily, store crypto holdings on offline systems, impose stricter KYC checks and use multiple-password verification for large transactions. The new regulations also effectively ban certain anonymity-focused coins like Dash and Monero.

https://cointelegraph.com/news/japans-financial-watchdog-sets-out-new-requirements-for-crypto-exchanges

South Korea

A group of lawmakers introduced a bill to legalize some new ICOs. This is the first challenge in parliament to the government’s ban on ICOs, which it imposed late last year. The bill would only allow ICOs by public organizations and research centers and would subject these offerings to strict regulation.

http://www.koreatimes.co.kr/www/tech/2018/05/133_248349.html

Australia

Australia’s securities regulator announced that is launching an inquiry into ICO fraud, including issuing inquiries to issuers. As a result of these inquiries, some ICOs have halted or altered the structure of their offerings

This update has been prepared by the Orbs Ltd. legal team for informational purposes only and does not constitute advertising or solicitation and should not be used or taken as legal advice. Those seeking legal advice should contact legal counsel licensed in their jurisdiction. Transmission of this information is not intended to create, and receipt does not constitute, an attorney-client relationship. Confidential information should not be sent to Orbs Ltd. in response to this update.