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This past week, co-defendants in a class action related to the theft of cryptocurrency engaged in their own lawsuit over alleged security failures.  IRA Financial Trust, a retirement account provider offering crypto-assets, sued class action co-defendant Gemini Trust Company, LLC, a crypto-asset exchange owned by the Winklevoss twins, following a breach of IRA customer accounts.  IRA claims that Gemini failed to secure a “master key” to IRA’s accounts, and that hackers were able to exploit this alleged security flaw to steal tens of millions of dollars of cryptocurrency.  This lawsuit demonstrates the growing trend of cryptocurrency thefts resulting from cyber breaches, and ensuing litigation activity.…

Continue Reading Litigation Between FinTech Companies Follows Class Action Over Cryptocurrency Theft

A recent class action refiled in federal court against Shopify highlights a growing trend of lawsuits against companies related to the theft of cryptocurrency, particularly as a result of internal company threats. See Forsberg et al v. Shopify, Inc. et al, 1:22-cv-00436 (D. Del.). Despite not itself being a repository for or facilitating the…

On Monday, May 17, 2021, the Federal Deposit Insurance Corporation (“FDIC”) issued a request for information and comment (“RFI”) regarding the current and potential digital asset activities of insured depository institutions (“IDIs”).  The RFI is intended to inform the FDIC’s understanding of digital asset activities, including associated risk and compliance management issues.  Comments on the RFI are due by July 16, 2021.

The RFI categorizes digital asset activities into five use cases and solicits comments based on this framework.  The five use cases are (i) technology solutions, such as token-based systems and distributed ledgers; (ii) asset-based activities, such as investments and margin lending; (iii) liability-based activities, such as deposit services and reserves; (iv) custodial services; and (v) other activities, which could include market-making and decentralized financing.  The RFI requests comment on whether additional use cases should be included within this framework and which use cases have the greatest demand in the marketplace.  The RFI also requests that commenters provide more detailed information about the use cases that IDIs currently conduct or are considering conducting.…

Continue Reading FDIC Issues Request for Information on Digital Assets

Today, the OCC released an interpretive letter concluding that national banks and federal savings associations (together, “banks”) may permissibly provide cryptocurrency custody services for customers.  The letter, written by Chief Counsel Jonathan Gould, describes custody of cryptocurrency as a modern form of the traditional banking activity of providing safekeeping and custody services, which the agency has previously permitted banks to conduct through electronic means.  The letter also “reaffirms the OCC’s position that national banks may provide permissible banking services to any lawful business they choose, including cryptocurrency businesses, so long as they effectively manage the risks and comply with applicable law.”
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Continue Reading OCC Interpretation Paves Way for Banks to Custody Cryptocurrency

On February 12, 2020, the Board of the International Organization of Securities Commissions (“IOSCO”) released a report titled Issues, Risks and Regulatory Considerations Relating to Crypto-Asset Trading Platforms.  The report describes the risks associated with crypto-asset trading platforms (“CTPs”) and sets forth key considerations for regulators in addressing such risks.  IOSCO is an association of primary securities and futures regulators from over 100 different nations.  The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are ordinary and associate members, respectively, of IOSCO.

To prepare this report, IOSCO first issued a consultation report on May 28, 2019, which included a survey of the approaches member jurisdictions were currently undertaking or considering with respect to CTPs.  The final report draws upon the consultation report and includes a summary of the survey’s findings.

The report notes that many of the issues and risks associated with trading on CTPs are similar to the issues and risks associated with trading traditional securities or financial instruments on trading venues.  Consequently, IOSCO states that the three core objectives of securities regulation are relevant in the crypto-asset context.  The three core objectives are: (1) protection of investors; (2) ensuring that markets are fair, efficient and transparent; and (3) reduction of systemic risk.  Supporting these objectives are principles that foster efficient markets, including: effective price discovery, appropriate transparency, market integrity, and fair access.  The final report, to assist regulators in evaluating CTPs under their purview, sets forth the following list of key considerations:…

Continue Reading IOSCO Issues Report on Risks Relating to Crypto-Asset Trading Platforms

On Friday, the leaders of the Securities and Exchange Commission (“SEC”), Commodity Futures Trading Commission (“CFTC”), and Financial Crimes Enforcement Network (“FinCEN”) (collectively, the “Agencies”) issued a “Joint Statement on Activities Involving Digital Assets” (the “Joint Statement”).  The Joint Statement serves as a reminder that businesses engaged in activities involving digital assets – or, as they are sometimes called, virtual currencies or cryptocurrencies – should be attentive to their anti-money laundering (“AML”) obligations, including under the Bank Secrecy Act (“BSA”).

The Joint Statement notes that the BSA requires “financial institutions” to:  (1) establish and implement an effective AML program; and (2) comply with certain recordkeeping and reporting requirements, including the filing of suspicious activity reports (“SARs”).  These requirements apply not just to a financial institution’s traditional lines of businesses, but also to its businesses involving digital assets.…

Continue Reading Leaders of the SEC, CFTC, and FinCEN Issue Joint Statement Emphasizing AML Obligations for Digital Asset Activities

On July 23, the New York State Department of Financial Services (“DFS”) announced a new Research and Innovation Division.  The Division will assume responsibility for licensing and supervising virtual currencies.  It will also “assess efforts to use technology to address financial exclusion; identify and protect consumer data rights; and encourage innovations in the financial services…

Innovation in financial services continues to move at a rapid pace. The significant increase in the number of fintech companies in recent years has highlighted a burgeoning market with significant economic potential, and a commercial need to create efficiencies and modernize the provision of financial products and services. Federal and state financial services regulators remain…

New York has enacted the Digital Currency Study Bill, which will establish a digital currency task force and provide the governor and the state legislature information “on the effects of the widespread use of cryptocurrencies and other forms of digital currencies and their ancillary systems in the state.”  The task force will conduct an extensive review of the blockchain industry in New York (with an emphasis on cryptocurrency exchanges), while analyzing the laws and regulations of other states, the federal government, as well as foreign countries. In particular, the task force will provide legislative and regulatory recommendations to “increase transparency and security, enhance consumer protections, and to address the long term impact related to the use of cryptocurrency.”  The task force will submit their findings by December 15, 2020.

This legislation is the latest step by New York to understand and regulate cryptocurrency as well as the blockchain industry.  Clyde Vanel, the primary sponsor for this bill and the Chair of the Subcommittee on Internet and New Technologies of the New York Assembly, stated that “the task force of experts will help us strike the balance between having a robust blockchain industry and cryptocurrency economic environment while at the same time protecting New York investors and consumers.”

New York is not the first state to establish such a task force.  In September 2018, the California state legislature passed a bill that will establish a working group to discuss the potential applications of blockchain technology and how such technology will affect businesses, the government, and other social purpose organizations.  The bill also, for the first time in California, defines blockchain technology as “a mathematically secured, chronological, and decentralized ledger or database.”[1]…
Continue Reading New York State Passes Legislation to Form a Cryptocurrency Task Force

FinTech and blockchain technologies are rapidly developing. With the emergence of so many new ideas and technologies comes the need for action, to protect both current and future innovations. Given the pace at which technology continues to disrupt the industry, securing IP assets—especially patents—should be a primary consideration for companies in this space. As the…