U.S. Financial Regulators Clarify Oversight of AML/CFT Obligations in Connection With Digital Asset Activities
On October 11, 2019, the leaders of the U.S. Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN) and the U.S. Securities and Exchange Commission (SEC) (together, the Agencies) issued a joint statement highlighting the application of anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA) to persons engaged in activities involving digital assets (Joint Statement). On the same day, the SEC filed an emergency action to halt a digital asset distribution, citing BSA/AML concerns.1
Digital Asset Securities: Joint SEC and FINRA Statement Aimed at Broker-Dealer Custody
On July 8, 2019, the long-awaited statement (Statement) on custody of digital asset securities was released jointly by the staffs (Staffs) of the U.S. Securities and Exchange Commission (SEC) Division of Trading and Markets and the Financial Industry Regulatory Authority (FINRA).1 The Statement is based on industry discussions with the Staffs and highlights the following:
- Certain noncustodial broker-dealer models may have a path forward for FINRA approval.
- The Staffs have concerns relating to broker-dealer custody of digital asset securities that remain unanswered, but certain good control locations (i.e., banks, issuers and transfer agents) may provide a viable custody solution under the Customer Protection Rule.2
- Market participants should consider other broker-dealer requirements, including books and records and financial reporting rules.
SEC FinHub’s Digital Asset Framework: A Guide for Issuers and Secondary Trading Markets
On April 3, the U.S. Securities and Exchange Commission (SEC)’s Strategic Hub for Innovation and Financial Technology (FinHub or Staff) released its much-anticipated guidance, the Framework for “Investment Contract” Analysis of Digital Assets (Framework), regarding its views on factors to consider in applying the Howey test to digital assets. In conjunction with the Framework, the SEC’s Division of Corporation Finance published its first no-action letter in connection with the sale of digital assets, providing relief to TurnKey Jet, Inc., for its proposed token sale.
The Security Token Story: SEC Reveals Act III — Registered Digital Assets — and Reminds Market Actors of Acts I (Investment Vehicles) & II (Secondary Trading)
On November 16, the U.S. Securities and Exchange Commission (SEC) announced its first enforcement actions against issuers of initial coin offerings solely for failing to register the offerings in violation of the federal securities laws since Munchee (i.e., without allegations of fraud). Unlike the Munchee order, these settlements impose penalties against the issuers and require certain undertakings, such as registering the digital assets as securities under the Exchange Act. The same day, the SEC’s Divisions of Corporation Finance, Investment Management and Trading and Markets released a joint statement reiterating the SEC’s lessons from recent enforcement actions related to digital assets. (more…)
One-Two-Three Punch: SEC and FINRA Announce Actions Against Unregistered Broker, Digital Asset Manager and FINRA Registered Person
On September 11, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) separately announced three “first of their kind” enforcement actions against participants in the digital asset (or “token”) market:
- In the Matter of TokenLot LLC. The SEC took action against a token sale website for operating as an unregistered broker-dealer in violation of the federal securities laws.
- In the Matter of Crypto Asset Management, LP. The SEC entered an order against a digital asset hedge fund manager for failing to register its fund as an investment company and offering and selling its fund’s securities in an unregistered offering.
- Department of Enforcement vs. Timothy Tilton Ayre. In its first disciplinary action involving digital assets, FINRA filed a complaint alleging that a registered person of a member firm violated federal securities laws and FINRA rules in its offering of a blockchain token as an unregistered security.
The Sheriffs are in Town: Recent Developments in Initial Coin Offerings (ICO) Enforcement and Investor Education
In the months following director William Hinman’s noteworthy speech on whether and when a digital asset is subject to securities laws, U.S. regulators have continued their stern warnings regarding the importance of compliance with the securities laws. This post highlights three important regulatory updates:
- On August 14, 2018, the Securities and Exchange Commission (SEC or Commission) issued an administrative order, In the Matter of Tomahawk Exploration LLC and David Thompson Laurance, taking action against an unregistered and fraudulent initial coin offering (ICO).
- On August 28, the North American Securities Administrators Association (NASAA) released an update on the progress of its ongoing Operation Cryptosweep.
- The Financial Industry Regulatory Authority (FINRA) issued two investor alerts, on July 27 and August 16, regarding blockchain tokens and ICOs.