Blockchain Week in Review: October 2020 | Perkins Coie

Weekly Focus:

• Kik & SEC Agree to $5M Judgment
• CFTC Releases Advisory on Futures Commission Merchants
• New York “Techsprint” Focuses on Virtual Currency Companies
• Powell Considers U.S. Digital Dollar at IMF Virtual Panel
• Ripple Considers Leaving U.S. over Lack of Regulatory Clarity
• New Jersey “Digital Asset and Blockchain Technology Act” Moves Forward in State Legislature
• IMF Issues New Report on CBDCs and GSCs
• The Bahamas Rolls Out First CBDC, the “Sand Dollar”
• Bank of Spain Releases CBDC Research Plan

U.S. Developments

Kik & SEC Agree to $5M Judgment

On October 20, 2020, Canadian messaging company Kik Interactive Inc. (Kik) and the U.S. Securities and Exchange Commission (SEC) agreed to resolve an ongoing enforcement case related to Kik’s digital coin offering.  The resolution came in the form of a joint proposed judgment filed before Judge Alvin K. Hellerstein of the U.S. District Court for the Southern District of New York.  Judge Hellerstein signed off on the judgment in an order filed on October 21.  The judgment comes on the heels of an earlier judgment handed down by Judge Hellerstein at the end of September that ruled Kik’s 2017 sale of $100 million worth of its own cryptocurrency, Kin, “constituted an unregistered offering of securities that did not qualify for exemption.”

Back in March, Kik argued in its summary judgment brief that the Howey test was not met in this case because (a) there was no common enterprise between the purchasers and Kik, (b) Kik did not owe any ongoing contractual obligations to the token (Kin) purchasers, (c) the purchasers assumed full control of the Kin, (d) there was no expectation of profits from the managerial efforts of others, as Kik promoted use and consumption of the token as a “medium of exchange,” and (e) the initial coin offering was conducted in reliance on Rule 506(c) of Regulation D.  The SEC disagreed and argued in its summary judgment brief that, among other things, Kik did not comply with Rule 506(c) and engaged in an unlawful public distribution of securities.  Judge Hellerstein ultimately ruled in the SEC’s favor, setting the stage for the joint Kik+SEC proposed judgment.

This judgment brings an end to the three-year litigation between Kik and the SEC.

To read our prior coverage of the Kik lawsuit in 2020, see Week in Review posts for October 2, March 27, and January 24; for 2019 coverage, see September 27, August 9, June 7, and January 28.

CFTC Releases Advisory on Futures Commission Merchants

On October 21, 2020, the Division of Swap Dealer and Intermediary Oversight (DSIO) of the Commodity Futures Trading Commission (CFTC) issued an Advisory to futures commission merchants (FCMs).  FCMs are entities involved in soliciting and accepting buy or sell orders for futures, options on futures, or swaps, and they accept money or other assets from customers to support such orders.  The Advisory addresses virtual currency specifically as one of the potential “other assets” held by FCMs, and provides guidance to the FCMs regarding the holding of virtual currency in segregated accounts, such as how to hold and report deposited virtual currency from customers in connection with futures contracts or swaps.

The Advisory sets forth 12 specific points that FCMs “must adhere to . . . when holding virtual currency as customer funds.” The points touch on a number of areas, mainly related to maintaining risk management programs concerning the acceptance of virtual currencies, virtual currency custodians, and ensuring segregation of customer funds.  For example, the Advisory reminds FCMs that: “Virtual currency held as customer funds by an FCM must be deposited only with a bank, trust company, or another FCM, or with a clearing organization that clears virtual currency futures, options on futures, or cleared swap contracts.”

The Advisory concludes that “virtual currencies present a degree of custodian risk that is beyond what is currently present with depositories, such as banks and trust companies.”  In reaching this conclusion, the Advisory relies on provisions of the Commodity Exchange Act (specifically, sections 4d(a)(2) and 4d(f)), the Bankruptcy Code, and CFTC Regulation 1.11.  This Advisory is limited to U.S. markets and does not address virtual currency held by FCMs on behalf of customers trading futures or options on foreign exchanges, nor does it address virtual currency held by FCMs on their own behalf, such as in a proprietary account.

“At the CFTC, one of our core values is to provide clarity to market participants,” said DSIO Director Joshua B. Sterling.  “As Chairman Tarbert has stated, the CFTC is committed to fostering responsible fintech innovation and improving the regulatory…