United States: Virtual Currency Regulatory Developments

In recent months, several virtual currency regulatory developments have taken place in the United States:

  • SEC Corporation Finance Director provides analysis in assessing whether digital assets constitute securities

    • On 14 June 2018, the Director of the SEC's Division of Corporation Finance, William Hinman, discussed the analysis applied by the SEC Staff in assessing whether a digital asset constitutes a security. The assessment of the status of a given asset as a security will rely on two sets of non-exhaustive factors. Hinman stated that the primary issue is "whether a third party . . . drives the expectation of a return," and then, whether the digital asset functions "more like a consumer item and less like a security."
    • The list of factors to consider in assessing whether a digital asset is offered as an investment contract and is thus a security includes:

      • Is there a person or group that has sponsored or promoted the creation and sale of the digital asset, the efforts of whom play a significant role in the development and maintenance of the asset and its potential increase in value?
      • Has this person or group retained a stake or other interest in the digital asset such that it would be motivated to expend efforts to cause an increase in value in the digital asset? Would purchasers reasonably believe such efforts will be undertaken and may result in a return on their investment in the digital asset?
      • Are purchasers "investing," that is seeking a return? In that regard, is the instrument marketed and sold to the general public instead of to potential users of the network for a price that reasonably correlates with the market value of the good or service in the network?
    • The list of contractual or technical ways to structure digital assets so that they function more like a consumer item and less like a security includes:

      • Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation?
      • Are independent actors setting the price or is the promoter supporting the secondary market for the asset or otherwise influencing trading?
      • Is it clear that the primary motivation for purchasing the digital asset is for personal use or consumption, as compared to investment? Have purchasers made representations as to their consumptive, as opposed to their investment, intent? Are the tokens available in increments that correlate with a consumptive versus investment intent?
    • The SEC will continue to focus on the economic substance of transactions in determining if the securities laws should apply. In particular, the SEC states that the securities laws generally will apply where transactions involve raising capital from investors to fund a venture.
    • Finally, Hinman further confirmed that current offers and sales of ether and bitcoin are not securities transactions.
  • Federal court upholds that virtual currencies are commodities

    • On 6 March 2018, the United States District Court for the Eastern District of New York confirmed that virtual currencies are commodities within the anti-fraud jurisdiction of the Commodity Futures Trading Commission (the CFTC). The order, which came in the form of a preliminary injunction, follows the CFTC's 18 January 2018 civil enforcement action against Patrick K. McDonnell and his company CabbageTech, doing business as Coin Drop Markets (CDM), alleging that McDonnell had induced customers to send money and virtual currencies to CDM in exchange for virtual currency trading advice and purchasing on customers' behalf. The CFTC also alleged that McDonnell and CDM misappropriated investors' funds.
    • The Court considered whether virtual currencies are commodities under the Commodity Exchange Act (CEA) and whether the CFTC has jurisdiction over commodity fraud that is not tied to the sale of derivatives products. The court held that virtual currencies "fall well-within the common definition of 'commodity,'" and thus the CFTC maintains the jurisdictional authority to stop spot trade virtual currency fraud under the CEA. Further, the order clarified that the CFTC may exercise jurisdiction over spot transactions in virtual currencies when there is potential fraud, even if the fraud is not in conjunction with derivatives based on virtual currencies.
  • Virtual commodity self-regulatory organization proposed

    • On 13 March 2018, Gemini, a virtual currency exchange, released a proposal to create the first self-regulatory organization for U.S. virtual commodity exchanges. The so-called Virtual Commodity Association (VCA), as envisioned, would be a non-profit, independent regulatory organization that would operate to foster responsible virtual commodity markets by requiring members to implement specified sound practices and supervising members' implementation of such practices. The VCA would also encourage greater co- operation with relevant regulators in an effort to assist with the maturation of the virtual commodity industry.
    • The proposal noted that the VCA would not operate any markets, be a trade association or provide regulatory programs for security tokens or security token platforms. Initially, the VCA would be open to trading facilities that offer users the ability to transact in the virtual commodity spot markets, but may offer membership to additional categories of market participants in the future.

William Hinman's speech is available at:

Our related client publication is available at:

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