February 21, 2018
by Daniel M. Payne, Cameron S. Matheson

Blockchain use cases are evolving rapidly.  Less so regulation.  This disconnect can been in recently filed regulatory enforcement actions and private civil litigation.  We discuss some possible emerging trends below, but caution it is early days.  We are tracking individual blockchain-related cases and the emerging litigation trends and look forward to periodically updating our analysis.

Recent SEC no-fine settlements.  The SEC has filed and settled a number of enforcement actions related to unregistered ICOs and alleged issuer fraud.  In 2014, these settlements included monetary penalties (see Voorhees and BTC Trading).  Two more recent settlements have not.  See BitCoin Investment Trust (July 2016) and Munchee (settled in December 2017).  Instead, the SEC imposed non-monetary penalties, including disgorgement and cease-and-desist orders.

That apparent pivot is notable, not only because the SEC tends to avoid no-fine settlements, but also because the SEC sought fines initially but not more recently.  It could be that the merits of the cases drove the different outcomes.  It also could be that the SEC views its no-fine settlements as a way of offering guidance through enforcement in an evolving industry.  We will monitor closely whether and how long the SEC decides to continue accepting no-fine settlements.  

On a related note, the SEC is seeking civil monetary penalties against companies that did not agree to settle on filing.  See PlexCorps and AriseBank.

SEC vs. CFTC.  Some have suggested the SEC and CFTC are engaged in a turf war over cryptocurrencies.  But any ambiguity in jurisdiction has not impeded their ability or willingness to enforce their perceived mandates.  The SEC has brought several actions treating ICOs as securities and alleging that issuers failed to register their ICOs as security offerings (see, e.g., RECoin).  The CFTC has treated cryptocurrencies as commodities and brought actions alleging fraud in connection with the sale or acceptance of cryptocurrencies (see, e.g., Coin Drop Markets).  We will continue to monitor how the two play together in the regulatory and enforcement sandbox.

Old sheriffs in a new town.  Although the underlying products have evolved, the SEC and CFTC generally have relied on existing rules and regulations to police the Blockchain space far (acknowledging that there has been some “regulation by enforcement”).  In issuing the DAO Report, the SEC affirmed the centrality of the Howey test (from 1946) in determining whether a product is a security.  The SEC also has relied on SEC Rule 15c2-11 to suspend trading in the stock of issuers that have allegedly defrauded investors by inaccurately claiming to have blockchain-related business.  Meanwhile, the CFTC issued a report in 2017 applying the definition of a commodity found in the 1936 Commodity Exchange Act to virtual currencies.

Regulators are not the only sheriffs in town.  It comes as no surprise to us that the plaintiffs’ bar has brought private civil actions close on the heels of the regulators, basing recently filed complaints on the alleged failure of some issuers to register their ICOs.  In some instances, the issuers’ conduct might reflect regulatory uncertainty, not intentional fraud.  In other instances, however, bad actors might be preying on a social-media fueled investing public all too eager to cash in on the “crypto craze” and fearing being left out of this generation’s supposed dot.com moment.  Recently filed actions involve allegations of stock manipulation, Ponzi schemes, and outright theft.  We will keep a close eye on which theories of liability stick and which slide.

About Blockchain Law Center

Blockchain technology utilizes a distributed digital ledger to record and track information, and can be leveraged to gain transparency and certainty in transactions ranging from cryptocurrency to supply chain tracking.  This blog provides information on the legal developments surrounding implementation of blockchain technology, with an initial focus on the financial services sector.