To remain competitive, companies find themselves increasing their efforts to digitally transform their businesses by developing new offerings based on emerging technologies and integrating these technologies into existing product and service offerings.
This is our final monthly bulletin for 2020, aiming to help companies identify important and significant legal developments governing the use and acceptance of blockchain technology, smart contracts and digital assets.
While the use cases for blockchain technology are vast, from copyright protection to voting, most of the current adoption is in the financial services section and the focus of this bulletin will be primarily on the use of blockchain and or smart contracts in that sector. With respect to digital assets, we have organized our approach to this topic by discussing it in terms of traditional asset type or function (although the types and functions may overlap), that is, digital assets as:
- Virtual currencies
- Deposits, accounts, intangibles
- Negotiable instruments
- Electronic chattel paper
- Digitized assets
Digital assets can themselves be assets or instead can reflect the ownership of an underlying asset. For example, electronic records that are the equivalents of negotiable instruments and electronic chattel paper would be digital assets, as would an electronic recording of a security interest in the underlying asset, such as recording title to real or personal property and the use of tokens to represent revenue streams from otherwise illiquid assets such as patents and commercial real estate (sometimes referred to as a “tokenized” or digitized asset).
In addition to reporting on the law and regulation governing blockchain, smart contracts and digital assets, this bulletin will discuss the legal developments supporting the infrastructure and ecosystems that enable the use and acceptance of these new technologies.
Each issue will feature in-depth insight on a timely and important current topic. In this issue, we review the crypto license bill introduced in the New Jersey state senate.
For further information on the status of Blockchain regulation, see “Blockchain Regulation: Speedbumps, Roadblocks and Superhighways,” a September 3 CoinTelegraph article by our partners Margo Tank and Michael Fluhr.
To build on our recent increasing recognition in the fintech and blockchain space, the DLA Piper IPT and Real Estate teams joined up to contribute to the inaugural edition of the Chambers and Partners Blockchain Guide 2020. Led by partner Scott Thiel and supported by Jonathan Gill and Kenny Tam, the team wrote the Hong Kong and China “Law and Practice” sections of the guide detailing the blockchain market and key legal and regulatory issues to note in each jurisdiction.
For related information regarding digital transformation, please see our monthly bulletin, eSignature and ePayment News and Trends.
DLA Piper launches high-value asset token platform
On November 5, DLA announced the launch of TOKO, a blockchain-based token platform for buying and selling high-value assets, developed by DLA in collaboration with Aldersgate Digital Ledger Solutions. TOKO launched as a proof-of-concept by tokenizing a piece of fine artwork commissioned and purchased by a group of DLA Hong Kong partners. Read more.
New Jersey Senate considers crypto license bill
The New Jersey Senate has introduced bill S3132, known as the Digital Asset and Blockchain Technology Act, pending a referral to the New Jersey State Senate Commerce Committee. A2891, an identical bill, was previously introduced in the Assembly and is currently reported and referred to the Assembly Appropriations Committee. The Bill seeks to regulate digital asset business activity through a mandatory licensing framework under the oversight of the New Jersey Department of Banking and Insurance, similar to the BitLicense regulatory framework in New York State.
Pursuant to the Bill, a person may not engage in a digital asset business activity with or on behalf of a New Jersey resident unless the person is licensed by the Department, has filed a pending license with the Department, or is licensed to conduct digital asset business activity by a state with which New Jersey has a reciprocity agreement.
SEC issues no-action letter on digital assets. On November 17, the Division of Corporation Finance (CorpFin) of the US Securities and Exchange Commission (SEC) issued a no-action letter addressing digital assets, specifically an ERC20 token known as VCOIN, to be used in an online software platform. The platform currently uses digital credits to enable platform users to “interact in virtual venues, play games … and offer and obtain virtual goods and services.” The credits cannot be transferred or used off the platform. The platform developer requested no-action relief to use VCOIN instead of the credits, which VCOIN would have real value and can be used on and off the platform. CorpFin particularly noted and relied upon the following factors in granting no-action relief:
- The developer will not use proceeds from the sale of VCOIN to finance the upgrade from credits to VCOIN, which upgrade will be fully functional and operational immediately upon its launch and before any VCOIN is sold.
- VCOIN will be immediately usable for its intended purpose at the time it is sold.
- The developer will impose limits on VCOIN purchases, conversions, and transfers.
- VCOIN holders will be subject to KYC/AML checks when they establish open wallets and on an ongoing basis.
- VCOIN will be made continuously available in unlimited quantities and at a fixed price; and the developer will generate enough VCOIN to maintain the fixed price.
- The developer will not promote or support listing or trading of VCOIN on any third-party trading platform.
- The developer will market and sell VCOIN to users solely for consumptive use as a means of exchanging value on, and in connection with, the platform.
- Users who purchase VCOIN from the developer will be required to affirm that they are acquiring VCOIN for consumptive use and not for speculative purposes.
FinCEN publishes proposed rule seeking to impose new recordkeeping and reporting requirements related to CVC. On December 18, the Financial Crimes Enforcement Network (FinCEN) released a notice of proposed rulemaking (NPRM) that seeks public comment on its proposal that banks and money service businesses submit reports, keep records, and verify the identity of customers in transactions involving convertible digital currency (CVC) or digital assets with legal tender status (LTDA) held in unhosted wallets or in wallets hosted in specified jurisdictions. Specifically, FinCEN is seeking to add (a) reporting requirements when CVC and LTDA transactions exceed $10,000 and (b) recordkeeping requirements when a customer’s CVC or LTDA transactions include a counterparty using an unhosted wallet or wallet in specific jurisdictions and the transaction exceeds $3,000. FinCEN will publish the rule in the Federal Register on December 23, and comments are due by January 4, 2021.
SEC FinHub to be stand-alone office. On December 3, the SEC announced that the SEC’s Strategic Hub for Innovation and Financial Technology, commonly referred to as FinHub, will become a stand-alone office. Valerie A. Szczepanik will continue to lead FinHub as its first director and will report directly to the SEC chair. FinHub was created in 2018 and housed within the Division of Corporation Finance.
Crypto firms seek to become banks. On December 8, BitPay and Paxos filed applications with the Office of the Comptroller of the Currency (OCC) to become federally regulated US banks. BitPay, a bitcoin payments company, submitted an application for the BitPay National Trust Bank, to be headquartered in Georgia. Paxos, a cryptocurrency services firm and stablecoin issuer, submitted an application for the Paxos National Trust. Each application will undergo a 30-day comment period.
Coinbase takes step for a public offering. On December 17, Coinbase Global, Inc., a cryptocurrency exchange, announced it confidentially filed a draft S-1 registration statement with the SEC. The Form S-1 is expected to become effective after the SEC completes its review process, subject to market and other conditions. The filing is not yet publicly available.