In a comprehensive and informative webinar titled The CFTC’s Approach to Fintech, Davis and Polk attorneys, Annette Nazareth and Jai Massari, explored recent legal and regulatory developments involving cryptocurrencies products and market places and the varying approaches taken by the CFTC, the SEC, governments around the world, as well as responses from the various U.S. states. The webinar was presented as part of the FIA’s Law & Compliance Division’s webinar series.
Nazareth, who served as an SEC commissioner from 2005 to 2008, and Massari both agreed that the virtual currency space is currently dominated by a crazy quilt of regulators, and that it is hard to get them all on the same page. Massari further observed that the CFTC has been very active and forward thinking in the regulation of virtual currencies, and noted that the fundamental premise asserted by the CFTC is that Bitcoin and other similar virtual currencies are commodities under the Commodity Exchange Act. That approach implicates CFTC oversight, whether or not derivative instruments or futures contracts, are linked to a particular virtual currency.
Meanwhile, and as noted in the presentation, the jurisdictional picture has sometimes become murky as the SEC has treated some virtual currencies as securities, especially those that have been deemed to be initial coin offerings (ICOs). The SEC has also played the role of primary regulator with respect to exchange traded funds (ETFs) that seek to hold virtual currencies, including Bitcoin. Thus far, the SEC has refused to approve any such applications although it has recently articulated its questions and concerns to two industry trade groups on this score.
No SEC-CFTC turf war on the horizon over virtual currencies. Massari responded to a question from Wolters Kluwer asking whether a turf war was emerging (or occurring) between the SEC and CFTC over cryptocurrencies with an unambiguous "no." Massari indicated that the agencies are closely cooperating and cooperating with each other. Nazareth concurred with this assessment, and noted that the agencies have agreed to a common approach as well as demonstrating their joint efforts to stamp out fraud in the virtual currency arena. Nazareth also pointed to a recent joint op-ed in the Wall Street Journal where the CFTC and SEC chairmen again pledged their commitment and support to bring integrity and transparency to the virtual currency markets.
The disparate and fragmented treatment by the 50 states. Nazareth also noted that aside from dealing with various federal regulators, virtual currency industry participants must also contend with the wide ranging requirements from the various states as well. While the state of New York created its Bitlicense, which rolled out in 2015 for virtual currency money transmitters, the regulatory treatment by the states is literally "all over the map." Nazareth noted there may be some hope in the future for greater consistency across the states as the Uniform Law Commission has developed a uniform code for virtual currency money transmitters. However, as of yet, no state has adopted the model code.
A potpourri of approaches internationally. Nazareth further noted that globally, governments have taken many approaches with regard to virtual currencies, from very liberal and open to highly restrictive. In China for instance the government has imposed severe limitations with respect to virtual currency activities. ICOs are considered to be illegal, and financial institutions and third-party payment providers are banned from accepting, using, or selling virtual currencies. Additionally, some recent reports have emerged that the government may have banned virtual currency mining and may be seeking an orderly exit. Electricity use by miners, which is significant, is reportedly being restricted as well.
At the same time, the government of Japan has exercised a relatively light touch with respect to virtual currency activities. While licensing is required for virtual currency companies, Japan’s Financial Services Agency has granted several licenses for virtual currency exchanges and laws have been enacted authorizing the use of virtual currency as payment.
Meanwhile, Nazareth noted that the European Union has taken a more measured approach. The EU has issued warnings to the public about the risk of investing in virtual currencies, and has instructed industry participants that anti-money laundering and anti-terrorist financing rules will apply to virtual currencies.
In her concluding remarks, Nazareth noted that regulators, overall, will need to rethink their approaches to bring a greater degree of consistency to virtual currency regulatory landscape. Massari echoed these sentiments and observed there is much work to be done by the regulators to provide guidance to the decent virtual currency exchanges and other industry participants.
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