Blockchain Week in Review - June 2020 | Perkins Coie

Weekly Focus:

  • The OCC Announces New Acting Comptroller and Includes FinTech Charters Among Focuses
  • The OCC Requests Comments to Update Outdated Regulatory Requirements and New Digital Technology and Innovation
  • SEC Commissioner Hester Peirce Nominated for Second Term
  • SEC Freezes Assets in a Multi-Level Marketing Cryptocurrency Scheme
  • Financial Services Committee Discusses Digital Dollar for Stimulus Payments
  • Russia Continues to Embrace Blockchain, Moscow Citizens to Cast Blockchain Secured E-Votes on Constitutional Amendments and Russian Supreme Court Uses Blockchain Technology to Vote for First Time
  • Ontario Securities Commission Blames Fraud Following Investigation of QuadrigaCX Downfall

The OCC Announces New Acting Comptroller and Includes FinTech Charters Among Focuses

On May 29, 2020, the Office of the Comptroller of Currency (OCC), the primary federal regulator of national banks, announced Brian P. Brooks as the new acting comptroller. In one of his first statements as acting comptroller, Mr. Brooks stated that “specifying what the parameters of the ‘fintech charter’ and other special purpose charters should be” is a vital component in maintaining a federal banking system that is responsive to the needs of Americans. Among other things, Mr. Brooks’ statements indicate that he plans continue to expand OCC efforts to enable fintech companies to become federally regulated financial institutions.

The OCC authority includes the ability to charter special purpose national banks. In July 2018, the OCC began accepting applications for fintech charters, designed to assist fintech companies in becoming federally regulated financial institutions. The OCC fintech charters were promptly challenged by the New York Department of Financial Services (NYDFS) as an impermissible expansion of OCC authority over state rights. Following a U.S. District Court for the Southern District of New York decision in favor of the NYDFS, the OCC appealed to the U.S. Court of Appeals for the Second Circuit. The OCC appeal in defense of its authority to issue special-purpose charters for fintech companies is currently awaiting a decision in the Second Circuit.

The OCC intends to meet challenges facing banks both today and in the long run by focusing on the following: (1) building responsible innovation to help the banking system keep up with changes in the way American consumers and businesses manage their finances; (2) enhancing the strength of the federal banking system by enhancing the scope and relevance of the national charter; (3) ensuring banks serve their entire community through fair access to credit, capital, and financial services; and (4) providing OCC employees engaging, rewarding, and challenging career opportunities.

Please click here for Mr. Brooks’ full statement.

The OCC Requests Comments to Update Outdated Regulatory Requirements and New Digital Technology and Innovation

On June 4, 2020, the OCC asked for public comments on a Notice of Proposed Rulemaking (NPR) to update or eliminate outdated regulatory requirements that no longer reflect the modern financial system. The agency also published an Advance Notice of Proposed Rulemaking (ANPR) on digital banking technologies and activities. The NPR seeks to make changes to 12 CFR 7, which include:

  • incorporating and streamlining OCC interpretations addressing permissible derivatives activities for national banks;
  • expanding the ability of national banks to choose corporate governance provisions under state law; and
  • codifying OCC interpretations of the National Bank Act relating to capital stock issuances and repurchases.

(excerpted from OCC News Release 2020-76)

Additionally, the ANPR seeks comments on 12 CFR 7, subpart E, and 12 CFR 155, and other banking issues related to digital technology and innovations. Issues the OCC asks for comment include:

  • whether the legal standards in 12 CFR 7, subpart E, and 12 CFR 155 are sufficiently flexible and clear in light of the technological advances that have transformed the financial industry during the last two decades;
  • whether these legal standards create unnecessary hurdles or burdens to innovation for banks;
  • whether there are digital banking activities or issues that are not covered by these rules that the OCC should address (e.g., digital finders’ activities, certain software, and correspondent services);
  • what activities related to cryptocurrencies or cryptoassets are financial services companies or bank customers engaged in and what are the barriers or obstacles to further adoption of crypto-related activities in the banking industry;
  • how is distributed ledger technology used or potentially used in activities related to banking; and
  • how are artificial intelligence and machine learning techniques used or potentially used in activities related to banking.

(excerpted from OCC News Release 2020-76)

The comment periods for the NPR and ANPR end on August 3, 2020.

Please click here for a link to the OCC News Release.

Please click here for the NPR and here for the ANPR.

SEC Commissioner Hester Peirce Nominated for Second Term

On June 2, 2020, Hester Peirce was nominated for a second term as commissioner of the U.S. Security and Exchange Commission (SEC). Earlier this year, Commissioner Peirce called for a three-year safe harbor for token projects in an effort to allow blockchain token projects to mature into utilities. Commissioner Peirce’s initial term expired Friday, June 5, 2020, and she has been serving as a commissioner since January 2018. Commissioner Peirce can serve for up to 18 months while awaiting confirmation from the Senate. Commissioner Peirce’s new term will expire June 5, 2020, if she is confirmed.

Please click here for the White House nomination announcement.

SEC Freezes Assets in a Multi-Level Marketing Cryptocurrency Scheme

The SEC has frozen assets of several individuals and companies, including MMT Distribution, LLC, and R & D Global, LLC, for an alleged scheme to defraud investors in two cryptocurrency-related schemes. The SEC complaint alleges that one of the individuals was operating several multi-level-marketing businesses, including a cryptocurrency mining operation and “cryptocurrency trading packages” scheme. The cryptocurrency mining operation scheme encouraged investors to purchase mining machines that would be hosted by MMT Distribution and provide weekly payouts. Payments to investors eventually stopped and no mining machines were made available to investors. The “cryptocurrency trading packages” scheme involved investors buying trading packages where half of the investors’ money was used to engage in trading activities and the other half was used to pay out commissions in the multi-level-marketing structure. The SEC complaint alleges the defendants misappropriated investor funds and made numerous false misrepresentations to investors. This is another example of the SEC pursuing securities fraud in the crypto space.

Please click here for the SEC Litigation Release and here for the Complaint.

Financial Services Committee Discusses Digital Dollar for Stimulus Payments

On June 11, 2020, the US House Financial Services Committee Task Force on Financial Technology held a virtual hearing to discuss ways to get underbanked and unbanked Americans stimulus payments more efficiently. In the hearing, the Committee discussed a centrally backed digital currency and digital wallets to create an open transparent digital dollar. Both Chairman Stephen F. Lynch and Ranking Member Rep. Tom Emmer in their opening remarks highlighted the need for technology to provide banking access to Americans in the wake of COVID-19. The digital dollar was in early drafts of the House of Representatives Covid-19 relief bill, but was not included in the final Coronavirus Aid, Relief, and Economic Security Act (CARES) bill. Several House bills have been introduced in recent months to help support underbanked and unbanked Americans have included a digital dollar or Federal Reserve bank account as potential solutions.

The Task Force members and panelists highlighted how a digital dollar could help Americans located in “banking deserts” and quicken stimulus payments to approximately 31 million Americans are still awaiting CARES Act stimulus checks from the government. Specifically, Rep. Warren Davidson submitted a letter co-signed by other Task Force members asking the Secretary of the Treasury to look for ways to integrate blockchain technology in the government’s response to the COVID-19 crisis. In Rep. Davidson remarks, he expressed concern over lack of laws in the digital asset space and has previously introduced the Token Taxonomy Act, which “would help regulators, industry and consumers have certainty and clarity about when securities law would apply to distributed ledger based projects.” The Token Taxonomy Act would exclude digital tokens from the definition of “security” and provide guidance on how the SEC may approach cryptocurrency regulation.

The Task Force memorandum includes a draft bill of the “Faster Stimulus Payments and FedAccounts Act.” The draft bill would provide for monthly direct stimulus payments into a qualifying individual’s existing bank account or a new FedAccount, prepaid debit cards, or checks. Additionally, the draft bill would require member banks to open a new FedAccount and the Federal Reserve Banks to create accounts for all eligible individuals.

Please click here for a video of the hearing and here for the Committee memorandum.

Please click here for a Forbes article discussing the hearing.

Russia Continues to Embrace Blockchain, Moscow Citizens to Cast Blockchain Secured E-Votes on Constitutional Amendments and Russian Supreme Court Uses Blockchain Technology to Vote for First Time

On June 25 and 30, 2020, citizens of Moscow will be able to vote for Russian President Vladimir Putin’s Constitutional amendments online. In a release by the City of Moscow, citizens will register and submit identifying information to gain access to the electronic voting system. The press release highlights an unspecified blockchain as an “almost impossible to crack” method for online voting without a single server. Moscow citizens previously voted online in September 2019 and December 2019. Additionally, on June 11, 2020, the Russian Supreme Court utilized blockchain technology during a remote session. The Russian Supreme Court online voting system used Kaspersky Lab’s Polys system and is stored on Softline’s cloud storage.

Please click here for a Cointelegraph article and here for a TASS article regarding Russia’s blockchain voting initiatives.

Please click here for a Moscow Press Release (in Russian).

Ontario Securities Commission Blames Fraud Following Investigation of QuadrigaCX Downfall

The Ontario Securities Commission (OSC) concluded its investigation of crypto asset trading platform QuadrigaCX (Quadriga), determining that Quadriga’s CEO defrauded clients. Quadriga ceased operations and filed for creditor protection in February 2019 following the death of its CEO. According to the OSC, Quadriga’s CEO ran a Ponzi scheme wrapped in modern technology. Quadriga’s CEO opened accounts under aliases and traded fictitious currencies with unsuspecting Quadriga clients. The OSC highlights that Quadriga did not have proper internal oversight controls which led clients to lose approximately $169 million. The OSC states that contrary to initial reports, the $169 million shortfall was not due to crypto assets being lost or inaccessible following the CEO’s death, but rather from fraudulent conduct.

Please click here for the OSC Quadriga Report.

[View source.]