On January 19, 2021, the American Bar Association’s (ABA) Innovative Digital Products and Processes Subcommittee (IDPPS) working group released an update on their comprehensive white paper addressing jurisdiction issues related to digital products, including cryptocurrencies and other digital assets and digital processes like blockchain.
The updated white paper provides an in-depth analysis of several current issues in the cryptocurrency and digital assets space that have developed since the first white paper was published in March 2019, including:
- rapid development of stablecoins;
- Growth of the decentralized financial movement and the increasing number of state central banks investigating the creation of virtual currencies;
- CFTC 2020 Guidelines on “Actual Delivery” of Digital Assets and Related Litigation;
- The SEC’s Digital Asset Framework, the first-time issuance of no-action letters related to digital assets, and the advancement of their key enforcement measures for major digital asset projects;
- Guiding SEC staff on how to hold securities of digital assets in accordance with broker-dealer rules;
- Recent developments in case law on certain CFTC enforcement actions for digital assets;
- New developments in the application of the travel rule to virtual asset service providers;
- FinCEN’s First Evaluation of Fines Against a Peer-to-Peer Virtual Money Changer; and
- International developments, including the recent EU approval of the Sixth Anti-Money Laundering Directive.
The need for this update reflects the rapid evolution of the digital asset and the cryptocurrency space. As regulators around the world strive to keep up with this constantly evolving industry, it is imperative that market participants continue to inform themselves about the applicable legal and regulatory framework, as described in this update. Some key developments should be discussed further below as we expect regulators to focus on these areas in the years to come.
A. Stable coins
Stable coins were developed in response to the price volatility of Bitcoin and other cryptocurrencies. As the name suggests, stablecoins aim to “increase price stability” as their value is tied to fiat currencies, which are typically “stable and liquid”. The stability of stablecoins should increase their market uptake, especially for payment purposes.
The Swiss Financial Market Authority (FINMA) published the stablecoin guidelines in 2019. These guidelines pointed out that although Swiss law does not contain any specific provisions on the regulation of stablecoins, these are treated in the same way as all other tokens based on blockchain. The specific characteristics of stablecoins can affect which financial laws apply. For example, if a token is pegged to a particular fiat currency, it will likely be classified as a deposit under banking laws. The updated whitepaper takes a closer look at the evolving approaches of FINMA and other supervisory authorities with regard to stablecoins.
B. Actual delivery
The Commodity Exchange Act (CEA) provides that agreements, contracts or transactions in goods – other than foreign currency or securities – entered into or offered by retail customers on a leveraged, marginalized or funded basis must be governed as or “as if” were futures unless they were covered by an exception. This effectively means that a non-exempt transaction can only be carried out on or under the rules of an exchange regulated by the CFTC and individuals providing services related to non-exempt transactions can be covered by one of the CEA’s professional registration categories.
A frequently discussed exception to this requirement are contracts for the sale of goods that result in actual delivery of the goods within 28 days. The CFTC has been grappling with the interpretation of the term “actual delivery” for years. The need to clarify the meaning of actual delivery in virtual currency transactions became more apparent in 2016 when the CFTC took its first enforcement action against a trading platform that offered retail consumer goods transactions in virtual currencies without registering with the CFTC. In its processing order against this platform, Bitfinex, the CFTC took the view that the delivery of Bitcoin bought with borrowed money to a private collective wallet in which the coins were stored for the benefit of the buyer, but also as security for the loan, did not take place represent actual delivery, as the buyer had no rights to access or use the purchased bitcoin until it was approved by Bitfinex after the loan was satisfied. In March 2020, the CFTC addressed the uncertainty surrounding the concept of “actual delivery” related to transactions in digital assets by issuing an interpretation consistent with the approach used in Bitfinex. This guide provides in part that the actual delivery exception only applies if a customer has possession and control of the entire amount of the digital asset and can freely use it in stores no later than 28 days after the date of delivery, thereby creating a transaction Lien on the digital asset as a means of ensuring repayment becomes incompatible with the actual delivery. The updated White Paper examines the CFTC’s action in this area in more detail.
C. SEC Digital Asset Framework and other enforcement issues
In April 2019, the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) published the Digital Asset Framework. This provides guidance on FinHub’s view as to whether a particular digital asset is considered security under the test set out in SEC vs. WJ Howey Co. and is therefore subject to SEC regulation. SEC officials recently issued their first non-trading letters related to digital assets, confirming that two digital assets, which essentially function as prepaid cards, are not considered securities. The framework and other developments related to the SEC’s regulation of digital assets are fully discussed in the updated White Paper.
The white paper also addresses the regulatory uncertainty surrounding digital assets that could potentially thwart law enforcement and innovation. The CFTC and SEC appear to be coordinating in combating suspected fraudulent activity related to cash market transactions in digital assets. However, their coordination does not necessarily mean that only that agency is responsible if only one agency takes an action. One legislative attempt to remove this regulatory uncertainty is the Digital Commodity Exchange Act of 2020 (DCEA), which was put in place to close regulatory loopholes between the CFTC and the SEC and provide a clear means by which market participants can secure their transactions in digital assets comply with the law. The updated white paper includes a more detailed discussion of the DCEA.
D. Travel rule
FinCEN’s travel policy has recently been a focus of international attention. The Financial Action Task Force (FATF) adopted an interpretative note in June 2019 confirming that countries should apply provisions similar to the travel rule to virtual asset service providers. In the United States, FinCEN has confirmed that the travel rule is the most cited violation by the IRS against money service providers that conduct money transfers in virtual currencies. The updated whitepaper expands this topic in detail.
 By Michael Spafford and Katherine Berris from Paul Hastings, Jonathan Marcus from Skadden and Daren Stanaway from Interactive Brokers.
 Tim Swanson, Why Bitcoin Needs Fiat (and that won’t change in 2018), Coindesk (January 4, 2018), https://www.coindesk.com/bitcoin-still-needs-fiat-currency-wont-change -2018 /.
 I would.
 FINMA, supplement to the guidelines for inquiries regarding the regulatory framework for initial coin offers (ICOS) (2019), https://www.finma.ch/en/news/2019/09/20190911-mm-stable-coins/.
 I would.
 7 USC § 2 (c) (2) (D) (iii).
 American Bar Association’s Derivatives and Future Law Committee Subcommittee on Innovative Digital Products and Processes Subcommittee on Jurisdiction, Digital, and Digitized Assets: Federal and State Jurisdiction Issues 61 (2020), https://www.americanbar.org/content/dam / aba / administrative /business_law/buslaw/committees/CL620000pub/digital_assets.pdf.
 See In re BFXNA Inc., CFTC No. 16-19 [2016-2017 Transfer Binder] Comm. Fut. L. Rep. (CCH) 33,766 (June 2, 2016).
 Retail Goods Transactions With Certain Digital Assets, 85 Fed. Reg. 37.734, 37.742-43 (June 24, 2020).
 SEC, Strategic Center for Innovation and Financial Technology, framework for the analysis of digital assets in the context of “investment contracts” (April 3, 2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital- Financial assets.
 SEC v WJ Howey Co., 328, US 293 (1946).
 See FATF, Results FATF Plenary, 16-21 May. June 2019 (June 21, 2019), https://www.fatfgafi.org/publications/fatfgeneral/documents/outcomes-plenary-june-2019.html. FinCEN then “applauded” the interpretation of the FATF. See FinCEN, Prepared Comments from FinCEN Director Kenneth A. Blanco at the Chainalysis Blockchain Symposium (May 13, 2020), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-directorkenneth-blanco-delivered- consensus blockchain symposium.
 See FinCEN, Prepared Comments from FinCEN Director Kenneth A. Blanco at the Chainalysis Blockchain Symposium (November 15, 2019), https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blancochainalysis- Blockchain Symposium.