There have been a number of developments around the globe in relation to digital currencies this month. Regulators in the United States (US) and Hong Kong (HK) have made further headway into clarifying the application of securities laws to tokens, exchanges and token offerings through enforcement actions and the release of a conceptual framework respectively.

  • Australia: The Reserve Bank of Australia (RBA) governor, Phil Lowe recently spoke at the Australian Payment Summit, noting that cash is likely to become a “niche payment instrument” but that for this to happen, the functionality, safety, and reliability of electronic payments needed to improve. The governor asserted the RBA’s stance that there still did not appear to be a case for a central bank issued digital currency or eAUD, particularly following the implementation of the New Payments Platform.
  • US: The US Securities and Exchange Commission (SEC) released its annual enforcement report, noting that in FY2018 it had brought over a dozen standalone enforcement actions in relation to digital currencies and initial coin offerings (ICOs). The SEC has stated that it has taken a leadership position globally in addressing misconduct relating to digital currencies and ICOs, providing guidance for other regulators around the world pursuing cases that “deliver broad messages” and have broad market impact.

The SEC has recently brought its first two cases imposing civil penalties for securities registration violations with respect to ICOs. Both Paragon Coin Inc. and CarrierEQ Inc. have agreed to refund investors, register the tokens as securities, file period reports, and pay penalties. The SEC has also settled its first case with respect to an unregistered national securities exchange, EtherDelta and its founder, Zachary Coburn. Coburn has left EtherDelta but was charged for violations during his tenure. The SEC also noted that it had chosen to impose a less severe penalty upon Coburn due to his cooperation during the investigation.

The SEC has also released a statement on digital asset securities issuance and trading, identifying three categories in which issues arise for their consideration:

  1. ICOs: The SEC has brought actions focusing on two key issues: whether digital assets constitute ‘securities’; and what registration requirements should apply for digital assets that are securities under securities law. The SEC noted that “there is a path to compliance” even for offerings that are illegally unregistered.
  2. Investment vehicles and advice for digital asset securities: The SEC emphasised that investment vehicles holding digital asset securities and those who advise others about investing in digital asset securities should carefully consider their registration, regulatory and fiduciary obligations.
  3. Secondary market trading: The SEC has focused on activities requiring registration as a national securities exchange or broker/dealer.
  • People’s Republic of China: In its annual financial stability report, the People’s Bank of China (PBOC) noted that it considers airdrops to be disguised ICOs that fall within the ban on all ICOs. Despite distributing tokens for free rather than selling to the general public, the PBOC stated that it plans to outlaw airdrops as the token issuers attempt to establish secondary markets for airdropped tokens to illegally creating value for themselves.
  • HK: The HK Securities and Futures Commission (SFC) has released a conceptual framework for the regulation of virtual asset trading platform operators in conjunction with its announcement that it intends to explore (via a sandbox) whether to license and regulate cryptocurrency exchanges. The SFC has also released a circular to intermediaries who distribute virtual asset funds to emphasise that persons carrying on a business of distributing interests in a collective investment scheme will be captured by the regulatory regime regardless of whether the underlying assets constitute securities or futures contracts.
  • United Kingdom (UK): The Cryptoassets Taskforce has released their final report on cryptoassets and the underlying technology, laying out the risks and potential benefits before setting out the actions that regulators should take to encourage responsible development in the sector while mitigating risks to the consumer and broader market.
  • International Monetary Fund (IMF): The IMF released a staff discussion note, ‘Casting Light on Central Bank Digital Currency’, proposing a conceptual framework for assessing domestic adoption of central bank-issued digital currencies. The paper states it is “too early” to draw conclusions as to the benefits of such currencies, and notes that the impact of introducing central bank-issued digital currencies will depend on the design and country of origin. At the Singapore Fintech Festival, the managing director and chairperson of the IMF, Christine Lagarde, spoke to the changing nature of money and stated that she believed there was a necessity to “consider the possibility [for the state] to issue digital currency” to satisfy public policy goals like financial inclusion, security and consumer protection, and privacy in payments.