financing of bitcoin and other cryptocurrency: ucc, regulatory...

Financing of Bitcoin and Other Cryptocurrency:

UCC, Regulatory and Hedging Concerns

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.

THURSDAY, OCTOBER 24, 2019

Presenting a live 90-minute webinar with interactive Q&A

William Brannan, Counsel, Lowenstein Sandler, New York

Miles B. Cowan, Attorney, Bailey Duquette, New York

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-961-8499 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 2.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

OVERVIEW AND REGULATORY FRAMEWORK

WHAT IS CRYPTOCURRENCY AND HOW IS IT REGULATED?

Financing Cryptocurrencies: UCC and Lender Issues

HAYNES AND BOONE, LLP | GREENBERG TRAURIG | MURRAY PLUMB & MURRAY

Cryptocurrencies - Overview

• Cryptocurrencies

o Often called “virtual currencies,” “digital currencies,” or “digital assets.”

– Digital assets used as a medium of exchange

– Exchanged over the internet peer-to-peer

– Transactions are publicly recorded on decentralized ledgers, or blockchains

» Bitcoin is the most well-know and analogizes well with gold or hand to hand physical money

Spawned many variations

» Others, like ether, provide a use case beyond a store of value, and are said to have dedicated “utility.”

» Other digital assets, usually called “tokens”, like DAO Token, are designed as “smart contracts”

that can self execute and often are involved in capital raises, or ICOs (initial coin offerings).



6

Cryptocurrencies - Overview

• What is it?

o Nakamoto described Bitcoin as a chain of digital signatures– Two related cryptographic keys

» “Public key” is essentially the user’s identity

» The related “private key” allows the user to speak for the public key

– Whoever has the private key can spend or transfer the cryptocurrency

o Blockchain keeps the order and record of transactions– Miners compete to solve a puzzle

» Using computing power, miners enhance their chances

» The randomness of which miner wins, prevents control by one group



7

8

Cryptocurrencies – Regulatory Framework

*Jurisdictional authority of a particular regulator to regulate cryptocurrency does not preclude other regulators from exercising regulatory power.

•Cryptocurrencies as Commodities

o CFTC v. McDonnell:

– Virtual currencies are “goods” exchanged in the market for a uniform quality and value

– Falls within CEA’s definition of “commodities” as “all other goods and articles . . . in which contracts for future delivery are presently or in the

future dealt in”

– In re Coinflip

» Bitcoin and other virtual currencies are encompassed in the definition and property defined as commodities

•Cryptocurrencies as Currency

o FinCEN: Applicant of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies

– The definition of a “Money Transmitter” does not differentiate between real currencies and virtual currencies.

•Cryptocurrencies as Securities

o The SEC has pursued organizations as issuers of unregulated securities

– The DAO Investigation: Application of the traditional “Howey Test” to determine DAO Tokens were securities.

o Some unofficial SEC statements seem to cede jurisdiction to CFTC for certain cryptocurrencies: “While there are cryptocurrencies that, at least as currently designed, promoted and used, do not appear to be securities, simply calling something a “currency” or a currency-based product does not mean that it is not a security.”



8


HAYNES AND BOONE, LLP | GREENBERG TRAURIG | MURRAY PLUMB &MURRAY

9

Cryptocurrencies – Regulatory Framework

•Coins / Tokens / Cryptocurrencies as a Security

o Howey Test: A token offering that represents an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others is a security.

o Securities Offerings: “…when a security is being offered, [U.S.] securities laws must be followed”

o SEC 21(a) Report – an ICO Offering is pitched on the basis that coins will increase in value, ability to lock in profits through trades on the secondary market and otherwise profit based on the work of others

o Secondary Trading and Brokerage Considerations:

o Secondary market transactions need to be facilitated by a registered broker-dealer.

o Outstanding Regulatory Issues:

o Custody

o The transient nature of a “security token.” Can a security token cease to be a security at a certain point? And potentially then become a commodity?

•Coins / Tokens / Cryptocurrencies as Currency

o Money Transmitters: When are you acting as a Money Transmitter?

o Users, Exchangers, and Administrators

o Federal Registration and State Money Transmitter Licensing Obligations



9

RETAIL COMMODITY FINANCING

LIMITATIONS ON FINANCING CRYPTOCURRENCIES CLASSIFIED AS COMMODITIES

21Financing Cryptocurrencies: UCC and Lender Issues


Cryptocurrencies – Secured Loans to Retail Customers

• CFTC has jurisdiction over contracts for future delivery as well as fraud in the spot market

• Additionally, though, CFTC has jurisdiction over "retail commodity transactions"

o Any agreement, contract or transaction in any commodity that is

– Entered into with . . .a person that is not an eligible contract participant; and

– Entered into . . . on a leveraged or margined basis . . .

o Background

– CFTC v. Zelener

» Involved foreign exchange contracts that purportedly we spot transactions

Contract called for settlement within two days; but instead, the parties “rolled forward” the transaction

CFTC asserted this was, in substance, a futures contract

– Congress created the Retail Foreign Exchange and then Retail Commodity provisions as a separate class of

transactions to be regulated under the CEA



11


• Actual Delivery Exception

o Retail Commodity Provision does not apply for “contract of sale that results in actual delivery . . . within 28 days

– Actual delivery has been interpreted strictly

» Book entry is not enough

– Retail Commodity Transactions Involving Virtual Currency

» CFTC proposal on “actual delivery” for virtual currencies

Customer must be able to take possession and control of entire commodity

Use it freely in commerce

Offeror or counterparty must not retain any interest or control

Must take physical delivery; no cash settlement

» Example specifically cites depository must be purchaser’s agent

» Example cited includes no liens



12

13


• Bitfinex

o Offered leveraged for Bitcoin margin purchases

o Retained private keys; or multi-sig

o CFTC found no actual delivery

• What if the leverage was offered, but not the sale

o Does the exception even apply?

– On its face, the actual delivery exception only applies to “contracts of sale”

o Does granting a lien result in giving up possession?

– Borrower transfers cryptocurrency to lender or lender’s agent

– Can the loan remain for over 28 days?



14

Thank You

William Brannan, CounselLowenstein [email protected]



Thank You

Miles B. Cowan, AttorneyBailey [email protected]

23

financing of bitcoin and other cryptocurrency: ucc, regulatory...

Documents