Financial Action Task Force Says Stablecoins Pose Money Laundering and Terrorism Financing Threat

The Financial Action Task Force (FATF) stated on October 18 that stablecoins pose a money laundering and a terrorism financing threat to the world.

The intergovernmental organization considers cryptocurrencies to be a “major strategic initiative.” In documents published following its latest meeting, the FATF noted that digital assets that are pegged to major fiat currencies would have a particularly large impact on the global financial system.

Approximately 800 representatives from 205 jurisdictions held meetings from October 16-18 in order to discuss issues under the FATF’s jurisdiction. The conference was led by FATF’s president Xiangmin Liu. Concerns regarding the use of cryptocurrencies were front and center.

Although the document discussed cryptocurrencies broadly, it specifically mentioned stablecoins on several occasions, noting:

“Emerging assets such as so-called global ‘stablecoins’, and their proposed global networks and platforms, could potentially cause a shift in the virtual asset ecosystem and have implications for the money laundering and terrorist financing risks. There are two concerns: mass-market adoption of virtual assets and person-to-person transfers, without the need for a regulated intermediary. Together these changes could have serious consequences for our ability to detect and prevent money laundering and terrorist financing.”

In a second document, titled “Money laundering risks from ‘stablecoins’ and other emerging assets,” the FATF stated that it will continue to analyze various risks associated with the use of stablecoins. The agency said it might clarify or or issue an updated statement regarding its virtual currency guidance, in order to effectively address concerns related to cryptocurrencies.

The second document stated:

“The FATF will continue to ensure its standards remain relevant and responsive and it will report to G20 Finance Ministers and Central Bank Governors in 2020 on the risks from global ‘stablecoins’ and other emerging assets.”

The FATF’s recent statements have come after a report from the Group of Seven (G7) advanced economies and the Bank of International Settlements (BIS) said that stablecoins pose a threat to global monetary policy, financial stability and competition.

The FATF has also determined how it will assess different countries’ implementation of its last guidance on crypto assets. The organization said it will include this process in its mutual evaluation procedure.

In June 2019, the FATF asked financial regulators throughout the world to enforce appropriate know-your-customer (KYC) and anti-money-laundering (AML) checks. The agency instructed digital currency exchanges and wallet providers to maintain customers’ KYC information for all transactions originating from their platforms.

The FATF’s document noted:

“Countries that have already undergone their mutual evaluation will be required to report back during their follow-up process on the actions they have taken in this area.”

According to the document, FATF member countries must implement the agency’s standards for crypto assets and various other emerging asset classes.

The document stated:

“Given the global nature of virtual assets, it is essential that countries implement these requirements swiftly, in particular understanding the risks and ensuring the effective supervision of the sector.”

The FATF also addressed the importance of digital identity in modern payment platforms:

“In recent years, there has been a significant shift towards digital payments. The number of transactions [is] growing at over 12 percent every year. Customer identification is essential to prevent criminals and terrorists from raising and moving funds. However, in the growing digital world, different customer identification methods exist.”

The FATF will publish draft guidance on digital identity for public comment. Although the section did not specifically address blockchain-enabled digital identity software, several firms in the crypto space are planning to develop secure digital identity platforms.

FATF’s guidance suggests using a “risk-based approach to using digital ID systems.” It mentions due diligence requirements as one potential issue. 

The document noted:

“The FATF supports financial innovation that does not create new safe havens for terrorists and criminals to carry out their transactions. Responsible innovation in the form of reliable digital ID systems contributes to the objectives of preventing its misuse for crime and terrorism, and supporting financial inclusion.”

Switzerland: FINMA Re-Affirms Stringent Approach to Anti Money Laundering and Blockchain Technology

The Swiss Financial Market Supervisory Authority (FINMA) has published guidance as to the application of regulatory requirements for payments on the blockchain for financial services providers under FINMA supervision. Specifically, the guidance addresses anti-money laundering (AML) and know your customer (KYC) rules.

In a release, FINMA said it recognizes the innovative potential of new technologies for the financial industry, IE Fintech, but the agency applies the relevant provisions of financial market law in a technology-neutral way.

While reaffirming its support of Fintech, FINMA stated that blockchain-based business models may not be allowed to circumvent the existing regulatory framework.

“This applies particularly to the rules for combating money laundering and terrorist financing, where the inherent anonymity of blockchain technology presents increased risks,” stated FINMA.

FINMA commented onn the recently approved AML/KYC approach by the Financial Action Task Force (FATF) which addressed financial services using blockchain. FINMA stated:

“As for traditional bank transfers, information about the client and the beneficiary must be transmitted with transfers of tokens (with the exception of transfers from and to unregulated wallet providers). Only then, for example, can the provider receiving this information check the name of the sender against sanction lists or check that the information provided about the beneficiary is correct.”

FINMA said it has consistently applied the AML Act to blockchain service providers since their emergence. Existing law requires that information about the client and the beneficiary be transmitted with payment orders. FINMA admits that no system currently exists at either a national or an international level for reliably transferring identification data for payment transactions on the blockchain.

Institutions supervised by FINMA are only permitted to send cryptocurrencies or other tokens to external wallets belonging to their own customers whose identity has already been verified and are only allowed to receive cryptocurrencies or tokens from such customers.

FINMA-supervised institutions are thus not permitted to receive tokens from customers of other institutions or to send tokens to such customers.

FINMA stated its regime is one of the most strict in the world:

“This practice applies as long as information about the sender and recipient cannot be transmitted reliably in the respective payment system. Unlike the FATF standard, this established practice applies in Switzerland without the exception for unregulated wallets and is, therefore, one of the most stringent in the world.”

The guidance from FINMA arrives following a US Congressional trip to Switzerland orchestrated to better understand the emerging crypto ecosystem. Organized by House Financial Services Committeee Chairwoman Maxine Waters, the Representative appeared to remain skeptical regarding the regulatory environment of Switzerland.

FINMA also noted the approval of two banking and securities dealer licenses to two digital asset firms which will offer blockchain-based services to institutions and professional customers. FINMA provided provided provisional approval to Sygnum AG and SEBA Crypto AG.

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FinCEN Issues Guidance on Virtual Currencies, Posts New Advisory on Threats Associated with Misuse

The Financial Crimes Enforcement Network (FinCEN) today issued guidance entitled, Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (CVC). FinCEN is the enforcement branch of the US Department of Treasury.

The guidance issued today does not establish any new regulatory expectations. FinCEN said that it consolidates regulations, guidance and administrative rulings that relate to money transmission involving virtual currency, and applies the same interpretive criteria to other common business models involving CVC.

The guidance is said to be in response to questions raised by financial institutions, law enforcement, and regulators concerning the regulatory treatment of multiple variations of businesses dealing in CVCs.

Additionally, FinCEN issued an Advisory on Illicit Activity Involving Convertible Virtual Currency to assist financial institutions in identifying and reporting suspicious activity related to criminal exploitation of CVCs for money laundering, sanctions evasion, and other illicit financing purposes.

The advisory seeks to identify information that would be most valuable to law enforcement if contained in suspicious activity reports.

Sigal Mandelker, Under Secretary of the Treasury for Terrorism and Financial Intelligence, said that Treasury is committed to helping financial institutions to detect and prevent bad actors from exploiting cryptocurrency for money laundering, avoiding government sanctions and other illicit activities.

“The comprehensive advisory FinCEN issued today highlights the risks associated with darknet marketplaces, peer-to-peer exchangers, unregistered money services businesses, and CVC kiosks and identifies typologies and red flags to help the virtual currency industry protect its businesses from exploitation.”

FinCEN Director Kenneth A. Blanco said that FinCEN was the first financial regulator to assign obligations regarding crypto to guard against financial crime.

“The money transmitter definition we published in 2011 and the guidance we issued in 2013 clarifying how that definition applies to transactions involving virtual currency have proven to be exceptionally durable. Our regulatory approach has been consistent and despite dynamic waves of new financial technologies, products, and services, our original concepts continue to hold true. Simply stated, those who accept and transfer value, by any means, must comply with our regulations and the criminal misuse of any methodology remains our fundamental concern.”

FinCEN’s rules define certain businesses or individuals involved with CVCs as money transmitters subject to the same registration requirements and a range of anti-money laundering, program, recordkeeping, and reporting responsibilities as other money services businesses.

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When Does A “Digital Asset” Qualify As A Security? A Deeper Dive Into Recent SEC Guidance.

Here’s a question for all of you. Between coins, tokens, stamps, tickets, vouchers, and chips, which of these qualifies as a “security” under U.S. Securities laws? It’s actually a trick question, they all do!

Well, technically speaking, they all could potentially qualify as securities. The answer actually lies in evaluating the details of how the respective asset is created, marketed and sold to purchasers. Recently the SEC has released some substantive guidance on how to actually analyze those details which deserves a deeper analysis.   

[easy-tweet tweet=”Between coins, tokens, stamps, tickets, vouchers, and chips, which of these qualifies as a “security” under U.S. Securities laws? It’s actually a trick question, they all do!” template=”light”]



On April 3, the SEC took a big step forward in clarifying its position regarding digital assets by putting forward two separate releases. The first of these releases was a No-Action Letter (the “NAL) pertaining to the issuance of tokens by TurnKey Jet, Inc. (“TKJ”). The second release was the announcement of “Framework for ‘Investment Contract’ Analysis of Digital Assets” (the “Framework”) to help determine whether a digital asset is a security and therefore subject to U.S. federal securities laws. Combined these two releases define some much-needed guide rails in analyzing whether a particular digital asset qualifies as a security. However, some industry professionals (including myself) believe that certain of the included substantive factors may be a bit over encompassing.

In any case, anyone who is looking to issue, and even those who have already issued,  digital assets need to read and fully understand the guidance provided in these two releases to make sure they stay on the right side of the SEC.


The TKJ NAL was issued by the SEC’s Division of Corporation Finance and represents the SEC’s first official No-Action letter pertaining to the issuance of digital assets. Without getting into a ton of detail as to the specifics of the subject offering (details can be found in the original request letter), the proposed offering essentially boiled down to the issuance and sale of certain tokens of TKJ which: (a) would be acquired/held/transferred within a closed network; (b) would each have a face value of $1; and (c) could later be used/redeemed for air charter services provided by providers within the network. 

TKJ’s counsel put together a detailed argument as to why the subject tokens should not be deemed securities by analyzing the factors of the Howey Test (as discussed below), and those in certain other applicable cases as noted in the original request letter, against the specific details of the subject proposed token offering.

While I encourage everyone to read the entirety of the arguments presented by TKJ’s counsel in the original request letter (if for no other reason than because I had to), spoiler alert, the SEC ultimately accepted the presented arguments and determined the subject tokens were NOT securities. In making that determination it relied primarily on the following factors (as noted in the NAL):

  • No funds from the sale of the subject tokens would be used to pay for the development of the platform/network where the tokens would be acquired/traded;
  • The platform/network where the tokens would be acquired/traded would be fully developed and operational prior to the offering/sale of the subject tokens and the cost of creating platform/network;
  • The subject tokens would be immediately usable for their intended functionality (i.e. purchasing air charter services) at the time they are sold;
  • Acquisitions/transfers of the subject tokens would be expressly limited to permitted members of the company’s platform/network (i.e. no external acquisition/trading);
  • Each subject token would at all times be sold at a fixed $1 and represent an obligation to supply an equal $1 of services;
  • If the company were to offer to repurchase any of the subject tokens, it would only do so at a discount to the face value of the subject tokens (unless a court otherwise ordered the liquidation of the subject tokens); and
  • Each token would be marketed/sold in a manner that emphasizes its functionality and not the potential for the increase in its market value.

In reading above it should be clear that what the SEC is attempting to isolate are some of the primary factors it believes makes the subject tokens strictly “utility” based as opposed to investment based.

Generally speaking, based on the NAL the SEC is taking the view that a token (or whatever digital asset) is not a security if the token is primarily intended to have a consumptive value (i.e. be used/traded for goods/services), if the token is marketed/sold based on its utility and not as an investment, and if the framework on which the subject token lives is private and fully paid for (or at least paid for with outside funds) and operational prior to the offering and sale of the subject tokens.

I intentionally generalized the above statements to make it easier to see that pattern.

It should be noted that while the NAL provides some strong guidelines as to what the SEC will look at in determining whether a particular digital asset is a utility or investment based, and such guidance is good to finally have, the NAL (like all No-Action Letters) is not binding law and may not be relied upon by anyone other than TKJ.

Put another way, just because a particular issuer thinks that their respective digital asset is in technical compliance with the handful of factors discussed above does not mean that the SEC will ultimately make the same determination with respect to the offering/sale of such digital asset.

Each offering must be evaluated on a case by case basis and must be looked at not only in light of the above-described factors but all other available guidance. This would include all of the additional guidance put forward in the Framework discussed below.


As noted above, the Framework was released concurrently with the release of the NAL. The Framework, which was created by the SEC’s Strategic Hub for Innovation and Financial Technology (i.e.FinHub”), is specifically intended to be a “framework for analyzing whether a digital asset is offered and sold as an investment contract, and, therefore, is a security.”

As stated in the introduction:

A threshold issue is whether the digital asset is a “security” under [U.S. securities laws].  The term “security” includes an “investment contract,” as well as other instruments such as stocks, bonds, and transferable shares.  A digital asset should be analyzed to determine whether it has the characteristics of any product that meets the definition of “security” under the federal securities laws.  In this guidance, we provide a framework for analyzing whether a digital asset has the characteristics of one particular type of security – an “investment contract.”  Both the Commission and the federal courts frequently use the “investment contract” analysis to determine whether unique or novel instruments or arrangements, such as digital assets, are securities subject to the federal securities laws.

More specifically, the Framework walks readers through the application of the so-called “Howey Test” (SEC v. W.J. Howey Co., 328 U.S. 293 (1946)) to the offering and sale of digital assets and the identification of certain factors to consider when trying to determine whether the offering and sale of a particular digital asset satisfies such test; thus requiring compliance with U.S. securities laws. For clarity purposes, it should be noted that the Framework does not (and does not intend to) provide any bright-line rules.

Noting specifically that a securities analysis needs to be performed on a case by case basis on the specific facts and circumstances surrounding the particular offering/sale of digital assets, the Framework is set up as a series of factors to consider in analyzing the respective prongs of the Howey Test in light of the subject offering/sale.

By way of background, there are typically four main prongs to the Howey Test: (1) there is an investment of money; (2) the investment is made in a “common enterprise;” (3) the investment is made with a reasonable expectation of profits; and (4) expected profits are, or are expected to be, predominantly derived from the efforts of others. For clarity, in the Framework prongs 3 and 4 are originally combined (as many analysts do) but are later analyzed separately.

Prongs 1 and 2 Assumed Satisfied.

With respect to the first two prongs, it is basically assumed in the Framework that in any offering/sale of digital assets these two prongs will be satisfied.

In particular, with respect to the first prong it states in the Framework “the first prong of the Howey test is typically satisfied in an offer and sale of a digital asset because the digital asset is purchased or otherwise acquired in exchange for value, whether in the form of real (or fiat) currency, another digital asset, or other type of consideration.”

Similarly, with respect to the second prong, the Framework simply states that “[i]n evaluating digital assets, we have found that a “common enterprise” typically exists.” The footnote further clarifies this statement by providing: “[b]ased on our experiences to date, investments in digital assets have constituted investments in a common enterprise because the fortunes of digital asset purchasers have been linked to each other or to the success of the promoter’s efforts.”

With the first two prongs being basically assumed to be satisfied, the majority of the Framework centers around providing guidance as to if/when prongs 3 and 4 will be satisfied with respect to a particular offering/sale of digital assets. I discuss these prongs, and the relevant factors provided in the Framework, in more below.

Is there a Reasonable Expectation of Profits?

As stated in the Framework:

An evaluation of the digital asset should also consider whether there is a reasonable expectation of profits.  Profits can be, among other things, capital appreciation resulting from the development of the initial investment or business enterprise or a participation in earnings resulting from the use of purchasers’ funds. Price appreciation resulting solely from external market forces (such as general inflationary trends or the economy) impacting the supply and demand for an underlying asset generally is not considered “profit” under the Howey test.

The Framework goes on to lay out the following factors to consider in determining whether a “Reasonable Expectation of Profits” exists with respect to a particular offering/sale of digital assets:

  • The subject digital asset gives the holder rights: (a) to share in the enterprise’s income or profits (through distribution, dividend or otherwise); and/or (b) to realize gain from capital appreciation of the subject digital asset (from appreciation based on future sales/trading or otherwise);
  • The subject digital asset is transferable or traded on or through a secondary market or platform (or is expected to be in the future);
  • A purchaser would reasonably expect that the issuing company’s efforts will result in capital appreciation of the subject digital asset (particularly where the subject digital asset/network is still in the development stage);
  • The subject digital asset is offered broadly to potential purchasers as compared to being targeted to expected users of the goods or services of the issuing company;
  • The subject digital asset is offered and purchased in quantities indicative of investment (as opposed to quantities indicative of consumption);
  • There is little apparent correlation between either: (a) the purchase/offering price of the subject digital asset and the market price of the particular goods/services that can be acquired in exchange for such digital asset (if any); and/or (b) the typical trading/purchase volume of the subject digital assets and the typical volume of the particular goods/services that can be acquired in exchange for such digital asset (if any);
  • The issuing company has raised an amount of funds in excess of what may be needed to establish the subject digital asset and/or the network on which it will exist;
  • The issuing company is able to benefit from the offering/sale of the subject digital asset as the holder of some of the same digital assets (or other assets of the same class/right);
  • The issuing company continues to expend funds (whether from its profits or from proceeds of additional sales) to enhance the functionality or value of the subject digital asset and/or the network on which it exists;
  • The subject digital asset is marketed (directly or indirectly) using any of the following:
    • The general expertise of issuing company (or any of its officers, employees, agents, etc.) and/or its ability to build or grow the value of the subject digital asset and/or the network on which it it exists;
    • Terms that indicate (or otherwise imply) the subject digital assets is an investment and/or that the solicited purchasers/holders are investors;
    • Terms that indicate (or otherwise imply) that the intended use of the proceeds from the sale of the subject digital asset will be used, in whole or in part, to develop subject digital asset and/or the network on which it exists;
    • Any representation based on the future (as opposed to the present) functionality of subject digital asset and/or the network on which it exists (and/or the prospect that the issuing company will deliver such functionality);
    • The promise (implied or explicit) that the issuing company will build a new/improved business or operation as opposed to delivering currently available goods/services;
    • The promise (implied or explicit) or implication that: (a) a market for the trading of the subject digital asset is, or will be, available (particularly where the issuing company implicitly or explicitly promises to create or otherwise support such trading market) and/or (b) that the subject digital asset will be readily transferable; and/or
    • Any emphasis on the potential appreciation of the subject digital asset and/or the potential profitability of the issuing company and/or the network on which the subject digital asset will exist.

As stated in the Framework, no one of the above factors is necessarily determinative alone but the more of the above which are present in connection with a particular offering/sale of digital assets the more likely it is that there is (or will otherwise be deemed to be) a reasonable expectation of profit; thus satisfying prong 3 of the Howey Test.

Are the Expected Profits To Be Derived From The Efforts Of Others?

As you can tell by the lead into this section, prong 4 of the Howey Test is dependent on there first being a reasonable expectation of profits (i.e. prong 3 is satisfied). If no reasonable expectation of profits exists with respect to a particular offering/sale of digital assets then further analysis of prong 4 is not necessary. This is why prongs 3 and 4 are often referred to collectively rather than individually. That being said, assuming a reasonable expectation of profits exists with respect to a particular offering/sale of digital assets it must be further considered whether those expected profits are, or are expected to be, predominantly derived from the efforts of others.

As noted in the Framework, the foregoing analysis centers around the following two questions: (1) “[d]oes the purchaser reasonably expect to rely on the efforts of [the issuing company]?;” and and (2) “[a]re those efforts “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise,” as opposed to efforts that are more ministerial in nature?

To aid in making this analysis the Framework provides the following factors to consider:

  • The issuing company is responsible for the development, improvement (or enhancement), operation, or promotion of the network on which the subject digital asset will exist (particularly if purchasers of the subject digital asset expect the issuing company (or its agents)  to be performing or overseeing tasks that are necessary for such digital asset/network to achieve or retain its intended purpose or functionality);
  • Where: (a) the subject digital asset and/or the network on which the subject digital asset will exist is still in development or otherwise not fully functional at the time of the subject offer/sale; and/or (b) purchasers would reasonably expect the issuing company to further develop (directly or indirectly) the functionality of subject digital asset and/or the network on which the subject digital asset will exist (particularly where the issuing company promises further development in order for the subject digital asset to attain or grow in value);
  • There are essential tasks or responsibilities performed and expected to be performed by the issuing company (or its agents), rather than an unaffiliated, dispersed community of network users (i.e. a “decentralized” network);
  • The issuing company (directly or indirectly) creates, or otherwise supports, a market for/the price of the subject digital asset; particularly where the issuing company: (a) controls the creation and issuance of the subject digital asset; and/or (2) takes other actions to support a market price of the subject digital asset (e.g. limiting supply or ensuring scarcity through buybacks, “burning,” or other activities);
  • The issuing company has a lead or central role in the direction of the ongoing development of subject digital asset and/or the network on which the subject digital asset exists; (particularly where the issuing company plays a lead or central role in deciding governance issues, code updates, or validation of transactions that occur with respect to the subject digital asset);
  • The issuing company has a continuing managerial role in making decisions about, or otherwise exercising judgment concerning, any of the rights the subject digital asset represents  and/or the network on which the subject digital asset will exist including (among other things):
    • Determining whether and how to compensate persons providing services to the subject network or to the entity or entities charged with oversight of the subject network;
    • Determining whether and where the subject digital asset will trade (particularly when the liquidity of the subject digital asset is promised/implied or is otherwise expected by the purchaser);
    • Determining who (whether internally or externally) will receive additional subject digital assets and under what conditions;
    • Making or contributing to managerial level business decisions (in particular as to how to deploy funds raised from sales of the subject digital asset);
    • Playing a leading role in the validation or confirmation of transactions on the subject network or in some other way having responsibility for the ongoing security of the subject network; 
    • Making other managerial judgments or decisions that will directly or indirectly impact the success of the value of the subject digital asset and/or the subject network;
  • Purchasers of the subject digital asset would reasonably expect the issuing company to undertake efforts to promote its own interests and/or enhance the value of the subject digital asset represents and/or the network on which the subject digital asset will, particularly where:
    • the issuing company has the ability to realize capital appreciation from the value of the subject digital asset (e.g. where the issuing company retains a retains a stake or interest in the subject digital asset or other asset of the same class);
    • the issuing company distributes the subject digital asset as compensation to management and/or the issuing company ‘s compensation is tied (in whole or in part) to the price of the subject digital asset in the secondary market;
    • the issuing company owns or controls (directly or indirectly) ownership of intellectual property rights of the subject digital asset and/or the subject network; and/or
    • the issuing company monetizes the value of the subject digital asset (especially where the subject digital asset has limited or no functionality).

Again no one of the above factors is necessarily determinative alone but the more of the above which are present in connection with a particular offering/sale of digital assets the more likely it is that any expected profits are (or will otherwise be deemed to be) expected to be derived predominately from the efforts of others; thus satisfying prong 4 of the Howey Test.

Additional Factors

In addition to the above-discussed factors, it should be noted that the Framework also provides for certain additional factors with respect to prongs 3 and 4 to be considered in determining if and when a digital asset, which was previously sold as a security, may no longer be a security.

While good to have, these factors are beyond the intended scope of this post. Further, as these factors apply to a very limited subset of digital assets in existence today (i.e. those originally sold as securities and no longer considered securities), if any, they are not all that useful at this time.

I should also add that I find the fact that the SEC took the time to issue guidance with respect to digital assets which were previously sold as a security and not provide any specific guidance with respect to digital assets which were NOT previously sold as a security but should have somewhat telling.

This may be my interpretation, but I read the absence of specific guidance in this context indicative of the fact that the SEC will view new offerings and existing offerings in the same manner.

Put another way, there is nothing in the Framework that would lead the reader to believe that an issuer who has already issued/sold digital assets should not perform the respective analysis and/or otherwise be subject to bringing itself into compliance with applicable U.S. securities laws.


As I have said many times before, in order for the crypto/digital asset industry to reach its full potential the players need clarity as to the application (or non-application where applicable) of U.S. securities laws.

While based on previous SEC guidance it was implied that a particular crypto/digital asset could theoretically exist which would not be considered a security, until now there has been no solid guidance on what factors might be considered by the SEC in that analysis. The factors presented in both the NAL and the Framework, while not exhaustive, really help set the guardrails for analyzing whether the offering/sale of a particular digital asset should be subject to compliance with U.S. securities laws.

Now I should add that the above-discussed factors can easily come off as over encompassing or overreaching to some and I don’t entirely disagree. Particularly when it comes to a couple of the factors above which, in my opinion, the SEC appears to lend particular strength to; whether the subject digital asset/network is fully functional at the time of sale and/or whether any proceeds from the sale of the subject digital assets will be used to fund the development of the subject digital asset/network.

In reading between the lines of the NAL and Framework a bit it feels like the SEC may weigh these factors a bit more heavily than others which I don’t necessarily agree with.

In fact, I am not even certain they should be factors at all. I don’t really see any reason why a particular digital asset, if otherwise being strictly utility in nature (i.e. satisfying all of the other factors present in the NAL and otherwise not meeting the other factors relevant to the Howey Test analysis), should be otherwise considered a security simply because the particular digital asset/network isn’t fully functional at the time of sale and/or because funds from the subject offering will be used (in whole or in part) to finish such development.

In the case of TKJ for example, if the SEC determined that the tokens to be issued by TKJ were strictly “utility,” as it appears they did, the fact that the underlying network was or wasn’t functional at the time of the sale of the tokens shouldn’t have made a difference.

Taking it out of the context of securities all together, assuming a company took advance orders for let’s say brake pads and then used the proceeds received from the advanced sale of those brake pads to fund the creation of the new brake pad warehouse and the respective worker’s salaries (yes it’s the plot of Tommy Boy, so what?). Are the brake pads now considered securities? Clearly not, so I don’t see why these particular factors would help push a decision one way or another.

Notwithstanding the above, it is good to finally have some definitive guidance to refer to when evaluating digital asset offerings and there are a couple of takeaways for industry participants.

First and foremost, the guidance put forth in the NAL and the Framework is expressly NOT exhaustive. There are any of a number of additional factors or considerations that may sway the SEC in one direction or another when it comes to a particular offering.

Moreover, as noted above none of the included factors are, or will be, determinative alone and should be viewed in totality with all of the other applicable factors on a case by case based on the specific facts and circumstances surrounding the particular offering/sale of digital assets.

Second, as noted above, I read the Framework to apply equally to new issuers and to issuers who have already issued digital assets which would otherwise qualify as securities given the stated factors.

The SEC has made it clear through recent actions that it is going after issuers of digital assets who have issued/sold such digital assets in violation of applicable securities laws.

As such, any issue who issued/sold digital assets in an offering which was not otherwise compliant with U.S. securities laws, whether based on prior guidance or otherwise, should be reviewing this new guidance to see if they need to bring themselves into compliance with applicable U.S. securities laws.

Finally, and almost more importantly, the guidance put forth in the NAL and the Framework is NOT intended, nor should be taken, as a roadmap to try to structure an offering in a way that will not be subject to U.S. securities laws.

In fact, I highly recommend that anyone issuing, or looking to issue, digital assets assume from day one that the subject digital asset will be deemed a security and that the offering will otherwise be subject to applicable U.S. securities laws.

Yes, it is possible to qualify for an exemption like TKJ. However, just because a particular digital asset/offering looks and smells like that of TKJ, does not mean that the SEC will view it the same way. Accordingly, unless and until you have a no-action letter (or other binding guidance) from the SEC with respect to your particular offering you should NOT assume it will be treated the same as in the NAL just because you intentionally structure it to match the factors stated above.

Anyone looking to sell or issue digital assets in the U.S., or who has otherwise previously issued/sold digital assets in the U.S. a non-compliant offering, needs to consult with a securities attorney, plain and simple.

An analysis of the factors included in the NAL and the Framework requires professional legal assistance as does any resulting compliance with respect to applicable U.S. securities laws. There are a ton of pitfalls awaiting the unwary and orange jumpsuits await those looking to try to circumvent the laws.


Anthony Zeoli is a Senior Contributor for Crowdfund Insider.  He is a Partner at the law firm of Freeborn in the Corporate Practice Group. He is an experienced transactional attorney with a national practice specializing in the areas of securities, commercial finance, real estate, and general corporate law. Anthony drafted the bill to allow for an intrastate crowdfunding exemption in Illinois that eventually became law.

Financial Services Commission of Mauritius Issues Guidance on Security Token Offerings

The Financial Services Commission of Mauritius has issued guidance on security tokens as part of their “Fintech series.”

The Guidance follows the regulator’s recognition of digital assets as a unique asset class for investors.

In March, the FSC issued a brief statement clarifying that a digital asset, be it debt or equity, a medium of exchange, or providing access to a service or product, constitutes an asset class for investing. The statement provided that only sophisticatedor expert investors, and certain institutions, could invest in these assets. Cryptocurrencies are considered to be a sub-category of digital assets.

Earlier this month, Mauritius stated that security tokens simply are securities as defined in the Securities Act of 2005 represented in digital format.

The FSC said it remains “highly supportive of Fintech related initiatives in Mauritius.”

Mauritius has worked to establish itself as a jurisdiction of preference for Fintech. Some innovative Fintechs have domiciled in Mauritius to take advantage of the relatively accepting regulatory environment for digital finance.  Recently Mauritius granted Fincross with an investment banking license to create a distributed ledger based investment bank. The principles said they reviewed all of the current jurisdictions deemed blockchain friendly and decided that Mauritius provided the best jurisdiction to establish their services.

In 2018, the FSC established a Memorandum of Understanding (MoU) with the UK Financial Conduct Authority to establish a framework for mutual collaboration in matters relating to financial services, exchange of information and investigative assistance in connection with the supervision and oversight of entities under the purview of both regulatory authorities. The FCA has formed multiple agreements around the world to foster Fintech innovation.


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UK Financial Conduct Authority Issues Consultation on “Cryptoassets” Seeking to Provide Clarity on Regulatory Approach

The UK Financial Conduct Authority (FCA) issued a consultation today on the emerging “cryptoasset” sector of finance.  The UK is well known for its thoughtful regulatory approach when it comes to innovative new financial services and the final outcome will be watched with interest around the globe.

The cryptoasset consultation is also part of the UK Cryptoasset Taskforce’s recommendation that the FCA provides additional guidance on the regulatory perimeter. The Taskforce published a report last October.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, commented on the consultation:

‘This is a small but growing market and we want both industry and consumers to be clear what is regulated, and what isn’t. This is vital if consumers are to know what protections they’ll benefit from and in ensuring we have a market functioning as it should.”

In a release, the FCA said the numbers regarding crypto remain relatively small but more consumers are investing in these digital assets.

Today, within the UK there are less than 15 cryptocurrency exchanges in operation out of a global total of about 231. Out of these exchanges in the UK, only 4 produce daily trading volume in excess of $30 million with aggregate daily trading volume of just $200 million for the group.

There are currently over 2,000 exchange and utility tokens in the market reports the agency. The FCA notes that in 2018 initial coin offerings (ICOs) saw a significant reduction in capital raised in compared to 2017. Global ICO funding was $65 million in November 2018, compared to over $823 million in November 2017.

The FCA estimates that there are 56 projects in the UK that have used ICOs, accounting for less than 5% of projects globally.

The FCA has previously issued warnings regarding the risk to consumers affiliated with investing in cryptoassets. About 78% of ICOs in 2017 were labeled scams. Yet the agency continues to pursue an important policy of ensuring competition in financial services – IE challenges to traditional finance – while providing sufficient investor protection.

The FCA states that publishing guidance should “reduce legal uncertainty and assist firms to develop legitimate cryptoasset activities and business models.” The intent is to “improve participation in the cryptoasset market and competition in the interest of consumers.”

Overall, the UK’s regulatory approach has been lauded around the world for fostering a robust Fintech ecosystem. Digital assets may be the most challenging project associated with the regulator’s portfolio of regulatory objectives.

Drawing the Line.

Most every crypto industry participant recognizes the need for bright-line rules to engender a successful sector of finance. Clear guidance has been missing in much of the world with some jurisdictions choosing to regulate via enforcement actions. Once guidance is finalised expectations are that it will be clear what is regulated by the FCA – and what is not.

Cryptoassets are a cryptographically secured digital representation of value or contractual rights that is powered by forms of DLT and can be stored, transferred or traded electronically. Examples of cryptoassets include Bitcoin and Litecoin (which we categorise as exchange tokens), as well as other types of tokens issued through the Initial Coin Offerings (ICOs) process (which will vary in type).

The Consultation states:

“The final Guidance will enable firms to understand whether certain cryptoassets fall within the regulatory perimeter. This should allow firms to have increased certainty around their activities while meeting our own regulatory objectives of consumer protection, enhancing market integrity and promoting effective competition in the interest of consumers. We encourage firms to seek expert advice if you are unsure whether the products you offer fall within the regulatory perimeter.”

The FCA has defined three different types of cryptoassets:

  • Exchange tokens: these are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They are, usually, a decentralised tool for buying and selling goods and services without traditional intermediaries. These tokens are usually outside the [FCA] perimeter.
  • Security tokens: these are tokens with specific characteristics that mean they meet the definition of a Specified Investment like a share or a debt instrument as set out in the RAO, and are within the [FCA] perimeter.
  • Utility tokens: these tokens grant holders access to a current or prospective product or service but do not grant holders rights that are the same as those granted by Specified Investments. Although utility tokens are not Specified Investments, they might meet the definition of e-money in certain circumstances (as could other tokens), in which case activities in relation to them may be within the [FCA] perimeter.

Exchange tokens, such as Bitcoin, are not considered to be money by either the FCA nor the Bank of England as these assets are simply too volatile to be considered a store of value, and, at least currently, are not widely accepted as a medium of exchange. Stablecoins are also considered to be exchange tokens yet the FCA adds that Stablecoins can be securities as well.

So where does the FCA seek to draw the line for security tokens?

Within the consultation, the FCA indicates that whether the token is transferable and tradeable on cryptoasset exchanges or any other type of exchange or market, this may be indicative that a token is a “Specified Investment” – thus a security. Simultaneously, the consultation states:

“Much like exchange tokens, utility tokens can usually be traded on the secondary markets and be used for speculative investment purposes. This does not mean these tokens constitute Specified Investments.”

The consultation includes several examples of what is, and what is not, a utility token.

This question may garner considerable interest from industry participants. The FCA says “the more decentralised the network the less likely it is that the token will confer enforceable rights against any particular entity, meaning it may not confer the same or equivalent rights as Specified Investments.”

In Europe, several jurisdictions have pursued, or are pursuing regulations that are viewed as supportive of crypto. France expects to enact law in early 2019 that defines their regulatory approach to crypto. The FCA has most certainly reviewed the proposed French regulation.

The Cryptoasset Consultation is open to feedback until Friday 5 April 2019. Stakeholders may submit responses via email to

Final Guidance on the existing regulatory perimeter in relation to cryptoassets will be published “no later than summer 2019.”

Download FCA Guidance on Cryptoassets here.

Swiss Financial Market Supervisory Authority Issues ICO Guidance

The Swiss Financial Market Supervisory Authority (FINMA) has published guidelines on initial coin offerings (ICOs). Switzerland, as many people know, is a hot bed of ICOs and cryptocurrency in general. Switzerland has recognized the newfound prominence in this sector of Fintech and has sought to create a regulatory environment that balances investor protection with an ecosystem that is conducive to innovation. FINMA’s response today was driven, in part, to the numerous requests they were receiving for guidance.

FINMA CEO, Mark Branson commented on the published guidance;

“The application of blockchain technology has innovative potential within and far beyond the financial markets. However, blockchain-based projects conducted analogously to regulated activities cannot simply circumvent the tried and tested regulatory framework. Our balanced approach to handling ICO projects and enquiries allows legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with our laws protecting investors and the integrity of the financial system.”

FINMA says it has seen a sharp increase in the number of ICOs planned or executed in Switzerland and a corresponding increase in the number of enquiries about the applicability of regulation. Given a legal and regulatory framework with partially unclear applicability, FINMA has published  guidelines, which complement earlier guidance. FINMA said that creating transparency at this time is important given the dynamic market and the high level of demand.

FINMA stated that financial market law and regulation are not applicable to all ICOs. Depending on the manner in which ICOs are designed, they may not in all cases be subject to regulatory requirements. Circumstances must be considered on a case-by-case basis.

As set out in previous guidance, there are several areas in which ICOs are potentially impacted by financial market regulation. At present, there is no ICO-specific regulation, nor is there relevant case law or consistent legal doctrine.

In assessing ICOs, FINMA said it would focus on the economic function and purpose of the tokens issued by an ICO organizer. The key factors are the underlying purpose of the tokens and whether they are already tradable or transferable. At present, there is no generally recognized terminology for the classification of tokens either in Switzerland or internationally.

FINMA categorizes tokens into three types, but hybrid forms are possible:

  • Payment tokens are synonymous with cryptocurrencies and have no further functions or links to other development projects. Tokens may in some cases only develop the necessary functionality and become accepted as a means of payment over a period of time.
  • Utility tokens are tokens which are intended to provide digital access to an application or service.
  • Asset tokens represent assets such as participations in real physical underlyings, companies, or earnings streams, or an entitlement to dividends or interest payments. In terms of their economic function, the tokens are analogous to equities, bonds or derivatives.

FINMA’s said that money laundering and securities regulation are the most relevant to ICOs. Projects which would fall under the Banking Act (governing deposit-taking) or the Collective Investment Schemes Act (governing investment fund products) are not typical.

The Anti-Money Laundering Act contains requirements for financial intermediaries including, for example, the need to establish the identity of beneficial owners. The law aims to protect the financial system against the risks of money laundering and the financing of terrorism. Money laundering risks are especially high in a decentralised blockchain-based system, in which assets can be transferred anonymously and without any regulated intermediaries.

FINAM added that securities regulation is intended to ensure that market participants can base their decisions about investments on a reliable minimum set of information. Moreover, trading should be fair, reliable and offer efficient price formation.

FINMA will handle ICO enquiries as follows:

  • Payment ICOs: For ICOs where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulations. FINMA will not, however, treat such tokens as securities.
  • Utility ICOs: These tokens do not qualify as securities only if their sole purpose is to confer digital access rights to anapplication or service and if the utility token can already be used in this way at the point of issue. If a utility token functions solely or partially as an investment in economic terms, FINMA will treat such tokens as securities (i.e. in the same way as asset tokens).
  • Asset ICOs: FINMA regards asset tokens as securities, which means that there are securities law requirements for trading in such tokens, as well as civil law requirements under the Swiss Code of Obligations (e.g. prospectus requirements).

ICOs can also exist in hybrid forms of the above categories. FINMA cited the example of anti-money laundering regulation that would apply to utility tokens that can also be widely used as a means of payment or are intended to be used as such.

FINMA said that it recognizes the innovative potential of blockchain technology and therefore supports the federal government’s Blockchain/ICO Working Group in which it is participating. Clarity about the underlying civil law framework will be a decisive factor in establishing this technology sustainably and successfully in Switzerland.

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Monetary Authority of Singapore Publishes Guidance on Initial Coin Offerings

The Monetary Authority of Singapore (MAS) has published a document providing guidance on Initial Coin Offerings (ICOs). Entitled “a Guide to Digital Token Offerings,” the document seeks to clarify when an ICO is in fact a security, and thus regulated and the application of securities laws.  MAS published a statement in August warning issuers and offering platforms that ICOs may be regulated in an approach similar to the US SEC. The statement was followed with a warning to investors to be cautious in backing tokenized offerings.

The Guide published today is described as not being exhaustive and “having no legal effect” calling into question its mission. MAS appears to be messaging the ICO community, both issuers and exchanges that facilitate crowdsales and secondary trading, that it continues to study the nascent sector of finance but will act if it believes an offering has ignored existing securities laws.. The final section of the Guide includes a statement on token issuers applying for the MAS Fintech Sandbox:

“Any firm that is looking to apply technology in an innovative way to provide new financial services that are or are likely to be regulated by MAS can apply for the regulatory sandbox. MAS expects that interested firms would have done their due diligence, such as testing the proposed financial service in a laboratory environment and knowing the legal and regulatory requirements for deploying the proposed financial service, prior to submitting an application.”

China, the largest Fintech market in the world, simply banned ICOs, along with exchanges, altogether thus stifling digital token offerings. Once the largest cryptocurrency market in the world, Japan has since emerged as the hot crypto trading market. Singapore is currently in the midst of its annual Fintech Festival, one of the largest financial innovation gatherings in the world.