Virtual Currency Legal Report: Week of January 7, 2022 | Coie Perkins


Weekly Fintech focus

  • US Congress to Hold Oversight Hearing on Cryptocurrency Mining
  • NY DFS Hires New Assistant Superintendent
  • Recent announcements from federal regulators signal changes in senior management at the SEC, CFTC and FDIC
  • CFTC Fines Crypto Betting Service Polymarket $1.4M Over Unregistered Swaps
  • Australian Open offers NFT sales alongside 2022 tournament
  • ESMA publishes Request for Evidence regarding Distributed Ledger Technology regulations

Developments in the United States

LEGISLATION

US Congress to Hold Oversight Hearing on Cryptocurrency Mining

The Oversight and Investigations Subcommittee of the House Energy and Commerce Committee is preparing a list of witnesses and intends to hold a hearing to examine the impact of virtual currencies on the environment, in focusing on bitcoin mining.

The bitcoin blockchain relies on a “proof of work” consensus mechanism that harnesses computing power to cryptographically prove the validity of transactions broadcast on the bitcoin network. Given the heavy reliance on computing power, this consensus method, and bitcoin in general, has received criticism for its potential impact on the environment. In December, Senator Elizabeth Warren sent a letter to a company engaged in bitcoin mining operations to gather information on “the impact these operations may have on climate change, the local environment, and the cost of electricity to retail consumers.” By the block, sources worked to gather witnesses “to account for the energy consumption of cryptographic validation of proof of work, in particular the Bitcoin network”. Although neither the timing of the hearing nor the witnesses have been confirmed, sources have told The Block that the hearing could take place as early as the end of January.

This congressional hearing will follow many others related to virtual currencies that have taken place over the past few months, illustrating congressional interest in the use and operation of virtual currencies.

REGULATION

NY DFS Hires New Assistant Superintendent

The New York Department of Financial Services (NY DFS) intends to hire Peter Marton as the new Deputy Superintendent of Virtual Currency.

As Deputy Superintendent, Mr. Marton will “provide his expertise to support policy decisions and regulation of emerging and innovative markets, including virtual currencies and virtual currency markets and businesses,” according to a job description for the position posted by NY DFS late last year. Mr. Marton was previously a director of Promontory Financial Group, specializing in digital asset strategy and optimization. At Mr. Marton’s announcement of his new role, he noted, “Crypto oversight should be a marathon, not a sprint, and I look forward to seriously pursuing this endeavor.”

The position is in the Research and Innovation Division of NY DFS. The division was created in July 2019 to “house the division of the Department responsible for the licensing and oversight of virtual currencies” and to “assess new efforts to use technology to address financial exclusion; identify and protect consumer data rights; and encourage innovations in the financial services marketplace to maintain New York’s competitiveness as a hub of financial innovation. The Division oversees the application process for virtual currency business licenses, known as BitLicenses, and plays a lead role in the formation of limited purpose trust companies organized for the purpose of providing services related to virtual currencies. .

Recent announcements from federal regulators signal changes in senior management at the SEC, CFTC and FDIC

On December 15, 2021, President Biden announcement his intention to appoint Summer Mersinger and Caroline Pham to fill two Republican positions on the Commodity Futures Trading Commission (CFTC). Ms. Mersinger most recently served as Chief of Staff to CFTC Commissioner Dawn Stump, who declared early December 2021 that she had no intention of seeking another position when her current term ends in April 2022. Ms. Pham is Chief Executive Officer of Citi, represents Citi on the Executive Committee of the Chamber of Digital Commerce and on global issues such as prudential regulation and systemic risk as well as financial markets, including currencies and commodities, fintech and digital assets. If confirmed, Ms. Mersinger and Ms. Pham will join Commissioner Rostin Behnam, who was confirmed as CFTC Chairman in December 2021, and take the seats held by Commissioner Stump and former SEC Commissioner Brian Quintenz, who resigned in 2021.

On December 20, 2021, Elad Roisman, one of two Republicans on the United States Securities and Exchange Commission (SECOND), published a declaration noting that he intends to step down as SEC commissioner by the end of January. Commissioner Roisman was appointed by President Trump and sworn in in 2018. Prior to his role at the SEC, Commissioner Roisman served as Senior Advisor to the U.S. Senate Committee on Banking, Housing, and Urban Affairs and Advisor to the Commissioner of the SEC Daniel M. Gallagher, focusing on enforcement and policy relating to the US equity and fixed income markets, the asset management industry, and international capital markets regulation. His departure will leave SEC Commissioner Hester Peirce as the only Republican SEC commissioner.

On December 30, 2021, the SEC announcement new appointments to SEC Chairman Gary Gensler’s leadership team. Among the appointees were Corey Frayer, who will advise Chairman Gensler on SEC policy development and interagency work relating to the oversight of crypto assets, and Jorge Tenreiro, who will serve as enforcement counsel and advise the SEC. Chairman Gensler on matters involving the SEC’s enforcement division. Prior to joining the SEC, Mr. Frayer served as a senior executive on the U.S. Senate Committee on Banking, Housing, and Urban Affairs for Chairman Sherrod Brown, where his work included advising on cryptocurrency policy. cash. Mr. Tenreiro joined the SEC in 2013 as a staff attorney in the New York Regional Office and later served as senior legal counsel, working on notable cryptocurrency-related law enforcement cases. .

On December 31, 2021, Federal Deposit Insurance Corporation (FDIC) President Jelena McWilliams announcement that she intends to step down as of February 4, 2022. Chairman McWilliams was appointed in June 2018. Martin Gruenberg, a member of the FDIC board of directors, will become interim chairman once the resignation of Chairman McWilliams will be effective.

DISPUTE

CFTC Fines Crypto Betting Service Polymarket $1.4M Over Unregistered Swaps

the The CFTC imposed a fine Blockratize, Inc. (d/b/a Polymarket) $1.4 million for offering “off-exchange event-based binary options contracts” and for its “failure to obtain designation as a Designated Contracts (DCM) or registration as a Swap Execution Facility (SEF).”

In addition to the fine, Polymarket must close all markets on its website that do not comply with the law on commodity exchanges (ECA) and CFTC regulations. Polymarket is further required to “cease and desist from violating CEA and CFTC regulations, as charged.”

Polymarket’s product is commonly referred to as an “event market”, where clients can buy and sell binary options tied to future events. For example, Polymarket’s social media promoted binary options stating if “more than 2.5 million people [will] go through a TSA checkpoint any day on or before December 31” or if “J.Lo and Ben Affleck [will] get engaged before Thanksgiving. The CFTC noted that Polymarket has offered more than 900 separate events since its inception, leveraging blockchain-hosted smart contracts to manage each event. The CFTC has determined that “event market contracts, each of which consists of a pair of binary options, constitute swaps within the jurisdiction of the CFTC, and therefore may only be offered on an exchange registered in accordance with the regulations CEA and CFTC”.

In the press release announcing the sanction, Acting Director of Enforcement Vincent McGonagle pointed out that “[a]All derivatives markets must operate within the bounds of the law, regardless of the technology used, and especially those in the so-called decentralized finance or “DeFi” space.

INDUSTRY

Australian Open offers NFT sales alongside 2022 tournament

The Australian Open, which is due to take place from January 17, 2022, has announced that it will publish a series of non-fungible tokens (NFT) corresponding to the matches taking place during the tournament. The metadata of each NFT will be linked to a plot of a tennis court surface in the actual tournament. If the winning shot from an Australian Open match lands on this plot, the NFT metadata will be updated in real time to reflect the match results.

The Australian Open also operates a virtual reality metaverse world called AO Decentraland, where the event will be streamed live in 3D.

International developments

ESMA publishes Request for Evidence regarding Distributed Ledger Technology regulations

On 4 January 2022, the European Union securities regulator, the European Securities and Markets Authority (ESMA), announcement a request for comments from market participants regarding the use of distributed ledger technology (DLT) in connection with the settlement and trading of tokenized securities. Specifically, ESMA invites comments on whether the current pre- and post-trade transparency and data reporting requirements need to be amended in order to be effectively applied to securities issued, traded and registered on DLT.

Stakeholders are invited to submit their comments by March 4, 2022. ESMA has indicated that it will consider industry comments to determine if changes to the regulation are necessary.

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