Blockchain Legal Digest

The Source for Blockchain Legal News & Opinion

Is the SEC Bullying Kik?

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Is the SEC lawsuit against Kik a step too far? Photo by PlusLexia.com | CC By 2.0

The Securities and Exchange Commission has filed what could be a landmark lawsuit accusing messaging app maker Kik with violating U.S. securities laws.

The lawsuit stems from Kik Interactive’s sale of blockchain-based tokens, which raised about $55 million for Kik, which had been struggling financially.  The SEC alleges that Kik failed to register the tokens, as required by U.S. law.

“By selling $100 million in securities without registering the offers or sales, we allege that Kik deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” said Steven Peikin, Co-Director of the SEC’s Division of Enforcement in a press release.  “Companies do not face a binary choice between innovation and compliance with the federal securities laws.”

The lawsuit, though, may help to establish clarity in what has been a murky area: are issuers of initial coin offerings required to comply with the same registration and disclosure requirements that traditional securities, such as stocks and bonds, must fulfill. Congress has not addressed the issue with legislation, and the SEC’s directives and litigation has not offered much clarity. Until the filing of the Kik lawsuit, the SEC had focused its litigation efforts on cases that involved not only unregistered tokens but also alleged fraud.

Some are questioning whether the lawsuit against Kik goes too far by seeking punishment for behavior that fell into a gray zone.

The SEC lawsuit is not a surprise, but still it’s a shame. Unlike many other companies that held ICOs, Kik was not a scam or a fly-by-night operation. As Fortune reported in 2017, the company had been experimenting with tokens for years with “Kik Points,” a type of digital money that traded hands up to 300,000 times a day. The SEC’s decision to come down heavy on Kik came in the name of protecting investors, but it also risks punishing early innovators in the blockchain economy.

Does the SEC’s Lawsuit Against Kik Go Too Far?

Predictably, Kik thinks the SEC’s legal arguments are flawed:

And some thorough analysis:

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Justice Fears Flight of Former Footballer

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The Department of Justice is seeking to detain Reginald Fowler in connection with his involvement in cryptocurrency scheme. Prison by Neticola | CC By-ND 2.0

The legal woes of former football player and Minnesota Vikings co-owner Reginald Fowler continued to mount this week as the U.S. Department of Justice filed a motion to detain him pending a trial on numerous charges relating to the operation of several crypto exchanges including Bitfinex.

The DOJ announced earlier in the week that Fowler and an Israeli woman had been charged in connection with the alleged operation of an illegal bank and unregistered money transmitter operation.

Fowler and the Israeli woman also were indicted by the New York Attorney General’s Office.

https://twitter.com/count_satoshi/status/1123600173354168320?s=20

Among other factors, the DOJ cited access to funds as one of the reasons it believes Fowler poses a risk of fleeing before trial.

This scheme involves a staggering amount of money, and the government believes that some of that money remains available to Defendant, especially in overseas jurisdictions. That, combined with Defendant’s international ties, would give him the means to flee to avoid prosecution.

Motion in U.S. v Fowler
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From A to W: A survey of state blockchain laws says …

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Survey of state blockchain laws shows a broad stretch of differing regulations.
In the Distance by Angus MacRae| CC By 2.0

JD Supra released the results of its updated survey of state laws relating to blockchain.  The best state for blockchain businesses: Wyoming is a leader, having enacted a series of regulations that exempts tokens from securities laws and virtual currencies from money transmitter laws. The worst: Possibly, New York, which has chased away blockchain-based companies with its BitLicense scheme..

One of the key issues with state blockchain regulation is that few states have addressed whether their money transmitter laws apply to virtual currencies.

Some states have issued guidance, opinion letters, or other information from their financial regulatory agencies regarding whether virtual currencies are “money” under existing state rules, while others have enacted piecemeal legislation amending existing definitions to either specifically include or exclude digital currencies from the definition. To use a pun those in the blockchain space should understand, there is a complete lack of consensus as to whether they do or not. This uncertainty is made all the more complicated by potentially contradictory guidance from the Federal government. 

JD Supra

Check out the complete survey here.

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Demand is high for blockchain lawyers; France moves to be model for regulation

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France wants to reign the as the model for European blockchain regulation. Versailles Photo by Ninara | CC By 2.0

Despite the crash in the value of cryptocurrencies, recruiters are seeing high demand for lawyers with expertise in areas relating to use of blockchain, according to The American Lawyer.

“I think that the blockchain space was extremely popular for lawyers toward the end of 2017, and then the cryptocurrency crash happened, and a lot of lawyers who were working in crypto or blockchain went back quietly to whatever they were doing before, like Silicon Valley in the ’90s” said J.R. Lanis, a shareholder at U.S. law firm Polsinelli according to The American Lawyer article. “Those who have stuck with it will continue to see a lot of activity in this area.”

France is vying to serve as a model within the European Union for blockchain regulation, according to Modern Consensus. French Finance Minister Bruno Le Maire proposed that other E.U. set up a framework based on France’s new blockchain law.

The French law provides a certification process for firms wanting to trade or create new in digital assets. Le Maire said, “development of the blockchain ecosystem is a priority for the government: it is a potential technology that can contribute to the modernization of our businesses and our economy.”

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Bi-partisan bill reintroduced in Congress to clarify blockchain regulatory regime

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U.S. lawmakers are seeking to encourage blockchain innovation to help American businesses remain competition with Chinese companies. Photo by Hobvias Sudoneighm | CC By 2.0

A bipartisan group of U.S. lawmakers re-introduced legislation aimed at clarifying how securities laws are applied to crypto tokens.

The Token Taxonomy Act of 2019, H.R. 2144, was introduced to provide regulatory certainty for businesses, entrepreneurs, and regulators in the U.S.’s blockchain economy. The proposed law would clarify the numerous conflicting state initiatives and regulatory rulings, and patchwork of judicial decisions, that have clouded certainty for entrepreneurs and businesses that use blockchain technology.

“The Token Taxonomy Act is the key to unlocking blockchain technology in America. Without it, the U.S. is surrendering its innovative origins and ownership of the digital economy to Europe and Asia. Passing this legislation, Congress would send a powerful message to innovators and investors around the world that the U.S. is the best destination for blockchain technology. In the early days of the internet, Congress passed legislation that provided certainty and resisted the temptation to over-regulate the market. Our intent is to achieve a similar win for America’s economy and for American leadership in this innovative space.

Ohio Republican Congressman Warren Davis

The legislation was written by Davidson (OH-08) and co-sponsored by Representatives Darren Soto (D-FL-09), Josh Gottheimer (D-NJ-05), Ted Budd (R-NC-13), Tulsi Gabbard (D-HI-02), and Scott Perry (R-PA-10).

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Quadriga: Bankruptcy proceedings begin; Claims of ties with money laundering and withdrawals from other exchanges

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Black hole Photo by NASA Goddard Space Flight Center| CC By 2.0

The Nova Scotia court that is overseeing the Quadriga morass ordered the start to bankruptcy proceedings, which could lead to the liquidation of assets and settlement of claims.

The court order came in response to a report from Ernst & Young, the accounting firm that was appointed as a monitor. In the report, the firm said, “Given the present circumstances, the possibility that Quadriga will restructure and emerge from [bankruptcy] protection appears remote.”

Separately, news reports are tying Gerald Cotton with Liberty Reserve, a currency that was shut down by U.S. law enforcement in 2013 for its alleged connection to money laundering.

Reddit users claim QuadrigaCX withdrawals came from other exchanges.

New information shows QCX has been a SCAM all along and the SCAM continues, even today.
by inQuadrigaCX2
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Quadriga: Representatives appointed, co-founder allegedly has criminal past, cold wallets empty

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The Quadriga mystery continues to unfold as news outlets report a cofounder served time in the US on criminal charges under another name. Photo by Patrice Puig | CC BY-SA 2.0

Events continue to unfold in the Quadriga saga.  Quadriga is a crypto exchange that was run by a 30-year-old Canadian named Gerald Cotten who allegedly died in India in December.  His widow alleges that the exchange was run by Cotten from a single encrypted laptop for which no one has the password. Consequently, about 115,000 customers of the exchange cannot access their funds, totaling more than $140 million, according to an article on NDTV.com.

Here’s the latest:

The law firms appointed by the Nova Scotia Supreme Court to represent Quadriga’s customers have a established a committee of users who will help the lawyers represent others who were affected by Quadriga’s shutdown.  The seven member committee includes a banker, an engineer and an economic policy adviser.

News outlets are reporting that Quadriga co-founder Michael Patryn was formerly known as Omar Dhanani who had spent time in federal prison in the United States on charges of conspiracy to commit credit-and-bank card fraud in 2005. Dhanani was an operator of shadowcrew.com, a now defunct marketplace for trafficking stolen credit and bank card numbers. Dhanani also admitted guilt in 2007 in California to separate criminal cases for burglary, grand larceny and computer fraud, according to Bloomberg.  Patryn was deported to Canada, where he became involved in cryptocurrency and later co-founded Quadriga with Cotten.

Ernst & Young, the court-appointed accounting firm that is examining Quadriga reported its discovery that the cold wallets that Quadriga is known to have used were empty, leaving open the question of what happened to more than a hundred million dollars in funds deposited by Quadriga customers.

https://twitter.com/johnbassilios/status/1103794742662447104

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Quadriga: Mystery Continues to Unfold

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Hundreds of thousands of dollars of cryptocurrency have been taken under control, but more than a hundred million worth of crypto held by the defunct cryptocurrency exchange Quadriga remain unaccounted for. Photo by Vinoth Chandar | CC BY 2.0.

The Quadriga mystery continues to unfold. The accounting firm appointed as a monitor has taken control of the funds held by the defunct Canadian crypto exchange, but questions remain about the whereabouts of other funds that were once deposited with Quadriga.

If you haven’t been following the Quadriga saga, here it is in a nutshell.  Quadriga is a crypto exchange that was run by a 30-year-old Canadian named Gerald Cotten who allegedly died in India in December.  His widow alleges that the exchange was run by Cotten from a single encrypted laptop for which no one has the password. Consequently, about 115,000 customers of the exchange cannot access ’s cannot access their funds, totaling more than $140 million, according to an article on NDTV.com.

Ernst & Young confirmed in a court filing on Feb. 20 that it successfully moved cryptocurrency, worth a few hundred thousand dollars, into cold wallets controlled by E&Y.

An earlier report from E&Y revealed that Quadriga apparently accidentally had transferred 103 bitcoin, worth about $470,000, to cold wallets that Quadriga is unable to access.

In the meantime, speculation about the Quadriga situation and the more than $100 million in missing crypto runs rampant:

https://twitter.com/brian_armstrong/status/1098656491609849856

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Alleged Death of Crypto Exchange Chief Sparks Speculation

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The mysterious death of Quadriga CEO Gerald Cotten has led to questions about the circumstances of his passing and the inability of customers to access funds. Photo by Véronique Debord-Lazaro | CC BY-SA 2.0

People have searched landfills for lost Bitcoin millions and we’ve seen a secretive heir to a banking fortune die on the way to rehab leaving behind hundreds of millions in crypto with no way to access it.   But nothing compares to the situation that is playing out with Canadian crypto exchange Quadriga CX.

If you haven’t been following the Quadriga saga, here it is in a nutshell.  Quadriga is a crypto exchange that was run by a 30-year-old Canadian named Gerald Cotten who allegedly died in India in December.  His widow alleges that the exchange was run by Cotten from a single encrypted laptop for which no one has the password. Consequently, about 115,000 customers of the exchange cannot access ’s cannot access their funds, totaling more than $140 million, according to an article on NDTV.com.

Why the “allegedly” caveats?

First off, there is online buzz about whether Cotten actually died.  He is alleged to have died unexpectedly in an Indian hospital from complications of Crone’s disease on December 9.  His company did not announce his death until more than a month later.

Court documents indicate Cotten finalized a will only a couple of weeks before he died, leaving nearly $10 million to his widow, according to a report in The Financial Post.

The situation has led to online speculation and anger.

Gerald Cotten… We’re coming after you. Reddit will never fail. It’s the internet versus one little, weak low life man.
byu/gotmygat inQuadrigaCX

Questions also have been raised about the storage of crypto assets by Quadriga and the alleged inability to access them.

“The Quadriga story doesn’t make sense. The one amazing thing about blockchains is that anyone can audit, in essence, any company.”

Emin Gün Sirer, a professor at Cornell University and co-director of the Initiative for CryptoCurrencies and Contracts, as quoted by NDTV.com

The situation has now been turned over to the courts. Quadriga filed for protection from creditors in a Nova Scotia court, and the court has appointed accounting firm Ernst & Young as a monitor. Stay tuned as the details emerge.

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Wyoming Continues Push to Be Blockchain Haven

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Although it may be known better for mountains and buffalo on the Great Plains, Wyoming’s legislators are hoping there will be a pot of gold at the end of the blockchain rainbow.
Photo by Always Shooting | CC BY 2.0

While New York, arguably the world’s financial capital, piddles with a study commission, Wyoming, one of the most rural of American states, continues to advance some of the most forward-thinking blockchain-related legislation.

Within the past week, Wyoming has pushed forward two pieces of legislation that would help to make it one of the world’s regulatory havens for blockchain.  The legislation includes the following:

Digital Assets — Existing Laws: Categorizes digital assets as property under existing laws, including the Uniform Commercial Code, authorizes security interests in digital assets,  and establishes an opt-in framework for banks to provide custodial services for digital assets.

Corporate Stock Certificates: Authorizes corporations to issue blockchain-based certificate tokens in lieu of traditional stock certificates.

The new legislation was celebrated by numerous blockchain advocates, including Caitlin Long, a member of the Wyoming Blockchain Coalition.

The new legislation comes on heels of several other pieces of legislation that position Wyoming as a haven for blockchain and cryptocurrency.

It’s “impressive and inspirational – the work that has been done by a number of key figures, including the Wyoming Blockchain Coalition and state legislators – in a very short period of time,” said Scott Burke, CEO of Canadian-based BlockCrushr Labs in a Newsweek article published last year. “It’s incredible to see common sense embraced and enacted in what could and should be an example-setting approach.”

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