Could using blockchain require registration with US regulators as a broker or exchange?
That’s the caution sounded in a discussion of the legal and regulatory challenges for banks using new financial technology hosted by Polsinelli, a law firm with offices in 20 US cities, at its New York office on December 8.
The US Securities and Exchange Commission hasn’t yet issued a decision on proposed changes of Transfer Agent Rules (the comment period on the rule proposal closed in April). The proposal suggested that blockchain could replace the function of transfer agents, which maintain records of investors and balances. At the same time, Richard Levin, an attorney at Polsinelli, said the use of blockchain could require an entity to register as a transfer agent.
“If you’re in digital currency or blockchain, but what you’re doing looks an awful lot like the futures or derivatives market — or an equities market — you may need to register or at least talk with regulators and figure out if you need to register or there’s an exemption that can be had,” said Levin.
Although blockchain could conceivably be labeled a commodity, and as Brent Tomer, chief trial attorney at the US Commodities and Futures Trading Commission (CFTC), said, the definition of a commodity can be “quite broad,” the CFTC’s license requirements cover “a much more limited sphere.”
“We have asserted through enforcement action that bitcoin and other virtual currencies are commodities,” said Tomer. “Conceivably certain blockchain uses could become commodities as well if used in the right context.” The CFTC did issue enforcement actions against Coinflip in September 2015 and Bitfinex in June 2016.
New York-based transactions and exchange automation provider Consensys tries to “cover its bases from a regulatory perspective,” said Brent Xu, director of enterprise and head of structured finance at the company. To do so, Xu added, the company has to consider both its construction of “grass roots” technology, meaning “disruptive applications,” and integration of new technology into legacy systems.
The use of multiple operational systems for complex trading activity can make it more challenging to catch blockchain activity that could trigger a registration requirement, according to Obreahny O’Brien, business solution leader for blockchain and distributed infrastructure strategy at Ernst & Young in New York.
“We see a common theme of needing to minimize exposure when dealing with blockchain technology, because it is so pervasive and you may have multiple players outside your organisation running this software that you may be taking ownership of,” she said. “As a result, how do you minimise your exposure and take into account people participating on your network creating a filing obligation, whether for tax or other considerations, in various jurisdictions?”