May 26, 2020

Despite Big News and Some Regulatory Progress, Digital Assets Face Continued Skepticism and Legal Hurdles

As the summer continues to heat up so does the digital asset industry with two major developments.

The Libra announcement last month represented a milestone in the cryptocurrency industry. Libra, with the backing of mainstream tech players like Facebook and traditional financial firms like MasterCard, became the first cryptocurrency with the potential to go “mainstream.” Everyone knows about bitcoin, but even bitcoin still has an aura of inaccessibility to it and the price volatility of bitcoin makes its use as an everyday currency difficult to imagine. Libra, on the other hand, with its Facebook backing, access to potentially billions of users, as well its built-in price stability could quickly surpass bitcoin in terms of value and utility. The intense media and government attention that Libra has received, even prior to its launch, demonstrates the power of Facebook and other big tech firms in bringing mainstream attention to cryptocurrencies.  

That is not to say, however, that the mainstream and regulatory reception of Libra has been positive. Central bankers and finance ministers from the United States, France, and England have spoken out against the coin. President Trump recently tweeted his disdain for cryptocurrencies and suggested that Facebook may need a banking charter. Senators from both parties lit into Facebook executive David Marcus in a recent Senate Banking Committee hearing. Even Mark Cuban, the outspoken tech entrepreneur and star of the reality show “Shark Tank” panned Libra as a “big mistake.” Additionally there are many unanswered questions about how Libra will work and where will be it be legal. 

Setting aside for a moment the strong individual and corporate personalities involved, the largely negative reception to Libra can be viewed both as the natural growing pains of a new technology that threatens the status quo and a sign that that cryptocurrencies still face major legal and technical hurdles to gaining widespread acceptance.

On a different note, Blockstack, a company that allows developers to build decentralized apps, announced on July 10, 2019 that it had become the first company ever to offer digital tokens regulated by the SEC.  The Blockstack token will not be a currency but rather a digital representation of a security.  Blockstack said that it had been granted qualification under SEC’s Regulation A+ registration exemption, which allows small issuers to solicit non-accredited investors without all of the hassle of a full IPO. Blockstack’s offering, while not as potentially revolutionary to everyday life as Libra, is certainly a breakthrough in legal and regulatory circles for those working for the digitization of assets. However, it’s unlikely that the Blockstack approval heralds an opening of the floodgates to SEC-approved digital coin offerings.

Notably, a number of companies have tried using the Reg A+ exemption to make initial coin offerings over the past two years with little success. There is no indication from the SEC that Blockstack’s approval will change the landscape. The economic case for issuing digital assets via a Reg A+ has not been proven, particularly since the cost of securing the SEC approval will likely prohibit many other would-be ICO contenders from seeking a similar path to market.

In sum, with regard to both LIBRA and Blockstack, only time will tell whether the summer of 2019 is remembered not only for its record heat waves but as the moment when the movement to decentralized digital assets and currencies took an important step toward mainstream adaptation.

© Polsinelli PC, Polsinelli LLP in California

TRENDING LEGAL ANALYSIS


About this Author

Thomas Wagner, Litigation, Financial Services, Polsinelli Law FIrm
Associate

Tom is an associate with substantial litigation experience in the financial services industry. He resolves disputes by listening to clients and knowing how litigation affects their business. Tom’s legal skills, industry knowledge, and understanding of client goals help him obtain cost-effective resolutions to complex legal problems. 
Tom has successfully resolved:

  • Trade-secret disputes
  • Unfair competition cases
  • Breach of contract cases
  • Claims arising under federal and state consumer protection statutes
  • Business fraud and business divorce...
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Stephen A. Rutenberg Shareholder Polsinelli New York Bankruptcy and Financial Restructuring Bankruptcy Litigation Capital Markets ,Commercial Lending ,Debt and Claims Trading, Financial Services, Insolvency, Financial Technology FinTech and Regulation
Shareholder

Stephen Rutenberg’s practice focuses on the intersection of special situations investing and FinTech including cryptocurrency and blockchain technology. 

A significant component of Stephen’s practice relates to his work in the distressed debt market, representing clients in the purchase and sale of loans and securities of distressed and bankrupt companies. Recent representations include advising on the purchase, sale and financing of bankruptcy trade claims in several major chapter 11 cases, including Lehman Brothers, and the MF Global and Icelandic bank liquidations. He works with all types of clients, specifically, asset managers, hedge funds, private equity firms, and global financial institutions that seek him out for his legal understanding, business sense, responsiveness, and care for client needs. 

Together with the other lawyers in Polsinelli’s renowned FinTech and Regulation practice, Stephen represents, investors, issuers and underwriters looking for market leading perspectives,  on cutting edge utilization of blockchain technology including investing in cryptocurrency and initial coin offerings (ICO’s). 

Stephen has experience with general financings, lending, and other corporate transactions. He has also counseled clients in the negotiation of total return swaps, credit default swaps, and other structures for the purchase and/or financing of loan and claim portfolios as well as formation and structuring work for startup companies and funds.
 

Admitted to practice in New York and as a solicitor in England and Wales, Stephen has significant experience advising on cross-border distressed trading matters and is recognized for this in the 2016 edition of IFLR1000as a Rising Star. In February 2017, Stephen received the UJA-Federation of New York’s James H. Fogelson Emerging Leadership Award for his contributions to the New York legal and philanthropic communities. Stephen is recognized as a thought leader frequently writing and speaking on the FinTech and distressed loan trading.

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