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FinTech and Regulation: BitBlog Weekly Update

This week’s summary includes updates on anti-money laundering in the crypto-friendly nation of Malta and a proposal to regulate cryptocurrency miners in the United States to help stop human trafficking. In other news, a New York based firm launches what it claims is the first gold-backed digital token; the head of the U.S. Commodities Futures Trading Commission comments on cryptocurrency, LIBRA encounters some additional obstacles. And our readers are invited to Denver for Denver Startup Week, this week, for events between September 17 and 19.

Malta, the“Blockchain Island” Announces a Strategic Plan to Combat Money Laundering

Malta, the smallest member of the European Union, is not typically a featured player in the world of international finance. But thanks to a concerted effort by the government, including the passage of a trio of blockchain and crypto-related laws in July 2018, the tiny Mediterranean nation has developed a reputation as one of the world’s most crypto-friendly jurisdictions. Politicians inside Malta have touted Malta’s attempts to provide legal and regulatory certainty in an industry where such certainty is a rare commodity. Their efforts have paid off as many well-known firms, including the cryptocurrency exchange Binance, have made Malta their home.

However, some international groups have criticized Malta’s crypto-friendliness as an invitation to money laundering and fraud. For example, the International Monetary Fund has asserted that Malta’s regulatory environment has created a significant risk of terrorism financing. Now, in an express effort to respond to criticism from the IMF and European Union authorities, the Malta Financial Services Authority (“MFSA”) announced that it is implementing a three-year plan to, among other things, combat money laundering and bring the country’s, “compliance standards to international levels.” The MFSA’s Plan indicates that the MFSA will work with the Malta Digital Innovation Authority and the country’s Financial Intelligence Analysis Unit to, “manage and address the risks inherent to cryptocurrency and blockchain technology.”

While some players in the digital asset industry may bemoan the MFSA’s plan as unnecessary bureaucracy, measures like this Strategic Plan are necessary to prevent crime while allowing the digital asset industry to grow and obtain mainstream status. Rather than scare away investment in the country, more robust AML policies may lead to increased investment in Malta, particularly by institutional investors by combining the existing “crypto friendly” regulatory and legal regime with more robust security and enhanced compliance requirements.


Former Director of Office of Illicit Finance Calls on U.S. Congress to Regulate Crypto Miners in Effort to Combat Human Trafficking

David Murray, the former director of the Office of Illicit Finance at the U.S. Department of Treasury, told a U.S. Senate subcommittee that human traffickers were using anonymous, decentralized financial systems to shield payments for their unlawful activities from police and regulators. One of Murray’s solutions: regulate the crypto miners. Miners are the computer operators who create a crypto currency through the fulfillment of a software protocol that validates transactions on a blockchain.

Crypto mining is essentially unregulated in the United States, but Murray suggested that Congress should create a new form of regulated financial institution known as a “virtual asset transaction validators,” aka, crypto miners. His proposal would require miners, and virtually anyone else dealing with virtual assets to know who they are dealing with in much the same way as the Bank Secrecy Act1 currently applies to financial institutions. Murray said that crypto miners could serve a critical gatekeeping function. He argued that miners could prevent bad actors from secretly moving assets by governing who can participate in crypto networks through vetting issuers, exchanges and custodians.

Murray deserves much credit for putting the spotlight on human trafficking and many of his suggestions are worthy of consideration, however Murray’s draconian proposal regarding crypto miners is problematic in a number of ways. Firstly, crypto miners generally don’t have access to the identity of a digital currency’s underlying owner. Although there are benefits to ensuring that all entities are reputable, Murray’s prescriptions are unlikely to reveal the existence of bad actors. Additionally, one of the most important and often confused features of most blockchains is that transactions can be tracked even if they are anonymous. As such there is reason to question Murray’s suggestion that crypto currency is ripe for extensive criminal use. Cash and other untracked stores of value such as gift cards are likely to remain the favored medium for most criminal actively regardless of any legislative activity. However, as the legislative reception to Libra shows, U.S. policy makers are highly suspicious of cryptocurrencies due, in large part, to the fear that such currencies are thought to facilitate unlawful activity some regulation of the crypto mining shouldn’t be ruled out.

Murray’s proposals can be found here.


First Gold-Backed Digital Token Launched by New York-based Firm

The United States officially ended any correlation between gold and the U.S. dollar in 1971 after having effectively abandoned the gold standard in 1933. But investors who want their (digital) currency backed by bullion now have a new way to do that. Paxos, a New York-based cryptocurrency firm, announced on September 4, 2019 that it was releasing PAX Gold, a digital token backed by actual gold held in a London vault. It’s hard not to see the irony in one of the newest asset classes being used as a representation of, and maybe even leading to a resurgence of, one of the oldest ones.

Paxos claims that PAX Gold is the first token of its kind and that it offers an inexpensive way for investors to hold gold when compared against more traditional products, such as ETFs, futures contracts or physical holdings. PAX Gold tokens are available via the company’s own website and on non-U.S. based cryptocurrency exchanges. The tokens operate on the Ethereum network and token holders who want to trade their PAX Gold tokens can do so in the manner as other digital tokens. Custody of the gold is held by Paxos Trust Company and Paxos is a trust company regulated by the New York State Department of Financial Services on its website.

Although the Pax Gold tokens trade on the de-centralized etherum blockchain the underlying gold is held in a centralized trust controlled by Pax. This is a good illustration of the fundamental principal outlined by Wharton professor Kevin Wharbach in his book “The Blockchain and the New Architecture of Trust” that blockchain is not trustless but rather it is a reallocation of trust among parties.2

More about PAX Gold can be found here.


France Continues to Put the Brakes on LIBRA

Thoughts that Facebook will have an easier time in Europe than in the US appear to be squashed as it has been widely reported that Bruno Le Maire the French finance minister said on September 12 that France will not support Facebook’s announced LIBRA currency due to risk of it endangering the monetary sovereignty of states. Although this is not the first time that Mr. Le Marie has expressed concern about giving a company with the reach of Facebook any power over monetary policy his recent statement of “I want to say it with great clarity: in these circumstances, we cannot allow the development of Libra on European soil.” appears quite final. It is not that Mr. Le Maire is against the concept of the digital currency but would prefer that they be controlled by the government, and as such he has previously proposed a “EurCoin” that would allow for more efficient movement of money without taking away the control of central banks. Given that LIBRA as currently envisioned is a stable coin backed by a basket of currencies it is not entirely clear why Mr. Le Marie is concerned that monetary sovereignty will be endangered by it.


New CFTC Chairman Heath Tarbert Gives Some thoughts on Crypto currency at NYU.

On September 10, 2019, new CFTC Chairman spoke at NYU School of Law’s Institute for Corporate Governance & Finance on a number of topics including crypto currency. As things currently stand crypto assets, such as bitcoin which are not considered securities by the SEC are regulated as commodities by the CFTC. Here are a few key take-aways of Chairman Tarbert's remarks.

  • In general the CFTC is not looking to stop innovation and would prefer the market to regulate itself rather than having the CFTC to set rules.

  • The CFTC is notably concerned about custody, particularly since much of what the CFTC regulates and is used to seeing is physical. "[Y]ou don’t have custody issues with aluminum”. This concern parallels that of the SEC and FINRA as discussed in our blog post about their joint guidance.

  • When it comes to the trading of crypto commodities the CFTC is trying to figure out how to set margin requirements due to the lack of pricing history of these commodities compared to gold and oil.

  • The recent Ninth Circuit Court of Appeals ruling, in favor of the CFTC in a fraud case against Monex Deposit Company, found that the CFTC only needs to prove fraud occurred, regardless of whether market manipulation has occurred. This makes it much easier for the CFTC to bring enforcement actions against crypto companies.3

  • The CFTC is still studying LIBRA to determine if they consider the proposed currency to be a commodity or just a method of payment. The CFTC is going to wait for the central banks to make their ruling before making their own. However, the CFTC also noted that the successful launch of Libra may cause the Financial Stability Board to reassess its conclusion that crypto does not raise a systematic risk to the economy.4

  • The Chairman is happy that the CFTC has approved new crypto exchanges and sees this as a sign of market vitality for the commodities sector.


[1]  The Bank Security Act

[2] The Blockchain and the New Architecture of Trust, Kevin Werbach

[3] Ninth Circuit Rules in Favor of CFTC in Fraud Case Against Monex Deposit Company and its Principals

[4] Financial Stability Board

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume IX, Number 260

About this Author

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

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...

Thomas Wagner, Litigation, Financial Services, Polsinelli Law FIrm

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...