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In this issue:
• <a href="#CFTC">CFTC Issues Guidance on Crypto Derivatives</a>
• <a href="#“Operation">“Operation Cryptosweep” Continues Enforcement Actions Against ICOs</a>
• <a href="#Countries">Countries Exploring National/State-Backed Cryptocurrencies</a>
<a id="CFTC"></a>CFTC Issues Guidance on Crypto Derivatives

By: <a href="https://www.bakerlaw.com/JonathanDBlattmachr">Jonathan D. Blattmachr</a>

On May 21, 2018, The Commodity Futures Trading Commission (CFTC) issued to exchanges and clearinghouses a staff advisory regarding cryptocurrency derivatives (the Advisory). The CFTC acknowledges that its guidance only “reflects staff’s current thinking based on experience with virtual currency derivatives products to date,” and that cryptocurrencies “are unlike any commodity that the CFTC has dealt with in the past.” The Advisory clarifies risks of concern to the CFTC, including that it may be difficult to get proper prices on derivatives’ underlying cryptocurrencies and obtain sufficient information about cryptocurrency spot markets to detect potential manipulation in those markets. The CFTC warns that exchanges and clearinghouses “should be proactive, flexible, and ensure proper surveillance and oversight of the trading and clearing of virtual currency contracts . . . .” The Advisory highlights that these entities should focus on, among other things, enhanced market surveillance, including requiring self-regulatory organizations (SROs) to establish and maintain oversight programs to detect and prevent manipulation and settlement disruptions.

That the CFTC admits that it is still getting its arms around this evolving problem seems a positive step forward; exchanges and clearinghouses will help shape regulation in this space. At the same time, the Advisory’s pronouncement that these players will have to take on more responsibility may leave them vulnerable to second-guessing later on. SROs and others must carefully construct their new compliance and oversight programs, and, as the Advisory also warns, closely coordinate with the CFTC’s staff. As crypto derivative trading increases, and we expect it will, regulation in this area will continue to be a hot topic.

Read the full text of the <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/%40lrlettergeneral/documents/letter/2018-05/18-14_0.pdf">CFTC guidance</a>.

<a id="“Operation"></a>“Operation Cryptosweep” Continues Enforcement Actions Against ICOs

By: <a href="https://www.bakerlaw.com/RobertAMusiala">Robert A. Musiala Jr.</a>

The North American Securities Administrators Association (NASAA) recently announced a coordinated series of enforcement actions by U.S. and Canadian regulators to take action against illegal initial coin offerings (ICOs) and the individuals behind them. Dubbed “Operation Cryptosweep,” the enforcement initiative has so far taken place in more than 40 jurisdictions throughout North America. According to the NASAA, since May 1, 2018, Operation Cryptosweep has resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions related to ICOs or cryptocurrencies. An NASAA task force organized in April 2018 reportedly identified hundreds of ICOs in the final stages of preparation for public launch. The same task force identified approximately 30,000 crypto-related domain name registrations, a majority of which appeared in the 2017-18 time frame.

According to Coindesk, funds raised through ICOs have reached $6.3 billion in the first quarter of 2018, representing 118 percent of total funds raised via ICOs for all of 2017. At the same time, the U.S. Securities and Exchange Commission (SEC) has been clear that most − if not all − ICOs are illegal sales of unregistered securities. Operation Cryptosweep appears to be the latest in a series of recent actions enforcing this position and targeting fraud in the ICO marketplace.

To read more about Operation Cryptosweep, see the following:
<ul>
 	<li><a href="http://www.nasaa.org/45121/state-and-provincial-securities-regulators-conduct-coordinated-international-crypto-crackdown-2/">State and Provincial Securities Regulators Conduct Coordinated International Crypto Crackdown</a></li>
 	<li><a href="https://www.wsj.com/articles/state-and-provincial-regulators-in-u-s-and-canada-target-initial-coin-offerings-1526918512?shareToken=st3a721a442811447cad1dae0c6f2844c8&amp;ref=article_email_share">State and Provincial Regulators in U.S. and Canada Target Initial Coin Offerings</a></li>
 	<li><a href="https://www.coindesk.com/us-canadian-regulators-launch-dozens-crypto-scam-probes/">US, Canadian Regulators Launch Dozens of Crypto Scam Probes</a></li>
 	<li><a href="https://www.coindesk.com/6-3-billion-2018-ico-funding-already-outpaced-2017/">$6.3 Billion: 2018 ICO Funding Has Passed 2017’s Total</a></li>
</ul>
<a id="Countries"></a>Countries Exploring National/State-Backed Cryptocurrencies

By: <a href="https://www.bakerlaw.com/TiffanyAMiao">Tiffany A. Miao</a>

Recent publications from the Bank of England and the Central Bank of Norway appear to have reignited the debate over the utility of national central bank-backed cryptocurrencies, sometimes referred to as central bank digital currencies (CBDCs). A paper published by the Bank of England focuses on design principles and balance sheet implications, offering three models for introducing CBDCs into the economy and guiding principles for an orderly introduction of CBDCs. According to the Bank of England report, end users may be expected to use CBDCs as a substitute for commercial bank deposits. The implications of this for bank balance sheets and bank funding/credit, and the potential for “digital bank runs,” are key risks that would need to be managed. The paper from Norges Bank (the Central Bank of Norway) explores some of the reasons for and purposes of issuing a CBDC, including a decline in the use of cash and the benefits of CBDCs as credit risk-free alternatives to private bank deposits and electronic payment systems. On May 17, Reuters reported that the government of Switzerland has requested a similar report to better understand the risks and opportunities of launching a Swiss CBDC that would be known as the “e-franc.” Other central banks that have previously explored CBDCs include those from Canada, Sweden, Japan, Singapore, and the European Central Bank.

The Royal Canadian Mint was an early pioneer in CBDCs with its MintChip project that launched in 2012 and developed substantial architecture. In 2016, the Royal Canadian Mint sold all of the assets related to MintChip to a private party. Despite the cancellation of the MintChip project and the tremendous economic and legal implications, it appears CBDCs may have recaptured the imaginations of some central bankers.

To read more about CBDCs, see the following:
<ul>
 	<li><a href="https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/central-bank-digital-currencies-design-principles-and-balance-sheet-implications.pdf?la=en&amp;hash=11469281B32821BCFD85B4A5483AB3577E38B2DD">Central bank digital currencies – design principles and balance sheet implications</a></li>
 	<li><a href="https://static.norges-bank.no/contentassets/166efadb3d73419c8c50f9471be26402/nbpapers-1-2018-centralbankdigitalcurrencies.pdf?v=05/18/2018121950&amp;ft=.pdf">Central bank digital currencies</a></li>
 	<li><a href="https://www.reuters.com/article/swiss-efranc/switzerland-seeks-study-of-state-backed-e-franc-cryptocurrency-idUSL5N1SO3BU">Switzerland seeks study of state-backed “e-franc” cryptocurrency</a></li>
 	<li><a href="https://www.mint.ca/store/news/nanopay-acquiert-cybermonnaiemc-aupres-de-la-monnaie-royale-canadienne-26400032#.WwgemkDwaM8">nanoPay Acquires MintChip(TM) from the Royal Canadian Mint</a></li>
</ul>

This Week in Blockchain: CFTC Guidance, SEC Enforcement, Central Bank Interest