Recently, largely due to emerging payment systems and new ways of conducting business online, there has been a trend developing among states that certain activity does not require money transmitter licensing. For example, several states have amended their statutes or issued regulatory guidance to indicate that a license is not needed if an entity is acting as an “agent of the payee” or as a “payment processor,” so long as certain conditions are met. In general, an agent of the payee is an entity that has a contractual relationship with the merchant or other ultimate payee such that payment to that entity constitutes, in effect, final payment. New York, for example, describes it as “any person authorized by a payee to receive funds on behalf of the payee and to deliver such funds received from the payor to the payee.” N.Y. Comp. Codes R. & Regs. tit. 3, § 406.2(l).
In the past year, the U.S Securities Exchange Commission (“SEC”) and Chairman Jay Clayton have repeatedly cautioned the cryptocurrency and initial coin offering (“ICO”) industries about the securities law implications for digital assets. On February 6, 2018, in testimony before the Senate Banking Committee, Chairman Clayton notably asserted that “[e]very ICO I’ve seen is a security.”
However, on June 14, 2018, William Hinman, the SEC’s Director of the Division of Corporation Finance, stated that, putting aside the fundraising that accompanied the creation of Ether, “current offers and sales of Ether are not securities transactions.” This statement was based on a novel theory of evolving decentralization that may very well have significant ramifications for cryptocurrency and ICO markets.
Please see our latest K&L Gates HUB article for a discussion about the context and implications for Director Hinman’s conclusions surrounding Ether. It also analyses the specific factors he suggests weighing in determining whether a given digital asset is a security.