STLR Link Roundup – February 25, 2018

SEC Charges Former Bitcoin-Denominated Exchange and Operator with Fraud

On February 21, 2018, the Securities and Exchange Commission (“SEC”) filed security fraud charges against BitFunder, a former bitcoin-denominated online platform, and its founder Jon E. Montroll, in violation of Section 10 (b) of the Exchange Act and Rule 10b-5. They were charged with operating an unregistered securities exchange, defrauding the users by misappropriating their funds, and failing to disclose the cyberattack resulting in bitcoins theft. The SEC also accused the founder of selling unregistered securities, and making false and misleading statements with respect to offing of securities.

Founded in December 2012 and shut down in November 2013, BitFunder and WeExchange Wallet were two platforms used by Montroll to conduct his business. Bitfunder was an online platform, for users to buy and sell virtual “shares” of virtual currency-related enterprises in exchange for bitcoins, while WeExchange Wallet functioned as a Bitcoin depository and currency exchange, through which users could deposit bitcoins and exchange them for Australian and US dollars. Montroll had never registered the two transaction platforms with the SEC. All the user’s bitcoins commingled in WeExchange Wallet were under the control of Montroll, who misappropriated the users’ bitcoins from time to time. In addition, Montroll sold unregistered securities called Ukyo Notes, which were claimed to be raised for the purpose of private investment. However, they were used partially for Montroll’s personal expense.

The threshold questions are whether BitFunder and WeExchange Wallet constitute securities exchanges and Ukyo Notes are kinds of securities, subject to U.S. federal securities laws, including the requirements of registration, exemption, disclosure, etc. The SEC, in its report with respect to the ICO of DAO Tokens, ruled that whether or not a particular transaction involves the offer and sale of a security will depend on the specific facts.

Facebook Responds to Criticism After U.S. Indictment Against Russians

Facebook was under strong criticism after the U.S. Department of Justice’s indictment alleging that Russian operatives manipulated social media, particularly Facebook, to influence public opinion and interfere with U.S. political system, including the 2016 U.S. presidential election and the upcoming 2018 midterm elections.

The alleged Russian companies and individuals pursued the political aims through Facebook pages, groups, events and by buying political advertisements on Facebook in the names of U.S. entities and persons, which were subject to the Federal Election Campaign Act (“FECA”) and Foreign Agent Registration Act (“FARA”).

In response to this criticism, Facebook has announced that it will take a series of actions to avoid being manipulated. Among others, it will verify election-related advertisers’ identities through a system combining automated and human fact checkers.

Beyond Bitcoin: Emerging Applications for Blockchain Technology

The House Subcommittee on Research and Technology and the Subcommittee on Oversight held a hearing titled “Beyond Bitcoin: Emerging Applications for Blockchain Technology” on February 14, 2018, together with the witnesses including government policy analysts, academics, and vice presidents from IBM and Walmart.

The hearing focused on blockchain technologies’ emerging applications both in the public and private sectors, particularly in cybersecurity, identity management, healthcare, supply chain management, etc.

The members of the subcommittees also expressed concerns about the security of blockchain systems and cautioned that blockchain technologies should be used in a proper way and be subject to government regulations.

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