Flash Digest – News in Brief

FCC Chairman Pai’s Strategy to Develop 5G Networks Requires Congressional Action

On February 26, FCC Chairman Ajit Pai announced the Commission’s plan to escalate development of 5G spectrum in the United States. Developing 5G networks, the Chairman said, will enable the U.S. to remain competitive in the emerging industries that 5G deployment is expected to support, such as development of autonomous vehicles and the Internet of Things.

Addressing the Mobile World Congress in Barcelona, Pai stated that the FCC plans to begin auctioning “millimeter wave spectrum” in the 24 gigahertz (GHz) and 28 GHz bands in November. Pai’s timeline, however, is contingent upon Congressional approval of a legal change allowing the Treasury Department to hold spectrum prepayments from major carriers prior to the auction. Congress must approve this change by May 13 for the Chairman’s plan to move forward without delay. While banks have held prepayments prior to auctions in the past, they are no longer able to do so as a result of their capitalization requirements.   

The FCC plans to promote rollout of 5G coverage by reducing red tape around infrastructure development. In remarks released on February 28, Commissioner Brendan Carr stated that the Commission plans to exclude small wireless facilities necessary for 5G deployment from the environmental and historic review procedures required for large, macrocell deployments. Carr stated that this, among other reforms, will reduce regulatory costs of small cell deployment by 80% and deployment timelines by 50%.

Reuters reports that Verizon Communications and AT&T Inc. have announced that they will roll out 5G technologies in 2018. The FCC also recently granted Samsung Electronics Co. regulatory approval for 28 GHz base stations, which Verizon will utilize in its 5G deployment.

FCC Commissioners have stressed the importance of U.S. leadership in the international race to establish 5G networks. Increased 5G connectivity would enable domestic companies to lead innovation in international markets for products utilizing millimeter wave spectrum.

In January, the FCC rejected a White House proposal to centralize the 5G system. While the Trump administration argued that a federal takeover of the nation’s 5G network would support the most efficient and secure deployment, industry leaders contend that a federal takeover would be a setback to deployment, given years of private sector investment in 5G technology and trials since 2016.

Supreme Court Hears Oral Arguments for United States v. Microsoft Corp.

On February 27, the Supreme Court heard oral arguments for United States v. Microsoft Corp., No. 17-2 (2018), a case deciding whether the Stored Communications Act (“SCA”) requires a U.S. company to release information within its control that is stored abroad.

In 2013, a judge on the United States District Court for the Southern District of New York granted a warrant to the United States under 18 U.S.C. § 2703 (2016) to investigate suspected drug dealer’s email content, which was held by Microsoft. Microsoft released metadata held domestically but refused to release information stored in its data centers in Ireland. While Microsoft had complied with previous demands for information stored in foreign data centers prior to this request, Microsoft claimed at oral arguments that, in reassessing its legal obligations, it had realized that the Act’s extraterritorial application was unauthorized.

The United States’ argument centered on the procedural classification of the government’s demand for information and the extraterritorial implications of the case. Justice Sotomayor questioned the government’s classification of its search of Microsoft’s data, asking whether the order was a warrant or a subpoena. The government responded that the order was a “hybrid,” requiring a production order granted by a judge and Microsoft’s further compliance with that order. According to Andrew Keene Woods of Lawfare, Justice Sotomayor may have suggested that the United States cannot conduct searches abroad under Rule 41 warrant authority. Justice Sotomayor also questioned whether enforcing the government’s production order would create international problems. The government contended that its request complied with the Budapest Cybercrime Treaty, joined by 50 nations, and that limiting the extraterritorial reach of the SCA might actually limit the United States’ ability to comply with its treaty obligations to produce information for other countries.   

Microsoft’s argument addressed the nature of the task of accessing data stored abroad and the practical impact of the Court’s decision on accessibility of information stored in foreign data centers. Justice Ginsburg asked, logistically, how data in Ireland could be acquired and elicited from Microsoft such that compliance with the government’s request would not require human activity in Ireland. Justice Roberts questioned whether ruling in Microsoft’s favor might enable the company to withhold data from legitimate government investigations, providing privacy attractive to its customers. Microsoft stated that it would not do so, but instead that it would store data close to customers to minimize latency in accessing it.

The Court also inquired whether application of the SCA to global cloud data is a question best left to the legislature. In February, Senator Orrin Hatch (R-UT) introduced Clarifying Lawful Overseas Use of Data (“CLOUD”) Act, specifically addressing disputes regarding cross-border data requests. Justices Ginsburg and Sotomayor suggested that the Court could affirm the lower court’s ruling on the case and leave reform to Congress.

SEC Investigates Market for Initial Coin Offerings

The SEC recently issued dozens of subpoenas and information requests to tech companies involved in cryptocurrency markets, according to the Wall Street Journal. The subpoenas request information on the structure of presales and sales of initial coin offerings (“ICOs”), which SEC Chairman Jay Clayton has argued are securities subject to regulation by the SEC.

The SEC’s investigations begin in light of the agency’s recent calls for greater regulation of the market for cryptocurrencies such as Bitcoin, Ethereum, and Litecoin, three of the most prominent cryptocurrencies. These currencies are traded on Coinbase, the largest platform for trading cryptocurrencies. In February, Clayton testified before the Senate Banking Committee alongside Commodity Futures Trading Commission (“CFTC”) Chairman J. Christopher Giancarlo on the need to regulate the growing market for cryptocurrency, calling on federal banking regulators and states to collaborate in a plan for the market that will better protect consumers and investors. Industry leaders and lawyers anticipate that the recent wave of subpoenas foreshadows a sharp increase in SEC enforcement in the market for virtual currencies.

Recent SEC subpoenas focus particularly on investigating “simple agreements for future tokens” (“SAFTs”). SAFTs allow wealthy individuals and investors to purchase and trade an interest in virtual tokens before the tokens are sold. A white paper published by Protocol Labs and Cooley in 2017 argues that “utility tokens” themselves are not likely to be classified as securities, because they would not satisfy the criteria of an “investment contract” under federal law. The paper states, however, that SAFTs are more susceptible to classification as “investment contracts” under the Supreme Court’s definition set forth in the four-prong Howey Test.

Cryptocurrencies are currently regulated by the CFTC as commodities, but Clayton has suggested that ICOs are, in fact, securities offerings—interests in companies, like stocks and bonds—and therefore within the SEC’s purview. Clayton claims that promoters and ICOs of cryptocurrencies have failed to comply with SEC regulations. The markets in which virtual currencies are traded are currently unregulated, and industry experts suggest that these markets leave consumers vulnerable to fraud. According to the Wall Street Journal, one forthcoming study from the Massachusetts Institute of Technology estimates that as much as $270 million of $317 million invested in initial coin offerings has likely gone toward fraud or scams.

Madeline Salinas is a 1L at Harvard Law School.