Alan Cohn was recently featured on the Future Tech Podcast. In an interview with Richard Jacobs, Editor of Crypto News Insider and Organizer & Host of the Bitcoin, Ethereum, and Blockchain Super Conference 2018, Alan discusses the recent regulatory changes and guidance related to cryptocurrency such as the recent Securities and Exchange Commission (SEC) Investigative Report on the Distributed Autonomous Organization and Investor Bulletins along with the need for clearer tax treatment of cryptocurrencies. Listen to the podcast here.
This summer, US and international regulators have brought enforcement actions, issued guidance and explanatory documents, and sharpened previously-taken positions regarding regulation of cryptocurrency and crypto-tokens under the anti-money laundering, derivatives, securities, and tax laws. These actions provide a better sense of the way in which US regulators will approach the blockchain and digital asset space going forward, but also leave many unanswered questions.
These recent actions indicate increased regulatory risk for certain types of activities. Companies that have made or are contemplating making initial coin offerings or cryptocurrency investments should assess these activities in light of these new regulatory pronouncements. But overall, this latest round of regulatory actions may provide greater regulatory certainty and a better understanding of regulatory priorities, which in turn can provide innovators and early adopters a clearer legal framework within which to operate.
Steptoe’s advisory covers four areas of recent regulation and guidance:
- Anti-Money Laundering
- Commodities and Derivatives Regulation
- Securities and Initial Coin Offerings
Read the full advisory here.
Before 2014, the treatment of virtual currency for tax purposes was somewhat of an open question. That is, would it be treated like a currency? Maybe a foreign currency? Or would it be treated like property? Or maybe a commodity or a derivative? The IRS took initial steps to answering that question in Notice 2014-21, where the IRS asserted that virtual currency would be treated like property.
A lot of practitioners thought that this was probably the right answer, as did many significant investors, but for ordinary folks who have been using bitcoin or other virtual currency to buy goods and services, it may have been a bit surprising. Essentially, the IRS characterization means that if you go to Starbucks and use bitcoin to buy your coffee, while it may seem to you the same as using dollars, for tax purposes, it’s more like using gold. And if your gold has appreciated in value since you acquired it, you may owe tax on the gain. Same thing with virtual currency. The problem arises because using virtual currencies to buy things seems much more like using cash than like using gold, so many virtual currency users may not have even considered that there could be potential tax consequences. Continue Reading
The Street quoted Alan Cohn in an article on August 20 titled “How Federal Regulators Are Playing Catch-Up With Bitcoin Craze.” The article looks at the most recent enforcement actions and regulatory guidance from the Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), and the Commodity Futures Trading Commission (CFTC). Mr. Cohn opined about the significance of the recent regulation: “What you’re seeing now is the next round of regulatory guidance, and in a sense, starting to fill in some of the gray areas and the gaps that have emerged given the pace of development in this area […] You’re seeing an advance in the regulatory framework evolving around this new asset class.”
Read the full article here.
On July 26, 2017, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury assessed a civil monetary penalty of $110,003,314 against Canton Business Corporation (BTC-e), one of the largest virtual currency exchanges by volume in the world, and a $12,000,000 penalty against Alexander Vinnik, a Russian national who allegedly controlled, directed, and supervised BTC-e’s operations, finances, and accounts. On the same day, a 21-count criminal indictment against BTC-e and Mr. Vinnick was unsealed, and Mr. Vinnick was arrested in Greece.
This is the second supervisory action that FinCEN has taken against a virtual currency exchanger, and the first against a foreign entity operating as a money services business (MSB) with activities in the United States. FinCEN’s action also imposes the second highest civil monetary penalty assessed against an MSB to date. FinCEN has increasingly brought enforcement actions against MSBs and other non-traditional financial institutions, and similar actions seem likely in the future.
On July 25, 2017, the Securities and Exchange Commission (SEC) issued its first guidance on how it will interpret token issuances or “Initial Coin Offerings” (ICOs) under relevant securities laws.
The headlines—“SEC Finds DAO Tokens are Securities”—come from Release No. 81207, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017), in which the SEC determined that the tokens issued in association with the Distributed Autonomous Organization (DAO tokens) in April-May 2016 were securities and explored the various implications of that determination. (See Steptoe’s analysis of this report here.)
However, the real news may be the other document released on July 25, a notice to investors titled “Investor Bulletin: Initial Coin Offerings” (July 25, 2017). In that document, the SEC sets out several areas of concern regarding ICOs—framed as advice to investors—from which the reader can discern the SEC’s initial expectations with respect to ICOs. Much of the guidance is not surprising, but the SEC’s statement paves the way for more certainty for companies considering ICOs. Continue Reading
The SEC announced yesterday that “offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.” Although not coming as a surprise, the SEC’s announcement affirms that companies seeking to involve US investors in an initial coin offering (ICO) must register offers and sales with the SEC or else qualify for an exemption.
The SEC chose the token offering by the Distributed Autonomous Organization (DAO) in April-May 2016 as the focus of the study. The DAO was built on top of the Ethereum blockchain by the German unincorporated organization Slock.it, and the success of its token offering ushered in the current wave of ICO activity. Although questions surrounded the DAO offering in terms of its prospective treatment under US securities laws, the DAO made headlines when it suffered an exploitation that led to the loss of $50 million in Ether. Although the SEC found that DAO “may have violated federal securities laws,” it decided against pursuing an enforcement action, choosing instead to use DAO as a demonstrative for future ICOs (“to advise those who would use a Decentralized Autonomous Organization … or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws”). Continue Reading
Alan Cohn was recently featured on IEEE Standards Association’s Blockchain Podcast Series. In an interview with Maria Palombini, Director, Emerging Communities & Opportunities Development, Alan and Maria discuss the legal issues surrounding blockchain smart contracts. In particular, Alan opines on why government agencies find blockchain technology promising, whether or not smart contracts are legally binding, and what blockchain-based smart contract dispute resolution looks like. Listen to the podcast here.
This post builds on our previous exploration of indemnification for smart contract risks. Today, we suggest three tools to address these risks: (1) cybersecurity insurance policies, (2) indemnification agreements with outside vendors, and (3) “make whole” agreements among the smart contract parties themselves. Collectively speaking, insurers, vendors, and other contract parties can provide the best source of indemnification, assuming that the proper contractual arrangements are put in place. Continue Reading
Congress has become increasingly interested in the current state of knowledge about potential links between terrorist financing and money laundering. In the House of Representatives, the Financial Services Committee’s Subcommittee on Terrorism and Illicit Finance held a hearing on June 8, 2017, titled “Virtual Currency: Financial Innovation and National Security Implications.” In the Senate, Senator Grassley (R-IA), along with Senators Feinstein (D-CA), Cornyn (R-TX), and Whitehouse (D-RI), recently introduced Senate Bill 1241, titled “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” The bill, which generally aims to strengthen criminal money laundering statutes, is specifically aimed at fighting terrorism and terror finance.
Of particular relevance with respect to S. 1241 are the potential implications of the bill on blockchain and digital currencies. Continue Reading