IRS Stepping Up Cryptocurrency Enforcement Efforts

The IRS has confirmed that it has begun sending letters to taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax from virtual currency transactions or did not report their transactions properly. In the announcement, IRS Commissioner Chuck Rettig says that “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”

The IRS identified the taxpayers receiving these letters through various ongoing IRS compliance efforts, likely including customer information that the IRS received last year after successfully enforcing a John Doe summons against Coinbase. The IRS has said that it expects more than 10,000 taxpayers will receive these letters by the end of August.

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Blockchain Takes Over Episode 261 of the Cyberlaw Podcast

On April 29, blockchain took over the Cyberlaw Podcast once again with Alan Cohn, Gary Goldsholle, Will Turner, and guest speaker, Jeff Bandman, covering all things blockchain and cryptocurrency. We dove right into the recent activity from the SEC, namely, the Framework for “Investment Contract” Analysis of Digital Assets and the No-Action Letter issued to TurnKey Jet, Inc. (TurnKey) for a digital token. Continue Reading

Congress Weighs In on Cryptocurrency Taxation

Bipartisan members of the House are advocating for more clarity in the tax law as it relates to taxation of cryptocurrency.

First, on April 9, Representative Warren Davidson (R-OH), a member of the House Financial Services Committee, reintroduced legislation that would provide clarity on certain tax and securities law issues related to cryptocurrency.  The bill, entitled the “Token Taxonomy Act of 2019,” resembles the original bill that Davidson introduced in the 115th Congress with Congressional Blockchain Caucus co-chair Darren Soto (D-FL).  The 2019 version of the bill is co-sponsored by Representatives Soto, Josh Gottheimer (D-NJ), Ted Budd (R-NC), Scott Perry (R-PA), and Tulsi Gabbard (D-HI) (who has announced she is running for President).

Davidson said in a statement that “[t]he Token Taxonomy Act is the key to unlocking blockchain technology in America.  Without it, the U.S. is surrendering its innovative origins and ownership of the digital economy to Europe and Asia.”

The bill would enact a number of new tax provisions.  Continue Reading

TurnKey Token Gets to Fly: SEC Issues First No-Action Letter for Token Sale

On April 3, the US Securities and Exchange Commission (SEC) provided important guidance for token issuers. The SEC Division of Corporation Finance issued a No-Action Letter dated April 3 regarding TurnKey Jet, Inc. (the “TurnKey No-Action Letter”) in which the SEC staff confirmed that it would take no action against Turnkey Jet, Inc. (TKJ) for selling tokens without registration. This guidance is most relevant to token issuers who are focused on commercial utility and record-keeping benefits in a centrally controlled network and are willing to minimize or eliminate the profit elements of the token. The TurnKey No-Action Letter, taken together with the Framework for “Investment Contract” Analysis of Digital Assets (“Framework”) issued by the SEC’s Strategic Hub for Innovation and Financial Technology on the same date, offers guidance for structuring the elements of a private, permissioned, centralized blockchain token and network.[1]  Continue Reading

SEC Smooths Out Digital Assets Turbulence With Further Guidance

Long awaited guidance from the US Securities and Exchange Commission (SEC) on application of the Howey test to digital assets came on April 3 in the form of a Framework for “Investment Contract” Analysis of Digital Assets (“Framework”) and a No-Action Letter regarding TurnKey Jet, Inc. (the “TurnKey No-Action Letter”). These two documents are best understood as part of a trilogy with the June 2018 Hinman speech.

The Framework offers the clearest indication yet of the SEC staff’s thinking on the Howey test, with the TurnKey No-Action Letter and the Hinman speech providing examples of where a digital asset fails to meet a necessary element of the test. For purposes of clarity, it helps to think of the Howey test as having four elements:  (1) an investment of money (2) in a common enterprise (3) with a reasonable expectation of profits (4) derived from the efforts of others.[1]

The first two prongs are essentially throwaways inasmuch as the Framework devotes only three sentences to them in total. SEC staff note that these prongs are “typically satisfied” in evaluating digital assets. On the other hand, the Framework pays significant attention to the third and fourth elements. Continue Reading

Judge Holds Blockvest Token a Security Under Howey, and the Wait for a Non-Security Token Continues

Last week, US District Judge Gonzalo Curiel of the Southern District of California reversed his previous November 2018 order and issued a preliminary injunction against Blockvest LLC (Blockvest) and its founder, Reginald Buddy Ringgold, III, after finding that the Blockvest token (BLV token) met the definition of an investment contract under the Howey test and was therefore a security.  While we are keen to see an example of a digital asset that falls outside the definition of a security either through application of the Howey test or a new test, we are relieved that Judge Curiel did not use the Blockvest case to set forth this precedent. Continue Reading

Steptoe Offers Blockchain Regulatory Insights and Authors Regulatory Overviews in GBBC’s 2019 Annual Report

The Global Blockchain Business Council (GBBC) recently published its 2019 Annual Report, “Beyond the Hype: Building Blockchains for Real World.” The report provides a comprehensive update on the global regulatory landscape surrounding blockchain technology along with an overview of some of the blockchain solutions being built by GBBC members.

Steptoe authored an overall insights piece, titled “Regulation in the US: Where are We, and Where are We Going?,” which looks at where the United States stands in terms of regulation and predicts what we’ll see in terms of regulation in 2019. Steptoe also provided regulatory updates for the United States as part of a global regulatory overview, with specific insights on ICO regulation in the US.

To access the GBBC 2019 Annual Report click here.

A Regulatory Fork for Stablecoins: Is New Texas Guidance a Sign of Things to Come?

Last month the Texas Department of Banking published an updated supervisory memorandum discussing the application of the state’s money transmitter law to digital assets.  Nearly every state has a money transmitter statute regulating businesses engaged in the transfer of money within that state, but states vary considerably with respect to how their laws apply to digital assets.  A number of states, including Texas, have taken the position that their money transmitter laws apply only to fiat currency and not cryptocurrency.  Such laws might still apply to a cryptocurrency company, for example one that exchanges cryptocurrency for fiat currency, but don’t govern companies that do not offer fiat-based services. Continue Reading

An Overview of Blockchain Cybersecurity Risks and Issues

Have you ever wondered how blockchains can be considered secure even though hacks of cryptocurrency exchanges routinely make headlines?  Or whether distributing a permanent ledger to every participant in a network might run afoul of privacy laws and regulations?  Data security and privacy are frequently part of the conversation about blockchain and technology in general, and they raise complicated legal issues for practitioners and clients to consider. Continue Reading

Blockchain and The Law: How a Simple Project can get Complicated Quickly

Evan Abrams recently published an article on CIO Review titled “Blockchain and The Law: How a Simple Project can get Complicated Quickly.” In his article, Evan discusses a number of complex legal regimes that CIOs should consider when building enterprise blockchain applications. Companies should assess which legal regimes apply to their specific application from both a federal and state level and keep in mind the laws applying to blockchain technologies can change rapidly. At the federal level, oversight may come from the Department of Treasury’s Financial Crimes Enforcement Network, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the Internal Revenue Service, among others. Companies seeking to enter the blockchain space should also look at state regulation, which varies widely. For example, New York has adopted a regulatory regime known as the BitLicense that covers a variety of virtual currency business activity.

To read the full article click here.

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