Can Your Cryptocurrency Get a Clearance?

You know that federal entities like the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Financial Crimes Enforcement Network (FinCEN), and the Internal Revenue Service (IRS) have all issued guidance concerning cryptocurrencies.  But get ready to add a new agency to the list—the Department of Defense’s Defense Security Service (DSS).

Standard Form 86 (SF-86), “Questionnaire for National Security Positions,” is the lengthy form that anyone applying for a security clearance from the US government must complete.  Question 20A of the SF-86 asks whether the applicant or immediate family members have ever “had any foreign financial interests (such as stocks, property, investments, bank accounts, ownership of corporate entities, corporate interests or businesses) in which you or they have direct control or direct ownership? (Exclude financial interests in companies or diversified mutual funds that are publicly traded on a U.S. exchange.)”

We know that FinCEN considers cryptocurrency to be currency, the CFTC considers it a commodity, and the IRS considers it to be property, but is it also a “foreign financial interest” for the purposes of the SF-86?  Continue Reading

Steptoe Applauds CFTC Decision on Cryptocurrency Rulemaking

Today, Steptoe & Johnson LLP’s Blockchain and Digital Currency practice applauded the Commodity Futures Trading Commission’s (CFTC) decision to propose, through the rulemaking process, an interpretation defining the term “actual delivery” in the context of retail commodity transactions involving cryptocurrencies like Bitcoin.

“We are pleased that the commission has chosen to respond to Steptoe’s petition for rulemaking, along with other requests for guidance, by proceeding in this manner,” said Micah Green, chair of Steptoe’s Financial Services practice and co-head of Steptoe’s Government Affairs and Public Policy Group. “We look forward to reviewing the proposal and working together with the industry to find the right approach for businesses that handle, trade, and exchange cryptocurrency.”

In July of 2016, Steptoe filed its petition requesting that the CFTC proceed with a rulemaking on this subject rather than continued enforcement actions, so that there would be visibility to the industry and an opportunity for the industry to comment and participate in the process. Specifically, the petition called for a commission rulemaking to set forth the requirements for effectuating a transfer of ownership under the Commodity Exchange Act (CEA). Under the CEA, retail commodity transactions within the terms and intent of such provision are required to be traded on a commission-regulated exchange, unless the transaction falls within one of the stated exceptions, such as a transaction that results in “actual delivery” of a commodity within 28 days. Accordingly, the petition also requested that a CFTC rulemaking outline the elements necessary to satisfy the requirements of “actual delivery” under the CEA as applied to leveraged or financed retail cryptocurrency transactions.

“Cryptocurrency and crypto-assets represent a new asset class, and we applaud the CFTC and other regulatory agencies who have chosen to evaluate their approach to innovation and investor protection to make sure it fits with this new type of asset,” said Jason Weinstein, co-chair of Steptoe’s Blockchain and Digital Currency practice.

Steptoe is among the leaders in the evolving legal and regulatory landscape surrounding blockchain technology and digital currency. The firm’s multidisciplinary, global practice features experience in a range of disciplines that will be impacted by blockchain technology in the coming years – including corporate and fund formation, financial services, international regulation and compliance, trade, IP, government contracts, public policy, tax, cyber, and government investigations and enforcement. Steptoe helped create and serves as counsel to the Blockchain Alliance and the Digital Assets Tax Policy Coalition. The firm also serves as the legal services partner of the Global Blockchain Business Council, and as an advisor to industry-leading advocacy groups Coin Center and the Chamber of Digital Commerce. The firm’s Blockchain and Digital Currency practice has advised venture capital firms, financial institutions, established companies, startups, and governments on issues surrounding digital currencies and blockchain technology.

Alan Cohn Featured on the Future Tech Podcast

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.

Blockchain and Cryptocurrency: The Emerging Regulatory Framework

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:

  1. Anti-Money Laundering
  2. Commodities and Derivatives Regulation
  3. Securities and Initial Coin Offerings
  4. Taxation

Read the full advisory here.

Bitcoin, Ether, and Ripple, Oh My! How the IRS Taxes Digital Currency

Background

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

Alan Cohn Quoted on the Recent Blockchain Regulatory Guidance

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.

Significant FinCEN Action Against BTC-e, Implications for Virtual Currency Exchangers

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.

Continue Reading

SEC Begins Offering Guidance on Initial Coin Offerings

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

SEC Weighs in on the Distributed Autonomous Organization’s Tokens

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

IEEE Standard Association’s Blockchain Podcast Features Alan Cohn

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.

 

 

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