Sanctions Compliance Risk Increases for Cryptocurrency Companies

Sanctions compliance considerations have always been an important factor for cryptocurrency companies, but a number of recent US government actions suggest regulators are increasingly focused on the intersection between digital currencies and economic sanctions.   This intensified focus highlights the importance of sanctions compliance for blockchain-related companies, particularly for those considered US persons.

This increased focus has been building for a number of months.  For example, in March of 2018, President Trump issued an Executive Order imposing certain sanctions on the Venezuelan government-issued digital currency known as the petro.

Last week, the US Department of Treasury’s Office of Foreign Assets Control (“OFAC”) took another step to ramp up sanctions against bad actors utilizing digital currency.  Continue Reading

A Thanksgiving Feast: SEC Sets the Table for More Crypto Enforcement Servings to Come

The Securities and Exchange Commission’s (SEC or Commission) November 16 announcement charging two cryptocurrency companies—CarrierEQ Inc. (d/b/a Airfox) and Paragon Coin Inc. (Paragon)—with conducting an initial coin offering (ICO) in violation of the securities registration rules should not come as a surprise to those in the industry. The SEC has repeatedly emphasized that issuers of securities—even those based on a blockchain or distributed ledger technology—must register such securities or comply with an applicable exemption from registration under the Securities Act of 1933 (the Securities Act). The Airfox and Paragon orders explain when the SEC will determine that a token offering constitutes a security, and the remedial measures that the SEC may require for token offerings that do not comply with the Securities Act. Following the announcement, the Commission’s divisions also put out a public statement outlining their views on digital asset securities issuance and trading. We view these actions as signals that the Commission is likely to ramp up its efforts to enforce the securities laws in the weeks and months to come. Continue Reading

Blockchain in the Retail Industry

In a recent Client Alert, Alan Cohn, Jason Weinstein, and Meegan Brooks discuss the impact of blockchain technology in the retail industry, which will likely see more disruption in the next few years than it has seen in decades. What role will blockchain technology play in that disruption?

Instead of completely disrupting the retail industry, blockchain technology could be used to aid compliance with new and evolving regulations. There are three specific applications within the retail industry where blockchain technology can be used to provide greater efficiency, effectiveness, transparency, and trust: (1) supply chain management and tracing the provenance of goods; (2) the resale market; and (3) automatic renewal and subscription services. While implementing any new technology, including blockchain, comes with its own challenges in terms of scalability and implementation, the benefits may outweigh the costs.

To read the full Client Alert, click here.

To learn more about Steptoe’s Retail Industry practice, click here.

The EtherDelta order: SEC continues to articulate what constitutes a cryptocurrency “securities exchange,” weighing in on “decentralized” exchanges

On November 8, the SEC issued a settled order against Zachary Coburn, the creator of the smart contract that powers the EtherDelta decentralized exchange.  In the settled order, the Commission found that Coburn’s EtherDelta smart contract, which enabled trading of Ether against any other ERC20 token, and the EtherDelta website through which buyers and sellers of ERC20 tokens met, operated as an unregistered “exchange” in violation of Section 5 of the Exchange Act.  Without admitting or denying the findings, Coburn consented to the order and agreed to pay $300,000 in disgorgement plus $13,000 in prejudgment interest and a $75,000 penalty.  The Commission’s order notes that Coburn’s cooperation was a consideration in not imposing a greater penalty.

This is the first case involving a so-called “decentralized exchange.”  Continue Reading

Alan Cohn Featured on the Washington Legal Foundation Webinar

On October 17, 2018, Alan Cohn participated in a panel discussion with Daniel Alter of Murphy & McGonigle and Scott Kimpel of Hunton Andrews Kurthen titled “Initial Coin Offerings: Can Securities Regulators Balance Market Growth and Investor Protection?” at the Washington Legal Foundation. Cohn lay the foundation for an in depth discussion on cryptocurrency and regulators approach to balancing market growth and investor protection. Cohn explained that there are a number of overlapping and interlocking regulatory structures that apply to this area of the law. To explain this concept, Cohn pointed to four regulatory lenses that apply to cryptocurrency and crypto-tokens: (1) currency regulation; (2) securities law; (3) commodities law; and (4) taxation. Mr. Alter and Mr. Kimpel highlighted principle actions taken by federal and state agencies to date and discussed how these agencies can evolve transparently to create balanced regulation.

A recording of the panel discussion can be found here.

Blockchain Takes Over Episode 229 of the Cyberlaw Podcast

On September 4th, Alan Cohn hosted the 229th episode of The Cyberlaw Podcast.  We took a deep dive into all things blockchain and cryptocurrency discussing recent regulatory developments and best practices for users of exchanges.   Our episode begins with Charles Mills discussing the landmark decision coming out of the New York Eastern District Court in favor of the Commodity Futures Trading Commission (CFTC) against Cabbage Tech, Corp.  Claire Blakey presents a timeline of the U.S. Securities and Exchange Commission’s (SECs) recent actions regarding ETFs.  Evan Abrams highlights the four takeaways from the Department of Treasury’s Financial Enforcement Network (FinCEN) Director Kenneth Blanco’s, speech on cryptocurrency. In addition, Evan discusses the Office of the Comptroller of the Currency (OCC) proposed charter for online lenders and other FinTech companies in the coming months.  Maury Shenk covers the recent reports about the EU finance ministers plan to discuss the possibility of cryptocurrency regulation. In addition, Maury discusses the European Blockchain Partnership, describing it as an integrated effort for a great blockchain future.  The Steptoe team was joined by Sarah Compani, Legal Counsel at Bitfinex, who provides listeners with takeaways as she responds to Alan’s questions regarding the future of exchanges, the Bitfinex platform, and potential security challenges going forward.

You can read the full summary and listen to the podcast here.

National Law Journal Names Weinstein, Cohn Trailblazers in Cryptocurrency, Blockchain & FinTech

Steptoe partner Jason Weinstein and of counsel Alan Cohn have been named to The National Law Journal’s list of Trailblazers in Cryptocurrency, Blockchain and FinTech. The list of 50 lawyers is featured in a special supplement in the September issue of the legal publication.

Weinstein and Cohn co-chair Steptoe’s global Blockchain and Cryptocurrency practice and are recognized for their leadership on the legal and regulatory issues surrounding cryptocurrency and blockchain technology. Together, they have represented nearly every type of participant in the blockchain ecosystem – including investors, funds, entrepreneurs, exchanges, transaction processors, retailers, and both early stage and more established companies.

See the full press release here.

4 Key Takeaways from FinCEN Director’s Speech on Cryptocurrency

The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) has principal responsibility for issuing and enforcing federal anti-money laundering (AML) regulations applicable to US financial institutions, including money services businesses (MSBs) operating as “money transmitters” in the cryptocurrency space.  Followers of cryptocurrency regulation have been eager for additional FinCEN guidance clarifying the agency’s approach to a number of significant industry developments.  FinCEN principally relies upon its 2013 guidance, subsequent administrative ruling letters, and other written correspondence such as the agency’s 2018 letter to Senator Ron Wyden confirming that initial coin offerings (ICOs) fall within FinCEN AML regulations.  However, the rapid pace of development in the blockchain and cryptocurrency sector has left many in the industry with questions regarding how to apply FinCEN’s regulations to new business models and technological advances.

On August 9, 2018, FinCEN Director Kenneth Blanco delivered a speech regarding the agency’s approach to cryptocurrency.  The speech offered helpful clarifications and insights, but also left a number of important questions unanswered.  Continue Reading

FINRA Encourages Firms to Report Involvement in Activities Related to Digital Assets

In a Regulatory Notice published July 6, 2018, the Financial Industry Regulatory Authority (FINRA) encourages its members to promptly notify FINRA if they, or their associated persons or affiliates, engage in activities related to digital assets such as cryptocurrencies and other virtual coins and tokens.  The Notice also encourages firms to inform FINRA of changes in the event the firm, or its associated persons or affiliates, intends to begin or in fact begins engaging in activities relating to digital assets not previously disclosed, on a continuing basis through July 31, 2019. Continue Reading

IRS Turning up the Heat on Cryptocurrency Transactions

The Internal Revenue Service (IRS) made a pair of announcements on July 2 that it is increasing its focus on taxpayers who avoid their tax obligations using cryptocurrency.

Background

By way of background, in April 2014, the IRS issued Notice 2014-21, which generally provided that “convertible virtual currency” is treated as property, not currency, for tax purposes and explained, in question and answer format, the application of existing general tax principles to transactions using convertible virtual currency.  The Notice defines virtual currency as “a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.”  It further provides that convertible virtual currency is “[v]irtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency,” citing bitcoin as one example of a convertible virtual currency.

The Notice describes some of the tax consequences of receiving or exchanging virtual currency for property or services.  If a taxpayer receives virtual currency in payment for goods or services, he or she has taxable income equal to the fair market value of the virtual currency.  If the taxpayer uses virtual currency to acquire goods or services, and the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, then the taxpayer has taxable gain.

The IRS became concerned that taxpayers were not reporting cryptocurrency transactions, and in November 2016, sought a court order to serve a John Doe summons on Coinbase, one of the world’s largest digital asset exchange companies.  The summons sought broad information on all U.S. customers conducting transactions in cryptocurrency from 2013-2015.  Although the court ultimately narrowed the scope of information that the summons could request, it did order Coinbase to comply with the summons.  Click here to read Steptoe’s blog post about the Coinbase summons.

New IRS Announcements

On July 2, the IRS Large Business and International division (LB&I) announced a new audit campaign to address tax noncompliance related to the use of virtual currency.  LB&I campaigns direct the IRS’s audit resources to specific areas the IRS believes have the greatest risk of noncompliance.  Virtual currency is one of 40 campaigns that have been announced by the IRS since January 2017.  The IRS’s announcement means that taxpayers who failed to report virtual currency transactions face an increased risk for audit. Continue Reading

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