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On June 7, 2022, Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act (RFIA), which seeks to create a complete regulatory framework for digital assets. This is the second in a series of blogs on this groundbreaking bipartisan legislation. Click here for a general overview of the bill and a summary of the tax provisions included in the RFIA.

The RFIA attempts to create a clear standard for determining which digital assets are securities and which are commodities, and draws clear jurisdictional lines between the SEC and CFTC. The SEC would retain jurisdiction over the sale of investment contracts, while the CFTC would gain jurisdiction over the digital asset spot markets. CFTC Chairman Rostin Benham quickly declared his support of the proposed division of labor, while SEC Chairman Gary Gensler has expressed concerns that the legislation may undermine existing market regulations for stock exchanges, mutual funds, and public companies.[1] The policy debate over which of the two agencies is best situated to regulate the crypto markets will likely grow louder in the wake of this proposal.

With respect to securities laws, the RFIA seeks to solve the long-standing problem of the application of the Howey test to digital assets: how long does the security label attach to a digital asset that was initially sold as an investment contract? Application of the full panoply of securities laws to every transaction in a digital asset can stifle the growth of a network and create headaches for entities seeking to comply with complex rules that don’t always fit the underlying conduct.

This update provides a summary of the securities law provisions and obligations placed upon the SEC in the RFIA.…

Continue Reading Securities Law Implications of Lummis-Gillibrand Bill

On June 7, 2022, Senator Cynthia Lummis (R-WY) and Senator Kirsten Gillibrand (D-NY) introduced the Responsible Financial Innovation Act (RFIA). This highly anticipated legislation is the first attempt at developing a comprehensive regulatory framework for cryptocurrency and digital assets.

The RFIA builds off proposals introduced this Congress and includes a number of provisions related to securities and commodities regulation. In addition, the RFIA amends the Internal Revenue Code to address and clarify issues related to the taxation and reporting of cryptocurrency and digital assets. Interestingly, the RFIA adopts one of the substantive provisions relating to digital assets in the Biden Administration’s “General Explanation of the Administration’s Fiscal Year 2023 Revenue Proposals,” known as the “Greenbook,” but not the other provision. Specifically, the RFIA adopts the provision permitting tax-free loans of digital assets, but not the provision permitting mark-to-market tax accounting for digital asset traders and dealers.

While this legislation attempts to address some of the largest outstanding questions related to the regulation and taxation of cryptocurrency and digital assets, it faces an uphill battle to be signed into law before the end of the 117th Congress. Heading into the 2022 mid-term elections, a number of Biden Administration and Democratic priorities are still awaiting action and will likely take priority this summer and fall over legislation like the RFIA. Further, this legislation will likely need to overcome the 60-vote threshold in the Senate to end a filibuster. However, the introduction of the RFIA in the Senate sets a new marker and will likely serve as a starting point in the next Congress for any legislation to regulate and tax cryptocurrency and other digital assets.

This update provides a summary of the tax provisions included in the RFIA.…

Continue Reading New Bipartisan Senate Legislation Seeks to Address Cryptocurrency and Digital Asset Tax Issues

On November 1, 2021, the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint report that, among other things, calls on Congress to adopt legislation to enable federal oversight of stablecoin issuers, custodial wallet providers that hold stablecoins,…

The House Rules Committee recently released the latest version of HR 5376, the Build Back Better Act. This proposal would amend Internal Revenue Code section 1091 (“loss from wash sales of stock or securities”) to apply to a much broader range of assets, including foreign currency, commodities, and digital assets, in addition to stocks and…

On October 15, 2021, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued anticipated Sanctions Compliance Guidance for the Virtual Currency Industry and updated two related Frequently Asked Questions (FAQs 559 and 646). OFAC has published industry-specific guidance for only a handful of other industries in the past two decades; the new guidance demonstrates the agency’s increasing focus on the virtual currency (VC) sector. It also clarifies US sanctions compliance practices in ways that could lay a foundation for future OFAC enforcement actions.

OFAC’s guidance was announced as part of broader US government enforcement priorities to combat ransomware, money laundering, and other financial crimes in the virtual currency sector, as noted in the Department of Justice’s recent announcement of a National Cryptocurrency Enforcement Team. The OFAC guidance was published in tandem with a Financial Crimes Enforcement Network (FinCEN) analysis of ransomware trends in suspicious activity reporting, but the guidance is directed at the VC industry in general and is not specific to ransomware. A ransomware actor who demands VC may or may not be a target of OFAC sanctions, and sanctioned actors may engage in a wide variety of VC transactions that do not involve ransomware. The recommended compliance practices in OFAC’s new guidance are focused on the full range of sanctions risks that arise from virtual currencies.

The guidance maintains OFAC’s longstanding recommendation for risk-based compliance programs, and builds on the May 2019 Framework for OFAC Compliance Commitments. The guidance also provides notable examples of compliance controls that are tailored to the unique risk and control environments of the VC sector.…

Continue Reading OFAC Issues Compliance Guidance for the Virtual Currency Industry

On May 20, 2021, the U.S. Department of the Treasury (“Treasury”) released the American Families Plan Tax Compliance Agenda, a report detailing the Biden administration’s proposed measures to raise $700 billion in additional tax revenue over the next decade through the Internal Revenue Service (“IRS”) and its enforcement-related efforts (the “Report”).  Additional detail about these…

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 US 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 Can Your Cryptocurrency Get a Clearance?

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)…

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…