On June 24, the five-year anniversary of New York’s virtual currency licensing regime known as the BitLicense, the New York Department Financial Services (DFS) published new guidance and FAQs related to approval for use of specific currencies and the licensing process, as well as a proposed conditional licensing framework. The measures offer important insight for companies holding or considering applying for a BitLicense and represent the most significant changes and proposed changes since the regulation’s initial issuance in 2015.

Guidance for Adoption or Listing of Virtual Currencies

Under the BitLicense regime, licensees and approved charter holders under the New York Banking Law (collectively, “VC Entities”) are required include virtual currencies (“coins”) they plan to “list” in their initial application to DFS. Historically, in order to list new assets VC Entities were required to go back to DFS to seek approval. Given the proliferation in coins available over the past five years this became a cumbersome and time-consuming system. In order to remedy this issue, in December of 2019, DFS issued proposed guidance to allow licensees to “offer and use new coins in a timely and prudent manner.” After receiving public comments, DFS has now published final guidance creating “two separate frameworks designed to enhance speed and efficiency in a VC Entity’s adoption or listing of coins.” These two frameworks include (1) “a general framework for a VC Entity’s creation of a firm-specific policy for the adoption or listing of a new coin, without DFS’s prior approval, through the process of self-certification” and (2) “a general framework for the process of Greenlisting coins for wider usage.”


Continue Reading New York Publishes New Guidance and Proposed Changes to BitLicense on Five-Year Anniversary

On November 15, Director Kenneth Blanco of the Financial Crimes Enforcement Network (FinCEN) offered his most extensive remarks on blockchain since the agency’s release of updated guidance in May. Speaking at the Chainalysis Blockchain Symposium, Director Blanco offered a number of insights on FinCEN’s current priorities and industry trends.

Suspicious Activity Reports

According to Director Blanco, since the publication of FinCEN’s guidance in May, the agency has received over 10,000 suspicious activity reports (SARs) related to convertible virtual currency (CVC) with 6,600 of those SARs filed by CVC-related businesses, including exchanges and kiosks. Director Blanco noted that this was a significant increase in SAR volume, particularly from CVC-related businesses, and included SARs from dozens of businesses that had never filed a SAR with FinCEN prior to the publication of the guidance.

Director Blanco also highlighted a couple of trends in SAR reporting. The first is SARs related to “potential unregistered, foreign-located money services businesses (MSBs), specifically, Venezuela-based P2P exchangers.” A foreign-located MSB is required to register with FinCEN if it conducts business in whole or in “substantial part” in the United States. (Determining precisely what constitutes “substantial part” continues to be an area of uncertainty for industry, which Director Blanco did not address.) A second trend was CVC kiosk operators reporting on “activity indicative of scam victims upon identification of new customers who have limited knowledge of convertible virtual currencies, particularly those in vulnerable populations, including the elderly.”


Continue Reading FinCEN Director Offers Most Extensive Remarks on Blockchain Since Agency’s New Guidance

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.
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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 US 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 IRS Turning up the Heat on Cryptocurrency Transactions

On March 19, 2018, US President Donald Trump issued Executive Order 13827 (the EO), which for the first time targets US economic sanctions against a virtual currency – namely, a digital currency colloquially known as the “petro” that has been issued by the Government of Venezuela (GOV). Specifically, the EO prohibits “all transactions related to,