Blockchain Legal Digest

The Source for Blockchain Legal News & Opinion

Crypto

#When Lambo? Maybe Never, But Don’t Count Out Blockchain Tech

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Cryptocurrency and its dreams of riches may be dead, but blockchain technology may survive.  Photo by Sam Churchill | CC BY 2.0


The New York Times remembers the heady days of a year ago  when a single Bitcoin was worth nearly $20,000 and everyone was getting “hilariously rich.”  The Times  chronicles the downfall of cryptocurrency, while noting that some believe that the fallout is good for the development of blockchain-based products.

“It’s painful to lose money, but it’s a necessary step,” The Times quoted VC Robert Neivert as saying. “2018 was about moving from hype to product.”
Following on that theme, BTC Manager published an article positing that even the death of cryptocurrency does not mean that blockchain technology is dead.


“The truth is we are moving towards a much more mature market in which only the fundamentally strong projects survive,” the article says. “Additionally, it is distracting from a straightforward fact; blockchain remains to be the next big thing to disrupt business and industry.”


And, if you ever do move forward on that blockchain-based project, beware of the regulatory traps you could fall into.  This article in CIO Review outlines some of the regulatory issues you’ll need to be aware of including money transmitter laws, securities regulations, derivatives trading requirements and tax laws.







All I Do Is … Settle? Khaled and Mayweather Caught in Crypto Crackdown

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DJ Khaled agreed to pay a $50,000 fine to the SEC for failing to disclose a payment to promote an ICO.  Photo by Meghan Roberts | CC BY 2.0

The U.S. Securities and Exchange Commission announced that it entered into a settlement agreement with music producer DJ Khaled (known best for his hit “All I Do is Win”) and boxer Floyd Mayweather (known best for his hits) based on their failure to disclose payments to promote an Initial Coin Offering.

The SEC accused Khaled of accepting $50,000 to promote an ICO offered by Centra Tech Inc. and Mayweather accepting promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc.   Khaled and Mayweather promoted the ICOs via social media, but did not disclose the payments they had received.

“These cases highlight the importance of full disclosure to investors,” said SEC Enforcement Division Co-Director Stephanie Avakian. “With no disclosure about the payments, Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”

Mayweather and Khaled did not admit to the SEC’s findings, but agreed to pay disgorgement, penalties and interest. Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest.   They also each agreed to not promote any securities for a period of time.

U.S. Official Calls for International Crackdown on Cryptocurrency

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Department of Justice Building, Washington, D.C.  by Ken Lund| CC BY-SA 2.0

A senior official in the U.S. Justice Department has called for international law enforcement agencies to take steps to prevent cryptocurrencies from being used to commit crimes.

U.S. Deputy Attorney General Rod Rosenstein told a meeting of Interpol, the International law enforcement agency, that countries should ensure that anti-money-laundering laws are applied to cryptocurrency, according to an article on Coindesk.

“We must not allow cybercriminals to hide behind cryptocurrencies,” Coindesk quoted Rosenstein as saying.

International Roundup: New regs could stifle blockchain development in China; South Africa considers tax hike on blockchain development; Malta considers “personhood” for blockchain

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Although China remains a leader in blockchain technology, new regulations threaten the blockchain industry there.  BitcoinExchange Guide reports that the Chinese blockchain market is “thriving like never before.”  

“China has had quite a big boom in the tech sector… where people are looking very strongly into blockchain technology,” Blockchain Exchange Guide quoted one analyst as saying. “Of course, the popularity of Bitcoin helped in terms of people understanding what blockchain is. In terms of technology, China is actually very welcoming in terms of how these things are being applied.”

But now, China is considering regulations that would, among other things, require users of blockchain services to register with their own names.

South Africa is considering legislation that could hike taxes on blockchain-related activities.  Coingeek reports that the National Treasury and the South African Revenue Services introduced changes to a draft of a tax bill that suggest that cryptocurrency should be categorized as a financial instrument.  The changes would mean that work on cryptocurrency would not qualify for a research and development tax credit that otherwise applies to innovative activities.

Blockchain haven Malta is considering a legislation intended to further blockchain-related innovation. Cryptoslate reports that the legislation could give legal personality to decentralized autonomous organizations (DAOs), smart contracts, and blockchains.  It’s unclear how that would apply to smart contracts or blockchains, but presumably it would be partly aimed at recognizing DAOs the same way corporations has separate rights from the people who have ownership or management responsibilities for them.

SEC Probes Investment Advisers’ Handling of Crypto

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U.S. Agencies continue crackdown on alleged illegal activities involving blockchain-based currencies and tokens.

The U.S. Securities and Exchange Commission is expanding its crackdown on on illegal activities involving cryptocurrencies by focusing on the activities of investment advisers, according to a report on the website Politico.

Politico reported that probe is targeting how advisers are storing cryptocurrencies, the vulnerability of crypto to hackers and possible price manipulation.

“Typically, after a sweep of this type, the SEC staff will publish its findings and observations, and that can provide very helpful guidance for advisers as they consider their compliance obligations,” Politico quoted Gail Bernstein, the top lawyer for a DC-based investment advisory trade group, as saying.

The problem is the latest in a series of actions by the SEC and the U.S. Commodities Futures Tradition Commission as they assert control over alleged illegal activity involving blockchain-based currencies and tokens.

Judge Affirms CFTC Jurisdiction Over Cryptocurrency

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  • Federal Court holds CFTC has authority to take action against My Big Coin, a cryptocurrency that was alleged offered subject to fraudulent claims.
  • The court’s decision is consistent with another holding and CFTC’s stated position and should have no effect on non-fraudulent use of cryptocurrency.

Although it’s received a fair amount of press, a recent U.S. federal court decision affirmed what we already knew — the Commodities Futures Trading Commission has authority to regulate cryptocurrencies.

The ruling came in a case involving the CFTC’s enforcement action against My Big Coin Pay, the offerer of a virtual currency called My Big Coin, and a number of individual defendants.

The court held that CFTC has authority over My Big Coin because My Big Coin is a virtual currency, and the CTFC has authority over virtual currencies because some virtual currencies are traded via futures contracts.  The court followed a line of cases involving natural gas that held the Commodity Exchange Act gives the CFTC authority over commodities if any of that general type of commodity is traded via futures contracts, regardless of whether the specific type of commodity at issue is traded via futures contracts.  

The CFTC alleged in its complaint that “My Big Coin is a virtual currency and it is undisputed that there is futures trading in virtual currencies (specifically involving Bitcoin),” wrote Senior Judge Rya W. Zopel of the District of Massachusetts.   “That is sufficient … to allege that that My Big Coin is a ‘commodity’ under the (Commodity Exchange) Act.”  

A copy of the opinion is available here:

MyBigCoinOpinion_2018_09_26Download

The decision is consistent with the ruling in a case earlier this year, CFTC v. McDonnell, in which New York federal court entered final judgment ordering the defendants to pay over $1.1 million in civil monetary penalties and restitution in connection with a lawsuit brought by the CFTC alleging fraud in connection with virtual currencies, including Bitcoin and Litecoin.

This is an important ruling that confirms the authority of the CFTC to investigate and combat fraud in the virtual currency markets.  This ruling, like the one in McDonnell from Judge Weinstein in the Eastern District of New York, recognizes the broad definition of commodity under the CEA, and also that the CFTC has the power to prosecute fraud with respect to commodities including virtual currencies.  We will continue to police these markets in close coordination with our sister agencies.

James McDonald, CFTC Director of Enforcement

The opinion, though, is fairly unremarkable.  It supports a position that the CFTC claimed four years earlier, and also is consistent with the McDonnell case.

It also won’t make much of a difference to users and investors of cryptocurrencies, except to the extent that it means the CFTC has authority to take action against fraud and market manipulation involving  cryptocurrency.

“When it comes to fraud and manipulation, we need to be strong. When it comes to policy making, I think we need to be slow and deliberate and well informed,” CFTC Chairman J. Christopher Giancarlo  told CNBC in September.


U.S. Congress Moves on Blockchain

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Pennsylvania Avenue by Vlad Podvorny / CC BY 2.0

Members of House introduce another blockchain-related bill.  Reps ask SEC for clarity on treatment of cryptotokens.

Although Capitol Hill has been preoccupied over the last few weeks with the Senate’s consideration of Supreme Court nominee Brett Kavanaugh, that hasn’t stopped the introduction of several blockchain-related bills.

Late last month, Rep. Tom Emmer, a Minnesota Republican, introduced three blockchain-related bills. This week, Democrat Rep. Doris Matsui of California and Republican Brett Guthrie of Kentucky introduced H.R. 6913, the Blockchain Promotion Act of 2018, which would create a working group to establish a common definition of blockchain.

“Blockchain technology could transform the global digital economy.  Opportunities to deploy blockchain technology ranges from greatly increased transparency, efficiencies and security in supply chains to more-opportunistically managing access to spectrum,” said Congresswoman Matsui in a press release.  “As our economies become increasingly digital, more organizations are turning to blockchain to keep track of their business transactions,” said Guthrie. “Blockchain can be a great resource for innovation and technology, but we must figure out exactly what best common definition is and how it can be used.

Although the legislation would reflect a welcome acknowledgment of the value of blockchain technology, it does not address some key points of regulatory uncertainty.  To that end, another bipartisan group of members of Congress sent a letter this week to Jay Clayton, the chairman of the Securities and Exchange Commission. The letter asks the SEC to provide clear guidance about when blockchain based tokens will be treated as securities, which are subject to restrictive regulations.

“This letter is the byproduct of months of work and conversations with industry, trade groups, and my fellow members of Congress,” said Rep. Ted Budd, a North Carolina Republican. “Sending this letter now is one Congress can do to make sure we stop this new technology from being driven offshore. The bottom line is that we must make sure the United States of America is the world’s leader in financial technology.”

3 Bills in U.S. Congress Seek to Encourage Blockchain Development

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U.S. Capitol by Kevin Burkett / CC BY-SA 2.0

The U.S. Congress will consider three bills that aim to relieve regulatory uncertainty and encourage the development of blockchain technology.  

Rep. Tom Emmer, a Republican from Minnesota and co-chair of the recently formed Congressional Blockchain Caucus introduced (1) a resolution that supports blockchain technology, (2) a bill that would clarify that processors of blockchain transactions are not subject to regulations for “money transmitters” and (3) a bill that would provide a temporary tax “safe harbor” for owners of cryptocurrencies that have  undergone a split known as a “hard fork.”

“The United States should prioritize accelerating the development of blockchain technology and create an environment that enables the American private sector to lead on innovation and further growth, which is why I am introducing these bills,” said Congressman Emmer in a press release.

Blockchain is a digital ledger — a log of transactions.  The ledger is shared across a network of computers, and transactions are recorded onto the ledger only if the computers on the blockchain network reach consensus on the validity of the transaction.  Transactions are logged on the ledger as part of a block, and the blocks are strung together in a chain, with each including a reference to the preceding block – thus the name “blockchain.” Bitcoin and other “cryptocurrencies” are “digital” money that ride on blockchain technology.

While countries such as Malta, Bermuda  and Liechtenstein have been proceeding with legislation to encourage development of blockchain technology, more than three years have passed since pro-blockchain legislation was introduced in Congress.  In late 2014, Texas Republican Steve Stockman introduced legislation in the U.S. House of Representatives to impose a five-year moratorium on regulation of blockchain technology, but that legislation has not made it out of committee.

Resolution Expressing Support for Digital Currencies and Blockchain Technologies

The first piece of blockchain legislation introduced by Congressman Emmer is a resolution “expressing support for digital currencies and blockchain technologies.” The resolution outlines the usefulness of blockchain technology in exchanges of value, the provision banking services to financially underserved people, identity and rights management, security for the Internet of Things, government record-keeping and increased efficiencies in industries such as insurance, healthcare and energy.  It further notes “the emergence of blockchain networks in many ways parallels the emergence of the internet at the end of the 20th century.”

Blockchain Regulatory Certainty Act

The second piece of legislation, called the “Blockchain Regulatory Certainty Act”  clarifies that miners of cryptocurrency are not subject to licensing and registration requirements for “money transmitters.”  Miners use powerful computers to process cryptocurrency transactions and post them to a shared ledger of transactions.

Although the miners typically receive a fee to process transactions, they do not control the digital funds that are being exchanged in a transaction.  The U.S. Financial Crimes Enforcement Network (FinCEN) issued rulings that stated that cryptocurrency miners and investors would not be subject to money transmitter regulations. Emmer’s legislation would appear to put into law the regulatory guidance from FinCEN.

Safe Harbor for Taxpayers with Forked Assets

The third piece of legislation introduced by Emmer  provides some protection  for U.S. taxpayers who own cryptocurrencies that have been “hard forked.”  A hard fork occurs when a cryptocurrency essentially splits into two versions (with one following the path of the original blockchain, and the other following a new path.   (Two of the most prominent cryptocurrencies — Bitcoin and Ethereum — have undergone hard forks.) Owners of the original currency then own both versions, and tax experts have noted that U.S. tax regulations are not clear on whether the owner of the receives income (for tax purposes) from the split and if so, when that income is deemed to have been received.  The Section of Taxation of the American Bar Association submitted comments in March 2018 asking the U.S. Internal Revenue Service to create a safe harbor for taxpayers who owned forked currency in 2017, but the IRS has not issued guidance in response. Emmer’s legislation would require the IRS to issue regulations or guidance on the tax treatment of forked cryptocurrency.

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