Blockchain and Cryptocurrency Law

Blockchain technology is a simple way of passing information from A to B in a fully automated, safe manner. One party to a transaction initiates the process by creating a block. This block is verified by millions of computers distributed around the Internet.  While blockchain is best known for its use in digital or cryptocurrencies like Bitcoin, its usage reaches a far wider range like data management, medical history digitization, digital identity creation, supply chain management, real estate tokenization, smart contract development, intellectual property preservation, among other innovations. Despite its increasing use, blockchain is an area that is complex legal and technology standpoint. 

In the United States, various federal and state laws apply to blockchain related transactions:

Securities and Exchange Commission (SEC) regulations apply to the offer and sale of cryptocurrency tokens.  Further, ICOs may also be considered securities offerings that must be registered.

The Commodity Futures Trading Commission (CFTC) considers virtual currencies as commodities subject to agency oversight.  However, the agency's jurisdiction is limited to virtual currencies used in a derivatives contract or if there is fraud involving a virtual currency traded in interstate commerce.

Taxation

While the cryptocurrency revolution has lifted many restrictions digital currencies are still subject to taxation. The IRS classifies cryptocurrency as property, and cryptocurrency transactions are taxable by law just like transactions related to any other property. Taxes are due when you sell, trade, or dispose of cryptocurrency in any way and recognize a gain. Cryptocurrency transactions are subject to federal securities laws, this includes initial coin offerings (ICOs).

Under IRS rules, virtual currency transactions are taxable and must be reported on the taxpayer's tax returns.  This includes selling or exchanging virtual currencies, using them to pay for goods or services or holding them as an investment.

The Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of Treasury, regulates money laundering and other financial crimes.  Unlike the IRS, FinCEN generally treats these tokens as alternative currencies, subject to the same rules and restrictions governing money laundering and illegal financing. 

Additionally, the New York Department of Financial Services regulates the use of virtual currencies in New York.  This includes requiring virtual currency licenses and charters for companies looking to offer virtual currencies.

Any parties using blockchain technology and/or digital currencies in a transaction should consult an attorney familiar with relevant regulations to avoid potential liability and financial losses.

What are the Main Types of Cryptocurrencies?

  • Payment tokens: These are cryptocurrencies created to facilitate transactions. Examples are Bitcoin (BTC), Ripple (XRP), Litecoin (LTC), Bitcoin Cash (BCH).

  • Platform tokens or smart contract tokens: Platform tokens are used on programmable, or general-purpose, blockchain applications upon which DApps are to be deployed. Examples are Ethereum (ETH), Cardano (ADA), EOS, TRON (TRX), and Tezos (XTZ).

  • DApp tokens: DApp tokens are native to a specific distributed application, and commonly represent access rights to resources or services provided by the DApp. Examples include Binance (BNB), Unus Sed Leo (LEO), Maker (MKR), Basic Attention Token (BAT), and Augur (REP).

  • Stable value tokens: Stable value tokens (or stablecoins) are a special kind of payment token created with the aim of minimizing the inherent volatility found in cryptocurrencies. The price of a stablecoin can be pegged to a fiat currency such as the US dollar, or to commodities. Examples of stablecoins include Tether, USDCoin, and TrueUSD.

What are the Characteristics of the Crypto Market?

The crypto market is overwhelmingly retail driven. Much like the e-commerce market and the content creation market, the crypto market is predominantly driven by retail investors and is international in nature. Experts believe that over the next 5 to 10 years, a new international capital market will be created centered on digital asset class.

Cryptos also trade 24/7, and offer much broader capital access to just about anyone. Compared to traditional equity market, where equity is limited to trading on a singular traditional exchange and gated by intermediaries such as brokers, cryptocurrencies are listed on multiple exchanges 24/7. Unlike traditional exchanges, the broker/intermediary layers are removed from the trading activities. There’s also no custodian necessary to settle and clear the funds. The crypto exchanges serve as the custodian, settler, and everything else in one place due to the use of technology, allowing much faster, cheaper and direct access.

How to find Cryptocurrency Lawyers

Complex legal issues arise around cryptocurrency and make finding the right lawyer critical for your business. It is widely accepted with the recent rise of digital assets that cryptocurrency attorneys will not have decades of experience.

Find the right legal team that you feel represented by, that can build on the attorney client relationship, and knows the regulations in your industry. Start with a phone or video consultation for general information purposes. A good crypto lawyer should be familiar with recent securities act litigation, and know more digital assets than bitcoin. A good law firm will cover corporate law, smart contracts, and be familiar with cryptocurrency exchanges.

The best cryptocurrency lawyers will advise and assist private cryptocurrency fund sponsors on all aspects of the fundraising lifecycle, including fund formation, regulatory compliance and market terms; preparing offering documents for new private cryptocurrency funds, including private placement memoranda, and limited partnership agreements.

The world is changing and any parties using blockchain technology and/or digital currencies in a transaction should consult an attorney to avoid potential liability and financial losses.

 

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