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Webinar: Bitcoin, Blockchain, and the Law
- 1. Bitcoin, Blockchain, andthe Law October 26, 2017
- 2. Agenda Introduction to Cryptocurrencies& Blockchain Bitcoin and Blockchain Use Cases Enforcement Actions Potential Areas of Regulation
- 3. Presenters Erica G. Wilson Vuono& Gray Stephen T. Middlebrook Womble Carlyle
- 4. Bitcoin and Blockchain: NotYour Partner’s Secured Transactions Erica G. Wilson - October 26, 2017
- 5. ● Chains ofdigital signatures ● 1188 cryptocurrencies ● Market value: $170 BILLION ● $3 billion traded per day What are cryptocurrencies?
- 6. Bitcoin Origins: Nakamoto(2008) Goal: Low-cost, irreversible transactions facilitated by “cryptographic proof instead of trust”
- 7. In Blockchain WeTrust ● Decentralized network = security ● Public ledger = transparency ● Irreversible transactions = certainty ● Finite, divisible resource = value
- 8.
- 9. Reality Check ● Exchanges≠ blockchain ● Volatile, uninsured ● User error
- 10. Use Cases: Bitcoin •Send • Spend • Speculate
- 11. Use Cases: Blockchain ●Funds settlement ● Asset tracking and transfer ● E-notarization ● Records management ● Smart contracts
- 12. Bitcoin in Practice InternalRevenue Service: bitcoins are property Securities and Exchange Commission: bitcoins may be securities Commodity Futures Trading Commission: bitcoins are commodities
- 13. Bitcoin in Practice ●Intellectual property ● Estate planning ● Family law ● Discovery ● Ethics
- 14. Regulation of Blockchainand Virtual Currency Business Activity Stephen T. Middlebrook October 26, 2017
- 15. 15 Potential Areas ofRegulation • Anti-money laundering (FinCEN). • Tax (IRS). • Securities (SEC). • Commodities (CFTC). • Consumer Protection and Safety and Soundness (OCC, states). • Unfair and Deceptive Acts and Practices (FTC, CFPB, states).
- 16. 16 FinCEN Anti-Money LaunderingRegulations • March 18, 2013 FinCEN issued guidance interpreting existing Bank Secrecy Act regulations for Money Services Businesses (“MSBs”). • Guidance clarifies when a participant in a virtual currency scheme might be engaged in “money transmission” and thus be considered an MSB. • MSBs must register with FinCEN, have AML program, maintain records, file reports.
- 17. 17 FinCEN Guidance onVirtual Currencies • FinCEN regulations define Money Transmission as “acceptance of currency, funds or other value that substitutes for currency from one person and the transmission of currency, funds or other value that substitutes for currency to another location or person by any means.” • FinCEN determined that virtual currency may be a “substitute” for real currency.
- 18. 18 Enforcement Action AgainstMt. Gox • Mt. Gox, based in Japan, was the largest Bitcoin exchange handling 70% of all transactions. • May 14, 2013, DHS seized funds belonging to Mt. Gox held at Dwolla and at Wells Fargo. • Seizure order asserted that Mt. Gox was engaged in money transmission and was required to register as an MSB. • In February 2014, Mt. Gox ceased operations, claiming it was hacked. Liquidation proceedings are on-going in Japan and there is a class action in U.S.
- 19. 19 Enforcement Action AgainstBTC-e • BTC-e was a large virtual currency exchange operated by Alexander Vinnik out of Russian and/or Bulgaria. • July 26, 2017 FinCEN imposed a $110 million dollar civil money penalty on BTC-e for failure to comply with MSB regulations. • BTC-e and Vinnik were indicted in federal court in N.D.Cal. for money laundering and related charges. • Law enforcement asserts that BTC-e was a hub for cybercriminals to launder their money. • BTC-e exchange shut down but claims it will return to operations.
- 20. 20 IRS Guidance onVirtual Currencies • On March 25, 2014, the IRS issued guidance on the tax treatment of virtual currencies. Notice 2014-21. • IRS stated that for federal tax purposes, virtual currency is treated as property not as foreign currency. • This means holders must track their basis in each unit of virtual currency and may experience a capital gain or loss when the unit is spent. • In 2016-17, IRS has been trying to enforce a “John Doe” subpoena to Coinbase seeking information on customers who bought and sold virtual currency. • Anticipate future tax evasion enforcement actions.
- 21. 21 Initial Coin Offerings •Initial Coin Offerings have become a popular way to raise funds to support new business ventures.
- 22. 22 Celebrities Promoting InitialCoin Offerings
- 23. 23 SEC Report onThe DAO • On July 25, 2017 SEC issued its Report on the DAO. • Found the tokens issued by the DAO were securities because they met the four prongs of the Howey test: – an investment of money. – in a common enterprise. – premised on a reasonable expectation of profits. – derived from the entrepreneurial or managerial efforts of others. • SEC took no enforcement action (DAO was already defunct). • Issuers of tokens that are securities must register. • Exchanges that transfer tokens that are securities must register. • Tokens that are not securities or that qualify for an exemption have no duty register.
- 24. 24 SEC Enforcement ActionAgainst RECoin • Sept. 29, 2017, SEC filed suit in federal court in the E.D.N.Y. against Maksim Zaslavskey and his company RECoin. • RECoin was an ICO token supposedly backed by real estate holdings. • Diamond Reserve Club was an ICO token supposedly backed by diamonds. • SEC alleges it was all a scam – no real estate and no diamonds. • SEC alleges these tokens were securities that were required to be registered.
- 25. 25 CFTC Asserts Jurisdiction •Definition of “commodity” in CEA is broad and includes: – Physical commodities. – Currencies and interest rates. – Futures contracts. • In 2015, CFTC said bitcoin and other virtual currencies are commodities. • CFTC clearly has jurisdiction over derivatives based on virtual currency: – Licensed TeraExchange for bitcoin swaps in 2014. – Licensed LedgerX for virtual currency options in July 2017. • CFTC says there is no discrepancy between SEC and CFTC positions – analysis depends on facts and circumstances.
- 26. 26 OCC Proposes FederalFinTech Charter • In Dec. 2016, the OCC announced plans to grant “special purpose” national bank charters to FinTech companies. • FinTech charters would allow holders to engage in: – Fiduciary activities within the business of banking. – Non-fiduciary activities if involve receiving deposits, paying checks or lending money. • FinTech charters would be subject to same rules as other charters and could take advantage of preemption of certain state laws. • FinTech charters accepting deposits could qualify for FDIC insurance. • Conference of State Bank Supervisors and NY Dept. of Financial Services have individually sued OCC to stop the proposal from going forward.
- 27. 27 State Regulation ofVirtual Currency • State regulation of virtual currency is inconsistent and unclear. • Do existing state money transmission statutes cover virtual currency transactions? – Some states say yes. – Some states say no. – Some states are silent. • New York’s Dept. of Financial Services created a new regulatory process for virtual currency referred to as the “BitLicense.” • Existing state statutes are not well suited for virtual currency businesses. • In July 2017, the Uniform Law Commission approved the “Uniform Regulation of Virtual Currency Businesses Act.” – Anticipate numerous state enactments over next couple of years.
- 28. 28 Uniform Regulation ofVirtual Currency Businesses Act • The Uniform Act regulates “virtual currency business activity” which includes exchanging, transferring or storing virtual currency on behalf of others. • Focus is on consumer protection and safety and soundness. • Licensing requirement for covered persons. • Mandated consumer disclosures and protections • Exemptions for: – personal, household, academic uses. – infrastructure and software providers. – de minimis users. – start-ups under certain thresholds who register and meet certain requirements. • Reciprocal licensing arrangements with other states that adopt URVCBA.
- 29. 29 Unfair and DeceptiveActs and Practices • The FTC, CFPB and state attorneys general all have “UDAP” authority to prosecute “unfair and deceptive” (and for CFPB, “abusive”) acts and practices. • Broad authority to police fraud and deception against consumers. • Anticipate UDAP enforcement actions, especially at the state level.
- 30. Questions and Answers Questionscan be submitted using the “Questions” box in your GoToWebinar control Panel.
- 31. Erica G. Wilson [email protected] 412-471-1800 StephenT. Middlebrook [email protected] 404-962-7529 Casey C. Sullivan [email protected] 844-363-3347
- 32. More Resources: Check outthe “Developments in the Law Affecting Electronic Payments and Financial Services” by Stephen Middlebrook, Tom Kierner and Sarah Jane Hughes and “A Historical Analysis of Substitutes for Legal Tender and Their Implications for the Regulation of Virtual Currency” by Stephen Middlebrook & Sarah Jane Hughes. See a demo of Logikcull, the powerfully simply, highly secure eDiscovery and data management software. For technology and eDiscovery news and tips, interviews with judges and practitioners, and more, sign up for Logikcull’s blog, Closing the Loop.