Cryptocurrency & Blockchain Law

Overview

Ever since the debut of Bitcoin, Ifrah Law has been at the forefront of the cryptocurrency movement, counseling companies on the best ways to utilize the digital revolution of blockchain in their own business models. Our attorneys have always been trailblazers, and our ability to brainstorm ways to leverage this concept of a decentralized peer-to-peer network has long been a valued asset to our clients.

While representing pioneers in the interactive entertainment and financial services industries, we have gained significant experience shaping programs for companies to enhance their products and their bottom line while staying within the bounds of the still-evolving regulatory landscape of cryptocurrency and blockchain law.

The Basics of Blockchain Technology

The term “blockchain” is more literal than one might expect, as it essentially refers to a series of data “blocks” chained together within a larger decentralized computer cluster rather than a network owned by a single entity. Because the blockchain is decentralized, an individual entity cannot directly influence it. This inability to personally manipulate the blockchain both increases security and complicates regulatory efforts.

When a machine connected to the computer cluster—referred to as a node—makes a “transaction” or any other exchange of data within the system and signs it with its private key, a new “block” is created that must be validated by other nodes. Each validated entry in the blockchain has its own “hash,” which is a unique digital signature that cannot be tampered with without dramatically changing the hash’s value.

Blocks of data within the blockchain are cryptographically linked to each other once they are validated, creating a secure chain that cannot be tampered with or broken in any way. Only an individual who has been onboarded into the system and has the right RSA keys can access data within the blockchain.

Federal and State Approaches to Cryptocurrency and Blockchain Law

While the recent proliferation of cryptocurrencies has received significant attention from both federal and state governments, that attention has not yet translated into a great deal of legislation.

Federal Legislation

Federal lawmakers have not yet passed any significant laws regulating cryptocurrency or the use of blockchain technology, leaving enforcement to finance-focused agencies like the Securities and Exchange Commission, the Commodities and Futures Trading Commission, the Federal Trade Commission, and the Financial Crimes Enforcement Network.

State Legislation

At the state level, the legislative approach to cryptocurrency has been inconsistent. Some states have expressed interest in fostering cryptocurrency and blockchain development by loosening regulatory restrictions and incorporating the blockchain into government recordkeeping. A couple of other jurisdictions have pledged to legalize the use of Bitcoin for the payment of state taxes, with Ohio becoming the first to formally do so in November 2018.

Conversely, other states have warned residents specifically against investing in cryptocurrency. The state of New York, in particular, has passed notably restrictive laws compared to other jurisdictions. That being said, some customers and investors view this increased regulation as a net positive for the fledgling industry. They see it as essential to mitigating the risk of financial losses through fraudulent cryptocurrency transactions.

Current U.S. Regulation of Cryptocurrency

Currently, cryptocurrency does not have a universally accepted definition, so the term is used broadly to refer to virtual currencies like Bitcoin and other blockchain-based digital assets or tokens. Furthermore, the sale of cryptocurrencies like Bitcoin is only subject to federal regulation when it is classified as a security sale, money transmission, or a component of a money services business (MSB).    The Securities and Exchange Commission has issued guidance indicating that its approach to cryptocurrency is to subject digital tokens to the long-standing Howey test used to determine whether more traditional products qualify as “securities” or “investment contracts,” and it has taken enforcement actions consistent with this guidance.

Classifying Blockchain Assets and Cryptocurrency Transactions

If a digital or blockchain asset is considered to be a security, the party issuing the asset must register it as a security with the SEC. Alternatively, they may specify how it is exempt from the registration requirements, such as when the asset is being offered only to accredited investors. MSB transactions are regulated by the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), which has established that it considers virtual currency exchanges to be MSB transactions and administrators of virtual currency repositories who can both issue and redeem that currency to be MSBs.

For tax purposes, the Internal Revenue Service (IRS) currently considers cryptocurrency to be “property” rather than currency, so anyone who owns cryptocurrencies must pay taxes on any gains they make from the sale of such digital assets and the purchase of goods with cryptocurrency, as well as for the fair market value of mined cryptocurrencies. Owners and issuers are also expected to keep detailed records of purchases and sales.

Get in Touch with Ifrah Law to Discuss Cryptocurrency and Blockchain Law

Ifrah Law’s prime positioning at the intersection of finance, technology, and government regulation enables us to effectively counsel companies on the cutting edge of cryptocurrency.

  • We advise companies like ConsenSys, the for-profit arm of Ethereum, on ways to take advantage of blockchain platforms while remaining compliant with pertinent regulations, both domestically and abroad.
  • We have advised clients concerning initial coin offerings (ICOs) or token sales with valuations in the tens of millions of dollars for such companies as Unikrn, ConsenSys, Joy Gaming, and FunFair.
  • We represent a new cryptocurrency exchange platform, supporting them in all of its startup needs, such as setting up money service businesses and other licenses and drafting policies and procedures.
  • We are working with numerous companies in industries spanning philanthropy to transportation, advising on the possibility of launching an ICO or token sale, and other ways to utilize the blockchain to achieve their business goals.
  • We counsel clients on cryptocurrency issues such as payment and licensing, consumer protection requirements, and data privacy, paying special attention to the growing scrutiny of digital assets by state attorney generals and federal agencies like the SEC, CFTC, and FTC.
  • We draft internal policies to ensure corporate compliance with anti-money laundering laws, banking and securities regulations, and international requirements.

If you have any questions about how federal and state cryptocurrency and blockchain laws may impact a recent or upcoming transaction, do not hesitate to reach out to Ifrah Law to discuss your situation.


ICOs as Securities Exceptions Infographic

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This infographic is provided for informational purposes only and not for the purpose of providing legal advice. Please contact Ifrah Law to obtain advice with respect to any particular issue or problem.

Blog Posts
December 28, 2018

New York AG Puts Crypto Exchanges in the Crosshairs

New York AG Puts Crypto Exchanges in the Crosshairs

Following on the heels of the SEC’s announcement of subpoenas to crypto exchanges and token issuers, yesterday New York Attorney General Eric Schneiderman announced “the Virtual Markets Integrity Initiative,” which he described as “a fact-finding inquiry into the policies and practices of platforms used by consumers to trade virtual or ‘crypto’ currencies like bitcoin and… Read More

March 1, 2018

If ICOs are Securities: What Cryptocurrency Issuers, Exchanges and Gatekeepers Need to Know.

If ICOs are Securities:  What Cryptocurrency Issuers, Exchanges and Gatekeepers Need to Know.

As predicted, the Securities and Exchange Commission (SEC) has taken additional steps to clamp down on the exploding ICO market: yesterday the Wall Street Journal  reported the agency had issued “dozens of subpoenas and information requests to technology companies and advisors.” After repeated warnings from regulators like SEC Chairman Jay Clayton, the SEC is now sending… Read More

February 28, 2018

Full Metal Cryptojacket

Full Metal Cryptojacket

In retrospect, it all seems so predictable. International capitalism creates virtual currencies. Banks are avoided. Millennials hail a new world order of anonymous or nearly untraceable market transactions. Numerous parties and exchanges hold on to large quantities of virtual currencies. But then the bad guys show up. And I’m not talking about the regulators. Last month, in what looks like the… Read More

February 20, 2018

Coming Soon: Digital Asset Regulation

Coming Soon: Digital Asset Regulation

In January, Bitcoin dropped to approximately 50% of its 2017 peak price.  Other digital currencies saw similar declines. Most market observers blamed these massive price fluctuations on related events: (i) widespread reports of fraud and price manipulation, and (ii) increasing prospects for the regulation of digital assets and currencies. Indeed, 2018 has brought us federal… Read More

February 5, 2018

Social Media’s Hesitation to Promote Cryptocurrencies Explained

Social Media’s Hesitation to Promote Cryptocurrencies Explained

In a paradox of sorts, cryptocurrency’s continued survival may hinge on its submission to greater regulatory oversight. Such a notion is paradoxical in the sense that cryptocurrency’s origins can be traced to a “stick it to the man” mentality in which currency is decentralized and not tied to any one governmental body. Thus, submitting to… Read More

January 22, 2018

2018: The End of Cryptocurrencies?

2018: The End of Cryptocurrencies?

Cryptocurrencies (e.g. Bitcoin) took the broader public by storm in 2017 and had a breakout year. There were outsized and even unprecedented returns, along with extreme volatility and even more extreme volatility.  The question for 2018 is whether cryptocurrencies had their “fifteen minutes of fame” or they are here to stay? Blockchain technology (which is… Read More

November 30, 2017

The Risks of Cryptocurrency and How the Government Will Protect Consumers

The Risks of Cryptocurrency and How the Government Will Protect Consumers

Bitcoin and a host of cryptocurrencies have taken both Wall Street and Main Street by storm in 2017.  The nearly continuous gains in the price of Bitcoin have spawned numerous imitators and led a number of companies to raise critical start-up funds by selling their own token/cryptocurrency in a process similar to an initial public… Read More

November 28, 2017

CFTC Regulated Markets May Give Bitcoin the Stability It Needs

CFTC Regulated Markets May Give Bitcoin the Stability It Needs

The unregulated nature of virtual currencies like Bitcoin plays a big role in their appeal. However, wild swings in prices in addition to the perception that these markets are subject to manipulation, make it difficult—if not impossible—for the average person to rely heavily on Bitcoin and other virtual currencies as a currency, much less as… Read More

July 25, 2017

ICOs: Proceed with Caution

ICOs: Proceed with Caution

Today, the Securities and Exchange Commission (“SEC”) issued an investor bulletin and an investigative report. The investigative report found that companies involved in sales of digital assets via distributed ledger or blockchain technology may be engaged in conduct subject to federal securities laws. While this report is the first of its kind to address initial… Read More