Cryptocurrency & Blockchain Law
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.
Currently, U.S. federal lawmakers have not 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.
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.
What is the 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, in the U.S., 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) views cryptocurrency as “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 U.S. 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.
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.