Blockchain technology is advancing rapidly with new use cases emerging on an apparently weekly basis. A particular area of growth has been the so-called business applications with ideas ranging from log storage to event tickets to supply chain management and more. While blockchain technology has the reputation of not being regulated, the reality is that a series of complex legal regimes can apply to blockchain technology and government agencies have pursued both civil and criminal penalties against people operating in this space.
Companies that do not step back and carefully consider the various legal problems that such technologies could raise can quickly find themselves in hot water. Below are just some of the legal issues that any company should consider before implementing a new blockchain-based technology.
Will your technology make you a money transmitter?
The Network for the Application of Financial Crimes of the Treasury Department (FinCEN) requires that certain entities administer or exchange cryptographic assets to register with the agency as a money transmitter (a type of regulated monetary service activity) and fulfill a series of regulatory obligations related to anti-money laundering. In particular, FinCEN has indicated that this includes companies engaged in the initial coin offer (ICO), among a variety of other assets. FinCEN has led a series of past actions against blockchain companies including Ripple Labs Inc. and BTC-E. In addition, almost all states have a similar regulatory regime that applies to money transmitters, which vary widely in their application to crypto-activity and other blockchain technologies.
Is your technology a security?
The Securities and Exchange Commission (SEC) has indicated that many crypto-assets, including many ICOs and so-called "utility tokens", are actually securities, which require compliance with the full panoply of US securities laws. . While the agency has indicated that not all crypto-assets are securities, the determination of the precise line requires a complex and nuanced analysis. This analysis varies considerably based on the underlying crypto-asset and the economy associated with this activity. The SEC has been active in enforcing securities laws against people in the blockchain space, such as its recent action, on November 8, against the founder of EtherDelta for operating an unregistered stock exchange.
Does your technology involve derivatives trading?
In 2014, the Commodity Futures Trading Commission (CFTC) stated that virtual currencies are a "commodity" subject to the supervision of the CFTC under the Commodity Exchange Act (CEA) – an opinion that has recently been confirmed by several federal judges. As a result, the CFTC now has a regulatory jurisdiction on derivatives trading markets for crypto-assets. It also stated its competence to enforce certain anti-fraud provisions of the CEA on the underlying spot markets for crypto-assets. The agency has introduced more enforcement actions against cryptocurrency companies and issued a series of customer advice and information on the risks associated with crypto-assets.
What are the tax implications of your technology?
Many companies entering the blockchain space assume that crypto-assets are taxed as currency. However, IRS claimed that virtual currency should be treated as a property under tax laws. This distinction may have important tax implications for companies and may raise a series of difficult follow-on questions. The IRS has issued limited guidelines on the taxation of crypto-assets, which means that compliance with all applicable tax provisions can quickly become complicated depending on the business activities in question. At the same time, IRS has become increasingly active in the crypto-asset space, including the issue of a convocation to Coinbase in search of a significant amount of customer information.
Will your technology require you to get BitLicense?
The state of New York has adopted a regulatory regime known as BitLicense that covers a wide variety of virtual currency businesses in New York and with residents in New York. Companies that fall under the scheme are required to obtain a license (which is a complex process) and to fulfill a number of regulatory obligations, including anti-money laundering obligations, capital requirements and cyber security, among others. Many companies have chosen to simply avoid doing business in New York rather than navigate the state regulatory regime.
Can your technology imply laws of economic sanctions?
The United States maintains a series of economic sanctions programs targeting certain countries, sectors and people. Companies that offer products, services or assets based on blockchain may be penalized by civil and criminal penalties for transactions that violate the sanctions laws. Crypto-assets are particularly popular in many sanctioned countries and Venezuela has even taken the step to issue its own cryptocurrency supported by the state called petro, which is subject to US sanctions. The laws on economic sanctions can be complex and, depending on the extent of a company's blockchain operations, a sanctions compliance program may be advisable.
This looks like a mountain of legal obstacles. Where do I start?
While a variety of complex legal regimes can apply to any particular blockchain technology, the good news is that not all schemes apply or present obstacles in all cases. Companies looking to enter the blockchain space should carefully evaluate the applicable regimes for their planned operations. Once the appropriate set of laws have been identified, the next step is to define appropriate compliance programs and obtain any necessary licenses or registrations. Finally, the laws that apply to blockchain technologies are constantly evolving and can change rapidly, so it is important to continue to follow legal developments as they occur.