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Blockchain technology is advancing rapidly with new use cases emerging on a seemingly weekly basis. A particular area of growth has been so-called enterprise applications with ideas ranging from records storage to event tickets to supply chain management and more. While blockchain technology has a reputation of being unregulated, the reality is that a number of complex legal regimes can apply to blockchain technology and government agencies have pursued both civil and criminal penalties against persons operating in this space.
Companies that don’t step back and carefully consider the various legal issues that such technologies might raise can quickly find themselves in hot water. Below are just a few 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 Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) requires certain entities administering or exchanging crypto-assets to register with the agency as a money transmitter (a type of regulated money services business) and comply with a variety of regulatory obligations related to anti-money laundering. Notably, FinCEN has indicated that this includes companies engaging in initial coin offerings (ICOs), among a variety of other activities. FinCEN has brought a number of past actions against blockchain companies including Ripple Labs Inc. and BTC-E. In addition, nearly every state has a similar regulatory regime applying to money transmitters, which vary greatly in their application to crypto-assets 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 in fact securities, requiring compliance with the full panoply of U.S. securities laws. While the agency has indicated that not all crypto-assets are securities, determining the precise line requires a complex, nuanced analysis. That analysis varies considerably based on the underlying crypto-asset and the economics associated with that asset. The SEC has been active in enforcing securities laws against persons in the blockchain space, such as its recent action, on November 8, against the founder of EtherDelta for operating an unregistered securities exchange.
Does your technology involve derivatives trading?
In 2014, the Commodity Futures Trading Commission (CFTC) declared that virtual currencies are a “commodity” subject to CFTC oversight under the Commodity Exchange Act (CEA) – a view that has recently been confirmed by multiple federal judges. As a result, the CFTC now has regulatory jurisdiction over derivatives trading markets for crypto-assets. It has also asserted jurisdiction to enforce certain anti-fraud provisions of the CEA in underlying spot markets for crypto-assets. The agency has brought multiple enforcement actions against companies dealing in crypto-assets and issued a variety of customer advisories and primers on the risks associated with crypto-assets.
What are the tax implications of your technology?
Many businesses entering the blockchain space assume that crypto-assets are taxed like currency. However, the IRS has asserted that virtual currency should be treated as property under the tax laws. That distinction can have important tax implications for businesses and can raise a number of difficult follow-on questions. The IRS has issued limited guidance on the taxation of crypto-assets meaning compliance with all applicable tax provisions can quickly grow complicated depending on the business activities in question. At the same time, the IRS has become increasingly active in the crypto-asset space, including issuing a summons to Coinbase seeking a significant quantity of customer information.
Will your technology require you to obtain a BitLicense?
New York state has adopted a regulatory regime known as the BitLicense which covers a wide variety of virtual currency business activity in New York and with New York residents. Companies falling within the regime are required to obtain a license (which is a complex process) and to comply with a variety of regulatory obligations including those related to anti-money laundering, capital requirements, and cyber security, among others. Many companies have chosen to simply avoid doing business in New York rather than navigate the state’s regulatory regime.
Could your technology implicate economic sanctions laws?
The U.S. maintains a number of economic sanctions programs targeting certain countries, sectors, and persons. Companies offering blockchain-based products, services, or assets can face civil and criminal penalties for transactions that violate sanctions laws. Crypto-assets are particularly popular in many sanctioned countries and Venezuela has even taken the step of issuing its own state-backed cryptocurrency called the petro, which is subject to U.S. sanctions. Economic sanctions laws can be complex and depending on the scope of a company’s blockchain operations, a sanctions compliance program may be advisable.
This seems like a mountain of legal obstacles. Where do I begin?
While a variety of complex legal regimes can apply to any particular blockchain technology, the good news is that not every regime will apply or present obstacles in all cases. Companies seeking to enter the blockchain space should carefully assess which regimes apply to their intended operations. Once the appropriate set of laws has been identified the next step is building out appropriate compliance programs and obtaining any needed licenses or registrations. Finally, the laws applying to blockchain technologies are in flux and can change rapidly so it is important to continue to follow legal developments as they occur.