An evolving ecosystem is changing the way society transfers value
By Sharon Yin
Last year will be known as the time cryptocurrencies entered the main stage. Bitcoin, Ethereum, and Ripple began in 2017 as “nerd money” but by year’s end garnered daily coverage from CNBC, Bloomberg, and Forbes. While the valuation of cryptocurrencies is speculative at best, the underlying technology will have lasting power, and more lawyers will assist in shaping this new ecosystem in the coming years.
Cryptocurrencies are digital assets or digital currencies that utilize blockchain technology to secure their transactions. A blockchain is an immutable, distributed ledger or database whereby all of the transactions are recorded and included in a block that is linked to a subsequent block in chronological order. Bitcoin, created in 2009, is the most well-known cryptocurrency and the first to utilize blockchain tech.
For years, U.S. regulatory agencies largely ignored cryptocurrencies. Then in March 2013, the Financial Crimes Enforcement Network, or FinCEN, tasked with administrating the Bank Secrecy Act, famously issued its guidance on virtual currencies, putting “exchangers” of cryptocurrencies on notice that they are “money transmitters” and may be subject to registration requirements.1 Although FinCEN was the first regulatory body to address cryptocurrencies, it would not be the last.
In April 2014, the Internal Revenue Service, or IRS, issued a notice declaring virtual currencies as “property” and thus taxable as with any asset.2 Recently, the IRS has taken affirmative steps toward enforcement. In November 2016, the IRS subpoenaed Coinbase, a U.S.- based bitcoin exchange, to provide information on its customers between 2013 through 2015. The IRS asserted that while Coinbase had approximately 5.9 million customers during this time, only about 2,500 individuals reported a taxable event likely related to bitcoin. The parties ultimately reached a compromise in which Coinbase would produce information on accounts with at least $20,000 in any transaction type (buy, sell, send, or receive) in any one year from 2013 to 2015.3
The past year also saw an explosion of initial coin offerings, or ICOs, a fundraising mechanism where companies issue a brand new cryptocurrency in exchange for more established crypto-currencies such as bitcoin, Ether, or Litecoin to fund their new blockchain ventures. These
offerings attracted the attention of the U.S. Securities and Exchange Commission, or SEC, and in July 2017 prompted the agency to publish its “Report of Investigation” on the DAO,4 an unincorporated Decentralized Autonomous Organization built on the Ethereum protocol. 5 Among its extensive analysis, the SEC concluded that depending on the facts and circumstances, some ICO issuances may involve the offer and sale of a security and thus be subject to federal securities laws.
In addition to regulations, plaintiffs’ lawyers are increasingly playing an important role in the cryptocurrency ecosystem. In late 2017, we saw several class-action filings alleging wrongdoing, fraudulent transactions, and breach of contractual obligations against blockchain startups. While some litigation may impede development, it also acts as a much-needed check and balance on the marketplace.
Similar to the transformative power of the internet, digital currencies are revolutionizing how our society transfers value. Lawyers on the forefront of this disruptive technology will have the ability to create more transparency and accountability, shape future legislation, and help create a more inclusive world. TBJ
SHARON YIN is a cryptocurrency lawyer specializing in digital currencies and blockchain technology. She advises blockchain startups on compliance and regulatory matters as well as structuring initial coin offerings. For more information, go to cryptocurrencylegalhelp.com.