Source: http://www.klgates.com/cryptocurrency-2018-when-the-law-catches-up-with-game-changing-technology-01-30-2018/
Timestamp: 2019-04-22 04:32:23+00:00

Document:
Despite blockchain’s other practical uses, cryptocurrency is in the spotlight. Cryptocurrency offers a peer-to-peer payment option that allows users to securely send or receive electronic payment. Cryptocurrency is decentralized digital currency secured through encryption techniques to control the creation of monetary units and to verify the transfer of funds. Unlike traditional currencies, cryptocurrency eliminates the role of a third party to process electronic payments. Because cryptocurrency is permanently recorded on a digital ledger using blockchain, all transactions are recorded and visible to all users, prohibiting third parties from tampering with payments.
The SEC offered additional caution to the ICO market on December 11, 2017 when it issued a cease and desist order to Munchee Inc., a smartphone app developer that sold digital tokens to raise funds (the “Munchee Order”) , and Jay Clayton, the SEC Chairman, released a “Statement on Cryptocurrencies and Initial Coin Offerings” (the “Clayton Statement”). ,  The Munchee Order emphasizes that the SEC will apply the facts and circumstances analysis under Howey to ICOs irrespective of token labels or classifications by offerors. Similarly, the Clayton Statement scrutinizes the characterization of tokens and includes an example for when token use may not be considered securities. Through this latest guidance, the SEC has clearly signaled its intent to monitor the ICO market and proactively enforce securities regulations.
The “Tezos” Lawsuits: GGCC, LLC v. Dynamic Ledger Solutions, Inc., et al., 3:17-cv-06779 (N.D. Cal. Nov. 26, 2017); Okusko v. Dynamic Ledger Solutions, Inc., et al., 3:17-cv-06829 (N.D. Cal. Nov. 28, 2017); Baker v. Dynamic Ledger Solutions, Inc., et al., 3:17-cv-06850 (N.D. Cal. Nov. 29, 2017); MacDonald v. Dynamic Ledger Solutions, Inc. et al., 3:17-cv-07095 (N.D. Cal. Dec. 13, 2017): The founders of a new cryptocurrency, “Tezos,” are facing several class action lawsuits stemming from a July, 2017 ICO alleging that Defendants violated securities laws by selling unregistered securities.
For example, faced with increasing questions about purchase and sale of cryptocurrency, the IRS has been forced to intervene. On March 25, 2014, the IRS issued Notice 2014-21, offering guidance as to how general tax principles apply to transactions involving virtual currencies. The IRS concluded that virtual currencies, which can be converted into traditional currency, are considered “property” for tax purposes and treated as a capital asset, such as stocks, bonds, and investment properties.
Cryptocurrency activity has not only received attention from the federal government, states have also become involved in the regulation and taxation of cryptocurrency transactions. For example, in January, 2018, Vermont introduced the first bill of its type focused on exempting new digital currency companies from certain state taxes. While Vermont has taken a friendly approach to cryptocurrency business, other states, such as New York, have sought more stringent policies on various cryptocurrency transactions. Those trading in cryptocurrency must consider developing state laws.
For example, the IRS treatment of cryptocurrency may lead to enforcement activity. The IRS contends that only 800 taxpayers reported gains related to Bitcoin from 2013-2015 when more than 14,000 Coinbase users bought, sold, sent, or received at least $20,000 worth of Bitcoin. On November 28, 2017, the IRS secured a John Doe summons in United States v. Coinbase, Inc. to serve upon Coinbase, the most popular exchange of cryptocurrency, seeking to identify its customers.
States, too, are getting in on the action. On January 17, 2018, the Massachusetts Securities Division filed an administrative complaint alleging that an ICO run by a Massachusetts resident violated state law by offering unregistered securities. The Massachusetts Securities Division seeks among other relief, to halt the ICO, return roughly $3.1 million to investors, and impose administrative fines.
Conclusion - What Lies Ahead?
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1. Bitcoin and other cryptocurrencies self-generate “coins” or “tokens.” “Miners” use computer software to solve complex algorithms to validate (or “mine”) transaction “blocks,” and, in turn, receive a predetermined portion of a token or coin.
2. The Report is available at: https://www.sec.gov/litigation/investreport/34-81207.pdf.
3. SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see SEC v. Edwards, 540 U.S. 389, 393 (2004); see also United Housing Found., Inc. v. Forman, 421 U.S. 837, 852–53 (1975).
4. There is much debate as to whether tokens with a consumptive use, or “utility tokens,” may not be considered securities under this test. Some argue that where purchasers are motivated by a desire to use or consume the rights that the token represents, the securities laws do not apply.
5. The Munchee Order is available at: https://www.sec.gov/litigation/admin/2017/33-10445.pdf.
6. The Clayton Statement is available at: https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11.
7. For additional information on the Munchee Order and the Statement, please see K&L Gates’ December 2017 articles: 1) “A Case of the Midnight Munchees: SEC Action Signals Caution in ICO Offerings,” available at: http://klgates.com/en-US/a-case-of-the-midnight-munchees-sec-action-signals-caution-in-ico-offerings-12-31-2017/; and 2) “United States Securities Law Compliance and Liability Implications of SEC Chairman’s Statement on ICOs,” available at: http://www.klgateshub.com/details/?pub=United-States-Securities-Law-Compliance-and-Liability-Implications-of-SEC-Chairmans-Statement-on-ICOs-12-31-2017.
8. Class action plaintiffs filed a similar case in the U.S. District Court for the Southern District of Florida, but the named Plaintiff has since voluntarily dismissed the case without prejudice. See Gaviria v. Dynamic Ledger Solutions, Inc., et al., 6:17-cv-1959 (M.D. Fla. Nov. 13, 2017).
9. Notice 2014-21 is available at: https://www.irs.gov/pub/irs-drop/n-14-21.pdf.
10. Vermont’s proposed bill is available at: https://legislature.vermont.gov/bill/status/2018/S.269.
11. New York’s virtual currency code is available at: http://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf.
12. United States v. Coinbase, Inc., C.A. No. 17-cv-01431-JSC, 2017 WL 5890052, at *4 (N.D. Cal. Nov. 28, 2017).
13. In the Matter of: Caviar and Kirill Bensonoff, E-2017-0120 (Mass. Sec. Div. Jan. 17, 2018).

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