Hot Takes

The SEC today has said that some tokens can be securities.

That comports with the analysis of securities laws and crypto-tokens we issued two years ago. What the SEC did not say is that all tokens are securities. Rather, they suggest a facts and circumstances test but only analyze the facts and circumstances surrounding last year’s DAO token sale.

We believe that applying the same facts and circumstances test to other tokens will mean that some do not fit into the definition of securities, particularly tokens with an underlying utility rather than a mere speculative investment value. Our securities framework and other research explains why this is the case. We hope clear guidance from the SEC to that effect will be forthcoming.

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The CFTC published a new report on cryptocurrencies today

A new primer released today by LabCFTC, the Commodities Futures Trading Commission’s FinTech initiative, is a helpful report that that outlines the agency’s relationship to the virtual currency and blockchain space.

The report explains that the agency considers cryptocurrencies to be commodities, what kinds of trading activities fall under its jurisdiction, what types of activities require approval, and how other agency’s jurisdictional interpretations interact with its own. It also outlines operational risks for cryptocurrency exchanges, and we’re happy to see that their conclusions mirror those in the report on cryptocurrency risk factors we developed for Lloyds of London.

Innovators building cryptocurrency businesses that may cross into the CFTC’s jurisdiction will no doubt be appreciative of the clarity offered by this report. We applaud the CFTC for publishing this articulation of its approach to cryptocurrencies.

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We taught Congress about ICOs.

The Congressional Blockchain Caucus held a briefing on token sales on Capitol Hill today. Coin Center, along with experts from the cryptocurrency industry, taught policymakers and their staff about how the law can approach this exciting method for crowdfunding distributed public networks in a way that sensibly protects consumers while preserving an innovation-friendly environment in the U.S.

Peter Van Valkenburgh laid out our thinking on a sensible approach to tokens for securities regulators. In short: lots of tokens are probably securities but there are is a small subset, those that are useful for purchasing distributed network goods and services, which are not. He was joined by Joel Monegro of Placeholder Capital, Ken Nguyen of CoinList, and Erik Kintner of Snell and Wilmer. Congressman Jared Polis, co-chair of the Congressional Blockchain Caucus, gave remarks after the panel highlighting the importance of government approaching this technology smartly to preserve innovation in this space.

Also, yesterday our executive director Jerry Brito was on stage during the Blockchain@State event held by the State Department. He was there to explain what blockchains are, what they can do, and perhaps most importantly, what they can’t do. Watch the event here (Jerry’s portion begins at around 50 minutes in).

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In Congressional Testimony, SEC Chairman says compliant ICOs are possible.

Jay Clayton appeared before the House Financial Services Committee in a routine hearing about the agency’s agenda, operations, and budget. Unsurprisingly, there were a few questions from committee members about the agency’s response to Initial Coin Offerings.

Rep. Patrick McHenry, committee vice-chairman, asked about the SEC’s recent investigative report which found that the DAO token sale was indeed an securities offering. Clayton responded:

Instead of starting with enforcement actions we decided to start by level-setting with this report and saying “hey, here’s how to behave well and here are some things that trouble us.” That was the intent of that, to notify people in the space that there are ways to do this right and some things that trouble us and if you do it right we’re all for it and if you do it wrong you’re going to have some explaining to do.

He was then asked about how entrepreneurs can use the token sale model correctly. He said to “first ask yourself if it’s a security,” and if it is, to find an exemption that fits or register as a security with the agency.

This is a key point. Many tokens are clearly securities. If yours is then then you would be best served by acknowledging that and taking steps to be compliant. However, we’ve argued that there is a certain class of tokens, those which are useful for accessing distributed network goods and services, that are not securities and should not be regulated as such. Learn more about that here.

What’s important here is that the SEC is acknowledging that there is a right way to do token sales and they don’t seem keen on quashing innovation in decentralized networks any time soon.

Watch the full hearing here.

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A token airdrop may not spare you from securities regulation.

Blockchain token based projects need network effects. There needs to be a mechanism for fairly and widely distributing tokens to in order for the project to function well upon launch. A popular method thus far has been to sell those tokens in advance to prospective users of the network that are interested in crowdfunding its development. Another, lesser known, strategy is an “airdrop.”

In an airdrop, a project’s creators can take a snapshot of a public blockchain, such as Bitcoin’s or Ethereum’s, and send tokens to all wallet addresses containing some number of bitcoin or ether at the time the snapshot was taken. This requires no action on the recipient's part other than to take whatever steps are needed to take control of the tokens once they have been gifted. It can be a way to jumpstart a community by instantly putting tokens in the hands of a lot of people with a proven level of cryptocurrency savvy.

This seems like something totally new and unique to token projects, right? Not really. It turns out people have tried airdropping before, but with stocks. And the SEC did not look favorably upon the tactic. See this 1999 press release:

In each of the four cases, the investors were required to sign up with the issuers' web sites and disclose valuable personal information in order to obtain shares. Free stock recipients were also offered extra shares, in some cases, for soliciting additional investors or, in other cases, for linking their own websites to those of an issuer or purchasing services offered through an issuer. Through these techniques, issuers received value by spawning a fledgling public market for their shares, increasing their business, creating publicity, increasing traffic to their websites, and, in two cases, generating possible interest in projected public offerings.

So, since the SEC has found that some tokens can be securities, if you are considering using an airdrop token distribution be warned that even giving away tokens is not necessarily free from scrutiny under securities law.

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Use cryptocurrency to help victims of Mexico earthquake.

By now you have heard of the devastation that an earthquake measuring 7.1 on the Richter Scale has caused in Mexico City and the surrounding areas. The death toll has reached over 200 and is climbing.

Mexican cryptocurrency exchange Bitso is raising funds to aid the relief effort. Bitso will be donating the funds to the Red Cross and Brigada de Rescate Topos Tlaltelolco A.C., a local earthquake relief organization. You can support this cause by sending cryptocurrencies to the addresses below.

Bitcoin (BTC) 1DaHfXsoPfZ2jznJhB62vR3QEVFhhZ2tMR

Ethereum (ETH) 0x88B6021aE4BB9830f2E9D5BB38B83427b9D7ffEc

Ripple (XRP) rEFMdiTbLmZq5ZiMGrWGoyP48DMFqXjNkM [No Destination Tag required]

You can learn more about this effort on Bitso’s blog.

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What are the tax implications of Bitcoin’s big fork?

A new report [PDF] from Deloitte may have some answers.

On August 1, 2017, Bitcoin block 478558 was mined. At that moment, the Bitcoin network split into two similar but incompatible versions: the original Bitcoin and a new network called “Bitcoin Cash.” Every existing holder of Bitcoin private keys now had control of tokens on both networks that could be moved and traded independently of each other. It turned out that the new Bitcoin Cash tokens have considerable value too. So what are the tax implications of this? The report lays out some ideas:

The Bitcoin chain-split has no obvious analogy for federal income tax purposes; however, whether or not it is a realization event, the chain-split has basis effects. While the conclusion may not be certain, the following can be said: There was no exchange of bitcoin for bitcoin cash; and, the receipt of bitcoin cash was a consequence of holding bitcoin.

An owner of bitcoin is entitled to bitcoin cash merely on the basis of his ownership. As a result, he may be treated as realizing ordinary income to the extent of the value of bitcoin cash. The value is normally determined on the date of actual or constructive receipt. Bitcoin cash was actively trading over-the-counter within hours of the chain-split. If it was a realization event, then the basis of bitcoin cash would be equal to the ordinary income actually recognized, and gain or loss on the disposition of bitcoin cash would be determined using that basis. Alternatively, it might be argued that the chain-split was similar to a property division. In that case, the basis in each bitcoin would be allocated between it and the related bitcoin cash.

The full report is a deep dive into the taxation of virtual currencies. You can access it here [PDF].

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Steptoe is putting on a Bitcoin tax event in DC.

Coin Center has partnered with law firm Steptoe & Johnson to put on a half-day workshop focused on the tax issues that blockchain technologies raise.

The program will feature a presentation on blockchain technology by Jonathan Johnson, President of Medici Ventures and Chairman of Overstock.com, as well as presentations and panels on legislative and regulatory developments, including the work of the Congressional Blockchain Caucus. The program will also include discussions about tax compliance and structuring investments.

Click here to register.

Event details:

Tuesday, September 12, 2017

11:30 a.m. - 6:00 p.m.

11:30 a.m. - 12:00 p.m. - Registration

12:00 p.m. - 4:30 p.m. - Lunch and Program

4:30 p.m. - 6:00 p.m. - Cocktail Reception and Networking

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Based in Washington, D.C., Coin Center is the leading non-profit research and advocacy center focused on the public policy issues facing cryptocurrency and decentralized computing technologies like Bitcoin and Ethereum. Our mission is to build a better understanding of these technologies and to promote a regulatory climate that preserves the freedom to innovate using permisionless blockchain technologies.