Hot Takes

We explained open blockchains at the FTC’s FinTech forum today.

This morning the Federal Trade Commission held the latest event in its series of FinTech forums and it focused on Artificial Intelligence and Blockchains. The half-day workshop was designed to bring together industry participants, consumer groups, researchers, and government representatives, to examine the ways in which these technologies are being used to offer consumers services, the potential benefits, and consumer protection implications as these technologies continue to develop.

Coin Center director of research Peter Van Valkenburgh opened up the blockchain portion of the agenda with a talk that clearly defined of the term “blockchain,” taking care to clarify the distinction between open and closed blockchain networks, and highlighting the characteristics of various consensus mechanisms and what they mean for what different types of blockchains can do. He then joined a panel discussion with other experts from the space. More information about the event and Peter’s slides are available 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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New digital currency bill in Congress? Here’s the real (crazy) scoop.

An article in the Daily Caller claims that some in Congress are considering a digital currency bill, but the story is based on anonymous sources and has very few specifics. It seems related to something we’ve been tracking for a while and I wanted to share some details in the hope that folks won’t be confused if this “story” gets more traction.

The article says that unnamed members of Congress are supposedly “looking at the compliant capabilities of AML Bitcoin, which is a compliant digital currency.” We’ll return to that odd phrasing in a minute, but first we’ll note that “AML Bitcoin” is a product and a company formerly called AtenCoin. On its website, “AML Bitcoin” also describes itself as a “compliant digital currency.” It’s hard to characterize what exactly is “AML Bitcoin,” so I invite you to take a look at their site and decide for yourself. To be clear, though, AML Bitcoin has nothing to do with Bitcoin and, from what we can tell, it’s a small altcoin project.

Now, here’s the fun twist. “AML Bitcoin” has recently teamed up with disgraced former lobbyist Jack Abramoff, who served time in federal prison for fraud, corruption, and conspiracy, to produce a reality TV show about lobbying Congress on digital currency. (Why can’t it ever be a dull day in this space?) As the Washington Post notes, “[t]he show will follow Abramoff as he leads a group from a cryptocurrency firm AML Bitcoin in a ‘boot camp’ that will transform the members ‘from techies to lobbyists ready to take on Capitol Hill,’ per the show’s creators.” Unfortunately, the headline for that Post article is, “Disgraced ex-lobbyist Jack Abramoff to train bitcoin activists in new reality TV show,” which leads people to think Abramoff is associated with Bitcoin and not “AML Bitcoin.” Here is another article on Abramoff’s tie-up with “AML Bitcoin.”

Now, as far as the bill that members of Congress are supposedly considering, we’ve seen a document floating around the Hill that may be the supposed bill in question. It is an unofficial and inexpert draft of a bill that, if it were taken seriously, would be very dangerous for cryptocurrencies. It’s hard to interpret because it is quote poorly drafted, but essentially it would sort digital currencies into two categories: “anonymous digital currency” and “compliant digital currency,” and then places AML requirements on merchants who accept digital currencies unless they use a “compliant digital currency.” It also has a "Possession Requirement" that requires merchants to "confirm that digital currency has been in possession of purchaser for at least 30 days[.]" Again, it’s hard to interpret the document because its drafting is bizarre and would create many unintended consequences.

We’re fairly certain that folks on Capitol Hill will see through all this, but we still think it's important to highlight these details. What folks in Congress and journalists may not know is the distinction between Bitcoin and AML Bitcoin, and they may not know about the Abramoff reality TV show. We hope they'll be careful as they look into any notional digital currency bills.

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Save the Date: The 2018 Coin Center Annual Dinner with be on May 14, 2018.

The Blockchain community’s night out is coming back to New York City during Consensus 2018. We hope you will join us once again to rub shoulders with some of the best and brightest in the industry, all while supporting Coin Center’s critical policy advocacy mission.

Monday, May 14, 2018 - 7:00 PM

The Plaza Hotel

768 5th Avenue, New York, NY 10019

Tickets will be on sale in early 2018. For sponsorship information please contact antonie@coincenter.org.

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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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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.