Hot Takes

The Cryptocurrency Tax Fairness Act was offered as amendment to the House tax reform bill last night in Congress.

Video of the Rules Committee meeting is below and you can watch Rep. Jared Polis speak about the bill that he co-sponsored with Rep. David Schweikert. The amendment would have created a de minimis capital gains tax exemption for personal cryptocurrency transactions, and helped clarify how exchanges could offer third-party tax reporting.

While the amendment was not adopted, we applaud the bipartisan leadership shown by Reps. Polis and Schweikert. That they recognized this issue, introduced a bill, and got it this far means a lot and it shows the IRS that many in Congress believe that the existing tax treatment of cryptocurrencies needs to be updated. The bill’s language didn’t make it into the larger tax reform bill, but that doesn’t mean the bill itself is dead; it’s alive and well and we will continue to advocate for its passage by Congress, and we’ll continue to work to try to have the IRS adopt as much of it as it might be able to through rulemaking. For an ecosystem that is barely a decade old to get this far in Congress is remarkable, and we’re only just starting.

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We briefed the Senate Republican High-Tech Task Force.

Senator Orrin Hatch, chairman of the taskforce, convened a Blockchain 101 briefing for republican policymakers and their staff.

Coin Center executive director Jerry Brito was joined on the panel by four Blockchain experts from industry, academia, and government to discuss what Blockchain technology is, how it’s being used today, how it could potentially be used in the future, and how policymakers can best approach the issue. The other panelists were:

  • Robleh Ali, Research Scientist, MIT Media Lab
  • Jonathan Johnson, President, Medici Ventures
  • David Mills, Deputy Associate Director, Federal Reserve
  • Paul Snow, CEO, Factom
  • Alan Cohn, Steptoe & Johnson [Moderator]

Senator Hatch also gave remarks stressing the importance of understanding and fostering blockchain technology.

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Coin Center gave a regulatory update at Ethereum Devcon3.

At the Ethereum community’s largest conference, executive director Jerry Brito and director of research Peter Van Valkenburgh took the stage after the project’s lead developers to give the audience an update on Coin Center’s work and regulatory issues that could affect developers building on this technology.

The update covered Coin Center’s work in pushing for a more developer friendly money transmission licensing system, advocating for these technologies in Congress, and addressing questions about securities regulation for crypto-asset tokens.

[Image courtesy of Rhys Lindmark]

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CFTC commissioner: tokens that start as securities may “transform” into commodities.

Yesterday I participated in a panel discussion on cryptocurrencies at Georgetown University’s first annual “fintech week,” where the subject of ICOs was unsurprisingly much discussed. One thing that stood out for me were comments by CFTC Commissioner Brian Quintenz that echoed a policy view we have long held: that a crypto-token may initially emerge through a securities offering, but later be considered a commodity just as Bitcoin is. Here’s what he said, according to Politico:

Digital currencies "may actually transform at some point from something that starts off as a security and transforms into a commodity," CFTC Commissioner Brian Quintenz said at the event hosted by Georgetown's law school. "That's going to be a very difficult but important conversation for us to have to give the market certainty, to allow for innovation to flourish and continue, but to make sure that we're being consistent in how we apply commodity law and protection of consumers across all products."

And here is Bloomberg’s account:

“It was right to classify it as a commodity, but we still have a lot of work to do,” he said yesterday to reporters at the FIA conference. “ICOs, these things can transform. They may start their life as a security from a capital-raising perspective but then at some point -- maybe possibly quickly or even immediately -- turn into a commodity.” His comments were some of the most specific from the CFTC on the nature of ICOs.

“There are new challenges all over the place with virtual currencies and commodities,” Quintenz said.

This is a very welcome statement that helps clarify how regulators are seeing this innovative space.

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Two podcasts that will help you understand the token boom.

Our director of research Peter Van Valkenburgh has been invited on as an expert in two podcasts. These make a good primer on what is hot in the cryptocurrency world.

The Invest Like the Best podcast’s Hashpower series gives an overview of what cryptocurrency is, what is driving investment in the ecosystem, and the promise that open decentralized blockchain protocols have for improving the internet’s infrastructure. It includes some of the most prominent voices in the cryptocurrency community. Peter is in episode three. Listen here.

The StartUp podcast focuses on the token sale held by messaging company Kik. In the face of staggering competition Kik has turned to tokens as an inventive way to both fundraise for itself and incentivize meaningful user participation within its app. Listen here.

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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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