Baker Botts Litigation, Securities, Corporate, Intellectual Property and Tax partners provide commentary on certain points that many companies and individuals should focus on concerning digital currency.
- Beyond whether cryptocurrencies themselves should be registered as securities, the SEC is starting to discuss what the legal requirements are for the platforms on which they are traded, and, in particular, whether those platforms should be registered as national securities exchanges under the ’34 Act.
- To the extent that cryptocurrencies are subject to regulation as securities and subject to anti-fraud rules, the SEC is starting to consider whether it will draw bright line rules as to whether, and to what extent, non-accredited investors may acquire, hold and use these tokenized securities without requiring that they be registered under the ’33 Act.
Civil Litigation and Criminal Law Issues
- There are a number of class actions pending around the country in which plaintiffs’ lawyers are arguing that initial coin offerings (ICOs) were illegal unregistered securities offerings, thus subject to rescission under the ’33 Act.
- Although some cryptocurrencies have more built-in anonymity than others and several new ones on the horizon that are claiming that they will provide full anonymity, Bitcoin transactions are not inherently anonymous. In many instances, cryptocurrency transactions may raise anti-money laundering issues, know-your-customer issues, and sanctions list issues.
- A major question is what cryptocurrencies are. Are they securities, commodities, or some other sort of property? The answers are clearer with respect to options and futures based on cryptocurrencies, but the SEC, CFTC, and CFPB are jockeying for regulatory positions that may overlap with respect to cryptocurrencies themselves.
- In the U.S., state regulators are not ignoring cryptocracies or exchanges and have been involved with the issue much longer than federal regulators.
- Regulations vary throughout the international arena. In the United Arab Emirates, as an example, there are multiple regulatory authorities including the ‘onshore’ Securities and Commodities Authority (SCA) and at least two "offshore" financial regulators being DFSA in the Dubai International Financial Centre (DIFC) and FSRA in the Abu Dhabi General Market (ADGM). Each regulator has taken a different position on digital currencies and ICOs ranging from issuing guidance on how ICOs might be viewed (making the distinction between utility tokens and securities offerings) and therefore how they might be regulated (ADGM) to an outright refusal to “recognize, regulate or supervise any ICO presently and that ICO investments are not offered legal or regulatory protection” (SCA).
- Distributed ledger technologies use decentralized tokens to execute transactions between counterparties and do so without the need for intermediaries, such as market-places, stock exchanges, and clearing banks. Blockchain technology was designed to be de-centralized. Its de-centralized nature enables users to trade on a peer-to-peer basis. This has disrupted banking and financial services already, as peer-to-peer file-sharing disrupted the media industry at the turn of the century. So, the question was asked at the Global Corporate Venturing "Symposium" in London last month: "Is this the end of intermediaries?" Contrary to some expectations at the start, the group concluded that -- actually -- trusted intermediaries are even more important to de-centralized networks, not less. And that regulators are likely to rely on regulated intermediaries that the peer-to-peer technology otherwise renders unnecessary."
- Under guidance dating back to 2014, the Internal Revenue Service has made clear that cryptocurrency is “property” for tax purposes, and that transactions in cryptocurrency can give rise to taxable gain or loss that must be reported by taxpayers. Based on the recent volatility in the prices for cryptocurrency the Internal Revenue Service may be increasing its enforcement activities regarding the reporting (or non-reporting) by taxpayers of their cryptocurrency transactions.
- With the recent changes to the “like-kind exchange” provisions of section 1031 of the U.S. Internal Revenue Code, the Internal Revenue Service must now bring attention to how they should interpret the tax treatment of cryptocurrency transactions in the U.S. and internationally.
- Digital currency is based on an open and unpatented blockchain or distributed-ledger technology. Bitcoin, the most popular cryptocurrency in terms of recognition and value, is unpatented. Supporters have argued that its lack of protection have allowed others to seemingly copy the code and invent hundreds of cryptocurrencies with slight modifications. However, patents and other forms of IP protection are available for the software and technology aspects of cryptocurrency and applications of the technology.
- The proliferation of cryptocurrencies raises significant questions about intellectual property law’s role. Companies that utilize blockchain technologies should be careful to seek protection if a particular implementation of the technology presents a novel solution. Patent applications in this space have ranged from payment processing and improvements, authentication, including trust and trustless systems, electronic settlement, and a host of applications. Patents will be subject to the same traditional principles that the invention is a new and useful process or machine as other software patents. If a business has built new and useful technology, or made a process more efficient by leveraging existing technology, it should consider whether the technology merits patent protection.
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