Regulatory Review for Cryptocurrencies

The regulatory landscape for cryptocurrencies is still in its infancy, and for the foreseeable future, it will be subject to regular and unpredictable change. Here’s an overview of compliance events in March, ultimately the ICO market in the US is on hold unless it’s a security token, but that’s good news for us we support US security tokens and international LYC only token sales.

Tokens are “stored value” therefore money transmitter rules apply to utility tokens as well.

On March 6th a New York federal judge ruled that the Commodity Futures Trading Commission, or CFTC, can regulate cryptocurrencies as commodities. This decision by U.S. District Judge Jack Weinstein was based on a CFTC decision in 2015 that cryptocurrencies are equivalent to commodities, however, Weinstein noted the “broad” manner in which the CFTC could apply commodity regulation.

Judge Weinstein’s decision may have been made in favor of the CFTC’s regulatory responsibility to protect consumers. In 2017 Coin Drop Markets, a company created by Patrick McDonnell of New York promised investment advice in exchange for patronage. However, upon failure to deliver advice or return customers’ money a federal lawsuit was brought against him in January of 2018. A preliminary injunction from Judge Weinstein has stopped McDonnell and his company from participating in commodities markets, including cryptocurrency markets, in order to protect investors from malicious and deceitful practices carried out by the company. SEC statements indicate their current position is that cryptocurrencies are securities, but a joint conference during February indicated their willingness to work with the CFTC until a more formal solution can be determined.

Whether cryptocurrencies are strictly commodities or securities, though, is a topic of fierce debate. In July 2017 the SEC determined ICOs and exchanges to be subject to securities regulation, causing creators eager to launch their projects to open ICOs in nations other than the U.S. A letter from Drew Maloney, the assistant secretary for legislative affairs for the Financial Crimes Enforcement Network (FinCEN) to U.S. Senator Ron Wyden (D. OR), expressed that “developer[s] that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value… is a money transmitter.”

Any person or organization selling tokens to a U.S. citizen without registering with FinCEN as a money transmitter can be charged with unlicensed money transmission unless they undertake the required regulatory requirements. These requirements include obtaining the proper licensing for soliciting investments from accredited investors, know your customer requirements (KYC), and anti-money laundering rules. Failure to comply can lead to a felony charge with up to five years in prison. Increased popularity in ICOs has led to heightened scrutiny from regulators, and the SEC, CFTC, and FinCEN are working alongside to enforce anti-money laundering and anti-terrorism funding operation.

It is important for ICOs to comply with reporting and recordkeeping requirements, KYC, develop comprehensive anti-money laundering strategies (AML), and most importantly if offered in the US to register with FinCEN as money transmitters to avoid unexpected penalties from inadequate licensing. While representing a significant additional investment for ICOs it is imperative regulatory agencies are satisfied for the sake of the issuing entity and for the protection of investors.

All token exchanges need to be registered!

On March 7th the SEC announced that all exchanges must be registered with the regulatory agency or be considered illegal, a regulatory hurdle which has proven un-obstructive to the market as of yet. However, a multitude of other actions from the SEC and other U.S. government authorities has contributed to the piecemeal that is the current regulatory environment. It is unclear whether cryptocurrencies are strictly securities and, depending on where you are or what purpose your tokens serve, the answer varies.

The future of trading cryptocurrencies in the U.S. is for exchanges to register their companies as broker-dealers and to apply for an Alternative Trading System (ATS) exemption from the SEC, however, none are currently live. Currently existing and operating exchanges are under heightened scrutiny from agencies like the SEC, CFTC, FinCEN, and IRS, but will continue to operate barring a direct order to halt their operations. Regulatory developments, however, do not necessarily point to a future of market stifling government intervention.

A new self-regulating organization (SRO) was proposed by the Winklevoss twins and, while drawing both strong support and sharp criticism, could indicate a step in the right direction. SROs like the New York Stock Exchange (NYSE), offer market stability and consumer protection sufficient to satisfy the demands of the SEC. Whether cryptocurrencies would necessarily benefit from an SRO is not yet clear, but was is certain is that government cooperation with industry participants is crucial for creating a regulatory framework that protects consumers while still allowing the industry to expand.

Wyoming comes through, but is it enough?

Leading the charge in government and industry cooperation is Wyoming, who recently passed a notable pro-cryptocurrency and blockchain bill unanimously, 60-0. House Bill 70 serves the industry, rather than stifling it, by exempting utility token developers from securities regulations given that they meet certain criteria. So long as tokens are not sold as investments, but are still able to be traded for something, serve a function on the network, and the seller does not enter a repurchase agreement or agreement to find a buyer for the token they can be considered utility tokens rather than securities. An example which has recently gained substantial media attention is Kodak’s ICO coin, KODAKCoin, which proposes to create a photographer network using blockchain technology. HB-70 would allow photographers to use the network and its corresponding tokens without having to register a brokerage account. So, the coin can still be exchanged for goods and services effectively without falling victim to unnecessary regulatory hurdles.

Leading the lobbying charge for HB-70 was the newly founded Digital Asset Trade Association, or DATA, a global non-profit. This powerful coalition of crypto and blockchain companies joined forces to promote development and growth for blockchain technology by lobbying on behalf of the industry within all levels of government. DATA has also proposed  Among the steering committee of this influential trade group are prominent legal experts like Brittany Kaiser, Co-Founder of Bueno Capital and CryptoHQ, who has experience lobbying for human rights at the United Nations and European Parliament. After this substantial victory DATA is an organization to watch, and based off of recent statements the trade group has its sights set on the future.

Whats next?

At a recent cryptocurrency conference, Blockchain Unbound, Brittany Kaiser said Colorado is the organizations next regulatory target. Colorado proves an interesting test case for many kinds of regulation and is often a leader in updating policy. In the coming months, industry professionals will be watching the state with bated breath, as many other states are likely to follow their example, and regulatory developments in Colorado could have broader implications for the nation at large.