United States: Ask Me Anything: Fenwick Lawyers Talk Blockchain And Cryptocurrency

Last Updated: October 7 2019
Article by Can Sun and Daniel S Friedberg

Innovators in the rapidly evolving blockchain and cryptocurrency space must navigate a variety of important legal and regulatory considerations. Fenwick blockchain co-chairs Can Sun and Dan Friedberg teamed up with ObEN for an Ask Me Anything session on Reddit, sharing their insights on community questions. Read on for their answers to 10 of the top questions from the community:

1. How has education at the university level integrated blockchain in business courses or tech courses? Did you go to college for a specific degree and then learn about blockchain and crypto post grad?

Most colleges do not offer blockchain majors (yet!), though a small handful of universities have started introducing programs as well as certificate courses, including NYU, MIT and Stanford. Many universities also offer at least one or two classes relating to blockchain and cryptocurrencies. The basics of blockchain technology are often covered by advanced computer science or mathematics classes such as cryptography as well. We have found the best background training is in computer science or mathematics.

2. If I'm thinking about doing an ICO for my project, what are the common things I have to look out for to make sure I'm doing things legally?

An ICO, or initial coin offering, comes in many flavors and formats, but often involves a sale of tokens or other cryptocurrency to the public. An ICO must comply with the laws applicable to both the issuer and any investors. The United States has the most stringent laws. A threshold question that must be considered prior to conducting an ICO is whether the tokens or cryptocurrency constitute "securities" in an applicable jurisdiction, and if so, the securities laws must be complied with. Another important area involves compliance with know-your-customer (KYC) and anti-money laundering rules. There are also tax, employment and intellectual property considerations. It is important for you to seek qualified legal advice with respect to any ICO.

3. I live in California, and I wonder why states can't mandate their own policies on crypto. Congress is always making a big deal about states' rights, and states being the laboratories of democracy. But other countries like South Korea are way more forward thinking and have implemented special "regulation-free zones," like Busan. How can we get the same sort of thing for California?

The laws governing cryptocurrencies often fall within the purview of federal agencies. That being said, there are some areas of the law that remain reserved to the states, or where state regulatory agencies have concurrent jurisdiction, and some states (most notably Wyoming) have taken a more liberal approach toward the regulation of cryptocurrencies. It is also true that other countries are more willing to experiment with this new industry. You can always speak with your local representatives regarding grassroots efforts to change cryptocurrency laws to make your state more favorable to cryptocurrency. At the federal level however, congressional action would be required to change existing laws, and while several bills have already been proposed in recent years, a wholesale revamp of existing laws looks highly unlikely at this point.

4. What countries are most favorable for cryptocurrency?

Singapore and Malta are often considered favorable jurisdictions. Japan, Gibraltar, Estonia, as well as many countries in Africa and Southeast Asia have also taken steps to promote the use of cryptocurrencies.

5. What is the difference between a cryptocurrency and a crypto that is considered a security?

"Cryptocurrency" is a broadly used term to refer to any digital asset on a blockchain, and can come in a variety of flavors. Security tokens are a subset and represent those cryptocurrencies that are securities under the laws of their jurisdiction. Each jurisdiction has its own laws and regulations for determining whether a cryptocurrency is also a security. In the United States, we have the Howey test, which considers a token to be a security if there is an investment of money by the purchaser in a common enterprise with an expectation of profits solely or predominantly from the efforts of others. As you can imagine, this is a highly factual test and needs to be analyzed in light of the specific circumstances of each cryptocurrency.

6. What happens if I own crypto that has been deemed a security? Can I no longer trade it if it is on an exchange?

If the cryptocurrency is treated as a security in your jurisdiction, you can only trade it if the cryptocurrency is either registered or an exemption from registration is available. Most cryptocurrency exchanges are not licensed to trade securities.

7. What are the biggest legal barriers to an ETF being granted?

The biggest barrier to an ETF, or exchange-traded fund, being granted is that the U.S. Securities and Exchange Commission must approve the financial instrument. Currently, the SEC remains concerned about digital asset custody issues as well as market manipulation.

8. If I'm under 16 and I have been investing in crypto, do I need to report my investment gains?

Yes, even minors generally need to comply with all tax laws.

9. Is the SEC lawsuit against KII supposed to set an example [out there that] they want law to be enforced by courts? And if successful, the SEC can go after bigger players? As an entrepreneur in the crypto space, what kind of offerings are currently considered safe and legal?

Unfortunately, we're unable to speak to the specifics of any particular lawsuit or company. However, we do want to note that it is possible to structure a token offering in compliance with U.S. laws. The specifics will depend on the nature of your tokenomics and business model, the technology, as well as how funds are raised and used.

10. What if you are working in the United States on a visa? Are your crypto earnings considered taxable? Only income earned in the U.S. is supposed to be taxable and crypto trading profits by definition is earned on the internet, not in any country.

We're unable to comment generally on individual tax liabilities as it depends on your specific circumstances, but we note that generally, under U.S. tax laws, a U.S. taxpayer must report income earned anywhere in the world to the IRS under a variety of rules and regulations, and it does not matter where the trading gain occurs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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