Articles Tagged with Digital Currency

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The ICO boom in 2017 brings with it questions of jurisdiction and compliance, and a need for further guidance.

Takeaways

  • The benefits of ICOs in raising capital, as well as in providing a marketing push for a new business model, are so significant that it is difficult to foresee them disappearing.
  • Large offerings backed by established players will have a big advantage over smaller ICOs by startups reluctant to pay associated compliance costs.
  • It is in the best interests of all legitimate and honest ICO sponsors that they do not operate in a gray market.

2017 has seen a boom in token presales and “initial coin offerings” (collectively, ICOs), which involve the sale to investors of customized “digital tokens” in exchange for established cryptocurrencies, most frequently Bitcoin or Ether. Many promoters had heralded ICOs as a fundraising method similar to initial public offerings (IPOs) of securities, with the benefit that they were unregulated. However, in the United States and certain other jurisdictions, regulators have now staked out their turf in ICOs, causing sponsors and digital exchange platforms to re-think their approach to compliance.

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The CFTC’s recent enforcement against Bitfinex’s financed trading activities demonstrates the Commission’s increasing interest in virtual currency and digital assets.

The U.S. Commodity Futures Trading Commission (CFTC) is further expanding its oversight of virtual currency exchanges and digital assets in general. On June 2, 2016, Bitfinex (a Hong Kong-based bitcoin and cryptocurrency exchange) settled with the CFTC following an investigation into its trading activities. The CFTC charged that the exchange offered illegal off-exchange financed retail commodity transactions, and that Bitfinex had failed to register as a Futures Commission Merchant (FCM) as required by law. As a result, Bitfinex will pay $75,000 in civil penalties.

This action is more evidence of the CFTC’s interest in not only bitcoins, but any digital asset that can be considered a commodity. Transactions in decentralized digital tokens (such as Ether, DAO Tokens, Safecoins, Factoids, and Bitcrystals) are becoming more common, and so is regulatory interest.

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Now that enforcement agencies have determined that digital currencies are more than a passing fad, they are establishing more permanent efforts focused on the novel legal issues digital currencies present. The SEC’s formation of its multi-office Digital Currency Working Group may foreshadow an increase in the agency’s exercise of regulatory authority over entities offering interests in Bitcoin and other digital currencies.

Businesses that transact in digital currencies or cryptocurrencies, such as Bitcoin and Litecoin, should be aware of the SEC’s increased focus on these transactions.

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Read this article and additional publications at pillsburylaw.com/publications-and-presentations.