Laws Implicated by Virtual Currencies, ICOs and Blockchain
Operating in the virtual currency space, undertaking an initial coin offering (ICO), or developing a blockchain application can implicate a web of legal obligations. For example, as we discussed in our October 2017 Maryland Legal Alert and November 2017 Maryland Legal Alert, companies raising money through ICOs can run afoul of federal and state securities laws for failing to register with the Securities and Exchange Commission or qualify for an exemption to registration under the Securities Act of 1933. As we discussed in our December 2017 Maryland Legal Alert, the Commodities Future Trading Commission views virtual currencies as commodities and has recently begun regulating the trading of bitcoin derivatives contracts. The following is a list of additional laws and regulations that should be considered if you are operating in the virtual currency space, undertaking an ICO, or developing a blockchain application: (a) Securities Exchange Act of 1934 and related state laws (registration as a “broker-dealer” is required for persons effecting virtual currency transactions); (b) Investment Advisors Act of 1940 and related state laws (there are registration and reporting requirements for persons providing advice about ICOs and other virtual currency offerings); (c) Investment Company Act of 1940 (there are registration and record keeping requirements for entities that hold a significant percentage of their total investment assets in virtual currencies); (d) Bank Secrecy Act and related state money services laws (there are registration, licensing, “anti-money laundering,” and “know your customer” compliance obligations for money transmission businesses such as virtual currency exchanges); (e) Department of the Treasury, Office of Foreign Assets Controls (OFAC) (ICO offerors and others transacting in virtual currencies are prohibited from dealing with persons sanctioned by OFAC); (f) Internal Revenue Code and related state tax laws (trading one virtual currency for another is a taxable event, and virtual currencies are treated as property, subject to capital gains and related tax treatment); (g) Federal Trade Commission and related state consumer protection laws (ICOs that fail to issue tokens in accordance with their white paper or other offering documents can be subject to federal, state, and consumer causes of action for unfair and deceptive trade practices); (h) Consumer Financial Protection Act of 2010 (CFPB) (the CFPB may investigate ICOs, virtual currencies and exchanges, and blockchain developers in connection with consumer complaints of unfair treatment; and (i) Export Administration Regulations of the Department of Commerce, Bureau of Industry and Security (developers of encryption software underlying blockchain-based virtual currencies may require licenses through the Export Administration Regulations before transferring the software outside of the United States). For more information concerning virtual currencies, ICOs, the blockchain, and how these issues can impact your business, please contact Andrew Wichmann or Michele Walsh.