3. Summary of US outlook to
• The United States has no coherent direction
on its cryptocurrency regulation other than
that there will be some soon.
• The Securities and Exchange Commission
(SEC) has warned investors of
cryptocurrency investing risks, halted several
ICOs and hinted at the need for greater
• The Commodity Futures Trading Commission
(CFTC) became the first U.S. regulator to
allow for cryptocurrency derivatives to trade
• Non-U.S. investors may have concerns over
clearing licensing hurdles put up individually
by the states.
• If the U.S. treats cryptocurrencies as
currency, actions by the federal government
and federal regulatory agencies would
preempt states’ licensing.
• If treated as “securities” cryptocurrencies &
token, especially ICOs, would have to clear
“blue sky laws” on a state-by-state basis but
they will have to register with SEC.
4. What is a Security? - Howey
• To determine if an offering is a
security, the SEC employs the
Howey Test, which classifies an
offering as a security if it meets all
four of the following conditions:
• It is an investment of money
• There is an expectation of
profits from the investment
• The investment of money is
in a common enterprise
• Any profit comes from the
efforts of a promoter or
• The Securities Act and Securities
Exchange Act have broad
definitions of the term security.
5. SEC Regulation on Security
• A security includes many familiar investment instruments such as notes, stocks, bonds, and
• Whether or not an investment is a security is important because securities are subject to meeting
• All securities must be registered with the SEC, with few exceptions. Along with registering with
the SEC, a company offering securities must disclose:
• A description of the company’s properties and business purpose
• A description of the security being offered
• Information about the company’s management
• Financial statements about the company, certified by independent accountants
6. Are Initial Coin Offerings (ICOs) Securities?
• Almost all ICOs are security offerings, at least as the
laws are written currently.
• Securities and Exchange Commission (SEC) has issued
a large number of subpoenas to initial coin offering
(ICO) issuers and to ICO gatekeepers who may have
been involved in token transactions that potentially
did not comply with the federal securities laws.
• The SEC has been as clear as it knows how to be that it
believes virtually all tokens (and simple agreements
for future tokens, or SAFTs) are securities for purposes
of the federal securities laws.
• Many ICOs do pass the Howey Test because they
“represent an investment of money in a common
enterprise with an expectation of profits coming from
the work or influence of a third party.”
7. Implications for Past and Future ICOs
• Fix the problem before the SEC fixes it for you
• This will be very difficult for past projects that have issued a significant number of tokens that have
gone on to trade on exchanges.
• It is likely the case that projects can make a best effort but not truly remedy the problem.
• From the regulator perspective, the most significant concerns have been related to how
cryptocurrencies may enable money laundering and the funding of terrorist groups through near-
anonymous transmission of funds.
• In the short term, ICO issuers and their legal counsel can work with the SEC to attempt to tailor existing
registration, reporting, trading, and exchange rules to better reflect the nature of tokens and token
• In the longer term, the crypto industry perhaps can work with the SEC, other regulators, and Congress
to develop a modified registration, reporting, and trading system that is designed specifically for
8. SEC & CFTC View on Exchanges Listing ICO
The SEC also made it clear on March 7th, in a public statement, that it intends
to increase its oversight of cryptocurrency exchanges and Initial Coin Offerings. In its
statement, the Commission wrote:
“If a platform offers trading of digital assets that are securities and operates as an
‘exchange,’ as defined by the federal securities laws, then the platform must register with
the SEC as a national securities exchange or be exempt from registration…”
On March 6, a federal judge also ruled that virtual currencies can be regulated as
commodities by the CFTC. The CFTC was the first U.S. regulator to allowcryptocurrencies to
trade publicly, though it’s still exploring what kind of regulations it will impose.
9. FinCEN view of ICO &
• According to FinCEN, anyone issuing an ICO is a money transmitter subject to
the Bank Secrecy Act.
• As such, they are required to register with the federal government, collect
information about their customers, and take steps to combat money laundering
and the financing of terrorism by their customers.
• A developer that sells convertible virtual currency, including in the form of ICO
coins or tokens, in exchange for another type of value that substitutes for
currency is a money transmitter
• Exchanges also qualify as money services businesses (MSBs) according to FinCEN.
• An exchange that sells ICO coins or tokens, or exchanges them for other virtual
currency, fiat currency, or other value that substitutes for currency, would
typically also be a money transmitter
• An ICO registered as a security, however, would not be considered a money
10. Legal Implications on ICOs & Exchanges
• No ICOs that raised capital in 2017 had so far registered or made clear that they had any plans to register with the SEC
• If ICOs are deemed securities, all ICO issuers that sold to U.S. citizens could be criminally guilty of a felony for violating U.S.
securities laws and possibly subject to five years in prison.
• If what FinCEN is saying holds merit, anyone who sells tokens to U.S. residents while, at the same time, failing to
register with FinCEN as an MSB and failing to perform the know-your-customer (KYC) and anti-money laundering (AML)
compliance obligations could also face several years in prison under a felony conviction.
• Employees and investors of ICO companies could be held criminally liable, too. Worse, the federally related offense of wire
fraud, which includes sending money over the internet to avoid reporting requirements, could easily be tacked on to all
• Coin Center called for more clarity on the issues through open consultation and discussion: “This is a complicated and
consequential legal interpretation, and one that should be discussed, unpacked, and eventually finalized in a more formal
and transparent setting ...”
• Any projects considering raising funds through an ICO will have to think carefully about how they structure that ICO and
whether they even want to sell tokens to U.S. citizens to begin with.
12. Cryptocurrency Taxes in the
• Cryptocurrencies Are Not Tax-Free
• After a prodigious growth year, the Internal Revenue Service (IRS) is coming
after the tax revenue that rightly derived from the significant profits gleaned
from crypto market acceleration.
• In most instances, cryptocurrencies operate in an interminable gray area where
it’s difficult to know how to rightly apply the law.
• However, for tax purposes, the IRS considers digital currencies to be owned
property rather than legal currency, and, as a result, it’s subject to taxation.
According to a 2014 IRS statement
• The sale or exchange of virtual currencies, or the use of virtual currencies to pay
for goods or services, or holding virtual currencies as an investment, generally
has tax consequences that could result in tax liability.
• Unfortunately, for many investors, they have not operated as if their crypto
investments are taxable, and now the IRS is making a move to collect those
13. Cryptocurrency &
• The UIGEA does not expressly prohibit Internet gambling, but it
does make it illegal for an online gambling business to knowingly
accept fund transfers. The Bitcoin gambling sites are currently
circumventing this legislation by keeping their funds in
bitcoin cryptocurrency wallets.
• The Federal Wire Act (Wire Act) prohibits “bets or wagers on any
sporting event or contest”. Some Bitcoin gambling sites have a
mixture of betting on sports and traditional casino games, and it is
conceivable the bets on sporting events could fall within the
language of the Wire Act.
• The CFTC’s jurisdiction is being tested by online businesses that
accept virtual currency for event contracts. A website, accepting
Bitcoin and other VCs, called predictious.com lists trades such as
trying to call who will be elected, whether a celebrity will have a
boy or girl child, or who will be the winner of a science competition.
The business world has been growing as new
innovations introduce new ways of doing things.
However, these can come with uncertainties. As
such, we should take note that participating in
the market involves being careful in choosing
where we put our money. Taking part in the
business world calls not only for courage, but also