Cryptocurrency Regulation: Recent Developments
Regulators are actively taking a role in the development of virtual currency-related markets and products. Earlier this month, for example, the Securities and Exchange Commission (SEC) initiated a broad investigation into companies and professionals behind a number of recent initial coin offerings (ICOs). See our prior posts on ICOs, such as here.
The December 2017 launch of the first cryptocurrency futures for trade in the U.S. also put a spotlight on the cryptocurrency movement—particularly on Bitcoin, the first and most notable crypto- or “virtual” currency, and the underlying blockchain technology upon which the virtual currency is built. See Freeman Law’s prior posts on blockchain, such as here. This drove still further Congressional and administrative interest in the regulation of the phenomenon.
Alongside federal regulators, many states are also seeking to address the regulation of cryptocurrency. A few states, acting as experimental incubators, have taken the lead in this regulation.
This post will examine some of the positions taken by several regulatory agencies with respect to this emerging technology. See our prior post, Bitcoin and Beyond: The Reality of Taxing and Regulating Virtual Currency, for additional insight as well.
The Financial Crimes Enforcement Network (“FinCEN”) was one of the first government regulators to examine the regulation of cryptocurrency. In March 2013, FinCEN released interpretive guidance stating that an administrator or exchanger of virtual currency is a Money Services Business (“MSB”).
According to FinCEN, as a MSB, an administrator or exchanger of cryptocurrency is classified as a “financial institution” subject to the Bank Secrecy Act (“BSA”) and its anti-money laundering (AML) regulations. FinCEN has actively sought to crack down on operators of cryptocurrency exchanges for failing to register with FinCEN as a MSB. Such failures can also constitute a criminal violation. The agency also has brought civil enforcement proceedings against exchanges for alleged failures to maintain adequate AML programs, failures to file required Suspicious Activity Reports (“SARS”), and other alleged BSA violations.
The SEC has been active in the regulation of crypto-related investment vehicles as well. The SEC maintains that many, if not most, Initial Coin Offerings (“ICOs”) are securities and are thus subject to SEC jurisdiction and supervision. The agency has, in fact, filed several enforcement proceedings involving ICOs and has indicated that it will take an active regulatory and enforcement role.
The SEC released a statement providing further warning to coin exchanges: “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.”
In addition, the U.S. Commodity Futures Trading Commission (“CFTC”) has taken the position that cryptocurrencies are commodities subject to its jurisdiction. To that end, a federal district court recently agreed with the CFTC’s assessment.
Government regulators believe that compliance levels are relatively low. But regulatory obligations are complex, uncertain, and evolving. While some of the largest cryptocurrency trading platforms are not registered as national exchanges with the SEC, some have secured money transmission licenses with FinCEN and/or various states. According to the SEC, this has caused confusion, as many of these platforms refer to themselves as “exchanges,” which it believes can give the “misimpression” to investors that they are regulated or meet the regulatory standards of a national securities exchange. The SEC has also cautioned that it does not review the trading protocols used by such platforms and that access to a platform’s trading services may not be the same for all users.
The rush of regulators into the cryptocurrency space may threaten to slow this burgeoning industry, but is also seen as a welcome development by many. As regulators stake their claims, however a number of questions are being raised. For instance, BSA regulations regarding the definition of a MSB provide that a MSB does not include a “person registered with, and functionally regulated or examined by, the SEC or the CFTC, or a foreign financial agency that engages in financial activities that, if conducted in the United States, would require the foreign financial agency to be registered with the SEC or CFTC[.]” This raises questions about the respective roles of FinCEN, the SEC, or the CFTC.
FinCEN addressed this question in a February 13, 2018 letter to U.S. Senator Ron Wyden. FinCEN seems to suggest that, in certain cases, cryptocurrency exchanges are subject to the BSA because they are broker-dealers, rather than MSBs, which is another type of “financial institution” subject to the Act. As a result, some exchanges that registered with FinCEN under the 2013 Guidance as MSBs may be perplexed to learn that the government now regards them as broker-dealers—and, thus, subject to another agency’s rules. Expect to see many more questions/issues touching on the sphere of each agency’s influence in the future.
New York was the first state to adopt a crypto regulatory regime, implementing its “BitLicense” in 2014. Under the requirements, anyone involved in a “virtual currency business activity” in New York must apply to obtain a license to conduct such activities.
Several other states, including Alabama, Connecticut, New Hampshire, North Carolina and Washington, have adopted legislation designed to address the regulation of virtual currency activity.
Recently, California introduced the Virtual Currency Act (A.B. 1123), which would require anyone involved in a “virtual currency business” in the state to first register with California’s Commissioner of Business Oversight. The California Act defines a “virtual currency business” as any business “maintaining full custody or control of virtual currency in this state on behalf of others.” The definition is very broad and encompasses “any type of digital unit that is used as a medium or exchange or a form of digitally stored value.” The Act, however, is facing stiff opposition, including from digital nonprofits.
Wyoming’s proposed legislation concerning blockchain is significant because it is the first comprehensive effort to address numerous aspects of securities law, corporate law, banking regulation, and tax that have been obstacles to blockchain and cryptocurrency businesses operating in the United States. With the state possibly leading the way as an early adopter, some believe that it may become a jurisdiction of choice for sector-specific ventures in blockchain-related technology and exchanges of cryptocurrency, as well as the issuance of non-security “utility tokens” in insurance and healthcare.
Wyoming’s proposed laws are contained in five separate bills. One of the bills, SF 111, provides that virtual currency is not subject to taxation as “property” in the state. Wyoming doesn’t have a state income tax, and the bill provides that virtual currency is personal property not subject to property tax in Wyoming. One motivating factor appears to be allowing Wyoming corporations and trust structures to take custody of and hold virtual currency.
Finally, U.S. Commodity Futures Trading Commission (CFTC) commissioner Brian Quintenz recently told an audience at the D.C. Blockchain Summit that self-regulation of cryptocurrency might be the answer:
“I believe that a private cryptocurrency oversight body could bridge the gap between the status quo and future government regulatory action,” he told the audience in his keynote address. Quintenz also suggested that a cryptocurrency self-regulatory organization (SRO) could have an impact beyond the U.S. market, and could potentially take on global significance.
Quintenz acknowledged that there are many jurisdictional questions concerning cryptocurrencies, with the CFTC, the SEC, the IRS, and FinCEN all potentially classifying such assets differently. Thus, he believes that self-regulation could be another option.
Cryptocurrency regulation is a hot topic at the moment, both in the United States and abroad. The interest taken by a growing number of agencies seeking to tax and/or regulate cryptocurrency demonstrates that the future of cryptocurrency is far from certain and most certainly subject to remain in flux. In the near-term future, the U.S. Congress could also play a larger role, as a number of committees are discussing the subject in the current session. We expect to dig into many of these developments in future posts.”
 Ian Wren, SEC Investigates Cryptocurrency Offerings, NPR (March 1, 2018). Retrieved at https://www.npr.org/sections/thetwo-way/2018/03/01/590076973/sec-investigates-cryptocurrency-offerings. An ICO is an unregulated way to raise funds for a new cryptocurrency venture. ICOs are used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. Initial Coin Offering (ICO), Investopedia. Retrieved at https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp.
 FIN-2013-G001: Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (March 18, 2013). Retrieved at https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-persons-administering.
 Nikhilesh De, SEC Official Says ‘Dozens’ of Crypto Investigations Underway, CoinDesk (March 16, 2018). Retrieved at https://www.coindesk.com/sec-official-says-agency-is-investigating-icos/.
 U.S. Securities and Exchange Commission, Public Statement: Statement on Potentially Unlawful Online Platforms for Trading Digital Assets, Divisions of Enforcement and Trading and Markets (March 7, 2018). Retrieved at https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-online-platforms-trading.
 A federal court recently held that the CFTC had jurisdiction to regulate a cryptocurrency business, creating possible jurisdictional tension among the CFTC and other federal agencies over the regulatory future of the emerging industry. CFTC v. McDonnell and CabbageTech, Case 1:18-cv-00361 (January 18, 2018). Judge Jack Weinstein agreed with the CFTC’s interpretation of its own power, ruling that virtual currencies are commodities and that the CFTC had jurisdiction to regulate fraud and manipulation in underlying virtual currency spot markets. Id.
 31 C.F.R. § 1010.100(ff)(8)(ii).
 California Legislature, An act to repeal Section 107 of the Corporations Code, and to add Section 2178 to, and to add Division 11 (commencing with Section 26000) to, the Financial Code, relating to currency (February 17, 2017). Retrieved at https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB1123.
 Robert V. Cornish Jr., Wyoming Enacts Trailblazing Blockchain and Cryptocurrency Legislation, Wilson Elser (March 12, 2018). Retrieved at https://www.wilsonelser.com/news_and_insights/insights/3090-wyoming_enacts_trailblazing_blockchain_and.
 See Nikhilesh De, Wyoming House Approves Utility Token Securities Exemptions Bill, CoinDesk (February 20, 2018). Retrieved at https://www.coindesk.com/wyoming-house-approves-utility-token-securities-exemptions-bill/.
 Annaliese Milano, Crypto Industry Should Self Regulate, Says CFTC Commissioner, CoinDesk (March 8, 2018). Retrieved at https://www.coindesk.com/crypto-industry-should-self-regulate-says-cftc-commissioner/.
 See, e.g., David Morgan, Congress sets sights on federal cryptocurrency rules, Reuters (February 19, 2018). Retrieved at https://www.reuters.com/article/us-crypto-currencies-congress/congress-sets-sights-on-federal-cryptocurrency-rules-idUSKCN1G31AG; Nikhilesh De, Crypto Featured for First Time in US Congress Economic Report, CoinDesk (March 16, 2018). Retrieved at https://www.coindesk.com/crypto-featured-first-time-us-congress-economic-report/; Kate Rooney, Congressional hearing on cryptocurrencies devolves into bitcoin bash fest, CNBC (March 14, 2018). Retrieved at https://www.cnbc.com/2018/03/14/congressional-hearing-devolves-into-bitcoin-bash-fest.html; Joshua Althauser, US Lawmakers Draft Bill Protecting Cryptocurrencies from Gov Interference, CoinTelegraph (August 20, 2017). Retrieved at https://cointelegraph.com/news/us-lawmakers-draft-bill-protecting-cryptocurrencies-from-gov-interference.