Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology
In Virginia, cryptocurrency is primarily unregulated by state authorities. However, the Virginia Bureau of Financial Institutions (“Bureau”) issued a letter titled “Notice to Virginia Residents Regarding Virtual Currency.” In doing so, the Bureau provided virtual currency a legal definition under state law and warned Virginia residents about the risks associated with cryptocurrency investments.
In the Notice, the Bureau defined virtual currency as a digital representation of value issued by private developers and denominated in their unit of account that does not have legal tender status and is not backed by any central bank or government. According to the Bureau, technological advances have fostered hundreds of different kinds of virtual currencies with their characteristics. Since the Burau noted various types of cryptocurrency, a reasonable interpretation is that the legal definition should be read broadly. However, even if a narrow interpretation prevails, the Notice nevertheless provides a statutory definition of virtual currency under Virginia law.
As stated above, Virginia officials expressly stated that the virtual currency by itself is unregulated by the Bureau. However, the notice details that there are instances where virtual currency is regulated under the general framework of Virginia law. Specifically, virtual currency can be regulated under Chapter 19 of Title 6.2 of the Code of Virginia in certain circumstances. Chapter 19 is titled “Money Order Sellers and Money Transmitters.” According to the Bureau, cryptocurrency can be regulated when virtual currency transactions also involve the transfer of fiat currency because the transaction involves legal tender. Consequently, there are exceptions to the Bureau’s statement that cryptocurrency is unregulated, specifically when the cryptocurrency transaction involves legal tender.
Furthermore, the Notice warns Virginia residents of the risks associated with cryptocurrency. Specifically, the Bureau states that “virtual currencies are highly volatile with the potential for complete loss of value.” Furthermore, the Notice warns that it may not be possible for investors to recoup their losses because most virtual currencies are not insured against loss. In addition, cryptocurrency transactions are final because they cannot be reversed. Consequently, Virginia residents cannot be compensated if their funds are stolen. Therefore, Virginia residents face the possibility of losing all of their cryptocurrency assets if they are not stored securely. For these reasons, the Bureau strongly cautioned residents to consider the risks associated with purchasing and using virtual currencies.
In conclusion, the Bureau Notice declares that virtual currency is primarily unregulated, provides virtual currency a legal definition under Virginia law, and warns Virginia residents of the risks associated with cryptocurrency.
Virginia Securities Act and Cryptocurrency
On January 21, 2021, Virginia’s State Corporation Commission (SCC) confirmed that cryptocurrency companies are subject to the Virginia Securities Act (VSA). The SCC is a state agency granted regulatory authority over utilities, insurance, retail franchising, railroads, securities, and state-chartered financial institutions. In other words, the SCC is legally authorized to regulate financial institutions in the state of Virginia. In fact, the SCC is Virginia’s primary filing office for corporations, limited partnerships, and limited liability companies. The SCC has broad powers, including delegated administrative, legislative, and judicial powers. These powers authorize the SCC to hold formal hearings. The SCC’s formal hearings can only be appealed to the Virginia Supreme Court. Since the SCC has authority over securities, they are legally authorized to enforce the VSA.
In the Commonwealth of Virginia, Ex Rel., State Corporation Commission v. James Yuschtk, and David Luftglass, the SCC confirmed that cryptocurrency firms are subject to the VSA. Section 13.1-504 of the VSA explicitly states that it is illegal for any person to transact business in the Commonwealth of Virginia as a broker, dealer, or investment advisor without being registered by state authorities. Furthermore, section 13.1-507 states that it is illegal for any person to offer or sell any security unless (1) the security is registered under Virginia law, (2) the security or transaction is exempted by this VSA, or (3) the security is a federal covered security. Although most virtual currency are not considered a securities, cryptocurrency firms operating in Virginia are probably subject to the VSA for two reasons: (1) because cryptocurrency is not listed as one of the many exemptions under the VSA; and (2) because the court in Yuschtk held that cryptocurrency firms must comply with the VSA.
In Yuschtk, the defendants operated a cryptocurrency investment fund called Capital Crypto Fund, LLC (“CCF”). Both defendants were Virginia residents, and they operated their crypto-investment fund within the state. However, neither Yuschick nor Luftglass were registered to offer or sell securities by state authorities. In addition, the fund was not registered under the VSA, and it was not exempt from registration. For these reasons, the SCC determined that defendants violated VSA by illegally conducting business as a broker-dealer without being registered to do so and by improperly offering securities that were not registered under the Act or exempt from registration. Accordingly, Yuschick and Luftglass were both found to have violated the VSA.
In conclusion, the Yuschtk case demonstrates that cryptocurrency investment funds are legally required to obtain proper registration under the VSA. Additionally, it implicitly holds that some cryptocurrencies may be categorized as securities under Virginia law since the SCC applied the VSA in the Yuschtk case. Nevertheless, legal ambiguity exists as to whether all cryptocurrencies are considered securities in Virginia and whether or not virtual currencies are classified as securities depending on their characteristics. Therefore, since legal ambiguity exists under Virginia law, cryptocurrency investment funds operating within the state should consult legal counsel and register under the VSA to avoid civil liability.
Virginia Cryptocurrency Updated Laws
|Virginia||HB 1900||Establishes the Health Care Provider Credentials Data Solution Fund for the purpose of soliciting proofs of concept to establish or improve a system for the storage and accessing of health care provider credentials data, utilizing blockchain or a similar technology, to be maintained by the Department of Health Professions. The Fund authorizes the secretary of Health to disburse matching funds on at least a one-to-one basis to any person who demonstrates such proof of concept.|
|Virginia||HB 2415||Creates a rebuttable presumption that a business record electronically registered on a blockchain is a self-authenticating document for certain facts. The bill provides that such presumption does not extend to the truthfulness, validity, or legal status of the contents of the fact or record.|
|Virginia||HB 2588||Directs the commissioner of elections to establish and supervise a pilot program by which an active duty member of a uniformed service who has been deployed overseas and is a registered voter of a county or city participating in such pilot program may return his voted military-overseas ballot by electronic means. The commissioner is required to promulgate standards and develop procedures for the secure transmission and return, storage, and processing of voted military-overseas ballots, including security measures, methods for verifying and authenticating a voter’s identity, and encryption methods for the voted ballots. To the fullest extent practicable, these standards and procedures are required to incorporate the use of blockchain technology, defined in the bill as technology using distributed databases and ledgers protected against revision by publicly verifiable open-source cryptographic algorithms and protected from data loss by distributed records sharing. The bill requires counties and cities participating in the pilot program to participate in a security review after each election. In each year of the pilot program, the bill requires the commissioner to conduct a security assessment and update the security measures for the pilot program. The bill also requires that voters eligible to return their military-overseas ballots by electronic means through the pilot program be permitted to sign the statement of voter and any other documents related to absentee voting using the digital signature associated with their respective Common Access Cards issued by the U.S. Department of Defense. The pilot program is in effect for elections held on and after Jan. 1, 2020. The bill requires the commissioner to submit a report on or before Dec. 1, 2024, on the outcomes of the pilot program and to include a recommendation as to whether to implement the electronic return of voted military-overseas ballots on a permanent, statewide basis. The bill has an expiration date of Dec. 31, 2024.|
To Conference Committee 2/21/19
|Establishes a 21-member joint subcommittee to identify blockchain technology research and economic development opportunities with the goal of creating a statewide, comprehensive and coordinated strategy relating to blockchain technology. In conducting its study, the joint subcommittee shall analyze and consider (i) economic development opportunities in the commonwealth available through the utilization of blockchain technology; (ii) different types of blockchain technology and the feasibility of economic development for each type; (iii) the creation of a statewide, comprehensive, coordinated strategy to encourage commercial activity in the blockchain technology sector; (iv) opportunities for deployment of blockchain technology in state government; and (v) strategies to incentivize the development of blockchain companies in the commonwealth. The joint subcommittee shall submit its report to the governor and the 2020 and 2021 regular sessions of the General Assembly.|
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Virginia Cryptocurrency and Blockchain Attorneys
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