By UpCounsel Cryptocurrency Attorney Lois Li

Cryptocurrency, also known as virtual currency, digital tokens, and coins, has become one of the most popular and versatile methods for carrying out financial transactions. The marketplace for cryptocurrency is rapidly expanding. However, there is uncertainty surrounding the treatment of offers and sales of such digital currencies. Since the increased popularity in using cryptocurrency in financial transactions and to raise funds, many countries have started implementing rules to regulate how cryptocurrency is used in business transactions.

The United States has implemented various federal level and state level regulations. Certain aspects of cryptocurrency may trigger money service business regulations, securities law, and some state level specific rules. If your business revolves around cryptocurrency, you will find this article useful in ensuring regulatory compliance when conducting cryptocurrency related activities.

Money Service Business Regulations

If your business involves transactions converting from cash to digital asset, or from digital asset to cash transactions, it is essential to consider whether some of these transactions may fall under the purview of money service business regulations. Virtual currency exchangers and administrators are “money transmitters” and need to comply with the Bank Secrecy Act and its implementing regulations. Some requirements include registration with FinCEN, having an AML compliance program, and procedure to file BSA reports.

Financial Crimes Enforcement Network (FinCEN) has issued a guidance letter in March 2018 and provided examples where the money transmitter rules would likely apply. For example, an exchange that sells Initial Coin Offering (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. Similarly, 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 also a money transmitter.

Securities Laws

When a company decides to sell coins and/or tokens, it is important to consider whether or not these coins are considered securities under the local jurisdiction and if yes, what are the securities law compliance requirements. The U.S. Securities and Exchange Commission (SEC) treats the majority of cryptocurrency as securities, adopting the same laws which govern stocks. Some older cryptocurrencies are treated as commodities (eg. Bitcoin), and are regulated by the U.S. Commodity Futures Trading Commission (CFTC).

In the U.S., to the extent that an ICO is structured in a way that it involves an offering or sale of securities or derivatives, certain participants in the ICO could fall under the authority of the SEC, or under the authority of CFTC. The “Howey Test” is currently used in analyzing whether an initial coin offering (ICO) is considered the offer or sale of “securities” under the Securities Acts. Even if it does, there are often registration exemptions that could be used in ensuring such ICO is conducted in compliance with securities law of the local jurisdiction.

Specific State Level Regulations

When deciding which state to incorporate your cryptocurrency business at, it is important to consider state specific regulations. Although most states are still either silent or vague on their stance of crypto related transactions, some states have implemented their own rules at the state level. For example, in the state of Wyoming, crypto to crypto is not considered as money transmission. In the state of New York, cryptocurrency related businesses are required to obtain a BitLicense issued by the New York State Department of Financial Services (NYSDFS) for conducting virtual currency activities.

If your business revolves around cryptocurrency, I would be happy to assist your company to ensure its regulatory compliance.

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About the author

Lois Li

Lois Li

Lois is a business and commercial attorney licensed in Michigan, U.S. since 2014 and in Ontario, Canada since 2015. As an attorney licensed in two countries, she is also experienced in preparing legal documents in both English and Chinese.

She has over five years of experience in assisting clients with business operations and legal services. Having served as both an outside and an in-house counsel, she has worked with many startup and small businesses. With a strong understanding of core business and the ability to translate business needs into legal requirements, she has helped many companies to establish policies and procedures, and drafted and negotiated employment and transaction contracts.

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