A digital coin, virtual coin, token or cryptocurrency is a piece of computer code. What makes this computer code special is that it is created on something called a “blockchain.” Blockchain technology allows people to engage in financial transactions directly with each other, without a bank or other financial intermediary. Transactions taking place on a blockchain are protected through cryptography and recorded on thousands of identical computer ledgers all over the world. There are some great introductions to blockchain technology and bitcoin that you can watch on YouTube.
Digital coins like bitcoin have value only because other people are willing to pay for them. As long as people have confidence in a digital coin, it will continue to have value. As of this writing, a lot of people have confidence in bitcoin. Indeed, people hold almost $130 billion in bitcoin alone, and over 230,000 bitcoin transactions are processed each day.
How Did Digital Coins Get Started?
The creation of bitcoin and the blockchain came on the heels of the Great Recession. The first digital coin, bitcoin, was created in 2009 by Satoshi Nakamoto. Nobody knows who Nakamoto is or whether he is one person or a group.
Nakamoto published a nine-page white paper called Bitcoin: A Peer-to-Peer Electronic Cash System. In the
The bitcoin blockchain is maintained by “miners” who are paid in bitcoin when they are first to solve complex mathematical problems. They are called miners because they are trying to unearth or mine a finite resource, namely, 21 million bitcoin that are available on the bitcoin blockchain. Unless there is
All lawyers should have some familiarity with the legal and regulatory issues concerning digital coins. Clients may ask to pay for legal services in digital coins. Individuals and businesses are choosing to acquire and hold digital assets. This means lawyers will be expected to be familiar with, and inquire about, digital coins in many types of matters such as litigation, tax, divorce, estate planning, probate, bankruptcy
The Regulation of Digital Coins
There is some uncertainty as to how digital coins are regulated in the U.S.
Digital coins as currency. Banking regulators require businesses selling virtual currencies like bitcoin to comply with anti-money laundering and “know your customer” regulations. At the federal level the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department, oversees registration and regulation of money transmitting businesses. FinCEN issued guidance in March 2013 on the regulatory responsibilities of money transmitter businesses in a document titled Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, which can be found online.
State money transmitter laws generally cover digital coin transactions. One notable exception is the state of Illinois. Illinois regulators do not consider digital currencies to be money under the Illinois Transmitters of Money Act. Only a few states, including North Carolina and New York, have enacted specific legislation addressing virtual currency money transmitters. For example, New York implemented “BitLicense” regulations that apply to money transmitters doing business in New York.
Digital coins as commodities. The Commodities Futures Trading Commission (CFTC) considers digital coins, which it calls “virtual currencies,” to be commodities. While the CFTC does not directly regulate the sale of commodities—such as gold, silver and pork bellies—it does regulate derivatives that are based upon the value of commodities, such as swaps, futures contracts
In the last
The CFTC also regulates through enforcement actions. The CFTC brought several antifraud actions concerning digital coin investment schemes. It also brought an enforcement action against Bitfinex, one of the major online digital coin trading platforms, for operating as an unregistered futures commission merchant and for facilitating the financing of transactions in bitcoin for participants who were not eligible under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Digital coins as securities. Actions of the Securities and Exchange Commission (SEC) have created the greatest angst for practitioners in the digital coin space. In
This is important for lawyers because Clayton has made it clear that the SEC is carefully scrutinizing the activities of gatekeepers of the securities markets—including lawyers. This is not an idle threat. The SEC has brought actions against lawyers for aiding and abetting violations of federal securities laws. Recently the SEC charged a lawyer and his firm with fraud under the 1933 Securities Act and aiding and abetting a client to commit fraud in filing a false securities registration statement with the SEC.
The determination of whether a digital coin is
But just because a digital coin was launched through an ICO does not mean that it will always be considered a security. Whether a digital coin is
In April 2018 congressional testimony, Clayton noted bitcoin as something that is often cited as a “pure medium of exchange … that has been determined by most people to not be a security.” While not the clearest guidance, practitioners took note. More definitive, albeit still nonbinding, guidance was recently provided by the director of the SEC’s Division of Corporate Finance. Director William Hinman addressed whether a digital coin that was originally a securities offering could later be used in the marketplace as a currency and no longer be
Aside from a number of enforcement actions, the only definitive guidance from the SEC on how to determine whether a token is
Accepting Digital Coins as Payment
Certain digital coins like bitcoin and ether are gaining wide acceptance as
The only state to expressly authorize attorneys to accept bitcoin as payment is Nebraska. If a Nebraska attorney receives bitcoin in payment, he or she is required to convert the bitcoin immediately to U.S. currency. Even if your state permits you to accept digital coins as payment for legal services, you should be extremely cautious in doing so.
Before you decide to accept payment in digital coins, first make sure that your state permits you to do so. Second, ensure that you are accounting for digital coin payments properly. Third, be aware of all the ways that your digital coins can be stolen. Even Apple co-founder Steve Wozniak has had bitcoin stolen. Common ways that digital coins may be stolen are through phishing schemes, fake exchanges