This document summarizes the key U.S. regulatory agencies and laws governing blockchain and cryptocurrencies. It discusses how the SEC views most tokens as securities and applies the Howey test. The CFTC considers cryptocurrencies a commodity and regulates derivatives contracts. FinCEN regulates exchanges and administrators as money transmitters under anti-money laundering and know-your-customer laws. While regulations are still developing, the SEC, CFTC and FinCEN increasingly oversee initial coin offerings and cryptocurrency trading activities.

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U.S. Legal and Regulatory
Landscape: Blockchain
Lilya Tessler
April 16, 2018
Crypto42 Token Investment Summit 2018

2. Rise of Regulation in the Blockchain/Token
Space
 Regulatory Regimes
– Commodity Futures Trading Commission
– U.S. Securities Exchange Commission
– Financial Crimes Enforcement Network
– State Laws
– International Regulations
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3. U.S. Securities Exchange Commission
(“SEC”)
 SEC regulates primary issuance and secondary trading of
securities.
 The features of the blockchain token determine whether it
would be viewed as a security.
– Merely calling a token a “utility” token or structuring it to provide some
utility does not prevent the token from being a security.
– Tokens and offerings that incorporate features and marketing efforts
that emphasize the potential for profits based on the efforts of others
contain the hallmarks of a security under U.S. law.
 SEC increasingly views most tokens as securities.
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4. SEC: The DAO Report
 Application of the “Howey” test.
– An investment of money
– in a common enterprise
– with an expectation of profits
– predominantly from the efforts of others.
 SEC found that DAO tokens offered and sold by a “virtual”
organization known as “The DAO” constituted an investment
contract, and therefore was a security under federal securities
laws.
– The SEC explicitly directed the report to others selling tokens to raise
capital, effectively putting the industry on notice.
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5. SEC: PlexCoin, Munchee and AriseBank
 PlexCoin
– December 2017 – SEC determined PlexCoin tokens were securities and froze
the company’s assets, in large part because the company promised increased
returns and made false and misleading statements.
 Munchee
– December 2017 – SEC determined Munchee tokens were securities and
issued a cease and desist letter prior to the company’s ICO, in large part
because the company claimed that the coins would increase in value.
 AriseBank
– January 2018 – SEC halted an ICO because the company’s marketing efforts
included false and misleading statements and failed to disclose the criminal
background of key executives.
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6. SEC – Open Issues
 When is a token a “security?”
 What asset class is a “securities” token?
 What exemptions are available for token issuers from U.S.
federal securities laws?
 How will KYC and AML regulations apply?
 What custody issues may arise?
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7. U.S. Regulatory Landscape:
Exchanges and Trading
 Money services business
 Broker-dealer and alternative trading systems
 FCM, SEF or DCM
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8. Commodity Futures Trading Commission
(“CFTC”)
 The CFTC has announced that tokens and cryptocurrencies,
referred to as “virtual currencies,” are subject to regulation by
the CFTC.
– The CFTC considers “virtual currency” as a commodity under the Commodity
Exchange Act (“CEA”) and virtual tokens as either “commodities” or
“derivatives contracts,” depending on the context, under the CEA.
 The CFTC’s regulations apply:
– whenever cryptocurrency or virtual tokens are used in a derivatives contract
(or to any transaction with virtual tokens that are considered derivatives
contracts) AND
– if any fraud or manipulation exists with regards to cryptocurrencies or tokens
that are traded in interstate commerce.
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9. Financial Crimes Enforcement Network
(“FINCEN”)
 FinCEN categorizes participants in virtual currencies as either “exchangers” and
“administrators” both of which are “money services businesses” under the Bank
Secrecy Act (the “BSA”).
– Exchangers are persons who engage in the business of exchanging virtual currency for real
currency, funds or other virtual currency.
– Administrators are persons who engage in the business of issuing virtual currency and has the
authority to redeem (withdraw from circulation) such virtual currency.
– Note, people who obtain virtual currency to purchase goods or services (including miners and
forgers) and bona fide investment companies which invest in virtual currencies for their own account
are not money transmitters.
 The BSA requires money services businesses to, among other things:
– Register as a money services business with FinCEN or qualify for an exception to registration.
– Develop and maintain effective anti-money laundering policies.
– Report “suspicious” transactions involving the transfer of at least $2,000 in funds or assets.
– Implement Know Your Customer/Counter-Party procedures.
– Comply with the Funds Transfer and Travel Rules of the BSA.
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10. Information About This Presentation
Thank You
 The ideas expressed herein are our own and do not reflect the positions
or advice of McDermott Will & Emery LLP. They are subject to change
without notice.
 This presentation does not constitute legal or other advice, nor does it
apply to any particular fact pattern.
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11. Contact Details
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Lilya Tessler
Partner
ltessler@mwe.com
212 547-5523