If your business is involved in cryptocurrency or Blockchain, it is in your best interest to understand the legal implications that may come along with transacting in digital assets. In this session, Jeff Neuburger, partner at Proskauer Rose and head of its Blockchain Practice, to covered the following topics and more: - Categorization of cryptocurrencies as securities and resulting implications - Types of licenses necessary to be involved in a cryptocurrency business - Non-fungible tokens and associated legal issues - Smart contracts

1. Legal Issues in
Cryptocurrency
and Blockchain
April 21, 2021 | MasterSnacks Webinar Series

2. JEFFREY D. NEUBURGER
Partner & Co-Chair
Technology, Media & Telecommunications (TMT) Group
Proskauer Rose LLP
jneuburger@proskauer.com
Welcome &
Introduction

5. The Legal Status of Cryptocurrency
under the Securities Laws
Prior SEC Enforcement
• July 2013: SEC brings action against operator a Ponzi scheme involving bitcoin. Court eventually ordered
disgorgement of over $40M and operator was sentenced to 18-month prison term.
• Dec. 2014: SEC settles enforcement action against operator of online portals that traded securities using Bitcoin or
Litecoin without registering the portals as broker-dealers or stock exchanges. $68K fine, plus operator barred from the
securities industry.
• Dec. 2014: SEC formed a new Digital Currency Working Group to collect and share information and assist in
enforcement.
- SEC Chair: “Regardless of whether an underlying virtual currency is itself a security, interests issued by entities
owning virtual currencies or providing returns based on assets such as virtual currencies likely would be securities
and therefore subject to our regulation.”
• Feb. 2016: SEC seeks default judgment in action against bitcoin mining firms for defrauding investors and operating a
Ponzi scheme by offering shares of a Bitcoin mining operation even though the company did not own enough
computing power for the mining it promised.
• Nov. 2016: SEC hosted a forum on Innovation in FinTech and addressed application of blockchain in corporate
environments re: compliance, cost-cutting
• July 2017: Report of investigation on The DAO re: initial coin offerings

7. The Howey Test
1. Investment of money…
• must give something “of value” in exchange for investment opportunity
2. …in a common enterprise…
• horizontal commonality: assets are pooled and investors share in risks and
profits
• vertical commonality: promoter’s efforts impact individual investors collectively
3. …with an expectation of profit…
• “profit” means either capital appreciation or participation in earnings (as
opposed to consumptive- or use-value)
4. …derived predominantly from the efforts of others
• the issue “is whether the efforts made by those other than the investor are the
undeniably significant ones, those essential managerial efforts which affect the
failure or success of the enterprise.”

8. SEC Kik Interactive Enforcement
• 2019: The complaint arises from Kik’s offer and sale of $100 million worth of blockchain-based digital
assets known as “Kin Tokens” from May to September 2017.
• Kik had sold Kin Tokens both (1) to accredited investors pursuant to SAFTs and (2) in a general
public sale to purchasers in select jurisdictions, including the U.S.
• The SEC claims that Kik thereby offered and sold unregistered, non-exempt “investment
contracts” – a form of securities – in violation of Sections 5(a) and 5(c) of the Securities Act.
• Oct. 2020: Court entered a final judgment on consent against Kik to resolve the SEC’s charges that
Kik’s unregistered offering of digital “Kin” tokens in 2017 violated the federal securities laws.
• A month prior, the court had granted the SEC’s motion for S/J, finding that undisputed facts
established that Kik’s sales of “Kin” tokens were sales of investment contracts, and therefore of
securities, and that Kik violated the federal securities laws when it conducted an unregistered
offering of securities that did not qualify for any exemption from registration requirements. The
court further found that Kik’s private and public token sales were a single integrated offering.
• Final judgment permanently enjoins Kik from violating the securities law registration provisions.
Kik is further required, for the next 3 years, to provide notice to the SEC before engaging in
enumerated future issuances, etc. of digital assets. Kik also paid a $5 million penalty.

9. Challenges to Blockchain:
The Latest Big Name Enforcement
• Critics site lack of clear ground rules, with DC picking
winners and losers
• Critics also suggest the conundrum some developers of
utility tokens face – utility of the token may not be evident
at the offering but comes with widespread use.

10. The Legal Status of Cryptocurrency
• Bitcoin – A currency, not a security
• Ether – May have been a security, but no longer
• Everything else --?????

11. SEC & DOJ Also Watchful for Unlawful
Endorsements in the Crypto Space

12. SEC & DOJ Also Watchful for Unlawful
Endorsements in the Crypto Space

13. 13
The Regulatory Environment –
CFTC Jurisdiction over Virtual Currency
Numerous enforcement actions in 2018
• CFTC filed enforcement action against companies allegedly
engaging in a fraudulent Ponzi scheme involving Bitcoin – had
allegedly promised to convert Bitcoin into fiat currency to invest on
the customers’ behalf in a pooled investment vehicle for trading
commodity interests
• Defendants CabbageTech allegedly induced customers to send
virtual currency in exchange for real time virtual currency advice
and trading – defendant allegedly never provided advice and simply
misappropriated customer funds.
• Defendants My Big Coin Pay allegedly solicited more than $6M in
investments for a virtual currency, and using for funds to buy luxury
items and falsely claiming the coin was backed by gold and was
trading.
• Some courts have reinforced the CFTC’s legal authority and
jurisdiction over cryptocurrency offerings.
• CFTC v. My Big Coin Pay, Inc., No. 18-10077 (D. Mass. Sept.
26, 2018) (declining to dismiss a complaint filed by the CFTC
against an entity over an alleged fraudulent virtual currency
offering, ruling that cryptocurrencies fall under the definition of
“commodity” under the Commodity Exchange Act (“CEA”) and
therefore may be duly regulated by the CFTC)

15. The Regulatory Environment –
Federal Activities
• 31 CFR §1010.100(ff): A “Money Services Business” must register with FinCen.
• “The definition of a money transmitter does not differentiate between real
currencies and convertible virtual currencies.”
• Exchanges and payment processors are considered to be money transmitters
unless a limitation or exemption applies.

16. 16
The Regulatory Environment –
FinCEN
• In 2015, FinCEN issued a Ruling (FIN-2015-R001) in response to a question from a company that
provides internet-based brokerage services between buyers and sellers of precious metals.
• FinCEN found that the Company would be a money transmitter and a dealer in precious metals,
precious stones, or jewels pursuant to its regulations.
• “FinCEN finds that, as the Company is going beyond the activities of a broker or dealer in
commodities and is acting as a convertible virtual currency administrator (with the freely
transferable digital certificates being the commodity-backed virtual currency), the Company falls
under the definition of money transmitter.”
• Same reasoning might apply to any service that holds custody of assets and issues a digital one
that can be subsequently freely traded.
• May 2015: FinCEN assesses $700K civil penalty against Ripple Labs for BSA violations
• July 2017: FinCEN issues $100 million civil penalty against BTC-e, a foreign virtual currency
exchange, for violating anti-money laundering laws.
• Oct. 2020: FinCEN assesses a $60 million civil money penalty against operator of Helix and Coin
Ninja, convertible virtual currency “mixers,” or “tumblers,” for violations of the Bank Secrecy Act
(BSA).

17. 17
The Regulatory Environment –
FinCEN & AML Proposed Regulations

18. The Regulatory Environment –
New York State
NYS BitLicense: Final rules released in June 2015
• The NYSDFS was the first state agency to release a
comprehensive framework for regulating digital currency-related
businesses.
• Imposes many of the same types of requirements that we already
have in the area of money transmission and clearinghouse
services, including capital requirements, anti-money laundering
safeguards, and “know your customer” type issues.
• The keystone of the regulations are consumer protections, anti-
money laundering compliance and cybersecurity rules that are
designed to place appropriate “guardrails” around the industry
without “stifling beneficial innovation.”
• The agency will not be regulating software developers – only
financial intermediaries.
• Companies will not be required to file a duplicative set of
application submissions if they want both a BitLicense and a money
transmitter license.
18

19. The Regulatory Environment –
Money Transmitter Licensing
NYS BitLicense: Final rules released in June 2015
• The NYSDFS was the first state agency to release a comprehensive
framework for regulating digital currency-related businesses.
• Imposes many of the same types of requirements that we already have in
the area of money transmission and clearinghouse services, including capital
requirements, anti-money laundering safeguards, and “know your
customer” type issues.
• The keystone of the regulations are consumer protections, anti-money
laundering compliance and cybersecurity rules that are designed to place
appropriate “guardrails” around the industry without “stifling beneficial
innovation.”
• The agency will not be regulating software developers – only financial
intermediaries.
• Companies will not be required to file a duplicative set of application
submissions if they want both a BitLicense and a money transmitter license.
19

20. 20
The Regulatory Environment –
State Laws

21. Digital Assets and Banking
• In 2019, Wyoming passed HB 74,
which authorized the chartering of
special purpose depository
institutions (SPDIs), which resemble
custody banks and can receive
deposits and conduct other
incidental activities, including
fiduciary asset management,
custody and related activities.
• This would include digital asset
custody services and settlement of
trades between digital assets and
U.S. dollars.

22. Non-Fungible and
Semi-Fungible
Tokens
(NFTs and SFTs)

23. 23
NFTs and SFTs
• What are they?
• Digital asset containing identifying data that
is encoded in a smart contract stored on that
token’s blockchain, making each NFT
unique, with a verifiable provenance.
• Bitcoin and cash are fungible (have the
same value/attributes when exchanged)
but the same NFT can’t be swapped for
another.
• Cryptokitties collectible digital kittens were
some of the first NFTs
• NFT can be used to prove value or scarcity
of digital assets (e.g., virtual land, artworks)

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25. April 22, 2021 Title of Presentation | FileSite Number 25

26. 26

27. NFT Legal Issues
• Intellectual Property - Do you have the necessary rights to create the NFT
and license the content associated with it?
• Rights of Publicity – Individuals may have rights in their name and likeness
which are violated by NFTs they have not authorized.
• What rights does a purchaser have to the underlying asset?
• Authenticity – A blockchain-based NFT enables ownership of the NFT to be
verified, but verifying ownership of an NFT does is NOT the same as verifying
that the NFT is “authentic” (i.e., authorized by the owner of the copyrighted
work or trademark) or that no duplicate or similar NFTs have been or will be
“minted”.
• Potential Fraud or Breach of Contract Claims – The value of NFTs is
largely based on the assumption of scarcity, but it is not always clear how
scarce an NFT will continue to be. Buyers of NFTs could potentially have
claims for fraud if a “minter” leads buyers to believe that there will only be a
limited number of copies, and then releases another versio or edition of the
same NFT, diluting the market.
• Is it a Security?

28. Take Aways…
• If you are getting involved in a cryptocurrency business, think about the following:
• Are the cryptocurrencies securities?
• Bitcoin, Ether – No, they are not
• Everything else – Apply Howey
• If the cryptocurrency is not a security, it could still fall within the ambit of the CFTC.
• Is the cryptocurrency a commodity?
• Does the project involve a commodity future?
• Does the opportunity involve a Money Service Business or a Money Transmitter?
• Consider necessary licenses.
• Will the business have any connection to NYS? Consider whether a bitlicense is
necessary.
• Is this an NFT-related business? Consider rights, licenses and relevant contract issues.

29. Questions?
JEFFREY D. NEUBURGER
Partner & Co-Chair
Technology, Media & Telecommunications (TMT) Group
Proskauer Rose LLP
jneuburger@proskauer.com

30. Thank You
F o r Wa t c h i n g & L i s t e n i n g
UPCOMING MASTERSNACKS WEBINARS:
TAXES ON BITCOIN AND DIGITAL ASSETS
April 28, 2021 | 12:00 PM ET/9:00 AM PT
Featuring: Peter Goodrich, Manager
CHALLENGES & OPPORTUNITIES FOR BUSINESSES IN THE AGE OF
DIGITAL ASSETS
May 5, 2021 | 12:00 PM ET/9:00 AM PT
Featuring: Mark DiMichael, Alexander Reyes, Peter Goodrich, David Rosenbaum,
Jeff Neuburger