#peter van Valkenburgh, #tokens, #tokens and regulation, #ICO, #ICO-Summit 2017, #Token Regulation Summit Vienna 2017

1. US: Tokens and Regulation
An update from Coin Center
October 2017
Peter Van Valkenburgh

2. What is Coin Center
and what do we do?

4. OUR SUPPORTERS

5. What we do:
Education
Policy Research
Advocacy

7. ICO History

10. The Howey Test
“An investment contract for purposes of the Securities Act
means a contract, transaction or scheme whereby a person [1]
invests his money in [2] a common enterprise and [3] is led to
expect profits [4] solely from the efforts of the promoter or a
third party, [exclusionary factors] it being immaterial whether
the shares in the enterprise are evidenced by formal certificates
or by nominal interests in the physical assets employed in the
enterprise.”

11. Closed-source or low-transparency cryptocurrencies
because without visibility into the operation of the
technology there is no reason to believe that profits
come from anything other than a promoter’s hype.
Open but heavily marketed pre-sales or sales of pre-
mined cryptocurrencies with a small and non-
diverse mining and developer community when
the facts indicate that profits come primarily from
the efforts of this discrete and profit-motivated
group.
Cryptocurrencies with permissioned ledgers or a
highly centralized community of transaction
validators.
Likely to qualify as
securities:

12. Highly decentralized cryptocurrencies (e.g. Bitcoin,
Litecoin) because of a lack of vertical commonality
or a discernible third party or promoter upon whose
efforts investors rely.
Sidechained Cryptocurrencies/Blockchains because
there is no expectation of profits if value pegged to
their existing bitcoin holdings.
Cryptocurrencies where initial distribution is made
through open competitive mining or proof-of-burn
because there is no investment of money.
“Utility” tokens or Distributed Computing Platforms
(e.g. Ethereum) because participants seek access to
these tokens for their use-value rather than an
expectation of profits.
Less likely to qualify as
securities:

13. Recent Developments
● The Swiss Model! (Stiftung)
● SEC DAO Investigative Report
● Reg D Rule 506 sales
● SAFT sales

15. SEC DAO Investigative Report
Key Points:
● It’s a report not a ruling or enforcement action.
● First statement from the SEC regarding how securities laws can apply
to tokens/cryptocurrencies.
● Identifies that the Howey Test is the appropriate test.
● Focuses on prong 4 of test: “reliance on the managerial efforts of a
third party or promoter.”
● Says DAO “Curator” had sufficient managerial responsibility for
generating any expected profits.

16. SEC DAO Investigative Report
Highly speculative possible takeaways:
● Referred to ether as a virtual currency
○ Means that it’s not a security?
● “The Commission has determined not to pursue an enforcement action
in this matter based on the conduct and activities known to the
Commission at this time”
○ Means the hard fork was a good idea?

17. SEC DAO Investigative Report (Curator)

18. SEC DAO Investigative Report (Platforms)

19. Reg D rule 506(c)
Source: https://www.sec.gov/fast-answers/answers-
rule506htm.html

21. SAFT Sales
● SAFT = “Simple Agreement for Future Tokens”
● Based on SAFE, “Simple Agreement for Future Equity” (Y-combinator)
● The SAFT is a security by design.
● It is a note you can buy today that promises you tokens in the future.
● The tokens are not (purportedly) securities upon receipt.
○ Because the network is live and provides a useful function
powered by a decentralized network.
● SAFT is only available to accredited investors.
○ but resultant tokens available to anyone, once delivered

23. Residual Questions

24. What happens after a year?

25. TheDAO!
Ethereum?
Bitcoin?
Paycoin?

26. Financial Surveillance
AML / KYC Regulation of Cryptocurrency Actors
Peter Van Valkenburgh

27. Bank Secrecy Act (1970)(US)
Obligates Money Service Businesses (MSBs) to do certain things:
● Registration with FinCEN
● Know Your Customer (KYC)
● Recordkeeping
● Anti-Money-Laundering (AML) Program
● Reporting
○ SAR - $2,000+ and suspicious
○ CTR - $10,000+ in cash
So, is a cryptocurrency user or company an MSB?

28. FinCEN VC Guidance (March 2013)
● Certain virtual currency actors have always been MSBs and BSA has
always applied (guidance, not rule)
● Creates three categories of actors: "user," "exchanger," and
"administrator."
○ A user is a person that obtains virtual currency to purchase goods
or services.
○ An exchanger is a person engaged as a business in the exchange of
virtual currency for real currency, funds, or other virtual currency.
○ An administrator is a person engaged as a business in issuing
(putting into circulation) a virtual currency, and who has the
authority to redeem (to withdraw from circulation) such virtual
currency.

29. FinCEN VC Guidance (March 2013)
● Administrators - doesn’t apply to decentralized cryptocurrencies.
○ Must issue AND have the authority to redeem. (but Ripple Labs settlement)
● Exchangers
○ "An [] exchanger that (1) accepts and transmits a convertible virtual currency or (2)
buys or sells convertible virtual currency for any reason is a money transmitter under
FinCEN's regulations, unless a limitation to or exemption from the definition applies
to the person."
● Users exempted (or are they?)
○ "A user who obtains convertible virtual currency and uses it to purchase real or
virtual goods or services is not an MSB under FinCEN's regulations."
○ What about a political contribution or other gift?
○ What if user “obtains” via mining, or by pre-mining a new cryptocurrency? (ICOs)

30. FinCEN VC Guidance Lingering Questions
● Question: What about miners?
○ Is a miner a user because they “obtain virtual currency virtual currency to purchase
goods or services?”
○ What if the miner sells their mining rewards for dollars or other fiat currency?
● Answer: 2014 Administrative Ruling
○ Mining = Obtaining. “The label applied to a particular process of obtaining a virtual
currency is not material to the legal characterization under the BSA” Can include:
“earning,” “harvesting,” “mining,” “creating,” “auto-generating,” “manufacturing,” or
“purchasing.”
○ Miners can sell rewards without being exchangers. “In undertaking such a
conversion transaction, the user is not acting as an exchanger, so long as the user is
undertaking the transaction solely for the user’s own purposes and not as a business
service performed for the benefit of another.”

31. FinCEN VC Guidance Lingering Questions
● Question: What about creators of new cryptocurrencies who sell an
initial distribution (ICO)?
○ Are they administrators? But if decentralized, they can’t redeem.
○ Are they exchangers? If they are merely selling tokens that they create and own, how
different than mining?
● Answer: Unresolved but there was the Ripple Labs settlement (2015).
○ Issuers of decentralized cryptocurrency or development companies selling from their
own supply don’t seem to fit the definition of administrator or exchanger.
○ Ripple Labs Settlement, Civil Monetary Penalty of $700,000 for selling XRP to buyers
for dollars without registering as an MSB.

32. Ripple Labs Settlement
● Statement of Facts and Violations:
○ “Notwithstanding the Guidance, and after that Guidance was issued, Ripple Labs
continued to engage in transactions whereby it sold Ripple currency (XRP) for fiat
currency (i.e., currency declared by a government to be legal tender) even though it
was not registered with FinCEN as an MSB. Throughout the month of April 2013,
Ripple Labs effectuated multiple sales of XRP currency totaling over approximately
$1.3 million U.S. dollars.”
○ Also Ripple Labs “described itself in federal court filings and in a sworn affidavit as ‘a
currency exchange service providing on-line, real-time currency trading and cash
management’”
● How is this any different than any other ICO or Token Sale?

33. Ripple Labs Settlement
● How is this any different than a miner selling its rewards?
○ Recall 2014 Mining Administrative ruling: “In undertaking such a
conversion transaction, the user is not acting as an exchanger, so
long as the user is undertaking the transaction solely for the user’s
own purposes and not as a business service performed for the
benefit of another.”
● Is this all constitutional?

34. Internationally
● Financial Action Task Force on Money Laundering
○ 35 member countries.
○ Guidance for a Risk-Based Approach to Virtual Currencies (2015)
■ Largely mirrors 2013 FinCEN Guidance
● EU
○ Amendments to the 4th AML Directive (2015/849)
○ Would add virtual currency exchange platforms as well as
custodian wallet providers to the list of obliged parties.

35. Questions?
Peter Van Valkenburgh
peter@coincenter.org