Erica G. Wilson, of Vuono & Gray, and Stephen T. Middlebrook, of Womble Carlyle, look at the basics of blockchain and bitcoin technology, the legal issues they raise, and the evolving regulatory landscape.

1. Bitcoin, Blockchain, and the Law
October 26, 2017

2. Agenda
Introduction to Cryptocurrencies & Blockchain
Bitcoin and Blockchain Use Cases
Enforcement Actions
Potential Areas of Regulation

3. Presenters
Erica G. Wilson
Vuono & Gray
Stephen T. Middlebrook
Womble Carlyle

4. Bitcoin and Blockchain:
Not Your Partner’s
Secured Transactions
Erica G. Wilson - October 26, 2017

5. ● Chains of digital signatures
● 1188 cryptocurrencies
● Market value: $170 BILLION
● $3 billion traded per day
What are cryptocurrencies?

6. Bitcoin Origins: Nakamoto (2008)
Goal:
Low-cost, irreversible
transactions facilitated by
“cryptographic proof instead of trust”

7. In Blockchain We Trust
● Decentralized network = security
● Public ledger = transparency
● Irreversible transactions = certainty
● Finite, divisible resource = value

8. Permissionless Distributed Ledger

9. Reality Check
● Exchanges ≠ blockchain
● Volatile, uninsured
● User error

10. Use Cases: Bitcoin
• Send
• Spend
• Speculate

11. Use Cases: Blockchain
● Funds settlement
● Asset tracking and transfer
● E-notarization
● Records management
● Smart contracts

12. Bitcoin in Practice
Internal Revenue Service:
bitcoins are property
Securities and Exchange Commission:
bitcoins may be securities
Commodity Futures Trading Commission:
bitcoins are commodities

13. Bitcoin in Practice
● Intellectual property
● Estate planning
● Family law
● Discovery
● Ethics

14. Regulation of Blockchain and
Virtual Currency Business Activity
Stephen T. Middlebrook
October 26, 2017

15. 15
Potential Areas of Regulation
• Anti-money laundering (FinCEN).
• Tax (IRS).
• Securities (SEC).
• Commodities (CFTC).
• Consumer Protection and Safety and Soundness
(OCC, states).
• Unfair and Deceptive Acts and Practices (FTC,
CFPB, states).

16. 16
FinCEN Anti-Money Laundering Regulations
• March 18, 2013 FinCEN issued guidance interpreting
existing Bank Secrecy Act regulations for Money
Services Businesses (“MSBs”).
• Guidance clarifies when a participant in a virtual
currency scheme might be engaged in “money
transmission” and thus be considered an MSB.
• MSBs must register with FinCEN, have AML
program, maintain records, file reports.

17. 17
FinCEN Guidance on Virtual Currencies
• FinCEN regulations define Money Transmission as
“acceptance of currency, funds or other value that
substitutes for currency from one person and the
transmission of currency, funds or other value that
substitutes for currency to another location or person
by any means.”
• FinCEN determined that virtual currency may be a
“substitute” for real currency.

18. 18
Enforcement Action Against Mt. Gox
• Mt. Gox, based in Japan, was the largest Bitcoin
exchange handling 70% of all transactions.
• May 14, 2013, DHS seized funds belonging to Mt. Gox
held at Dwolla and at Wells Fargo.
• Seizure order asserted that Mt. Gox was engaged in
money transmission and was required to register as an
MSB.
• In February 2014, Mt. Gox ceased operations, claiming it
was hacked. Liquidation proceedings are on-going in
Japan and there is a class action in U.S.

19. 19
Enforcement Action Against BTC-e
• BTC-e was a large virtual currency exchange operated by
Alexander Vinnik out of Russian and/or Bulgaria.
• July 26, 2017 FinCEN imposed a $110 million dollar civil
money penalty on BTC-e for failure to comply with MSB
regulations.
• BTC-e and Vinnik were indicted in federal court in N.D.Cal.
for money laundering and related charges.
• Law enforcement asserts that BTC-e was a hub for
cybercriminals to launder their money.
• BTC-e exchange shut down but claims it will return to
operations.

20. 20
IRS Guidance on Virtual Currencies
• On March 25, 2014, the IRS issued guidance on the tax
treatment of virtual currencies. Notice 2014-21.
• IRS stated that for federal tax purposes, virtual currency is
treated as property not as foreign currency.
• This means holders must track their basis in each unit of
virtual currency and may experience a capital gain or loss
when the unit is spent.
• In 2016-17, IRS has been trying to enforce a “John Doe”
subpoena to Coinbase seeking information on customers who
bought and sold virtual currency.
• Anticipate future tax evasion enforcement actions.

21. 21
Initial Coin Offerings
• Initial Coin Offerings have become a popular way to
raise funds to support new business ventures.

22. 22
Celebrities Promoting Initial Coin Offerings

23. 23
SEC Report on The DAO
• On July 25, 2017 SEC issued its Report on the DAO.
• Found the tokens issued by the DAO were securities because they met the
four prongs of the Howey test:
– an investment of money.
– in a common enterprise.
– premised on a reasonable expectation of profits.
– derived from the entrepreneurial or managerial efforts of others.
• SEC took no enforcement action (DAO was already defunct).
• Issuers of tokens that are securities must register.
• Exchanges that transfer tokens that are securities must register.
• Tokens that are not securities or that qualify for an exemption have no duty
register.

24. 24
SEC Enforcement Action Against RECoin
• Sept. 29, 2017, SEC filed suit in federal court in the E.D.N.Y.
against Maksim Zaslavskey and his company RECoin.
• RECoin was an ICO token supposedly backed by real estate
holdings.
• Diamond Reserve Club was an ICO token supposedly backed
by diamonds.
• SEC alleges it was all a scam – no real estate and no
diamonds.
• SEC alleges these tokens were securities that were required to
be registered.

25. 25
CFTC Asserts Jurisdiction
• Definition of “commodity” in CEA is broad and includes:
– Physical commodities.
– Currencies and interest rates.
– Futures contracts.
• In 2015, CFTC said bitcoin and other virtual currencies are commodities.
• CFTC clearly has jurisdiction over derivatives based on virtual currency:
– Licensed TeraExchange for bitcoin swaps in 2014.
– Licensed LedgerX for virtual currency options in July 2017.
• CFTC says there is no discrepancy between SEC and CFTC positions –
analysis depends on facts and circumstances.

26. 26
OCC Proposes Federal FinTech Charter
• In Dec. 2016, the OCC announced plans to grant “special purpose” national
bank charters to FinTech companies.
• FinTech charters would allow holders to engage in:
– Fiduciary activities within the business of banking.
– Non-fiduciary activities if involve receiving deposits, paying checks or lending
money.
• FinTech charters would be subject to same rules as other charters and could
take advantage of preemption of certain state laws.
• FinTech charters accepting deposits could qualify for FDIC insurance.
• Conference of State Bank Supervisors and NY Dept. of Financial Services
have individually sued OCC to stop the proposal from going forward.

27. 27
State Regulation of Virtual Currency
• State regulation of virtual currency is inconsistent and unclear.
• Do existing state money transmission statutes cover virtual currency
transactions?
– Some states say yes.
– Some states say no.
– Some states are silent.
• New York’s Dept. of Financial Services created a new regulatory process
for virtual currency referred to as the “BitLicense.”
• Existing state statutes are not well suited for virtual currency businesses.
• In July 2017, the Uniform Law Commission approved the “Uniform
Regulation of Virtual Currency Businesses Act.”
– Anticipate numerous state enactments over next couple of years.

28. 28
Uniform Regulation of Virtual Currency Businesses Act
• The Uniform Act regulates “virtual currency business activity” which
includes exchanging, transferring or storing virtual currency on behalf of
others.
• Focus is on consumer protection and safety and soundness.
• Licensing requirement for covered persons.
• Mandated consumer disclosures and protections
• Exemptions for:
– personal, household, academic uses.
– infrastructure and software providers.
– de minimis users.
– start-ups under certain thresholds who register and meet certain requirements.
• Reciprocal licensing arrangements with other states that adopt URVCBA.

29. 29
Unfair and Deceptive Acts and Practices
• The FTC, CFPB and state attorneys general all have
“UDAP” authority to prosecute “unfair and deceptive”
(and for CFPB, “abusive”) acts and practices.
• Broad authority to police fraud and deception against
consumers.
• Anticipate UDAP enforcement actions, especially at
the state level.

30. Questions and Answers
Questions can be submitted using the
“Questions” box in your GoToWebinar
control Panel.

31. Erica G. Wilson
ewilson@vuonogray.com
412-471-1800
Stephen T. Middlebrook
smiddlebrook@wcsr.com
404-962-7529
Casey C. Sullivan
casey.sullivan@logikcull.com
844-363-3347

32. More Resources:
Check out the “Developments in the Law Affecting Electronic Payments
and Financial Services” by Stephen Middlebrook, Tom Kierner and Sarah
Jane Hughes and “A Historical Analysis of Substitutes for Legal Tender and
Their Implications for the Regulation of Virtual Currency” by Stephen
Middlebrook & Sarah Jane Hughes.
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