On January 30, 2019, a Florida appellate court reversed the trial court’s dismissal of State v. Espinoza, instead holding that a Bitcoin business was both a money transmitter and a payment instrument seller, subject to Florida’s statutes governing money services businesses. The decision contrasts with recent guidance in Texas and Pennsylvania regarding cryptocurrencies, where virtual currencies in those states were not deemed money under applicable state statutes and businesses that conduct transactions exchanging virtual and sovereign currencies do not generally require a currency exchange license.
The Pennsylvania Department of Banking and Securities recently issued guidance under the Money Transmitter Act (“MTA”) for entities engaged in various forms of virtual currency business in the commonwealth. The MTA, like similar statutes in other states, requires entities engaged in a money transmitter business to obtain a license, maintain minimum net worth standards, pay a surety bond, be subject to periodic examinations, and take other actions to safeguard customer funds. As we previously reported, many of these statutes were not drafted with virtual currency businesses in mind, which has created various compliance challenges for the crypto community.
On January 7, 2019, the United States Patent and Trademark Office (USPTO) issued further guidance on patent subject matter eligibility, which should ease some of the burden placed on patent applicants seeking to obtain U.S. patents on certain technology, including blockchain technology.
A vigorous competition among the states to regulate digital assets has begun to develop. Some states, such as New York, have adopted regulations that take a very proscriptive approach to regulation in the interest of consumer protection. States like Wyoming, on the other hand, see an opportunity to stimulate the local economy and take a far more permissive view of digital assets. Two bills now under consideration by the Wyoming Legislature seek to further expand the digital asset economy in the state.
Not only do operators of virtual currency businesses face a growing body of overlapping federal regulations, but they must also contend with a patchwork of state laws as well. Compliance with state money transmitter laws, which typically provide for licensure and supervision of various non-bank financial services companies that handle cash on behalf of consumers, has become a hot-button issue for members of the crypto community. A few states, such as New York with its BitLicense regime, have developed very specific regulations for cryptocurrency businesses. Other states are silent on the issue and have not issued any specific regulations or interpretive guidance, leaving the industry to speculate as to the proper interpretation of the law in those states. Texas falls into a third category of states that have issued interpretive guidance (but not formal regulations) to apply their existing money transmitter statutes to operators of virtual currencies. Recent guidance from the Texas Department of Banking provides a thoughtful discussion of the virtual currency industry and interprets the Texas Money Services Act (the “Act”) for operators of virtual currency businesses doing business in the state.
The year 2018 was a busy one for the SEC in the digital asset space, with the agency cementing its role as the primary de facto regulator of crypto finance in the United States. The SEC’s enforcement division was operating at full speed, bringing a series of enforcement cases in the crypto space with an emphasis on fraud and scams involving digital assets. Notably, the SEC brought first of its kind cases involving digital securities against an unregistered broker-dealer, an unregistered investment company and an unregistered token exchange. The SEC also took action against an airdrop of securities, while at the same time providing general guidance on when the federal securities laws apply in the first place.
In a recently published Request for Information (“RFI”), the Commodity Futures Trading Commission (“CFTC”) seeks public comment on the underlying technology, opportunities, risks, mechanics, use cases, and markets related to Ether and the Ethereum Network. According to the CFTC, the public input from this request will help to advance its mission of ensuring the integrity of the derivatives markets as well as monitoring and reducing systemic risk by enhancing legal certainty in the markets. In particular, the RFI seeks to understand similarities and differences between Ether and Bitcoin.
In addition to seeking general comment, the RFI includes 25 specific questions, many of which include multiple parts. The RFI concludes by noting that the CFTC looks forward to continuing to engage proactively with the innovator community and market participants in order to help facilitate market-enhancing innovation and ensure market integrity. Public comments are due 60 days after the RFI is published in the Federal Register.
Congressmen Darren Soto (D-FL) and Ted Budd (R-NC) recently introduced two bipartisan bills to address virtual currency price manipulation and maintain the United States’ leadership in the cryptocurrency industry. In a joint statement citing the New York Attorney General’s recent report on crypto exchanges and other recent media reports, the members announced that:
“Virtual currencies and the underlying blockchain technology has a profound potential to be a driver of economic growth. That’s why we must ensure that the United States is at the forefront of protecting consumers and the financial well-being of virtual currency investors, while also promoting an environment of innovation to maximize the potential of these technological advances. This bill [sic] will provide data on how Congress can best mitigate these risks while propelling development that benefits our economy.” Continue Reading Congress Considers Bipartisan Bills to Prevent Virtual Currency Manipulation
The Commodity Futures Trading Commission (“CFTC”) recently published a detailed primer on smart contracts. The Primer discusses their functionality, use cases, regulatory environment and potential risks. It describes a “smart contract” as a set of coded computer functions that (1) may incorporate the elements of a binding contract (e.g., offer, acceptance, and consideration), or (2) may execute certain terms of a legal contract, or (3) allows self-executing computer code to take actions at specified times or based on reference to the occurrence or non-occurrence of an action or event (e.g., delivery of an asset, weather conditions, or change in a reference rate). The Primer also observes that a smart contract may not be a legally binding contract, which is a critical distinction for developers and entrepreneurs (and their counsel) in the digital economy.
The acting general counsel of the Federal Election Commission (“FEC”) recently published for public comment a draft advisory opinion under the Federal Election Campaign Act and related FEC regulations regarding mining cryptocurrencies for the benefit of political committees. According to draft Advisory Opinion 2018-13, a service provider has proposed to provide services to political committees to enable individuals to use the processing power of internet-enabled devices to mine cryptocurrencies, with the political committees receiving the mined cryptocurrency. A “political committee” is broadly defined under FEC regulations to include a wide variety of groups that have paid money or provided anything else of value to influence a federal election. Continue Reading Mining Cryptocurrency Under Federal Election Law