On October 9, 2019, the Internal Revenue Service (Service) released Revenue Ruling 2019-24. The revenue ruling considers whether taxpayers should realize gross income under two common scenarios involving cryptocurrency and includes a number of illustrative examples. The Service concluded that a so-called “hard fork” on a cryptocurrency blockchain does not create taxable income if a taxpayer does not subsequently receive new units of cryptocurrency, but taxable ordinary income is generated by “airdrops” following a hard fork that delivers new units of cryptocurrency to a taxpayer.
On September 19, 2019, the House of Representatives by voice vote approved H.R. 2613, a bipartisan bill entitled the “Advancing Innovation to Assist Law Enforcement Act.” The bill instructs the director of FinCEN to study and prepare a report to Congress on emerging technologies, including blockchain, in an effort to combat money laundering and other forms of illicit finance. Though somewhat modest in scope, the bill is among the first to be approved by one of the chambers of Congress on the topic of blockchain.
On September 24, 2019, the House Financial Services Committee held an oversight hearing entitled “Oversight of the Securities and Exchange Commission: Wall Street’s Cop on the Beat.” The format of the hearing was somewhat unusual in that the sole witnesses were the five sitting SEC commissioners. Though it is common for the SEC chair to testify before Congress, the other commissioners testify very infrequently, and the assembly of all five at a single hearing is extremely rare, with the last such joint testimony coming back in 2007. While the hearing covered a wide range of issues related to securities regulation and enforcement, it also touched on a number of topics of particular interest to crypto and blockchain businesses, including the application of the securities laws to digital assets.
On September 13, 2019, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced sanctions targeting three North Korean state-sponsored malicious cyber groups responsible for North Korea’s malicious cyber activity on critical infrastructure. As part of the sanctions, OFAC alleges that the entities conducted successful operations targeting more than 16 organizations across 11 countries, including the SWIFT messaging system, financial institutions and cryptocurrency exchanges.
Effective September 1, 2019, lawmakers in Texas passed legislation clarifying the ability of businesses organized under Texas law to incorporate blockchain technology into their entity recordkeeping and communications. In doing so, Texas joins the ranks of several other states that have similarly amended their corporate formation statutes.
The Federal Trade Commission reached a settlement with the promoters of chain-based cryptocurrency schemes—Thomas Dluca, Louis Gatto, Eric Pinkston and Scott Chandler—in which the defendants promised recruits big rewards in exchange for a small payment of bitcoin or Litecoin. In reality, the defendants’ schemes, promoted through YouTube videos, social media and in conference calls, depended on continual recruitment of new participants to generate revenue. Under the FTC settlement, each defendant is permanently banned from operating, participating in or assisting others in promoting or operating any multi-level marketing program, pyramid, Ponzi or chain referral scheme, and three also were required to make payments in redress.
As we first reported in April, the New York Attorney General has been locked in a complicated dispute with a virtual currency exchange operator over the authority of the Attorney General to investigate its activities. In its defense in court proceedings, the crypto exchange asserted that the Attorney General lacked both personal jurisdiction and subject matter jurisdiction over it because of its efforts to avoid doing business in New York state. In a ruling ultimately siding with the Attorney General, a New York trial court on August 19 permitted the regulatory investigation to continue. The judge’s opinion underscores the difficulty faced by crypto entrepreneurs seeking to avoid contacts with U.S. customers in order to avoid the jurisdiction of U.S. courts and regulators.
The United Kingdom (UK) tax authority, Her Majesty’s Revenue & Customs (HMRC), has taken the first steps toward recovering tax that it believes may be outstanding from UK resident cryptocurrency investors: it has been reported that several crypto exchanges have received demands from HMRC relating to customer details and their transactional activity.
The Senate Committee on Banking, Housing, and Urban Affairs and the House of Representatives’ Financial Services Committee each held recent hearings to discuss cryptocurrency and, in particular, the proposed creation of a new digital currency by a prominent US technology company. Both hearings primarily focused on what economic and security concerns a new, privately issued digital currency may raise, how best to regulate the new currency and what role the US and Congress could play in advancing or hindering the growth of cryptocurrencies and blockchain technology more generally.
As reported in the July 26, 2019 Hunton Andrews Kurth LLP client alert, first France and now the United Kingdom have joined the growing number of European countries that have, in recent months, announced they are considering a new form of tax specifically directed at “digital” businesses. The new form of digital services tax is based on the premise that traditional methods of profit allocation between different countries are no longer fit for their purpose and that, in the context of “digital businesses”, a fresh approach needs to be adopted that takes into account the value added by the business’s user base.
Read the full alert here.