United States Regulation of Virtual Currencies

Bull Blockchain Law LLP | Andrew Bull and Tyler Harttraft | Nov 9, 2021

Which legislative and regulatory provisions govern virtual currencies in your jurisdiction?

 

In the United States, federal and state regulations and laws govern virtual currencies. While the US Congress has proposed federal legislation over the last two years, Congress has yet to pass any form of legislation directly addressing virtual currencies. Instead, governmental agencies – such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network (FinCEN) – provide guidance through reports and administrative decisions.

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Additionally, US federal courts continually create precedent by applying traditional authoritative statutes through judicial determinations regarding virtual currencies. Overall, a significant portion of the regulatory provisions governing virtual currencies in the United States are from:

  • guidance released by a governmental agency;
  • case-by-case administrative decisions by a governmental agency; and
  • federal and state court rulings.

For example, in 2013, FinCEN published guidance on the Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. The guidance interpreted implementing regulations previously promulgated by the Treasury that implement the Bank Act.

Since this release, thousands of cryptocurrency payment applications, Bitcoin ATMs, virtual currency transmitters and other companies transferring cryptocurrency have had to adhere to the rules under the Bank Secrecy Act and FinCEN’s guidance. In sum, much of the virtual currency industry in the United States is governed by administrative law. That said, many court rulings – typically in the criminal context – have set precedent regarding virtual currencies.

Separately, the SEC – one of the more active agencies in the virtual currency industry – has issued guidance as well as several administrative rulings that make up a general framework for companies operating in the industry. In July 2017 the SEC issued the first securities-based administrative decision against a virtual token. Called The DAO Report, the SEC targeted the Decentralized Autonomous Organization (DAO), an organisation offering its own tokens for purchase using the Ethereum Blockchain token, Ether. The tokens represented interests in the DAO platform and its organisers would invest in projects that received a majority vote from DAO token holders. Created by Slock.it, the platform was marketed as a “for-profit entity whose objective was to fund projects in exchange for a return on investment”.

Applying the Howey test, the SEC focused on the fact that Slock.it used “various promotional materials disseminated by test, the SEC focused on the fact that Slock.it used “various promotional materials disseminated by Slock.it and its cofounders informed investors that [t]he DAO was a for-profit entity whose objective was to fund 12 projects in exchange for a return on investment”. Additionally, the DAO token satisfied the expectation of profits prong because “the DAO’s investors relied on the managerial and entrepreneurial efforts of Slock.it and its co-founders, and the DAO’s Curators, to manage the DAO and put forth project proposals that could generate profits for the DAO’s investors”. Lastly, while DAO token holders had certain voting rights, this did not grant them “control over the enterprise”, and thus the fourth prong of the Howey test was also satisfied.

Furthermore, while Congress has not passed any federal legislation, several states have passed their own legislation addressing virtual currencies. In Wyoming, state legislation was passed in 2019 which classified:

 

 

digital assets within existing laws; specifying that digital assets are property within the Uniform Commercial Code; authorizing security interests in digital assets; establishing an opt-in framework for banks to provide custodial services for digital asset property as custodians; specifying standards and procedures for custodial services under this act; clarifying the jurisdiction of Wyoming courts relating to digital assets; authorizing a supervision fee; making an appropriation; authorizing positions; specifying applicability; authorizing the promulgation of rules; and providing for an effective date.

 

 

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Several other states have also passed legislation.

Overall, the regulatory environment addressing virtual currencies in the United States is mostly comprised of federal governmental agencies, state legislatures and federal courts.

 

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