The laws and regulations surrounding cryptocurrency are evolving and inherently uncertain, because the innovative technology and its impact do not fit neatly within any one existing categorical regulatory framework. Block chain technology primarily functions as a trust-less mechanism for transferring payments in such a way that solves the double-spending problem without the need for a centralized bank or clearing house. As a result, much of the existing legal guidance to date has focused on whether cryptocurrency should be legally defined as a currency or a commodity, and which tax, business, and financial regulations should apply as a result. While we think it would be dishonest to claim to be legal experts on bitcoin (because we think as of yet, there is no such thing), we believe the areas of law which will have the greatest near-term impact on cryptocurrencies include banking and finance, tax, and white-collar litigation.
Banking & Finance
In the U.S., most people engaged in cryptocurency businesses are concerned with complying with the Bank Secrecy Act and its regulations enforced by the Financial Crimes Enforcement Network (FinCEN). If an individual or entity falls under the legal categorizations of a money services business or a money transmitter, the implications for the crypto startup are expensive and burdensome. FinCEN’s most important guidance for crypto businesses to date was published on March 18, 2013. Additionally, 47 U.S. states have laws and regulations on businesses that meet the classification of “money transmitter.”
The Internal Revenue Service defines gross income as all income from whatever source derived. There are, of course, ways to exclude certain types of income from being taxable. However for purposes of categorization, the IRS issued guidance indicating that virtual currency ought to be treated as property, for U.S. taxation purposes. On March 25, 2014, the IRS published a list of FAQs in Notice 2014-21. This means reporting gains or losses on virtual currencies can become very complicated for people who regularly transact in bitcoin, however it underscores the reality that income from cryptocurrencies must be reported under current law.
Evaluating Risks & White Collar Defense
Violating the regulations promulgated under the Bank Secrecy Act, the IRS, or any number of other federal laws can carry heavy criminal penalties for the individuals and businesses who violate them. In advising cryptocurrency companies, part of any risk assessment must include an evaluation of how much a given business model may be susceptible to falling under practices that would subject them to criminal liability. As the industry grows, the need for white collar defense on such matters will also undoubtedly grow. The precedent set by any such litigation will in turn shape the way future laws and crypto businesses will evolve and adapt.