Regulation of Cryptocurrencies and Blockchain Technologies (eBook)

Dr. Rosario Girasa is Distinguished Professor of Law, Lubin School of Business, Pace University, Pleasantville, New York. He is the author of four prior published works that range from cyberlaw, law of finance, and shadow banking. He is also the author of approximately 130 articles published in diverse U.S. and international journals.

Dedication 6
Preface 7
Contents 9
Acronyms 11
Table of Cases 14
The Digital Transformation 16
Introduction 16
Definitions and Types of Non-fiat Currencies 18
Money 18
Back to Basics. What Is Money? 18
Reasons for the Rise of Virtual Currencies 20
Types of Currencies 22
Digital Currencies 24
Virtual Currencies 24
Cryptocurrencies 26
Key Actors in Digital Technology 26
Benefits and Risks of Digital Currencies 29
Benefits of Digital Currencies 29
Risks of Digital Currencies 30
U.S. Government Agencies’ Risks Advisories 31
Commodity Futures Trading Commission (CFTC) 31
Consumer Financial Protection Bureau (CFPB) 32
Government Services Administration (GSA) 33
Securities and Exchange Commission (SEC) 33
Immigration and Customs Enforcement (ICE) 34
Federal Reserve Board (FED) 34
European Union Agency for Network and Information Security (ENISA) 35
Nobel Laureates’ Concerns 35
Technology Underlying Cryptocurrencies and Types of Cryptocurrencies 44
Blockchain Technology 44
Types of Blockchain Technology 47
Uses of Blockchain Technology 48
Banks and Blockchain Technology 49
Types of Cryptocurrencies 50
Bitcoin 50
How Bitcoin Works 50
Mining 51
Ethereum 54
Comparison of Bitcoin and Ethereum 55
Other Variations of Cryptocurrencies 56
Litecoin 56
IOTA 56
Golem 57
Request Network 57
Dash 58
Ripple 59
Monero 59
Digital Tokens (Cryptotokens) 60
Types of Tokens 60
Forks 62
Altcoins 63
Meta Coins 63
Sidecoin 64
Sidechain 64
Legal Issues of Digital Technology 72
Jurisdiction 72
SEC v. Shavers 75
Gordon v. Dailey 76
Virtual Currencies as Money 77
Smart Contracts 78
Intellectual Property 80
Federal Regulation of Virtual Currencies 85
Introduction 85
U.S. Government Agencies Concerned with Virtual Currencies 87
Securities and Exchange Commission (SEC) 87
SEC First Enforcement Action: REcoin 88
The DAO Conundrum 90
SEC v. Munchee Inc. 92
SEC Chairman’s Commentary 94
SEC Warnings to Social Media 95
SEC and Crypto Co. 96
SEC Disapproval of NYSE Proposed Rule Change 97
Commodity Futures Trading Commission (CFTC) 97
Prohibited Activities 98
In re Coinflip, Inc. 98
CFTC v. Bitfinex 99
CFTC v. LedgerX, LLC and TeraExchange 100
CME, CBOE, and Cantor Exchanges 101
Authority Over Bitcoin Interpretation 103
CFTC Self-Certification Announcement 104
Consumer Protection Resource Page 106
Financial Crimes Enforcement Network (FinCEN) 107
FinCEN’s Guidance to Persons Administrating, Exchanging, or Using Virtual Currencies 107
FinCEN’s Ruling Concerning Virtual Currency Software Development January 30, 2014 109
FinCEN’s Ruling Concerning Convertible Virtual Currency Trading and Booking Platform 110
FinCEN’s Application of Money Transmission to Virtual Currency Mining 111
Requirements When Designated as a Money Services Business 113
U.S. v. Lord 113
Additional Agencies That May Regulate Virtual Currencies 115
Federal Reserve Board 115
Consumer Financial Protection Bureau (CFPB) 116
Office of Comptroller of the Currency (OCC) 116
Federal Trade Commission (FTC) 117
North American Securities Administrators Association (NASAA) 119
States’ Regulation of Virtual Currencies 129
States Requiring Licenses for Virtual Currency Businesses 130
Alabama 130
California 130
Connecticut 131
Georgia 131
Idaho 131
Nevada 132
New York 132
BitLicense 132
North Carolina 134
Texas 134
Vermont 135
Virginia 136
Washington 136
Wyoming 136
Miscellaneous States Giving Recognition to Virtual Currencies 137
Arizona 137
Delaware 137
Florida 138
Hawaii 138
Illinois 139
Massachusetts 139
New Jersey 140
West Virginia 141
States That Have Not to Date Enacted Legislation Concerning Virtual Currencies 141
Proposed Uniform Virtual Currency Codes 143
Uniform Regulation of Virtual-Currency Business Act 143
Conference of State Bank Supervisors: Model Framework (CSBS) 145
Criminal Prosecutions and Civil Litigation Concerning Virtual Currencies 152
Statutory Prohibitions 152
Criminal Prosecutions 156
U.S. v. Murgio 156
U.S. v. BTC-e 156
“Darknet” Prosecutions 157
U.S. v. Budovsky (Liberty Reserve) 157
U.S. v. Cazes (AlphaBay) 158
Immigration and Customs Enforcement (ICE) 159
ICC v. Hubbard (PDXBlack) 159
“Silk Road” Prosecutions 160
The Tor Project, Inc. 160
U.S. v. Ulbricht (Computer Hardware Bitcoins) 160
U.S. v. Benthall 162
U.S. v. Shrem and Faiella 162
U.S. v. Force and U.S. v. Bridges 163
Bitcoin as Money 164
Law Enforcement Prosecution Difficulties 165
SEC Civil Enforcement 166
SEC v. PlexCorps 166
SEC v. Voorhees 167
SEC v. Sand Hill Exchange 168
SEC v. Willner 168
SEC v. UBI Blockchain Internet, Ltd. 169
SEC v. Arisebank 169
CFTC Civil Enforcement 170
CFTC v. Gelfman 170
CFTC v. McDonnell 171
CFTC v. Dean 172
CFTC v. My Big Coin Pay, Inc. 173
Private Litigation 174
Ripple Labs and R3 174
Crowdfunding and the Taxation of Virtual Currencies 181
Crowdfunding and Virtual Currency 182
SEC Final Rule 183
Limitations on Investments 183
Requirements Relating to Issuers 184
Requirements Relating to Intermediaries (Brokers and Funding Portals) 185
Special Rules for Registered Funding Portals 188
Non-resident Funding Portal Requirements 189
Completion of Offerings and Cancellations 190
Miscellaneous Provisions Applicable to Funding Portals 190
Restriction on Resales and Disqualification Provisions 191
Crowdfunding Platforms 191
Rewards-Based Model 191
Equity-Based Model 192
Charity-Based Model 192
Debt Model (Peer-to-Peer) 192
Litigation Model 193
Product Pre-Order Model 193
Enforcement 193
Virtual Currency as Property for Tax Purposes 195
The Foreign Account Tax Compliance Act (FATCA) 199
Internal Revenue Service Enforcement of Regulations 200
Subpoenas as a Method to Investigate Tax Fraud Cases 200
U.S. v. Coinbase 201
Chainalsis and the IRS 202
Congressional Proposals to Tax Virtual Currency Transactions 203
International Regulation 210
International Organizations And Entities 210
The Bank for International Settlements 210
European Union 212
European Central Bank (ECB) 212
EU Directive on Money Laundering 213
European Securities and Markets Authority (ESMA) 214
European Union’s New Blockchain Initiative 217
European Court of Justice Ruling 217
Organisation for Economic Co-operation and Development (OECD) 218
United Nations (UN) 219
G20 219
IOSCO 219
Selected Countries Permitting and/or Regulating Virtual Currencies 220
Argentina 220
Australia 220
Austria 221
Belgium 221
Belarus 222
Brazil 222
Bulgaria 222
Canada 223
Columbia 224
Croatia 224
Cyprus 224
Czech Republic 225
Denmark 225
Estonia 225
Finland 226
France 226
Germany 227
Greece 227
Hong Kong SAR 227
Hungary 229
Iceland 229
India 229
Indonesia 230
Iran 230
Ireland 230
Israel 231
Italy 231
Japan 232
Jordan 232
Lebanon 232
Lithuania 233
Luxembourg 233
Malaysia 234
Mexico 234
Netherlands 234
New Zealand 235
Norway 235
Philippines 235
Poland 236
Portugal 236
Saudi Arabia 236
Serbia 237
Singapore 237
Slovenia 238
South Africa 238
South Korea 238
Spain 239
Sweden 239
Switzerland 240
Taiwan 240
Thailand 241
Turkey 241
United Arab Emirates 241
United Kingdom 242
Vietnam 243
Countries Banning Bitcoin and Other Virtual Currencies 243
Bangladesh 243
Bolivia 243
China 244
Ecuador 245
Kyrgyzstan 245
Morocco 245
Nepal 245
Alternative National Virtual Currency 246
Russia and Venezuela 246
Conclusion: The Future of Cryptocurrencies 258
Appendix 1: How Bitcoins Enter into Circulation and Are Used in Transactions 264
Appendix 2: SEC Commissioner Jay Clayton’s List of Questions Investors Should Ask Before Engaging in Cryptocurrencies 266
Index 268