Financial Services Law

Practice Areas > Financial Services Law

Financial Services Law for Blockchain Companies

Blockchain companies often function as financial services companies within the eyes of the law, especially companies that invest in or use cryptocurrencies like Bitcoin, Ether or Dash in their daily operations.  There are many layers of regulation that can apply to such companies, including:

Anti-Money Laundering laws.  The Bank Secrecy Act, as amended by the Patriot Act, imposes a host of regulations on “financial services companies” and others, such as Money Services Businesses.  These laws require such companies to have anti-money laundering policies and procedures in place, and conduct Know Your Customer due diligence on customers or clients.  Having the right policies in place is critical not only in preventing your business from being used as a conduit for criminal proceeds or terrorist financing, but in standing up to an audit.

Data Privacy Laws – Protecting customer data is critical, and there are a host of different legal regimes that govern how you must protect sensitive information about customers and clients.

Data Security Laws – As with data privacy, covered organizations must take into account and protect sensitive data from hackers and thieves.  

Tax law issues that arise in the Blockchain context are not entirely new.  There are different types of legal regimes that apply to traders, investors, miners and Blockchain companies.  The Tax Cuts and Jobs Act, for example, signed into law in December, 2017, for example, considered the applicability of the “like kind” rules to cryptocurrency trades.  The Act changed the existing tax law significantly in that it removed personal property from the definition of “like kind” property that can be exchanged on a tax-deferred basis under Section 1031 of the Internal Revenue Code.  While in our opinion like kind treatment was arguably never applicable to cryptocurrency-to-cryptocurrency trades, the Act law settled the question in the negative.  As a seasoned tax attorney I can explain the best approaches to take in your cryptocurrency tax reporting and analysis.

Contract law in the Blockchain context covers everything ranging from purchase and sale agreements for cryptocurrency mining equipment to traditional employment agreements, services agreements and other contracts typical to businesses large and small.

Securities law issues are among the most interesting and timely in the cryptocurrency field.  Since its Report of Investigation in the Dao matter, the SEC has been hard at work studying this field, especially as it pertains to Initial Coin Offerings (ICOs), which raised over $1.5 billion in investor funds in 2017.  One key issue has been whether ICO tokens are “securities” that must either be registered, or for which the issuer must qualify for an exemption from regulation.  We expect to see increased enforcement activity in 2018 around this issue, which hopefully will establish a framework through which both coin issuers and investors can have legal certainty.  This could be preferable to the present environment, in which issuers avoid the US market altogether rather than risk a securities violation, or strain to qualify their token as a “utility”’ token not qualifying as a “security” under federal or state law.

There are many banking and financial legal issues that arise in the cryptocurrency space, including the applicability of the Bank Secrecy Act (BSA) to exchanges, when a business is considered to be a “money transmitter”, and when Know Your Customer / Anti-Money Laundering (KYC / AML) rules will apply.

International legal issues incorporate elements of all of the above areas of law and more.  Clients often have questions as to the best jurisdiction in which to incorporate, which invokes traditional tax questions concerning citizenship, income sourcing and what opportunities are available to plan one’s tax affairs.

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