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US Federal Government: Confusing Regulation For Crypto, Full Clearance For Blockchain

With more influential voices in academia and politics speaking out against burdensome federal regulations, is change imminent?

Individual US states seem to be in competition for the title of the most crypto-friendly in the Union – Ohio’s recent announcement of imminent crypto tax payments being the latest example. Meanwhile, federal authorities remain in disarray with regard to how to define, let alone consistently regulate digital assets.

It is not just stakeholders and crypto buffs who bemoan the disorderly state of federal policies: their usual talking points have been recently validated by academics. In an article forthcoming in a Journal of Financial Transformation, University of Arkansas Law School professor Carol Goforth weighed in with an opinion that essentially summarizes what experts have been airing all along. Goforth notes that there are at least four distinct federal regulators that oversee various aspects of digital assets’ issuance and, each with a different interpretation of their nature.

While the Commodity Futures Trading Commission (CFTC) treats crypto as commodities, the Securities and Exchange Commission (SEC) insists they are securities, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) applies currency rules, and the Internal Revenue Service treats digital money as property.

Skeptical of the possibility that these regulatory powers get consolidated anytime soon, Prof. Goforth calls for increased coordination between the agencies in an effort to introduce a more nuanced, rather than ‘monolithic,’ approach to various crypto assets. In other words, her proposed remedy is to treat such assets on a case-by-case basis, contingent upon their functionality and their users’ motivations. But have there been any signs of such change of heart in the US regulators and policymakers as of late?

At least in one instance, yes. On December 11, CFTC issued a public request for input, seeking in-depth comments on multiple aspects of how Ether and the Ethereum Network operate. The document, which will generate feedback to fuel the work of the Commission’s LabCFTC initiative, includes a list of 25 items pertinent to Ethereum’s purpose, functionality, scalability, security, and even the details of the system’s imminent shift to proof-of-stake consensus mechanism.

While the news got the community agitated, it’s not immediately clear what will come out of the regulator’s renewed interest in Ethereum’s fundamentals. Some observers, like MIT Technology Review’s Mike Orcutt, suggested that the development might endanger the prospects of the long-anticipated ETH futures.

What appears to be the CFTC’s effort to rethink the status of a single asset might not be indicative of broader concerted push towards “a more nuanced approach.” Other US regulators haven’t made similar moves, while some produced signals are indicating that they are still very much in line with the good old catch-all approach. For instance, consonant with their usual trope, recent remarks by a Department of the Treasury official stressed the need for crypto industry players to strengthen anti-money laundering (AML) and Combating the Financing of Terrorism (CFT) infrastructure.

US Congress

There is always hope that legislators on the Capitol Hill will lead the charge towards a better regulatory framework. Indeed, in the last few weeks, the blockchain-minded members of Congress have been on the move, making waves in the media and announcing proposed bills.

On Dec. 6, US Representatives Darren Soto and Ted Budd introduced two bills aimed at preventing crypto price manipulation and optimizing regulatory framework: The Virtual Currency Consumer Protection Act of 2018 and the U.S. Virtual Currency Market and Regulatory Competitiveness Act of 2018, respectively.

Both include recommendations to the CFTC that prescribe a set of regulatory changes. The first bill outlines possible scenarios of price manipulation in the crypto markets and advances remedies, whereas the second one calls for a comparative study of regulatory arrangements in other national contexts, with the view to improve the current domestic ‘burdensome regulations that may inhibit innovation.’

The last few weeks have also seen the rise of a new star of crypto legislation, at least in terms of generated publicity. Even though not a formal member of the Congressional Blockchain Caucus, Representative Warren Davidson of Ohio came into the spotlight at least twice in the month of December so far. First, speaking at the Blockland Solutions conference in Cleveland, Davidson announced that he was planning to introduce a bipartisan bill that would create a new asset class for tokens, thus enabling the feds to regulate initial coin offerings (ICOs) more efficiently.

A week later, during an interview to NPR, Davidson said that the border wall between the US and Mexico could be crowdfunded, suggesting that one of the mechanisms for that could be blockchain and issuance of ‘wall coins.’

The executive

While financial regulators and lawmakers are taking time to figure out ways to better handle the realm of digital assets, many federal agencies that are not concerned with monetary matters are exploring the uses of blockchain technology to aid their day-to-day operations.

With increasing interest to supply chain logistics as one of the most widely discussed non-financial blockchain applications, the news emerged that the feds are eyeing DLT-powered provenance tracing tools to increase food safety.

Amid the outbreak of E. coli associated with romaine lettuce originating from a California farm that took a while to trace and had the authorities introduce a blanket warning, the US Food and Drug Administration (FDA) took steps towards improving its tracking tools. The agency hired Frank Yiannas, formerly Walmart’s food safety boss, as its foods and veterinary medicine deputy commissioner. Just a few months ago Yiannas oversaw first trials of Walmart’s blockchain-powered tracking system, and he is now expected to introduce a similar solution with the FDA.

The United States Department of Homeland Security (DHS) took an interest in two blockchain applications relevant to the scope of its activities. One is related to forensic analysis of transactions: apparently concerned about the potential of ‘privacy coins’ like Monero and Zcash to help criminals escape the same level of scrutiny that is already available for bitcoin transactions, the DHS kicked off pre-solicitation process for parties potentially interested in supplying solutions capable of dealing with such “newer blockchain implementations.”

Another matter of the agency’s interest is germane to the licensing and certification functions performed by its three subsidiaries: the US Customs and Border Protection (CBP), US Citizenship and Immigration Services (USCIS), and Transportation Security Administration (TSA). In an effort to improve the documentation flow, the DHS calls for startups to offer blockchain-powered solutions that will help combat fraud, counterfeiting, and forgery of digital documents.

In the defense field, the US Air Force Institute of Technology (AFIT) unveiled an app designed to train members of the armed forces to develop and run blockchain-based supply-chain solutions. Recognizing that such supply chains will most likely be prevalent in the future military logistics, the Air Force partnered with several private contractors to build a system preparing personnel for their new functionality. Among the decisions that they will learn to make is what incentive structure best suits a given task, or whether a system should be permissionless or permissioned.

Meanwhile, the research arm of the US military, the Defense Advanced Research Projects Agency (DARPA), is looking to explore potential uses of permissionless distributed ledgers. In preparation for a workshop scheduled for February 2019, the agency solicits information on a range of blockchain-related topics, including security and centrality of distributed consensus protocols.

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Cryptos See Widespread Green, But Total Market Cap Remains Close to 3-Month Low

August 12: Crypto markets are seeing solid gains today in a fresh attempt at recovery following recent losses.

Bitcoin (BTC) dominance –– or the percentage of total crypto market cap that is Bitcoin’s –– is continuing to see a 2018 record-high percentage, at close to 50.9 percent. After the leading coin decoupled from the wider market yesterday –– holding its gains while other cryptos floundered –– healthy growth has today been distributed across virtually all of the major cryptocurrencies, as Coin360 data shows.

Market visualization from Coin360

Market visualization from Coin360

Bitcoin (BTC) is trading at around $6,310 at press time, up a strong 3.45 percent on the day, according to Cointelegraph’s Bitcoin price index. The top coin has seen a 24-hour high of $6,455, but has failed to break through $6,500 resistance, trading sideways within the $6,300-400 range for most of today. Having dipped briefly down to a low around $6,209, Bitcoin has recovered in the couple of hours before press time to hold just above the $6,300 price point. Weekly losses remain at about 10 percent, while on the month Bitcoin is up around 1.42  percent.

Bitcoin’s 24-hour price chart

Bitcoin’s 24-hour price chart. Source: Cointelegraph Bitcoin Price Index

Ethereum (ETH) is currently trading around $322, up  a solid 5.31 percent on the day. After plummeting as low as $306 in evening trading hours yesterday, the altcoin saw a strong push upwards to test the $330 mark. These fleeting attempts to break to a higher price point failed to hold, and the altcoin has since retraced towards the $320 mark. Ethereum’s losses on its weekly chart are at a little over 20 percent, with monthly losses heftier still, at almost 25 percent.

Ethereum’s 24-hour price chart

Ethereum’s 24-hour price chart. Source: Cointelegraph Ethereum Price Index

On CoinMarketCap’s listings, all of the top 25 crypto assets by market cap are seeing a healthy flush of green, with gains on the day pushing as high as around 5-6 percent.

Among the top ten coins by market cap, Stellar (XLM) and  Litecoin (LTC) are up the most, both seeing almost 6 percent growth on the day.

Although a Facebook spokesperson yesterday denied  rumors that the social media giant had been considering a potential partnership to build a Facebook variant of a Stellar blockchain, the asset is nonetheless riding positive momentum, which has been particularly strong on the XLM/USD chart.

Stellar’s 24-hour price chart

Stellar’s 24-hour price chart. Source: CoinMarketCap

Another leading performer among the top ten coins is anonymity-oriented altcoin Monero (XMR), in 10th place by market cap, up almost 4 percent and valued around $93.66 at press time.

Among the top twenty coins by market cap, IOTA (MIOTA), number 11th, is up 4.44 percent and is trading at $0.54 at press time. As seen across the crypto markets, the altcoin is still down on its weekly chart, but has seen a burst of upwards momentum as of evening trading hours August 11.

IOTA’s 24-hour price chart

IOTA’s 24-hour price chart. Source: CoinMarketCap

Still within the context of the top twenty ranked coins, NEO and Tezos (XTZ) are seeing stronger-than-average growth, both up around 4 percent.

As noted, for the second day running, Bitcoin’s share of the total market cap is above 50 percent and is pushing 51 percent at press time. BTC dominance has been consistently on the rise as of mid-May, while the second-ranked crypto, Ethereum, has seen a downtrend on the month in terms of its total market cap share, down to around 15 percent today.

3-month chart of cryptocurrencies by dominance

3-month chart of cryptocurrencies by dominance. Source CoinMarketcap

Total market capitalization of all cryptocurrencies is around $214.7 billion at press time, close to its lowest levels on the three-month chart, only hitting lower points in the past two days, and up slightly from yesterday’s low around $207 billion. As compared with $410.6 billion in mid-May, the market is coming bearishly close to a 50 percent decline.

3-month chart of the total market capitalization

3-month chart of the total market capitalization of all cryptocurrencies from CoinMarketCap

Alongside retail and institutional HODLers, crypto miners are feeling the pinch of the protracted bear market. Analysts have this week forecast that graphic processing units (GPU) manufacturing giant Nvidia will see a decline in its revenue from sales of crypto mining hardware, which had accounted for over 9 percent of overall revenue in its 2018 Q1 report.

Meanwhile, the director of the U.S. Financial Crimes Enforcement Network (FinCEN) this week revealed that the agency has seen a surge in filings of crypto-related Suspicious Activity Reports (SARs), which now reportedly exceed 1,500 in number per month.

This rising figure was presented as a positive indicator, with the director emphasizing that compliance with regulatory obligations is increasingly important given that “harm can be done with devastatingly increasing speed, breadth, and obscurity in the digital world.”

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FinCEN Says It Now Receives 1,500 Crypto Complaints a Month

The Financial Crimes Enforcement Network (FinCEN) receives more than 1,500 reports every month from financial institutions regarding cryptocurrencies, a top official said Thursday.

FinCEN director Kenneth Blanco, speaking at the Chicago-Kent Block (Legal) Tech Conference, discussed the role his agency takes in regulating cryptocurrencies. He noted that while cryptocurrencies can prove beneficial for certain use cases, they also create opportunities for bad actors such as financial criminals, terrorists and rogue states.

Blanco emphasized the importance of Suspicious Activity Report (SAR) filings – a type of document that financial institutions must file following a suspected incident of money laundering or fraud. FinCEN receives more than 1,500 SARs every month regarding suspicious activities involving cryptocurrency transactions, he said.

These reports come from both traditional financial institutions and cryptocurrency exchanges, he said.

He explained:

“It was filings by both banks and other virtual currency exchanges that provided critical leads for law enforcement. This information included beneficial ownership information, additional activity attributed to the exchange of which we were previously unaware, jurisdictional information, and additional financial institutions we could contact for new leads. All of this was obtained through SARs and the supporting documents filed by financial institutions.”

Blanco also discussed FinCEN’s role in the crypto space more broadly, explaining that the regulator has worked for years in the cryptocurrency field, with a focus on “exchanges, administrators and other persons involved in money transmission” related to cryptocurrencies.

He justified the agency’s legal standing in the field by noting that cryptocurrencies acting as a substitute for fiat currencies are covered by a 2011 rule FinCEN issued regarding money service businesses that provide money transmission services.

In addition, Blanco noted that the agency has been working closely with other regulators, including the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC) on “policy development and regulatory approaches” related to cryptocurrency.

Blanco referenced initial coin offerings (ICOs) during his remarks, noting that “this rapidly growing area has gained a lot of recent public attention.” He specifically cited fraud around the fundraising method as an area of focus.

He continued:

“While ICO arrangements vary and, depending on their structure, may be subject to different authorities, one fact remains absolute: FinCEN, and our partners at the SEC and CFTC, expect businesses involved in ICOs to meet all of their [anti-money laundering/combating the financing of terrorism] obligations. We remain committed to taking appropriate action when these obligations are not prioritized, and the U.S. financial system is put at risk.”

Kenneth Blanco image via the U.S. Government / Flickr

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Poloniex Is Officially in Trouble After Ignoring Hoards of Complaining Customers

On July 25, the Department of Justice (DoJ) showed its interest in Poloniex — a Delaware-based cryptocurrency exchange platform — in a rather unexpected fashion: Chief Special Investigator of the Investor Protection Unit (IPU) Craig Weldon emailed a number of Poloniex users, asking them to respond if they have any difficulties with their account.

The request wasn’t unjustified as, over the past few months, the exchange’s social media and support center accounts have been besieged by users who have been locked out of their accounts. Now, the DoJ has reached out to Delaware-based investors for further action.

Brief introduction to Poloniex

Poloniex was founded in 2014 by Tristan D’Agosta, an entrepreneur of whom scarce information can be found about online. Currently, the exchange is headquartered in Wilmington, Delaware. According to the Coinmarketcap database, Poloniex is currently the 30th largest crypto exchange in the world, with a daily volume trade of around $54 million and around 98 tokens available for trade. As of February 2018, the exchange ranked considerably higher: By the end of that month, it was the 14th largest crypto exchange globally, trading a total of almost $140 million on a daily basis. Poloniex doesn’t work with fiat currencies and allows users to perform margin trading — i.e., trading with borrowed funds instead of your own.

In February 2018, Poloniex was acquired by Dublin-based payments technology company Circle for $400 million. Notably, Circle is backed by Goldman Sachs, a Wall Street powerhouse which invested $50 million in it back in 2015, among other venture capital groups.

Announcing the deal, Circle co-founders Sean Neville and Jeremy Allaire emphasized that they plan on growing the Poloniex platform into more than a crypto-only exchange: 

“We envision a robust, multi-sided distributed marketplace that can host tokens which represent everything of value: physical goods, fundraising and equity, real estate, creative productions such as works of art, music and literature, service leases and time-based rentals, credit, futures, and more.”

“Firstly and immediately, you can expect Circle to address customer support and scale risk, compliance, and technical operations to bolster the existing product and platform,” they also wrote.

In March, Allaire revealed Poloniex’s plans for expansion to the Asian market: the company is going to hire up to 100 people in the region.

Poloniex’s KYC woes

So far, the exchange has been signaling that it aims to achieve full regulatory compliance with U.S. authorities. In an open letter that D’Agosta sent to exchange users in May 2015, he revealed that Poloniex is a Money Services Business (MSB) and, therefore, is “bound by the rules and regulations defined by the Financial Crimes Enforcement Network (FinCEN).” Consequently, the exchange introduced the first signs of Know Your Customer (KYC)/Anti-Money Laundering (AML) procedures: Since May 2015, Poloniex users were required to state their name and country for any withdrawals. To withdraw tokens equalling more than $2,000 within a 24-hour period, they had to specify their address and phone number, while withdrawing more than a $7,000 equivalent within 24 hours required ID verification.

In December 2017, Poloniex announced that the KYC/AML procedures were going to become more rigorous, urging legacy account holders to undergo a verification processes before a deadline in order to “avoid any potential interruptions in your ability to trade on the platform.” A specific deadline was not outlined, however, stating that it was coming during “Q1 2018.” There have been no public announcements regarding the deadline ever since, while — in late May — a number of customers reportedly began receiving emails in which Poloniex asked them to verify their account within 14 days — after which the unverified accounts were frozen, leaving some customers puzzled. Complaints were voiced even by Poloniex users who obliged to complete mandatory verification procedures: Some account holders claimed that, even after confirming their identity and receiving notifications assuring that they may now continue trading, their accounts remain blocked.

The Poloniex terms of use that is listed on their website confirm that they are registered as a MSB with FinCEN and specifies the registration number. Moreover, the exchange warns about data confidentiality: “Poloniex may be required to file details of Account activity to FinCEN from time to time. Poloniex may also be required to provide information to government agencies as required by law to other state or federal agencies.”

More customer complaints and DoJ intervention

Unofficial Poloniex reddit channels are swamped with various threads of alleged-user complaints over their accounts being frozen — even after submitting the required documents. A significant amount of such account holders claim that the Poloniex support has been ignoring their complaints for weeks. For instance, recently, the user bethonpl announced a one year anniversary of his support ticket. Similar accusations are frequently featured in replies to Poloniex’s Twitter account.

On July 9, a Reddit user PoloniexSuit shared a petition against Poloniex — allegedly after contacting his attorney — urging affected customers to sign it, although only a modest 12 people have done so, as of press time. Long prior to that, in summer 2017, another affected Poloniex user reportedly contacted FinCen, although the outcome of that report is unknown. Earlier this year, users would also take to the official Poloniex Subreddit to voice their concerns regarding long transaction and withdrawal times: One user reported a withdrawal ticket that’s been open since early January, while another user claimed that they have been waiting for a withdrawal for more than seven weeks — and both have remained unanswered by Poloniex’s Subreddit admins.

On July 25, Cointelegraph obtained details of an email that suggests that Poloniex has attracted the Investor Protection Unit (IPU) of the Delaware Department of Justice’s (DOJ) attention. As shown in an screenshot of said letter, Chief Special Investigator of the Investor Protection Unit (IPU) Craig Weldon wrote to a broad list of individuals (the email CCs around 100 people), asking them to contact him should they, in case, experience any difficulties with their Poloniex account.

When contacted by Cointelegraph, the Public Information Officer for the Delaware Department of Justice Carl Kanefsky confirmed that the DoJ has reached out to “Delaware-based” investors, stating that the agency learned of them “based on [their] research.” The DoJ confirmed that “a number of cryptocurrency investors” contacted their agency, albeit without mentioning any particular platform — the agency cited “open investigation” as the reason for not disclosing details:

“While we cannot comment on the status of open investigations, we can confirm that a number of cryptocurrency investors have complained to our office about frozen accounts and poor communications with cryptocurrency exchanges that have hindered the investors’ ability to make withdrawals of cryptocurrency in a timely fashion, if at all. This can be problematic for investors who are seeking to withdraw their investments and are unable to do so within a timeframe that permits them to get the price they seek.”

The Public Information Officer of the Delaware DoJ also urged local investors to continue contacting their agency with any complaints about their investments.

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US Lawmakers Want FinCEN Mandate to Explicitly Cover Crypto

A new Congressional bill would update the mandate of the Financial Crimes Enforcement Network (FinCEN) to include a specific focus on cryptocurrencies.

The FinCEN Improvement Act (H.R. 6411), filed jointly by U.S. Congressmen Ed Perlmutter (D-CO) and Steve Pearce (R-NM) on July 18, directs FinCEN to look into how cryptocurrencies might be used in terrorism or other illegal activities, in addition to working with tribal law enforcement agencies and other terror financing schemes.

Specifically, it includes language reflecting “matters involving emerging technologies or value that substitutes for currency, and similar efforts.”

It states:

“Although the use and trading of virtual currencies are legal practices, some terrorists and criminals, including international criminal organizations, seek to exploit vulnerabilities in the global financial system and are increasingly using emerging payment methods such as virtual currencies to move illicit funds.”

FinCEN, which operates under the U.S. Treasury Department, is set to “safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities,” as stated on its website.

Pearce said in a news release that the new directives would “ensure” FinCEN’s ability to “continue their vitally important mission in the dynamic world environment.”

The proposed bill comes years after FinCEN first published guidance for money transmitters working with cryptocurrencies. Firms in the U.S. that undertake such activities are required to register with FinCEN, and more recently, the agency said that exchanges which handle tokens sold during initial coin offerings (ICOs) must also comply with its regulations.

“This is an important step in modernizing FinCEN and ensuring our law enforcement and intelligence communities can detect and prevent criminals and terrorist networks from using virtual currencies to move illicit funds or carry out cyber warfare,” Perlmutter said last week.

Image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.

This article is intended as a news item to inform our readers of various events and developments that affect, or that might in the future affect, the value of the cryptocurrency described above. The information contained herein is not intended to provide, and it does not provide, sufficient information to form the basis for an investment decision, and you should not rely on this information for that purpose. The information presented herein is accurate only as of its date, and it was not prepared by a research analyst or other investment professional. You should seek additional information regarding the merits and risks of investing in any cryptocurrency before deciding to purchase or sell any such instruments.

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At DC Hearing, Coinbase Calls Out Federal Regulators For ‘Harming Innovation’

The Subcommittee on Capital Markets, Securities, and Investment considered the major questions associated with cryptocurrency and Initial Coin Offerings (ICO) in a recent hearing entitled “Examining Cryptocurrencies and ICO Markets” that took place in Washington DC on March 14.

At the hearing, the Subcommittee discussed ICOs and cryptocurrency, the potential benefits for the economy, provision of legal support to its investors, and the development of a regulatory approach applied by the appropriate US regulatory bodies.

In his testimony, Mike Lempres, Chief Legal and Risk Officer at Coinbase wallet and cryptocurrency exchange, stated that the power of the digital currency’s technology can transform “capital formation, innovation and economy,” saying that its “tremendous potential” can be only achieved through “responsible regulation.”

However, at the current stage, the US regulatory system “is harming healthy innovation” due to a lack of understanding of what should be allowed and what should be not, and how digital assets should be considered; either as securities, commodities, property, or money.

“There is so much uncertainty about the definition of a security and the scope of regulatory control that the market is being chilled. This is bad for everyone because the technology won’t stop — it will simply move overseas and we will miss out on the opportunity to cultivate the benefits in the U.S.”

For Lempres, the goal is to ensure that potential benefits from new technology are not harmed by uncertainty resulting from “regulatory or legal missteps.” Lempres provided a short review of the main US regulatory bodies such as the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Internal Revenue Service (IRS), the Financial Crimes Enforcement Network (FinCEN), and Federal Trade Commission (FTC)

According to Lempres, the SEC, which is in charge of securities transactions, considers crypto as securities, while the CFTC who fully controls commodity derivatives transactions, claims that tokens are commodities. FinCEN has full authority for Know Your Customer (KYC) and Anti-Money Laundering (AML) matters, and considers tokens to be money. Meanwhile, according to the IRS, the digital coins should be considered as property for tax treatment. According to Lempres, this constitutes an extreme “lack of coordination.”

Answering a question from the Subcommittee chairman Rep. Bill Huizenga, Lempres stated that Coinbase cannot start supporting ICOs until the necessary regulations are adopted.

“We do not support any [ICO] at the current time because we are not sure what the regulatory [treatment] is… We are waiting for the dust to settle between the CFTC and SEC before we electively engage on supporting ICOs.”

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FinCEN: Money Transmitter Rules Apply to ICO Developers, Exchanges

The Financial Crimes Enforcement Network (FinCEN) published a letter Tuesday that indicates the U.S. agency will apply its regulations to those who conduct initial coin offerings (ICOs).

In the letter, which was sent to U.S. Senator Ron Wyden last month, FinCEN’s assistant secretary for legislative affairs, Drew Maloney, explained that both developers and exchanges involved in the sale of an ICO-derived token would be liable to register as a money transmitter and comply with the relevant statutes around anti-money laundering and know-your-customer (KYC) rules.

“…a developer that sells convertible virtual currency, including in the form of ICO coins or tokens, in exchange for another type of value that substitutes for currency is a money transmitter and must comply with AML/CFT requirements that apply to this type of [money services business]. An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency, fiat currency, or other value that subsitutes for currency, would typically also be a money transmitter.”

The distinction is a notable one given the recent regulatory developments around the blockchain funding model. Washington, D.C.-based Coin Center, which published the letter after it became available today, explained in a blog post that, under this interpretation of the law, a group that conducts an ICO that involves U.S. residents but hadn’t registered with FinCEN as a money transmitter and adhere to KYC regulations may be charged with a felony under federal law.

Coin Center later told CoinDesk in an email: “We do not agree with their assessment and believe such a decision should be subject to the open rulemaking process.”

That said, the FinCEN letter goes on to note that “ICO arrangements vary” and that there are jurisdictional differences depending on the make-up of an ICO and its associated token. Token sales structured as a sale of securities or derivatives would fall under U.S. Securities and Exchange Commission (SEC) or Commodity Futures Trading Commission (CFTC) regulations, respectively.

FinCEN indicated that it such regulatory obligations as they relate to ICO participants would depend on the relevant circumstances as well.

“The application of AML/CFT obligations to participants in ICOs will depend on the nature of the financial activity involved in any particular ICO. This is the matter of the facts and circumstances of each case.”

According to Maloney, FinCEN is working with other U.S. agencies on this issue, explaining:

“FinCEN is working closely with the [SEC] and the [CFTC] to clarify and enforce the AML/CFT obligations of businesses engaged in ICOs activities that implicate the regulatory authorities of these agencies.”

Warning sign image via Shutterstock

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Treasury Official: Department Working With IRS to Police Crypto Exchanges

The U.S. Department of Treasury is ramping up its enforcement against the potential for money laundering and criminal financing through cryptocurrencies.

Improving “anti-money laundering/combating the financing of terrorism (AML/CFT)” rules is one part of regulating the “evolving threat” of cryptocurrencies, according to Under Secretary for Terrorism and Financial Intelligence Sigal Mandelker, who testified before the Senate Banking, Housing and Urban Affairs Committee on Wednesday.

Financial institutions need to implement new rules to ensure they are complying with new regulations, which will include a new “due diligence” rule which takes effect in May 2018, she said.

Cryptocurrency exchanges fall under this umbrella, Mandelker said, outlining how the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) would work with exchanges to ensure criminal parties were not using cryptocurrencies to transfer funds.

She explained:

“To ensure that virtual currency providers and exchangers know the rules and follow them, FinCEN has prioritized engagement with – and examination of – these entities, focusing both on the approximately 100 that have registered with FinCEN as money transmitters as required, as well as those that have not.”

The agency has partnered with the Internal Revenue Service to recommend actions some of these exchanges can take to better comply with existing regulations, she said. Mandelker also noted that the U.S. is cooperating with other countries to regulate cryptocurrencies in general.

The European Union is in the process of developing more stringent regulations for financial institutions to prevent terrorist well, she said.

FinCEN has already begun taking enforcement actions as well, she said, citing the U.S.’s shutdown and fine on the former BTC-e exchange, as well as the fine on its alleged operator Alexander Vinnik.

Legal paraphernalia image via Shutterstock

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ICOs Flow Continues As Regulations Fall Around the World: Expert Blog

Expert Blog is Cointelegraph’s new series of articles by crypto industry leaders. It covers everything from Blockchain technology and cryptocurrencies to ICO regulation and investment analysis. If you want to become our guest author and get published on Cointelegraph, please send us an email at

Initial Coin Offering (ICO) is a new way of fundraising enabled by digital currencies and Blockchain technology where participants invest fiat currencies and receive ‘‘tokens,’’ digital assets in return.

ICOs are widely seen as an innovative fintech alternative to traditional initial public offering of stock (IPO) as a means for start-up businesses to raise capital. A person, project or company in need of capital creates a new kind of digital coin and sells a tranche of them for fiat currencies on a digital trading platform or exchange.

Prior to an ICO, a business would typically release a “whitepaper” which provides investors with an explanation of their proposed project, the rights behind the virtual tokens they would be issuing, the risks of the investment and details of the ICO itself.

The rights behind the digital tokens can vary considerably, and many tokens are not intended to grant the investor an ownership stake in the business, unlike stock.

Currently, there isn’t a standardized way of preparing a whitepaper in comparison to regulated prospectuses for IPOs.

ICO’s token valuation

With the exception of hedge fund managers who indiscriminately assess ICO tokens for their long and short selling prospects, the underlying motivation of an ICO investor is the expectation that the token’s value would uptick after the ICO, and the investor would sell it to make a tidy profit.

A token’s value is determined based on (1) the demand for the token which may be denominated in a highly volatile virtual currency (2) the underlying company’s financial performance. Currently, there isn’t a standardized way of determining a token’s value. ICO investors trade these tokens at a profit or loss.

ICO’s technology

The Ethereum (ETH) ICO platform is public and open-source and features smart contract functionality. It is still in its early stages of development, and its application is of experimental nature.

Vitalik Buterin, co-founder of ETH, cautioned that there are flaws, technical intricacies of ETH Blockchain networks that support ICOs arising from the centralization problem, which could take up to two to five years to solve. Buterin expects 90 percent of ETH-based ICOs to fail.

Despite information technology (IT) network security measures, software applications, computer hardware, the Internet, Blockchain platforms supporting the ICOs, are also vulnerable to computer viruses, physical or electronic break-ins, attacks or other disruptions of a similar nature (Hacks).

The revelation of the technical vulnerabilities of the ETH-based platform and the risk of Hacks could add operational, technological risks for ICOs.

ICO’s Fraud

This year has been the year of ICOs for countries like Russia, China and Japan. To date ICOs raised $3 bln, averaging 20 new virtual coin offerings a month, that produced an average investment return of 1,320 percent, 293 times S&P 500 return of 4.5 percent during the third quarter of 2017.

There have been many new uses for ICOs, including municipality-funding applications in Japan. But Joseph Lubin, co-founder of ETH,  cautioned that some of the ICOs have been plain old scams.

In the US, the Department of Justice (DOJ) and the Federal Bureau of Investigations (FBI) began clamping down on fraudulent virtual currency transactions after the FBI issued a first of its kind report analyzing the likelihood and consequences of illegal activities involving virtual currencies in April of 2012. Less than a year later, in March of 2013 the Financial Crimes Enforcement Network (FinCEN) enacted registration requirements for money service businesses (MSB) dealing in virtual currencies before the first ICO launched in July of the same year.

ICO’s regulation

With the known ICO related risks in mind, global regulators, legislators and central bankers have been working on devising effective regulatory measures to mitigate concerns over security, consumer protection and financial crime.

The first country to regulate ICOs was the US Securities Exchange Commission (SEC), which on July 25, 2017, issued a landmark opinion concerning digital assets stating that ICOs can sometimes be considered securities — and as such are subject to strict laws and regulations.

Putting the new SEC law to use: (1) the SEC brought charges against two companies and their operator for defrauding investors in a pair of fraudulent ICOs and (2) ICO token holders served Tezos with two potentially groundbreaking class action lawsuits alleging that its $232 mln ICO violated US securities laws and misled investors.

Since SEC’s ICO pronouncement, twenty-eight countries have proposed or enacted ICO legislation in an uncoordinated fashion. Some countries mimicked the SEC in regulating ICOs as a security. Other countries like China abruptly banned ICOs and shut down all virtual currency exchanges.

Other US laws applicable to ICOs in addition to SEC laws

With the enactment of ICO regulations, institutional investors have become increasingly interested in investing in them. Here are other US laws they should take into consideration in addition to the SEC laws when evaluating an ICO for investment.

  • CFTC on ICO Tokens: Commodity Futures Trading Commission (CFTC) regulates virtual currencies/tokens as commodities. A commissioner explained, “crypto-tokens offered in a pre-sale can transform. They may start their life as a security regulated under SEC from a capital-raising perspective but then at some point – maybe possibly quickly or even immediately – turn into a commodity.” This is how many understand the simple agreement for future tokens (SAFT) concept because no bright-line rule determines which types of tokens are securities and which are not. Instead, what qualifies as a security can only be determined by a facts-and-circumstances-driven analysis of particular tokens.
  • FinCEN on Foreign Virtual Currency Businesses: According to a spokesman for FinCEN, “A foreign virtual currency business may have to register with FinCEN depending on several factors. If the foreign virtual currency company is registered with, and functionally regulated or examined by the SEC, CFTC or if it engages in activities that, if conducted in the US would require it to register with the SEC or CFTC, then it would not have to register as an MSB with FinCEN. If it does not satisfy this condition, the answer depends on how it operates, on behalf of whom and where its customer base is located based on a facts-and-circumstances-driven analysis.”
  • IRS on Foreign Virtual Currency Businesses: A foreign virtual currency business may be subject to US tax laws because virtual currencies are characterized as property according to Notice 2014-21, gains of which are subject to federal taxation and tax reporting requirements under Information Reporting and Backup Withholding, Foreign Account Tax Compliance Act (FATCA), Country-by-Country Reporting (CbCR). The IRS may claim jurisdiction over a foreign virtual currency business that lacks any physical presence in the US, so long as they do substantial business in the US based on a facts-and-circumstances-driven analysis. According to the new chief of the IRS Criminal Investigation division, “in 2018: (1) the Nationally Coordinated Investigations Unit, and (2) the International Tax Enforcement Group will be increasingly focused on the cross-border use of virtual currencies.”


As regulations fall on ICOs around the world, it opens the doors for institutional investors to partake in ICOs of companies that may have a global footprint from a business, technological and legal structure standpoint. This requires sophisticated evaluation of all ICO related risks in all jurisdictions the company operates. “ICO companies, their executives and institutional investors should carefully take into consideration the ever-changing regulatory landscape around the world and implement a good compliance program. An ICO company needs to comply with various countries regulations including money-laundering regulations and anti-bribery laws, while minimizing risk,’’ advised John Kearney of MyComplianceOffice.

Disclaimer: This article is adapted with permission from Tax Management Memorandum, 58 TM Memorandum 418, 10/16/17. Copyright 2017 by The Bureau of National Affairs, Inc. (800-372-1033)

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for TaxNotes, Bloomberg BNA, other publications and the OECD.

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Pipe Dreams: Bitcoin Won't Solve Pot Industry's Banking Problem

Charles Alovisetti is a senior associate and co-chair of the corporate department at Vicente Sederberg LLC, and works with legal cannabis businesses in the U.S.

In this opinion piece, Alovisetti warns such enterprises to be wary of using bitcoin or other cryptocurrencies as a solution to the pot industry’s continued difficulty obtaining or keeping bank accounts (a familiar problem for blockchain startups.)

One of the major challenges facing legal marijuana businesses is lack of consistent access to banking services. Many marijuana businesses do have banking accounts, but the sword of Damocles dangles above them, always threatening an unappealable termination of an account.

Enter digital currencies, which promise an end run around a wary financial system. There is a great deal of excitement in the marijuana industry about the possibilities regarding bitcoin and other cryptocurrencies.

But before the cannabis industry gets carried away with images of marijuana businesses sidestepping hostile federal banking regulators, we need to take a hard look at the future of digital currencies.

Alternative prescriptions

One strategy that’s been pushed is for cannabis businesses to take an existing digital currency and simply use it as a method of transacting business to avoid the need to rely on banks.

This way, marijuana companies without bank accounts could eliminate the need to operate in cash, instead accepting payment directly from customers or other businesses in digital currency – although converting digital currency into dollars will still require a bank account.

Another possible use of digital currencies would be to develop a new token, often referred to as an app coin, protocol token, or altcoin, specifically for the marijuana industry. Again, the goal would be to reduce or eliminate the use of cash and integrate blockchain technology into the compliance and other needs of marijuana businesses.

Finally, some business offer bitcoin-based payment processing services. These services allow customers to purchase bitcoin via a credit or debit card and then purchase a marijuana product with the recently acquired bitcoin. The store then converts the bitcoin back into dollars. The idea is to provide an alternative to traditional payment processing services and credit card companies that will not work with marijuana businesses.

Harsh realities

However, regulators present a real and present threat to cryptocurrencies as they currently exist; for example, recent Chinese regulatory restrictions have seen the closure of platforms allowing people to buy or sell tokens.

And these threats become even more important for digital currencies servicing marijuana-related businesses (“MRBs” in the parlance of the Financial Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN).

As longtime CoinDesk readers will recall, in March 2013, FinCEN published its initial guidance on virtual currencies. The agency defined three categories of participants: users, exchangers and administrators. A user is “a person that obtains virtual currency to purchase goods or services,” whereas an exchanger is “a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency” and an administrator is “a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.”

FinCEN concluded that, barring any specific exemption, exchangers and administrators are money service businesses (MSBs) and as such are subject to FinCEN registration and the framework of the Bank Secrecy Act (BSA), which was designed to aid FinCEN’s investigations of potential criminal activity.

Subsequent administrative rulings have clarified that FinCEN considers digital currency exchanges, ATM operators, and payment processors to be exchangers within the agency’s tripartite framework.

On the marijuana side of the equation, it is important to note that, while marijuana remains illegal federally, the industry in the U.S. exists in its current form because it is tolerated pursuant to federal policy, as set forth in the Cole Memo (put out by the Department of Justice on Aug. 29, 2013).

The Cole Memo states that while marijuana remains illegal federally, federal law enforcement should not consider prosecution of state-legal marijuana businesses if those business do not implicate any of eight enumerated enforcement priorities (e.g. preventing revenue from the sale of marijuana from going to criminal enterprises and preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or illegal activity).

A potent brew

While it is unfair to associate all digital currency use with illicit activity, there is a perception, reinforced by certain bad actors, that digital currencies are being used to launder money, divert revenue to criminal enterprises and traffic illicit drugs. Any risk that a business could be seen as violating the Cole Memo priorities needs to be treated extremely seriously as it could provoke a federal law enforcement action.

While the Cole Memo addressed violations of the Controlled Substances Act (CSA), it was silent as to financial crimes that would inevitably result from the use or banking of proceeds of a federally illegal activity. In response to financial institutions’ concerns regarding accepting MRBs as clients, on Feb. 14, 2014, in two memos often referred to as the “Valentine’s Day Letters,” the Department of Justice and FinCEN each outlined their respective attitudes to money laundering concerns related to the violations of the CSA.

The FinCEN memo contained detailed guidelines on how to provide banking services to an MRB while remaining compliant with the BSA. These guidelines included the obligation to file different types of suspicious activity reports (SARs) in response to activity on the part of an MRB. The new DOJ memo updated the earlier Cole Memo to extend the realm of non-priority violations to include provisions of the money laundering statutes, the unlicensed money remitter statute and the BSA triggered by underlying violations of the CSA.

But the DOJ reiterated that any exercise of discretion regarding its resources was subject to the provision of services to an MRB whose activities do not trigger any of the eight priority factors. The DOJ also noted that following the FinCEN guidance was critical to remaining within the low enforcement priority category of the Cole Memo.

Again, FinCEN has also made it clear BSA compliance obligations also apply to many businesses dealing in digital currencies – exchanges, ATM operators and payment processors are all required to register as MSBs. That means that to comply with the Cole Memo and FinCEN’s marijuana policy guidance, any digital currency business that is required to register as an MSB must make the required SAR reports outlined in the Feb. 14, 2014, FinCEN guidance.

Just say no

When it comes to marijuana firms using cryptocurrencies, discretion should remain the better part of valor.

The marijuana industry in the U.S. exists solely due to permissive federal policies that require businesses to follow certain guidelines, including filings SARs with FinCEN. If these guidelines are not being followed to the letter, which is a challenging and sometimes onerous task, a business is no longer within the guidance of the Cole Memo and is at higher risk of facing federal law enforcement action.

And even if these guidelines are religiously adhered to, while FinCEN-compliant use of digital currencies is not explicitly prohibited by federal policy, their use is sometimes linked by law enforcement with money laundering, illicit drug sales and other illegal activities.

As these crimes are listed as prevention priorities in the Cole Memo, digital currency use could potentially provide an excuse for Attorney General Jeff Sessions (no fan of legal marijuana) to crack down on state-legal pot enterprises.

Cannabis growing image by Shutterstock

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