You Received One of the IRS Crypto Letters—What’s Next?

Taxpayers should take prompt action to assess their situation, yet move carefully before making representations or filings to the IRS.

Over the past month, the Internal Revenue Service (IRS) has sent letters to over ten thousand taxpayers that it believes may have failed to report virtual currency transactions (primarily Bitcoin-related) or may have omitted income derived from virtual currency transactions. These letters continue to receive significant press coverage from major financial outlets and may be just the beginning of the government’s notification, collection and enforcement efforts. For example, the IRS has also recently sent notices to certain virtual currency investors informing them that the investors’ reporting does not match other records in the IRS’s possession.

Taxpayers who receive an IRS letter, receive an investor notice, or have questions about reporting their past virtual currency transactions (e.g., sales of tokens or exchanges of one token for another) should consider the following advice: Continue Reading

Blockchain Week in Review: Week of August 9, 2019

U.S. Regulatory

Kik Files Answer to SEC Complaint

On August 7, Canadian messaging company Kik Interactive Inc. (“Kik”) filed its answer to the U.S. Securities and Exchange Commission’s (“SEC”) complaint filed in the Southern District of New York.  In its 131-page answer, Kik argues for a narrow reading of the Howey test and maintains that the SEC has taken quotes out of context and misrepresented documents and testimony in its treatment of the facts in the complaint.

Kik responds to each of the allegations asserted by the SEC in its complaint, in turn, denying those that support the view that Kin tokens constitute securities under the Howey test and that Kik violated the securities laws in any way.  Kik maintains that, although the Howey test is a “flexible” standard, it is “far from limitless” and should not be broadly interpreted by the court.  In addition, Kik argues that the DAO Report should not be considered fair warning to Kik as a digital currency issuer because the facts are meaningfully distinguishable as a community currency. Continue Reading

Blockchain Week in Review: Week of August 2, 2019

U.S. Developments

Regulatory Developments

Commissioner Hester Peirce Speaks Before the SUSS Convergence Forum: Inclusive Blockchain Finance, and Emerging Technologies

On August 1, 2019, Securities and Exchange Commission (“SEC”) Commissioner Hester Peirce gave a speech before the Singapore University of Social Sciences Convergence Forum: Inclusive Blockchain, Finance, and Emerging Technologies. In her remarks, she discussed the challenge U.S. regulators are facing in trying to address the cross-border trading of digital assets. She emphasized that this problem is not unique and raises the same concerns as other cross-border asset trading—“the fear that we [the U.S. Government] will not be able to examine foreign entities registered to operate in our markets and, more generally, that our [the SEC’s] ability to enforce domestic rules will be stymied by our [the SEC’s] inability to regulate outside our borders.” However, she also stated that due to the current diverse landscape of jurisdictional specific regulation combined with the many different use cases for digital assets (and therein legal considerations), these concerns are exacerbated. Continue Reading

Blockchain Week in Review: Week of July 26, 2019

U.S. Developments

Regulatory Developments

SEC Issues Second No Action Letter for Blockchain-Based Project

On July 25, 2019, the staff of U.S. Securities and Exchange Commission (SEC) issued its second ever no-action letter to a company planning to issue blockchain-based tokens. The letter was issued to Pocketful of Quarters (PoQ), a gaming start-up. PoQ seeks to issue an Ethereum-based ERC-20 stablecoin, “Quarters,” for use within its gaming platform.

No action-letters are public letters from the SEC staff to specific projects, stating that the agency will not recommend enforcement if the project follows and meets certain requirements and commitments stated in the letter. They can be useful for other companies seeking to set up similar projects, laying out the perimeters that the SEC desires from blockchain projects. Continue Reading

Blockchain Week in Review: Week of July 19, 2019

U.S. Developments

Legislative Updates

Facebook’s David Marcus Testifies Before Congress on Libra

David Marcus, the Facebook blockchain chief in charge of its planned Libra cryptocurrency and Calibra-branded digital wallet, testified for two days before Congress last week to answer questions about the social media giant’s plans for a cryptocurrency. U.S. Senator Mike Crapo, Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, delivered remarks at the hearing entitled “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.” In the hearing, Marcus described how Congress asked Facebook for more information about how the Libra system would work, how it would access and use consumer financial information, and the privacy implications for consumers. Marcus stated that the Libra Association, a nonprofit based in Switzerland, would be tasked with managing the Libra network, and added that Facebook would be one of many members of the association involved with the project. It is not yet clear whether Facebook will implement a moratorium on Libra’s development pending the government’s probe into the proposed cryptocurrency. Despite Marcus’s extended testimony before Congress, there have been calls from congressional members to have Facebook CEO Mark Zuckerberg testify on Capitol Hill to provide lawmakers with additional information about how Libra and Calibra will work and how they could be regulated. Continue Reading

Blockchain Week in Review: Week of July 12, 2019

U.S. Developments

Regulatory Developments

SEC and FINRA Issue Joint Statement on Digital Asset Custody Issues

On July 8, 2019, the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) (collectively, “the Staffs”) issued a joint statement addressing questions each has received from market participants regarding proper custody of digital assets under both federal securities laws and FINRA’s rules.

The joint statement highlights the importance of the Customer Protection Rule to protect investors from loss of assets and to help the SEC monitor for potential fraud. The joint statement discusses both broker-dealers seeking to have custody of digital assets and broker-dealers seeking to conduct noncustodial activities. For the latter, the Staffs mention several noncustodial models and note in the statement that generally these noncustodial activities “do not raise the same level of concern among the Staffs, provided that the relevant securities laws, SRO rules, and other legal and regulatory requirements are followed.” Continue Reading

Blockchain Week in Review: Week of June 28, 2019

U.S. Developments

Regulatory Developments

CFTC Announces Two Events Designed to Encourage FinTech Innovation

On June 27, 2019, the Commodity Futures Trading Commission (“CFTC”) announced two events designed to encourage fintech innovation. First, the agency announced the launch of LabCFTC Accelerator. According to the press release, “LabCFTC Accelerator is a component of the broader CFTC’s LabCFTC initiative, focused on deploying a variety of tools, including internal pilots and tests, market research, and innovation competitions in order to drive better understanding and potential adoption of emerging technologies.”

Second, the CFTC announced that it will hold its second annual FinTech Forward 2019 conference—dedicated to exploring the latest in fintech developments—on October 24, 2019. The agency hopes to bring together innovators, regulators, and the general public to examine the impact of developments in such areas as digital assets, commodities, exchange platforms, machine learning and AI, RegTech, and algorithmic trading. Registration for FinTech Forward 2019 will be open to the public early this fall. Continue Reading

Can Blockchain Survive the California Consumer Privacy Act?

The California Consumer Privacy Act (“CCPA”) is a sweeping new law that introduces a host of privacy rights for California consumers, as well as creates a series of robust obligations for certain businesses that collect personal information about those consumers.

Join us for CCPA Week: A series of webinars hosted by Perkins Coie’s Privacy & Data Security practice focused on getting your business ready to comply with this enigmatic statutory scheme. Attendees will receive an overview of the current state of legislative amendments, insight into the high burden of persuasion industries may face, and guidance on leveraging existing compliance and governance programs to build a global privacy program that incorporates responsible data usage and proactive privacy practices.

Register here for the entire series, or select the blockchain-specific webinar below.

The California Consumer Privacy Act and Blockchain

Thursday, July 18, 2019
1:00 p.m. PT | 3:00 p.m. CT | 4:00 p.m. ET

This webinar is an in-depth analysis of the intersection of the CCPA and blockchain technology—including the law’s applicability to businesses that utilize or offer blockchain technology solutions, as well as the legal obligations of, and potential methods of compliance for, subject businesses.

Presenters

Joe Cutler | Partner, Privacy & Data Security
Charlyn Ho | Counsel, Technology Transactions & Privacy
Anna Mourlam | Associate, Securities Litigation
Marina Gatto | Associate, Privacy & Data Security

Blockchain Week in Review: Week of June 21, 2019

U.S. Developments

Facebook Announces Formation of Calibra and Launch of Libra

On June 18, 2019, Facebook announced the launch of Libra, a new cryptocurrency designed to have a stable value and be widely accepted internationally, and the formation of a new subsidiary, Calibra, which will provide digital wallets and other services for users in the Libra network.  The Libra network will be administered by the Libra Association, a Swiss nonprofit organization whose initial members are anticipated to include Calibra and 27 other organizations.  Continue Reading

Blockchain Week in Review: Week of June 14, 2019

U.S. Developments

Regulatory Developments

SEC Chair’s Recent Comments on Digital Assets

Securities and Exchange Commission (“SEC”) Chairman Jay Clayton touched on digital asset issues during two recent appearances. On June 4, Chairman Clayton addressed the Mid-Atlantic Regional Conference, where he noted the work of SEC staff to trace transactions across blockchains. Specifically, he mentioned that tracing was critical in two recent cases where the SEC was able to obtain preliminary injunctions to stop alleged potential frauds.

On June 6, Chairman Clayton appeared on CNBC, where he discussed virtual currency exchange-traded funds (“ETFs”). He stated that the SEC is engaging with those seeking ETFs but that core issues, such as custody of digital assets and prevention of market manipulation, continue to be sticking points that the SEC is working through. Continue Reading

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