SEC and U.S. Attorney’s Office Bring Action Against Promoter of Bitcoin Store, Inc.

On June 30, 2017, the SEC and the U.S. Attorney brought parallel civil and criminal fraud charges against Renwick Haddow, the owner of an unregistered broker-dealer entity named InCrowd Equity Inc., and two corporate entities named Bitcoin Store, Inc. and Bar Works, Inc. (SEC Litigation Release, US Attorney Press Release)} In addition to filing the civil complaint, the SEC sought and obtained an emergency asset freeze against Haddow, Bitcoin Store, and Bar Works.

According to the SEC, Haddow, a citizen of the United Kingdom living in New York, used an unregistered broker-dealer—InCrowd Equity Inc.—to solicit potential investors to purchase securities of Bitcoin Store and Bar Works. In connection with raising over $37 million, Haddow and other employees of InCrowd allegedly made numerous false statements concerning the companies’ operations and the existence and qualifications of certain senior executives.  For example, according to the SEC’s complaint, Haddow set up Bitcoin Store to be a purported “Bitcoin trading platform.”  The investor materials that were sent to prospective investors claimed that Bitcoin Store had gross sales of over $7 million and that the proceeds from the stock issues would be put toward Bitcoin Store’s working capital and development.  In addition, the investor materials allegedly contained an introductory letter signed by Bitcoin Store’s “Chief Executive, Gordon Phillips.” The materials described Mr. Phillips as a former “Global Head of Currency and Options trading” at HSBC.  They also claimed that he held an MSc in finance from Yale.  In reality, according to the SEC, Mr. Phillips never obtained any degree from Yale, never worked for HSBC, and was a fictitious person.  The SEC also claims that Bitcoin Store had no operations and never generated the gross sales claimed in the offering materials, and was a complete sham.

The SEC alleges that Haddow diverted more than eighty percent of the funds raised for Bitcoin Store and transferred more than $5 million from Bar Works’ bank accounts to accounts in Mauritius and Morocco.

This case demonstrates that the SEC and the Department of Justice are keenly watching companies that raise funds and tout information relating to bitcoin.

 

 

Blockchain Week in Review – June 16, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Regulatory Updates

Illinois Regulators Determine that Digital Currencies Are Not Considered Money
In new guidance provided and finalized by the Illinois Department of Financial and Professional Regulation (“IDFPR”), the agency has taken the stance that decentralized digital currencies are not money because they are not “authorized or Continue Reading

Blockchain Week in Review – June 9, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

SEC Obtains Judgment Against Bitcoin Mining Companies The SEC obtained final judgment this week against GAW Miners, LLC and ZenMiner, LLC. – two virtual currency mining companies who, along with their principal, Homero “Josh” Garza – have been the subject of ongoing investigation and litigation since the SEC filed a complaint against them in December 2015. The two mining companies were accused Continue Reading

Resources on Crypto-Tokens and Securities Law

Recently, there has been growing interest in whether, and in what circumstances, crypto-tokens may constitute “investment contracts” under the U.S. Supreme Court’s Howey test, rendering them securities subject to regulation in the United States.  The following resources take a deep dive into that issue, exploring the structural, marketing and other key considerations that may make crypto-tokens more or less likely to be securities under Howey.  As these resources demonstrate, the Howey test is highly fact-dependent, indicating that certain crypto-tokens may be securities under Howey whereas others – if properly designed – may not.

Continue Reading

Blockchain Week in Review – May 26, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Regulatory Updates

Vermont Law Recognizes Digital Currency as a Permissible Investment
Earlier this month, Vermont Governor Phil Scott signed Continue Reading

Guilt by Association: Bitcoin and the WannaCry Ransomware Attack

The recent so-called “WannaCry” ransomware cyber-extortion attack has thrust bitcoin as a means of payment back into the debate surrounding illegal online activity. Much in the way that the internet, in its early days, was seen as a tool useful only for crime, pornography, and other socially unacceptable activities, so too are bitcoin and other cryptocurrencies seen by some as only useful for bad actors. This of course ignores the substantial investment in bitcoin and other cryptocurrencies by legitimate and well-known businesses, financial institutions, and even governments all around the world. Still, in some corners the stereotype persists. But much in the way that the internet continued to grow and evolve, so too will the bitcoin and cryptocurrency ecosystem grow and evolve, and its use by bad actors will continue to diminish. Continue Reading

Two New White Papers Exploring Use Cases and Legal Issues of Distributed Ledger Technology-Based Smart Contracts and Self-Sovereign Identity Systems

We are pleased to release two in-depth white papers discussing cutting-edge legal and technology issues applicable to smart contracts and self-sovereign identity systems.

In the smart contracts white paper, Dax Hansen, Partner and Chair of the Blockchain and Digital Currency Industry Group, and Carla Reyes, Visiting Assistant Professor of Law at the Stetson University College of Law, define and demystify DLT-based smart contracts with a review of the current academic and industry literature, describe five actual use cases for smart contracts and analyze the novel legal issues surrounding smart contracts. This is the first comprehensive treatment of the full range of legal issues related to smart contract applications – going beyond the narrow discussion of contract law issues that predominate the existing literature.

Hansen and Reyes describe the state of the art of smart contracts in digital asset sales and capital markets, supply chain management, smart government records and smart cities, real estate land registries, and self-sovereign identity systems. The paper consists of four sections:

  • A brief introduction to DLT-based smart contracts;
  • A review of current academic and industry literature on smart contracts;
  • An exploration of the legal issues in emerging use cases of smart contracts; and
  • An initial risk mitigation checklist for businesses developing applications using smart contracts.

Following an overview of the legal risks involved in the use cases of this nascent and quickly-evolving technology, the authors conclude that companies in all industries should determine how this significant technology will impact them, that companies can benefit from the use of this significant technology, and that industry participants can address relevant legal issues with careful planning and collaboration.

In the self-sovereign identity white paper, Joe Cutler, Dax Hansen, and Charlyn Ho discuss the development of self-sovereign identity as a DLT-based technology, the various industry leaders offering DLT-based identity solutions, and the key legal issues self-sovereign identity solutions will face as the technology goes mainstream. The paper addresses:

  • The background and state of digital identity
  • Distributed ledger technology and self-sovereign identity
  • A sampling of companies or foundations working on DLT-based identity solutions
  • Self-sovereign identity and the law

While tracing the evolution of self-sovereign identity, the authors describe the many ways DLT can be leveraged to create applications that allow users to control their digital identity in a way that is both secure and portable across multiple platforms. Entities building out such solutions that are profiled in the white paper include Sovrin, Uport, Civic, R3, and Mooti.

Finally, Hansen, Cutler, and Ho discuss the most pressing legal considerations facing this promising technology, including:

  • Privacy Laws;
  • Anti-Money Laundering Laws;
  • Biometrics Laws;
  • Laws Governing Online Identities and Death;
  • Trust Frameworks and
  • Practical Considerations for Governments Using SSI.

As self-sovereign identity and other DLT-based technologies grow in popularity and adoption, they will have an ever increasing disruptive impact across all industries. The authors conclude that these advances will demand that legal practitioners, lawmakers, and technologists harmonize their approaches with applicable law.

Follow the links below to download the White Papers:

Perkins Coie LLP Legal Aspects of Smart Contracts Applications

Perkins Coie Self-Sovereign Identity and Distributed Ledger Technology_Framing the Legal Issues

Washington — B&O Taxation of Unredeemed Gift Cards

The Washington State Department of Revenue has just issued a draft Excise Tax Advisory (“ETA”) (will be hyperlinked to the attached document) in which it concludes that unredeemed gift card receipts (e.g., breakage) which are taken into income should be reported as subject to service B&O tax.  (As a reminder, in 2004, the Washington legislature excepted most gift cards from escheat, and now, after a period of non-redemption, companies may bring such receipts into income for book and federal tax purposes.  However, such companies are still liable should the card be redeemed.)   

We looked at this issue years ago, and the only authority on the issue was the administrative rule that said that gift cards are taxable upon redemption.  The Department’s conclusion is contrary to such administrative rule.  It is unclear whether this conclusion is being applied prospectively or retroactively, and there may be other associated issues.

The Department indicates it does not intend to hold stakeholder meetings on this ETA, and has set May 11 as the deadline to submit comments.  If you have any interest in this issue, we would be happy to assist you and coordinate whether there are multiple retailers with an interest. Please contact Gregg Barton or Bob Mahon.

 

Governor Signs Into Law Amendments to Washington’s Uniform Money Services Act

On April 18 the governor of Washington signed into law amendments proposed by the Washington Department of Financial Institutions (“DFI”) in December of last year, to the state’s Uniform Money Services Act, including provisions specific to digital currency.  The changes take effect on July 23, 2017.

Aligning with Washington’s Interim Regulatory Guidance on Virtual Currency Activities, published in December of 2014, the amendments do not broaden the scope of regulated activities relating to digital currency.  However, they provide clarity regarding the regulation of digital currency products that operate within a limited or closed universe.  For example, loyalty points programs and virtual currencies redeemable only on online gaming platforms are explicitly exempted from the licensing requirement, as are tokens issued in connection with a distributed ledger that do not operate as a medium of exchange.

In addition, digital currency exchanges and other companies offering digital currency products are permitted to include like-kind digital currency holdings as capital reserves to the extent obligated to consumers.

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