Below is a summary of some of the significant legal and regulatory actions that occurred over the past weeks. 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. Please visit our sister blog, FintechLegalReport, for the Fintech in Review – Weeks of March 19th through March 30th, 2018 portion.
U.S. Developments
Regulatory Updates
NFA Comments on CFTC’s Proposed Interpretation of “Actual Delivery”
On March 20, the National Futures Association (NFA) issued a letter to the Commodity Futures Trading Commission (CFTC) in which it provided its comments to the CFTC’s proposed interpretation of “actual delivery” in the context of virtual currency transactions subject to the Commodity Exchange Act (CEA) Section 2(c)(2)(D)(ii)(III)(aa), released on December 15, 2017.
The concept of “actual delivery” exists as an exception for retail commodity transactions under the Commodity Exchange Act (CEA) Section 2(c)(2)(D), a provision of the CEA intended to protect retail investors making a margined, leveraged, or otherwise financed purchase of a commodity. Transactions falling under this provision are treated as futures contracts and are subject to the full extent of the CFTC’s futures regime, unless an exception applies. The “actual delivery” exception provides that a sale is excepted from this provision if the purchaser takes possession of the commodity within 28 days of the transaction, and the seller relinquishes all control over the commodity.[1] The CFTC’s proposed interpretation of “actual delivery” puts the exception in the context of purchases of virtual currency. The proposed interpretation sets forth two criteria necessary to establish “actual delivery” in a retail commodity transaction:
(1) a purchaser has the ability to (i) take possession and control of the entire quantity of the commodity (i.e., the virtual currency), and (ii) use it freely in commerce (both within and away from any particular platform) no later than 28 days from the date of the transaction; and
(2) the seller does not retain any interest in, or control over, any of the commodity at the expiration of 28 days from the date of the transaction.
The proposed interpretation additionally offered examples of when “actual delivery” would and would not be found to have occurred.
In its Comment Letter, the NFA proposed the following:
- Shortening of the 28-day period (a measure which would likely require action by Congress) on the basis that many virtual currency products are extremely volatile, offered for speculative investment purposes, and have attracted many retail investors;
- Clarification of the terms “depository,” “possession,” and “control” in the context of virtual currencies;
- Further consideration of the potential impact on certain virtual currency exchanges under the proposed interpretation of “actual delivery”–Specifically, exchanges that purchase virtual currencies for their own account and only allocate them to purchasers via internal bookkeeping entries. Under this model, the exchange collects large amounts of customer funds to buy and hold virtual currencies on behalf of the customers, although the purchases remain allocated in the public ledger as to the exchange, not the customer. Consequently, the NFA notes, those exchanges are not subject to the same level of regulatory scrutiny as other depositories, custodians, and intermediaries that hold customer funds in a similar fashion. The NFA expressed concern particularly in instances where a retail investor purchases virtual currency using a credit card or other leveraged means.
The CFTC’s proposal was open for public comment until March 20. NFA Comment Letter 3.20.18
OFAC Indicates That It May List Cryptocurrency Addresses on its Sanctions List
The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury released an FAQ on its website on March 19 indicating that it may add digital currency addresses to its Specially Designated Nationals (SDN) List to alert the public to those identifiers associated with a sanctioned person or entity who is otherwise on the SDN List. The FAQ indicates that anyone who identifies a wallet address believed to be associated with a blocked individual should file a report with OFAC that includes the digital wallet address, ownership, and any other relevant information. The field for digital currency addresses on OFAC’s SDN List would indicate the unique alphanumeric identifier and the digital currency stored in the wallet. OFAC’s FAQ provided definitions of “virtual currency,” “digital currency,” “digital currency wallet” and “digital currency address” for the purposes of its sanctions program:
“Virtual currency is a digital representation of value that functions as (i) a medium of exchange; (ii) a unit of account; and/or (iii) a store of value; is neither issued nor guaranteed by any jurisdiction; and does not have legal tender status in any jurisdiction.
Digital currency includes sovereign cryptocurrency, virtual currency (non-fiat), and a digital representation of fiat currency.
A digital currency wallet is a software application (or other mechanism) that provides a means for holding, storing, and transferring digital currency. A wallet holds the user’s digital currency addresses, which allow the user to receive digital currency, and private keys, which allow the user to transfer digital currency. […]
A digital currency address is an alphanumeric identifier that represents a potential destination for a digital currency transfer. A digital currency address is associated with a digital currency wallet.”
OFAC FAQs: Sanctions Compliance (See Questions on Virtual Currency, Paragraphs 559-563.)
IRS Issues Reminder to Taxpayers Regarding Virtual Currency
The Internal Revenue Service (IRS) issued a notice on March 23 in which it reminded taxpayers that income from virtual currency transactions is subject to federal tax regulation and must be reported on income tax returns. The Notice reiterated that the IRS treats virtual currency as property for federal tax purposes, meaning that the same general tax principles for other property apply equally to virtual currencies. Among other points, the IRS noted the following:
- A taxpayer who received virtual currency as payment for goods or services during the 2017 tax year must include the fair market value in U.S. dollars of the virtual currency at the time the payment was received.
- If the fair market value of the property received was higher than the value of the virtual currency paid by the taxpayer, the taxpayer has a taxable gain. Conversely, if the FMV of the property received is lower than the value of the virtual currency paid, the taxpayer has incurred a loss.
- Virtual currency paid by an employer is considered taxable wages. Additionally, virtual currency paid to an independent contractor in exchange for services is considered self-employment income.
- Miners of virtual currency must report as gross income successfully mined cryptocurrency, the value of which is to be calculated in U.S. dollars as of the date of receipt.
For further discussion of the tax implications for virtual currency and additional information about IRS actions with respect to taxpayers, see Perkins Coie’s Virtual Currency Report: Urgent Tax Reporting Considerations for Virtual Currency Traders, Miners, and Anyone Contemplating Investment 3.26.18
International Developments
G20 Calls for Recommendations for Cryptocurrency
Following several G20 meetings held March 20-21, international economic leaders issued a statement (“communiqué”) seeking proposed cryptocurrency regulations by July 2018. The first G20 meetings began in December 2017 as precursors to the G20 Summit, scheduled to take place November 30 – December 1, 2018 in Buenos Aires. The communiqué suggested agreement among the members that cryptocurrencies need to be examined across the world, but it stopped short of calling for a regulatory crackdown. The members expressed a belief that the technological innovation underpinning cryptocurrencies is of great value to the worldwide financial system, but noted concerns about consumer and investor protection, risks of money laundering and funding terrorist activity, tax evasion, and volatility and stability of cryptocurrencies. The communiqué took the position that cryptocurrencies should more appropriately be considered assets, not currency, and regulation should flow from that position. Some countries, including Brazil and the UK, did not agree with that position, and asserted that cryptocurrencies would not be regulated according to such an approach. Reuters Article 3.19.18
Liechtenstein Proposes New FinTech Regulations
Prime Minister Adrian Hasler of Liechtenstein announced on March 21 at a Finance Forum in Vaduz that the government will introduce a bill in the summer of 2018 with proposed regulation for blockchain technology. The bill will provide legal and regulatory clarity for businesses developing distributed ledger technology (DLT), in addition to potential consumers of the technology, in an effort to attract FinTech innovation to the country. More broadly, Liechtenstein has taken a lighter regulatory approach to blockchain technologies, including digital currencies, which are not currently subject to licensing requirements. The Financial Market Authority of Liechtenstein has issued two formal statements related to digital currencies and ICOs FMA Digital Currency Statement 2.16.18; FMA ICO Statement 9.10.17, both of which are favorable to the industry in terms of taking a permissive approach to regulation and taxation of digital assets. Announcement 3.21.18
[1] CEA Section 2(c)(2)(D)(ii)(III)(aa)