Members of Congress Respond to IRS Tax Guidance for Digital Assets
On December 20, eight members of the U.S. House of Representatives sent a letter to the Commissioner of the Internal Revenue Service (“IRS”) urging further clarity on positions expressed in the IRS’s October tax guidance for digital assets.
The letter described various ways in which the October guidance raised additional questions about the taxation of digital assets, specifically identifying the issue of airdropped or forked digital assets as an area of immediate concern. The authors expressed concern that ambiguity regarding airdrops and forks may result in unanticipated tax obligations for owners of digital assets who become owners of additional digital assets as a result of a fork or airdrop. According to the authors, this outcome would be inconsistent with the IRS’s previous interpretations regarding unsolicited prizes or samples.
The letter also describes other deficiencies in the IRS guidance with respect to the various forms of income generated from digital assets, including the treatment of retirement funds invested in digital assets or dividend income generated through the ownership of digital assets. The authors also urge the IRS to use its authority for penalty relief in instances where taxpayers have made a good faith effort to comply with the new guidance without further information regarding the treatment of unresolved issues.
Please click here for the letter.
Formal Indictment Brought Against Cryptocurrency Developer
On January 7, Virgil Griffith, a cryptocurrency and blockchain developer, was formally indicted by a grand jury in New York for one count of conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”). The charge is based on conduct described in a sealed complaint filed by the U.S. Department of Justice in November that led to Mr. Griffith’s arrest on November 29, 2019.
According to the government, Mr. Griffith allegedly violated the IEEPA by attending and participating in a cryptocurrency conference hosted by the North Korean Government in April 2019. According to the sealed complaint, while at the conference, Mr. Griffith discussed how blockchain and cryptocurrency technology could be used by the North Korean government to launder money and evade international sanctions. After the conference, Mr. Griffith allegedly began formulating plans to facilitate the exchange of cryptocurrency between North Korea and South Korea. Mr. Griffith was released on bail on January 9 and is pending trial.
Please click here for a news report related to the indictment.
Cryptocurrency Firm Longfin and CEO Settle SEC Fraud Action
On January 3, Longfin Corporation and its Chief Executive Officer, Venkata Meenavalli, agreed to pay $400,000 in disgorgement and penalties in connection with their violations of the federal securities laws. Longfin and Meenavalli were charged with making misrepresentations in SEC filings related to Longfin’s Regulation A+ offering in 2017, including claims that the company was managed and operated in the U.S. when its operations and other resources remained offshore. The settlement concludes a series of civil enforcement actions against Longfin and Meenavalli in which the SEC has already secured over $26 million of ill-gotten gains. The SEC plans to establish a Fair Fund to distribute money received from the defendants to harmed investors.
The SEC previously obtained a default judgment against Longfin and ordered nearly $6.8 million in monetary relief. The SEC also previously filed a separate action alleging that Longfin, Meenavalli, and three affiliated individuals illegally distributed and sold more than $33 million of Longfin stock in unregistered transactions. In June 2019, the court ordered over $26 million in disgorgement and penalties against the three affiliates, and in August 2019 entered default judgments ordering civil penalties of $284,139 and $28,416 against Longfin and Meenavalli, respectively. A parallel criminal action against Meenavalli, filed by the U.S. Attorney’s Office for the District of New Jersey, remains ongoing
Please click here for the SEC statement.
SEC Brings Fraud Action Against Cryptocurrency Miner
On January 8, the SEC filed a complaint against Donald Blakstad and two of his companies in U.S. District Court for the Southern District of New York, alleging fraud related to Mr. Blakstad’s sale of unregistered securities. In the complaint, the SEC alleged that Mr. Blakstad orchestrated a $3.5 million scheme against more than a dozen investors through the fraudulent offer and sale of securities in a purported cryptocurrency mining operation. Instead of using the proceeds he raised from investors to purchase cryptocurrency mining equipment, Mr. Blakstad used most investor proceeds for his personal benefit, including for personal entertainment, purchasing a stake in a nightclub, and purchasing a luxury car.
The SEC complaint, among other things, seeks disgorgement of all funds Mr. Blakstad received as part of the offerings, a civil penalty, and a prohibition on serving as an officer or director of any publicly traded company.
Please click here for the SEC Complaint.
Rhode Island Updates Money Transmission Licensing Law
New regulations took effect on January 1, 2020 that combine existing laws that regulate electronic money transmission and the sale of checks into one regime. In short, the regulation introduces the new concept of “currency transmission” activity. While this concept still regulates the sale or issuance of payment instruments and stored value, and receiving money or monetary value for transmission (including the holding of funds incidental to transmission), it only regulates these activities to the extent that such services are provided “primarily for personal, family, or household purposes.”
Moreover, the new regulation introduces the concept of virtual currency and expressly includes maintaining control of virtual currency or transactions in virtual currency on behalf of others as being part of regulated currency transmission activity.
Please click here for the new Rhode Island Regulations
Qatar Bans Digital Asset Trading
On January 6, the Qatar Financial Center Regulatory Authority announced that all trading in digital assets (including fiat-to-digital asset and digital asset-to-digital asset trading), custody and financial services related to digital assets are now prohibited in Qatar. The broader ban on digital asset trading comes after Qatar’s central bank stated in early 2018 that transacting in bitcoin was illegal within the jurisdiction.
Please click here for a news article reporting on the recent ban.
Bahamas Launches Digital Version of the Bahamian Dollar
On December 27, the Central Bank of the Bahamas launched the pilot phase of “Project Sand Dollar,” a new initiative of the Bahamian government for a digital currency designed to be equivalent to the paper version of the Bahamian dollar. Residents of Exuma in the Bahamas can now participate in the initiative by downloading and installing a mobile wallet application to their smart phones. The mobile wallet functions similar to other electronic payment applications and can then be loaded with “sand dollars” to pay retailers and service providers through wallet-linked QR codes.
Given that the sand dollar is still in its pilot phase, the Central Bank has imposed various restrictions on the use of the sand dollar. For now, businesses cannot retain more than $1 million, and residents cannot store more than $500 in their mobile wallet. However, the Central Bank anticipates extending the pilot to Abaco in the Bahamas in the first half of 2020.
Please click here for the Central Bank of the Bahamas Summary of Project Sand Dollar.