COUNCIL FOR THE ADVANCEMENT OF BLOCKCHAIN MEETING SUMMARY. November 13, :00 p.m.-4:00 p.m.

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1 MEETING DATE November 13, 2018 COUNCIL FOR THE ADVANCEMENT OF BLOCKCHAIN MEETING SUMMARY November 13, :00 p.m.-4:00 p.m. MEETING PARTICIPANTS A. Council Members Dan Baer, Stephanie Copeland, Blake Cohen, Paul Foley, Eric Kintner, Matt McClintock. Hannah Parsons, Paul Quigley, Scott Sanderson, Sasha Shtern B. Staff Jana Persky MEETING SUMMARY The meeting was called to order at 2 p.m. A. Minutes October 23, 2018 Copeland motioned to approve the minutes from the October 23, 2018 meeting as written. Parsons seconded the motion. Motion passed unanimously. B. Working Session on Proposed Legislation Foley presented on the draft proposal for a Blockchain Point of Contact in the Polis administration. The group discussed whether the role should be an advocate for the industry or a neutral safe harbor to help navigate the process. The group agreed that a neutral support option would be most beneficial, but the ideal candidate would understand the industry and the regulatory concerns, and help organize regulators to provide a more streamlined process for answering questions. Copeland to work on setting up time to present to the Polis team. McClintock reported on draft taxation bill providing a de mininis exclusion for gains derived from sale of virtual currency, ( Cryptocurrency Tax Fairness Act ) based on the Polis/Schweikert draft in the US Congress. Bill is being drafted. Persky agreed to help Kintner and McClintock set up meeting with Department of Revenue to discuss this bill and additional clarity needed on blockchain. Kintner shared updates on the Colorado Digital Token Act. The new draft of the bill provides additional clarity on consumptive purpose. The working group is continue to clarify the exchange exemption and how it applies to exchanges/broker-dealers/salespeople. Kintner to connect with bill drafter to develop appropriate language. Council discussed potential for a FinTech sandbox but decided it is likely best to wait a year to see if it is needed. Arizona is an example, though the Council discussed different options for qualification, so as timeframe vs. number of users, and other requirements for entering/exiting the Sandbox. C. Colorado Commission on Uniform State Laws The next CCUSL hearing is on January 11 and the Council is planning to testify against the Uniform Virtual Currency Bill. Representative Cole Wist, who had brought up the ULC Virtual Currency Bill, lost his seat so it

2 is unclear if there will be other proponents of the legislation. The Council would still like to make sure it is prepared to oppose. D. Other Actions Baer reported that the Higher Education Working Group will have its first meeting on December 13 th at 8am at the Department of Higher Education. With all agenda items discussed, the meeting adjourned at 4:00pm.

3 Executive Summary Colorado Digital Token Act (C.R.S ) The Initial Coin Offering (ICO) industry flourished in 2017 and 2018, raising an estimated $14 billion for cryptocurrency projects. 1 Despite the tremendous growth in this new fundraising model, there remains regulatory uncertainty that ICOs constitute illegal securities offerings. The impetus behind the Colorado Digital Token Act is to provide regularity clarity for companies that desire to issue digital tokens and use cryptoeconomic systems to create new forms of decentralized, Web 3.0 platforms and applications. Certain cryptoeconomic projects, including those focused on protocols and infrastructure, can be tokenized and, as a result, create new business models that have powerful network effects. There is growing recognition that ICOs could be well suited for the growth capital fundraising stage of cryptoeconomic projects that have already developed a minimum viable product. Innovative consumer goods platforms, like Indiegogo, Kickstarter and Crowd Supply, currently provide a means for consumer goods companies to acquire growth capital and consumers by pre-selling the right to receive consumer goods before such goods are ready to be sold or used, and also provide a marketplace for the purchase and sale of consumer goods that are ready for use. In contrast, companies using cryptoeconomic systems that seek to acquire growth capital and network participants by pre-selling digital tokens that have a primarily consumptive purpose face regulatory uncertainly that the offer, sale or transfer of such digital tokens may be prohibited under the Colorado Securities Act. The Colorado Digital Token Act provides a registration exemption under the Colorado Securities Act for issuers of digital tokens that have a primarily consumptive purpose. In addition, the Act provides a licensing exemption under the Colorado Securities Act for platforms that seek to facilitate the purchase, sale or transfer of digital tokens that have a primarily consumptive purpose. 1 See

4 Colorado digital token act 2 - legislative declaration - exemptions - definitions - rules. (1) Short title. The short title of this section is the "Colorado Digital Token Act" 3. (2) Legislative declaration. The general assembly hereby: (a) Finds that: (I) Cryptoeconomic systems (or protocols that govern the production, distribution, and consumption of goods and services in a decentralized, digital economy) can be an important component of blockchain technology; (II) Blockchain technology has the potential to create new forms of decentralized, Web 3.0 platforms and applications that have advantages over the current centralized Internet platforms and applications; (III) Colorado has become a hub for companies and entrepreneurs that seek to utilize cryptoeconomic systems to power blockchain technology-based business models; (IV) Companies that seek to utilize cryptoeconomic systems face regulatory uncertainty that the issuance, sale and purchase of digital tokens that have a primarily consumptive purpose may be prohibited under the Colorado Securities Act; (V) Crowdfunding consumer goods platforms, like Indiegogo, Kickstarter and Crowd Supply, provide a means for companies and entrepreneurs to acquire growth capital and consumers by pre-selling the right to receive consumer goods before such goods are ready to be sold or used, and also provide a marketplace for the purchase and sale of consumer goods that are ready for use; (VI) Companies using cryptoeconomic systems that seek to acquire growth capital and consumers by pre-selling digital tokens that have a primarily consumptive purpose face regulatory uncertainly that the offer, sale or transfer of digital tokens may be prohibited under the Colorado Securities Act; and (VII) Companies that seek to create a marketplace to effect the purchase, sale or transfer 4 of digital tokens that have a primarily consumptive purpose face regulatory uncertainty that effecting or attempting to effect the purchase, sale, or transfer of a digital token may be prohibited under the Colorado Securities Act. 2 The Colorado Digital Token Act (the Act ) was developed by the Colorado Council for the Advancement of Blockchain Technology Use, including the members of the Council s Securities Working Group (collectively, the Council ). 3 The Council settled on the term digital token, rather than terms like utility token, because the Council believed an open-ended term would not create any presumption that the Act should be narrowed to only certain types of protocol or infrastructure projects. 4 The Council included transfer in order to expressly permit free digital token offerings, like airdrops, and not suggest that only digital tokens that are purchased or sold for consideration would be available to utilize the exemptions available under the Act.

5 (b) Determines that: (I) The costs and complexities of state securities registration can outweigh the benefits to Colorado businesses using cryptoeconomic systems that seek to raise growth capital and create new decentralized Internet platforms and applications by offering the sale or transfer of digital tokens that have a primarily consumptive purpose; and (II) Companies that seek to issue, or effect the purchase, sale, or transfer of, digital tokens that have a primarily consumptive purpose face regulatory uncertainty under our state securities laws; and (III) The issuance, sale, purchase, and transfer of digital tokens that have a primarily consumptive purpose allows companies using cryptoeconomic systems to access the growth capital and build a network of participants they need to grow and expand their businesses. (c) Declares that: (I) Creating a Colorado digital token act, with limitations to protect consumers, will enable Colorado businesses that use cryptoeconomic systems to obtain growth capital to help grow and expand their businesses, thereby promoting the formation and growth of local companies and the accompanying job creation as well as to help make Colorado a hub for companies that are building new forms of decentralized, Web 3.0 platforms and applications. (3) Exemptions. (a) Issuer exemption. An offer or sale of a digital token is exempt from section if: (I) The offer or sale: (A) Occurs after the securities commissioner initially promulgates rules to implement this section; and (B) Complies with all of the requirements of this subsection (3)(a) and those contained in the rules promulgated pursuant to subsection (5) of this section; (II) The issuer of the digital token files a notice of intent with the securities commissioner as specified in subsection (3)(c) of this section; (III) The primary purpose 5 of the digital token is a consumptive purpose; 5 The Council believes that only those digital tokens that have a primary consumptive purpose should qualify for the issuer exemption from registration as a securities offering. Digital tokens that only have minor or nominal consumptive purposes should not qualify. The Council recognizes that the term primary purpose is not defined and does create a bright-line test, but the Council believes that it would be very difficult to define or identify such bright lines in the Act. The Council believes that the Colorado Securities Commissioner s rulemaking process and future case law would be better suited for further clarifying this requirement.

6 (IV) The issuer of the digital token markets 6 the digital token to be used for a consumptive purpose and does not market the digital token to be used for a speculative or investment purpose; and (V) (A) The consumptive purpose of the digital token is available at the time of sale or transfer; or (B) (I) The consumptive purpose of the digital token is available within one hundred (180) days 7 after the time of sale or transfer of the digital token; (II) The initial buyer is prohibited from reselling or transferring the digital token until the consumptive purpose of the digital token is available; and (III) The initial buyer provides a knowing and clear acknowledgment that the initial buyer is purchasing the digital token with the primary intent to use the digital token for a consumptive purpose and not for a speculative or investment purpose. 8 (b) Licensing exemption. A person that engages in the business of effecting or attempting to effect 9 the purchase, sale, or transfer of a digital token is exempt from section if: (I) The person: (A) Effects or attempts to effect the purchase, sale, or transfer after the securities commissioner initially promulgates rules to implement this section; and 6 The Council believes that digital tokens that seek to qualify for this exemption should be marketed for their consumptive purposes and should not be marketed in any way that suggests the digital tokens have an investment or speculative purpose. The Council believes that this requirement will help to reduce the likelihood that token purchasers are misled by the all-too-familiar speculative hype surrounding ICOs. 7 The Council believes that digital tokens that have a primary consumptive purpose either at the time of sale or within a reasonable time period after sale are less likely to lead to rampant speculation and token flipping surrounding many ICOs. The Council decided that a 180-day period after sale (coupled with the restrictions on transfer of digital tokens before the consumptive purpose is available) was a reasonable balance between the desire to reduce the speculative ICO buying atmosphere and still permit cryptoeconomic businesses and projects the same opportunity to pre-sell their consumptive purpose tokens in an ICO as consumer goods companies have to pre-sell their consumer goods on platforms like Indiegogo and Kickstarter. 8 The Council believes that requiring this acknowledgement by the buyer of a pre-sale digital token is important to establish the buyer s intent that she is purchasing the pre-sale tokens for primarily consumptive purpose and not relying on the efforts of the issuer to generate profits for the buyer (as required under the US Supreme Court s Howey test for investment contracts). 9 The Council believes that digital token exchanges should also have the benefit of a licensing exemption to create marketplaces, like Indiegogo and ebay, for the purchase, sale or transfer of digital tokens.the Council wrestled with how to describe the type of broker-dealer or securities salesperson activities. The Council s intent is to capture the scope of activities that would be subject to licensing as a broker-dealer or securities salesperson under the Colorado Securities Act.

7 (B) Complies with all of the requirements of this subsection (3)(b) and those contained in the rules promulgated pursuant to subsection (5) of this section; (II) The person files a notice of intent with the securities commissioner as specified in subsection (3)(c) of this section; (III) The digital token can be used for a consumptive purpose at the time the person effects the purchase, sale, or transfer of a digital token; and (IV) The person takes reasonably prompt action to terminate effecting the purchase, sale, or transfer of any digital token that does not conform to the requirements of this subsection (3)(b). 10 (c) An issuer of a digital token and a person that is engaged in the business of effecting or attempting to effect the purchase, sale, or transfer of a digital token each shall cause to be filed a notice of intent with the securities commissioner before such issuer or person may qualify for an exemption under this section. The securities commissioner shall make a form available for this purpose on its website. 11 If the information contained on the notice required in this subsection (3)(c) becomes inaccurate in any material respect for any reason, such issuer or such person shall file an amendment to the notice in writing with the securities commissioner within thirty days. 12 (d) Notwithstanding any other provision of this part 3, the securities commissioner may enter into agreements with federal, state, or foreign regulators to allow digital tokens issued, purchased, sold, or transferred in this state to be issued, purchased, sold, or transferred in another jurisdiction, and any digital tokens issued, purchased, sold, or transferred in another jurisdiction to be issued, purchased, sold, or transferred in this state. (4) Definitions. As used in this section: 10 The Council debated whether to include a requirement under the licensing exemption under subsection 3(b) that the issuer of the digital token also have filed a notice of exemption under subsection (3)(a). The Council decided that such a requirement may be one way, but not the only way, to determine if the digital token constitutes a security under the Colorado Securities Act. For example, some cryptoeconomic projects, like Bitcoin, do not have an issuer in the traditional sense that could file a notice of exemption, yet the SEC has indicated that Bitcoin is not a security. As a result, the Council decided that the Securities Commissioner should address this requirement through its rule making process. 11 The Council debated whether to include a minimum number of requirements for the notice forms. The Council decided that the Securities Commissioner should have the flexibility to determine the types of information required to satisfy the requirements of the Act. 12 The Council s intent for the Act is to create a narrow exemption under the Colorado Securities Act for certain types of digital token offerings that have a primary consumptive purpose. The Council believes that there digital token projects that should remain subject to the securities laws. The Council debated whether to include an express provision that the Securities Commissioner and Attorney General retained the authority to enforce the securities laws as well as to prohibit fraud or deceit in the issuance, sale or transfer of digital tokens. The Council decided that it was not necessary to include such a provision and instead make this intent clear through this annotated version of the Act.

8 (a) "Consumptive purpose" means to provide or receive goods, services, or content, including access to goods, services, or content. 13 (b) "Digital token" means a digital unit that is: (I) Created: (A) In response to the verification or collection of a specified number of transactions relating to a digital ledger or database; (B) By deploying computer code to a blockchain network that allows for the creation of digital tokens or other units; or (C) Using any combination of the methods specified in subsections (4)(b)(I)(A) and (4)(b)(I)(B) of this section; (II) Recorded in a digital ledger or database that is chronological, consensus-based, decentralized, and mathematically verified in nature, especially relating to the supply of units and their distribution; and (III) Capable of being traded or transferred between persons without an intermediary or custodian of value. (5) Rules. The securities commissioner may adopt rules as necessary to implement this section or enforce this section or provide exemptions or waivers to the requirements of this section. (6) Safe Harbor. 14 No presumption shall arise that an issuer of any digital token or other cryptocurrency, or any person that effects the purchase, sale, or transfer of any digital token or other cryptocurrency, has violated the Colorado Securities Act solely by reason of such person s participation in the issuance, sale, purchase, or transfer of any such digital token or other cryptocurrency if such person does not meet the requirements specified in section 3(a) or section 3(b) of this section. No presumption shall arise that any issuer s securities offering permitted under the Colorado Securities Act will be integrated with any issuer s digital token offering permitted under this section. 13 The Council believes that the consumptive purpose requirement should not be limited to purely digital uses. For example, the Council discussed a Crane Coin example whereby an issuer could pre-sale a digital token where the capital could be used to construct a construction crane and the tokens could be redeemed to use the construction crane once it is operational. 14 The Council wanted to make it clear that the provisions of the Act are intended to provide a narrow exemption from the securities laws. Digital token offerings or exchanges that facilitate the sale or transfer of digital tokens that don t comply with the exemptions under the Act should not be deemed per se in violation of the securities laws. Likewise, contemporaneous offerings of other digital tokens or securities by issuers should not per se be integrated with any offerings or transfers of digital tokens under the Act.

9 Colorado Digital Token Act [TO ADD SPONSORSHIP INFORMATION etc] Summary The Colorado Digital Token Act provides a registration exemption under the Colorado Securities Act for issuers of digital tokens that have a primarily consumptive purpose. In addition, the Act provides a licensing exemption under the Colorado Securities Act for platforms that seek to facilitate the purchase, sale or transfer of digital tokens that have a primarily consumptive purpose. 1. Issuer Exemption The issuer exemption creates an exemption from relevant securities laws (section ) for digital tokens that are designed to be used for consumptive purposes and not for speculative or investment purposes. An example of this type of token is XXXXX. This is similar to a crowd-funding platform like Indiegogo or Kickstarter that allows a company or entrepreneur to acquire growth capital by pre-selling the chance to receive a good, even before such a good is ready for use. To qualify for this exemption: The issuer of the token must file a notice of intent with the Securities Commision The primary purpose of the token must be a consumptive purpose The issuer of the token must market the token to be used for a consumptive purpose and not for a speculative or investment purpose The token s consumptive purpose must be available within 6 months of the time of sale of the token The token cannot be resold or transferred until the consumptive purpose is available The buyer of the token must acknowledge that they are purchasing the token with the intention to use the consumptive purpose This exemption is intended to create clear delineations of tokens that are primarily intended to be used for a consumptive purpose and thus can be safely and fairly exempted for securities regulations. 2. Licensing Exemption The licensing exemption creates an exemption from broker-dealer requirements (section ) for people or exchanges that are selling tokens that meet the consumptive purpose outlined above. To qualify for this exemption: The token must be able to be used for a consumptive purpose at the time of purchase or sale

10 Both the issuer of the token and the person selling the token must file notice of intent with the securities commissioner The person selling the token must stop selling the token promptly if it is found to be in compliance This exemption will allow exchanges and other sellers of tokens to safely sell digital tokens that are primarily intended to be used for consumptive. This is a natural follow-on from the issuer exemption. Context: The Initial Coin Offering (ICO) industry flourished in 2017 and 2018, raising an estimated $14 billion for cryptocurrency projects. Despite the tremendous growth in this new fundraising model, there remains regulatory uncertainty that ICOs constitute illegal securities offerings. The costs and complexity of navigating this regulatory system can be prohibitive to entrepreneurs, particularly as they are trying to acquire the capital necessary to grow. The impetus behind the Colorado Digital Token Act is to provide regularity clarity for companies that desire to issue digital tokens and use cryptoeconomic systems to create new forms of decentralized platforms and applications. Endorsements/Examples: Similar to Arizona H.B. 2601, which passed in 2018 Similar to Wyoming H.B. 70, which passed in 2018 The full Blockchain Council is in support of this bill This bill creates a common-sense exemption from securities laws for tokens that are clearly not intended to be securities or investments. This will provide clarity for entrepreneurs without subjecting consumers to any additional risk.

11 Follows is the text from the Cryptocurrency Tax Fairness Act sponsored by Polis (D) and Schweikert (R) in congress. No substantive modifications have been made. Please note a few annotations. We will need folks from the legislative bureau of the General Assembly to work on the section references within the CO tax code. Text in BOLD is the text of the bill. Annotations in underlined italics. Working title: THE COLORADO CRYPTOCURRENCY TAX FAIRNESS ACT OF 2019 A BILL To amend the Colorado Income Tax Act of 1987 to exclude from gross income de minimis gains from certain sales or exchanges of virtual currency, and for other purposes. Be it enacted by the General Assembly of the State of Colorado, SECTION 1. VIRTUAL CURRENCY. (a) IN GENERAL. Section of the Colorado Income Tax Act of 1987 is amended by inserting after section the following new section: SEC.. GAIN FROM SALE OR EXCHANGE OF VIRTUAL CURRENCY. (a) IN GENERAL. Gross income shall not include gain from the sale or exchange of virtual currency for other than cash or cash equivalents. (b) LIMITATION. (1) IN GENERAL. The amount of gain excluded from gross income under subsection (a) with respect to a sale or exchange shall not exceed $600. This exclusion should cover 100% of all gain on any transaction that does not exceed $600. In other words, an individual who purchases a meal, a product, or a service for an amount of $600 or less does not report gain because even if she purchased BTC at $0.01, the total amount of her gain would not exceed $600 on the transaction. This also scales up to exclude the first $600 of gain on larger transactions. If our purchaser buys a vehicle for $10,000, she will have to report the gain on her BTC to the extent her gain exceeds $600. The first $600 of her gain is excluded, and she must report and pay tax on the amount of her gain in excess of $600. (2) AGGREGATION RULE. For purposes of this subsection, all sales or exchanges which are part of the same transaction (or a series of related transactions) shall be treated as one sale or exchange.

12 The aggregation rule prevents our hypothetical vehicle buyer from making a series of 20 payments valued at $500 to avoid recognition of gain. Those payments would be aggregated, forcing her to recognize and report the gain on the transaction. (c) VIRTUAL CURRENCY. For purposes of this section, the term virtual currency means a digital representation of value that is used as a medium of exchange and is not otherwise currency under section. ( NOTE: Cross reference to definition of virtual currency from definitions working group, if applicable. Otherwise, pull in definition used by IRS. ) (d) INFLATION ADJUSTMENT. In the case of any taxable year beginning in a calendar year after 2018, the dollar amount in subsection (b) shall be increased by an amount equal to (1) such dollar amount, multiplied by (2) the cost-of-living adjustment determined under section 1(f)(3) of the Internal Revenue Code of 1986 for the calendar year in which the taxable year begins, determined by substituting calendar year 2018 for calendar year 1992 in subparagraph (B) thereof. Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50. I did not research to see if Colorado has its own COLA adjustment; I doubt it does. This language was modified just to specifically reference the COLA language that appears in IRC section 1(f)(3) and peg it to 2018 with the assumption that this law can be enacted in (b) CLERICAL AMENDMENT. The table of sections for part of the Colorado Income Tax Act of 1987 is amended by inserting after the item relating to section the following new item: Sec.. Gain from sale or exchange of virtual currency.. (c) REPORTING OF GAINS OR LOSSES. The Secretary shall issue regulations providing for information returns on virtual currency transactions for which gain or loss is recognized. (d) EFFECTIVE DATE. The amendments made by this section shall apply with respect to transactions entered into after December 31, 2018.

13 Colorado Cryptocurrency Tax Fairness Act [ADD SPONSORSHIP INFORMATION etc] Summary This bill creates an exemption from capital gains tax for taxpayers purchasing small goods and services with cryptocurrencies. This bill is almost identical to the Cryptocurrency Tax Fairness Act that then-reps Polis and Schweikert introduced to the US Congress. Currently, cryptocurrencies like Bitcoin are taxed as property within Colorado, which means that gains from sale and exchanges are treated as capital gains, not ordinary income. Because there is no de minimus exemption for small transactions, taxpayers purchasing goods or services, such as a cup of coffee or an MP3 download, with a cryptocurrency must track and report the price of the cryptocurrency at the time of sale to report to the IRS at the end of the year. This creates a lot of friction that discourages the use of cryptocurrencies in everyday purchases. Under this bill, any cryptocurrency transaction under $600 would be completely exempt from capital gains tax. Taxpayers would not be required to track small purchases nor pay taxes on them. This mirrors the same kind of exemption that is provided for foreign currency. Transactions above $600 would still require gains to be tracked and reported, and capital gains tax to be paid. This bill also includes an inflation adjustment to ensure the bill remains relevant over time, and an aggregation rule to prevent a hypothetical purchaser from breaking a large purchase into several smaller payments to avoid recognition of gain. Endorsements/Examples: CoinCenter Jared Polis The full Blockchain Council is in support of this bill This bill will encourage the usage of cryptocurrencies for everyday purchases, as it will reduce the amount of friction that taxpayers face while remaining essential revenue-neutral by clarifying the need for reporting on gains or losses.