SEC DAO Report and The Future of Virtual Currencies

Transcription

1 SEC DAO Report and The Future of Virtual Currencies October 11, 2017 By: Carol Van Cleef and John Harrington

2 Contact Us Carol R. Van Cleef Partner John Harrington Partner

3 IN THE BEGINNING 3

4 4

5 It was simple Sort of Medium of exchange Store of value Unit of measure Stone, metals, paper Issuer private, government 5

6 Enter Digital Age Electronic Money Wires ACH Digital Currencies Internet Commerce e.g., e-gold Virtual Currencies Online Games Linden Dollars 6

7 And then 7

8 Downloadable Open Source Code 8

9 So what is Bitcoin? First-use case of blockchain or distributed ledger technology Like regular ( fiat ) currency sort of The first cryptocurrency but not the first virtual currency Real monetary value, but only exists in the ledger 9

10 Bitcoin versus Fiat Currency 10

11 How does Bitcoin work? Each person who owns bitcoin has at least one digital wallet address Wallets are encrypted and can only be accessed with a private key In a transaction, bitcoin is sent from one user to another user s public wallet address Amount and address are recorded on public ledger (in blocks on the blockchain) 11

12 Anyone can get Bitcoin 12

13 Value of Bitcoin Massive increase over time Huge fluctuation with overall upward trend Has equivalent value in other currencies, fiat and virtual 13

14 Charting it out - Lifetime 14

15 Evolution of the Conversation Bitcoin Cryptocurrencies Blockchain Blockchain Technology and Other Distributed Ledger Technologies Smart Contracts And ICO 15

16 The Proliferation of Virtual Currencies Is it possible to make a better Bitcoin? 16

17 Building Block(chain)s What is blockchain technology? Distributed and decentralized network Computers (nodes) validate inputs Running record of data, called a ledger 17

18 Graphically 18

19 Emerging Potential of Blockchain/DLT Technology Accessible technology Virtually unlimited use cases Consortium efforts across every industry New technological solutions for old problems New products and services And new ways to raise funds 19

20 Exploiting the Potential for Fund Raising The first ICOs Native currencies Mastercoin and Ethereum building networks Smart contracts and Decentralized Applications Decentralized Autonomous Organizations ERC-20 token standard The White Paper 20

21 The DAO The DAO Token Sale The Hack The Fix The Petition The SEC Report 21

22 The SEC Report of Investigation: The DAO Tokens were securities Applied Investment Contract test as originally established by US Supreme Court in SEC v. W.J. Howey Co. (1946) An investment of money In a common enterprise With a reasonable expectation of profits From the efforts of others Some nuance due to the new technology, structure and decentralization Platforms that maintain facilities allowing secondary market trading of tokens need to be registered as securities exchanges or exempt 22

23 SEC on DAO Software developer/promoter unregistered broker dealer Implications for Purchasers of Tokens on resale Potential investment company under 40 Act Jurisdictional issues? 23

24 The One-Two Punch BTCe one of world s largest cryptocurrency exchanges seized next day, founder arrested Department of Justice indicted founder FinCEN imposed fines $110 million BTCe $12 million founder Failure to be registered with FinCEN as a money services business Failure to implement an Anti-money laundering compliance program, file SARs and CTRs 24

25 SEC Actions Letters sent to companies in late August One company gave back funds raised in ICO SEC filed on 9/29 complaint against real estate and diamond ICO promoter for fraud, and penny stock pump-anddump type schemes (SEC v. Recoin Group Foundation) Sale of unregistered security Tokens and coins did not exist Investor Bulletins 25

26 The Explosion of Token Generating Events and the Occasional ICO Over $2 billion raised by mid-september 2017 Largest to date - $238 million Frenzy unabated by SEC report China ban in early September Russian ban? Many other countries following U.S. lead 26

27 Analyzing an ICO/TGE What is it? Currency Security Commodity What is the purpose of the coin or token? How much will be raised? Where will it be done? What is the intended use of the proceeds? What is the management team like? What are the legal/regulatory/tax implications? 27

28 Regulatory Climate for Virtual Currencies 18 USC 1960 Failure to register as an MSB Failure to be licensed under state money transmitter laws State money transmitter statutes 49 states maybe/maybe not definitely NY Uniform Law Commission Virtual Currency Model Code MSB registration AML compliance program SARs, CTRs and Funds Transfer Rule Customer Identification (See BTCe) IRS Property Coinbase - John Doe Summons SEC/CFTC DAO Report Enforcement Actions Rejected ETFs 28

29 Near Term Bubble? Losses? More regulation? New cop on the block? Lawsuits? Prohibition? 29

30 The Future More virtual currencies launched More token sales More funds raised More ideas become reality Fundraising forever changed Arms race intensifies The world is smaller than ever 30

31 Questions? 31

32 Atlanta Chicago Cincinnati Cleveland Columbus Costa Mesa Denver Houston Los Angeles New York Orlando Philadelphia Seattle Washington, DC bakerlaw.com These materials have been prepared by Baker & Hostetler LLP for informational purposes only and are not legal advice. The information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should consult a lawyer for individual advice regarding your own situation.