SEC DAO Report and The Future of Virtual Currencies October 11, 2017 By: Carol Van Cleef and John Harrington
Contact Us Carol R. Van Cleef Partner 202.861.1514 cvancleef@bakerlaw.com @carol_vancleef John Harrington Partner 216.861.6697 jharrrington@bakerlaw.com 2
IN THE BEGINNING 3
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It was simple Sort of Medium of exchange Store of value Unit of measure Stone, metals, paper Issuer private, government 5
Enter Digital Age Electronic Money Wires ACH Digital Currencies Internet Commerce e.g., e-gold Virtual Currencies Online Games Linden Dollars 6
And then 7
Downloadable Open Source Code 8
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
Bitcoin versus Fiat Currency 10
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
Anyone can get Bitcoin 12
Value of Bitcoin Massive increase over time Huge fluctuation with overall upward trend Has equivalent value in other currencies, fiat and virtual 13
Charting it out - Lifetime 14
Evolution of the Conversation Bitcoin Cryptocurrencies Blockchain Blockchain Technology and Other Distributed Ledger Technologies Smart Contracts And ICO 15
The Proliferation of Virtual Currencies Is it possible to make a better Bitcoin? 16
Building Block(chain)s What is blockchain technology? Distributed and decentralized network Computers (nodes) validate inputs Running record of data, called a ledger 17
Graphically 18
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
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
The DAO The DAO Token Sale The Hack The Fix The Petition The SEC Report 21
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
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
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
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
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
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
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
Near Term Bubble? Losses? More regulation? New cop on the block? Lawsuits? Prohibition? 29
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
Questions? 31
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