New-Wave Legal Challenges for Bitcoin and Other Cryptocurrencies

Now, those involved in global Initial Coin Offerings (ICOs), which function like traditional securities offerings, and similar transactions will need to consider whether the cryptocurrencies concerned are securities, as well as the extent to which U.S. securities laws apply to such transactions made outside the United States. In an ICO, virtual coins or tokens are distributed by a company to the public in exchange for another cryptocurrency or fiat currency. These coins or tokens come with particular rights, which could range from a right to access software, redeem the token for a currency or service, or receive future earnings from the company.

In a recent shot across the bow after issuing its report, the Securities Exchange Commission (SEC) filed an emergency TRO to freeze the assets of a Brooklyn-based businessman and two of his companies in an attempt to halt two ongoing ICOs, including one that the SEC claimed was disguised as a club membership. See, SEC v. RECoin Group Foundation, LLC. The Department of Justice (DOJ) too has recently weighed in. In July, the DOJ brought criminal charges against BTC-e, a major foreign platform for buying and selling virtual currencies, and its Russian operator for violations of U.S. anti-money laundering laws (more on this below). Other countries, including the United Kingdom and Japan, similarly have indicated that regulatory reform to address cryptocurrency growth is on the horizon. In light of this enforcement environment, those using cryptocurrency to do business need to pay attention to the rules of financial regulatory compliance and the possibility of defending civil or criminal charges.