Virtual currencies are captivating investors and companies alike with their potential to revolutionize business transactions and the way consumers spend and manage their money. But the explosion of Bitcoin and other cryptocurrencies is happening so quickly that what some see as a goldmine also presents a multitude of legal landmines for anyone venturing into this uncharted territory.

During the first Congressional hearing on virtual currencies in 2013, U.S. Senator Tom Carper, D-DE, who was Homeland Security and Governmental Affairs Committee Chairman at the time, was widely quoted in media accounts as saying: "Virtual currencies have captured the imagination of some, struck fear among others, and confused the heck out of many of us." Certainly, the legal landscape is racing to catch up with this rapidly evolving market. Nevertheless, you can navigate this challenging environment successfully with comprehensive legal assistance that combines the knowledge and experience of attorneys across multiple disciplines.

Here are some of the issues you should be aware of if you want to participate in the digital currency market:

  • Regulatory compliance. As investment in cryptocurrencies has become increasingly commonplace, regulators have broadened their focus beyond simply targeting clearly illegal activity, such as utilizing cryptocurrency to commit drug offenses, and are moving aggressively to bring this sector into the fold of existing rules and regulations. This means virtual currencies are now being subjected to compliance with many federal and state anti-money laundering rules and regulations, in addition to those segmented across various countries. Numerous other issues loom, including possible registration with the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission, and application of Office of Foreign Assets Control regulations to businesses dealing with virtual currencies.
  • Raising capital. Virtual currency markets have taken crowdfunding to a new level with “initial coin offerings,” also called ICOs or token sales, which enable startups and online projects to raise money without selling stock or pitching to venture capitalists. The SEC has asserted an aggressive position on whether ICOs are securities. In unscripted remarks in November at a Practising Law Institute program on securities regulation, SEC Chair Jay Clayton stated: “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security,” according to the Wall Street Journal. The SEC has also raised concerns that new technologies and financial products associated with ICOs can be used improperly to entice investors with the promise of high returns in a new investment space. Attorneys familiar with securities regulation and enforcement can assist developers, businesses, and individuals with ICOs.
  • Implications for financial services. The advent of virtual currencies is opening up new opportunities for financial services products at a wide range of institutions, including traditional banks. Financial instruments such as insurance and derivatives have become available to help hedge clients’ risks, and there is the potential for new investment offerings focused on Bitcoin. Consumer financial services and intellectual property attorneys with experience in product development can provide invaluable insight in this area.
  • Cybersecurity and data privacy. Privacy and data security are crucial for virtual currency market participants. The transaction system leaves users with limited protection and recourse in cases of fraudulent transfers, unauthorized transactions, or lost bitcoins. Anyone involved in the cryptocurrency space will need advice on issues that include development of information risk management programs, cyber protection, vendor assessment and management, security disclosures, employee training, and cyber incident planning and response.
  • Tax issues. The IRS treats virtual currency, which is not backed by any government, as “property” rather than currency. This can create practical and legal complexities in ascertaining taxable income. The tax and accounting implications of Bitcoin may include revenue recognition, mark-to-market valuation, characterization of profits and losses for tax purposes, and basis tracking.

Ballard Spahr has responded to the emerging need for business guidance on virtual currencies by forming a team of attorneys with a breadth of regulatory, enforcement, litigation, and transactional knowledge and experience. We recognize that the excitement surrounding digital currencies has provided an immense opportunity for interested parties to safely and lawfully participate. Through our combined strengths, we can help market participants take advantage of this innovation while minimizing the inherent risks.

Ballard Spahr partners Marjorie J. Peerce and Peter D. Hardy are co-leaders of the firm’s Virtual Currency team. Based in the firm's New York office, Margie focuses on white collar criminal defense, regulatory matters, and complex civil litigation. She has handled criminal and regulatory investigations in a wide range of legal issues, including securities fraud involving bitcoins. A national thought leader on money laundering and criminal tax law, Peter is based in the firm’s Philadelphia office. He advises corporations and individuals in a range of industries against allegations of misconduct—including Bank Secrecy Act violations, money laundering, tax and securities fraud, and identity theft and data breach—and counsels clients on compliance with the array of applicable laws and regulations. Contact Margie or Peter at ballardvirtualcurrency@ballardspahr.com.


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Contact our
Virtual Currency Team at ballardvirtualcurrency@ballardspahr.com.