Articles Posted in Technology

We have explored the emerging technology of virtual currencies, after delving into the blockchain space last month.  We explored how virtual currencies are being regulated—a hitherto unclear area of law that befits our general understanding of the technology itself.  After all, the blockchain was specifically designed to avoid the vicissitudes of politics that accompany regulation, which is what has allowed it to be such an engine of wealth.  The technology can be tethered to tokens and commodities, or simply used in exchange for Central Bank backed currencies.  We explored unclaimed property, gift, licensure, and tax laws, and how each applies to virtual currencies.  This week we hone our gaze on more specific laws and their effects on virtual currency: The Patriot Act and Bank Secrecy Act.  We will also focus on data privacy and security.

These two federal laws have achieved many things. Their statutory requirements can apply when something of value is exchanged between parties (e.g., goods, currencies), or stored value is issued, redeemed, or sold, or even when electronic wallets are simply held.

These requirements run the gamut regarding what those who fall under the federal statutes must accomplish. For example, often those engaging in the above-listed activities must retain specific information on whatever transfer or holding they engaged in the transaction. This helps the government track information it needs to bring the transactions under whatever legal scope it deems proper. Yet, much information is already stored, however, as the blockchain essentially acts as a ledger, but it can also be difficult to extract sometimes.

We are continuing our discussion about virtual currencies and the related issues. Because this is a burgeoning technology producing a wonderful array of blockchain innovations, regulators have struggled to determine how, or whether at all, they should regulate it.  It poses an array of novel legal questions, and its economic impact renders it of crucial importance.  Hence, it behooves regulators to assess the market and technology in order to tailor regulation. Also, many companies are not well versed in the areas of law that might affect them.  In fact, many simply follow suit, and repeat what they see other companies doing, and assume the technology’s novelty leaves them in the clear.  However, it can steer them into problems, and they often will not know they are not in compliance with the legal requirements.

In general, taxation is one area where policy matters is one that unfortunately pervades most people. Congress is currently laying the groundwork for new regulations that are innovated and tailored towards virtual goods and virtual currencies.  It is conducting congressional studies to see how best to accomplish the task. So, congressional hearings on the subject are a frequent occurrence on Capitol Hill.

As it stands, a number of states have already passed legislation imposing the taxation of “digital downloads.”  Although, this type of legislation is not directly aimed at virtual currencies and goods specifically, some state statutes are so broad that they could effectively envelop such areas.  To date, this is the extent of laws applying to virtual goods, virtual currencies, and virtual-currency transactions in our country. There has yet to be comprehensive and standard legislation that applies definitively to the whole country in these areas.  As a result, specific guidance on how to comply with taxes is spotty and unreliable, and there are no institutions that shine a guiding light.

Last month, we explored the area of law surrounding blockchain technology.  Last week, we focused on a narrower realm of blockchain technology – i.e., virtual currencies.  Today, we delve further into digital currencies that are adding so much value to the modern economy.  Because the technology is so innovative and new, its legal landscape remains hazy and nuanced.  Today, we explore the legal interplay between virtual currencies and money-transmittal licensure.

At this time, state, federal, and international laws require that individuals and companies obtain licenses to engage in activity that involves the acceptance of funds coupled with the agreement to transfer or pay them to another party. In some circumstances, the law even requires special registration.  The only exception to this typically is when the recipient of the funds uses them to pay directly for goods and services offered by someone else. This has a close bearing on virtual currencies because they are often considered to be funds themselves. Depending on the exchange, such currencies may be considered merely placeholders for an asset, rather than assets or funds themselves.  This means, however, for exchanges in which virtual currencies are considered funds, licensure laws apply.

Although, the word “funds” is used often in this regulatory sphere, it might not be in the traditional sense.  As it is applied in licensure law, funds do not require real cash or money to be involved.  Really, most any type of monetary value is covered within the language of these laws. This includes, but is not limited to, electronic value.

We have narrowed our focus on blockchain’s legal issues to cryptocurrencies.  Tokenizing is a recent capital innovation and its legal landscape is hazy and nuanced at this time. This week, we will hone our focus further to shed light on this new technology, its economic and social benefits, and its legal implications so that its use may be optimized.  There is no legal constant for virtual currencies.  Instead, legal characterizations vary with the currency’s implementation.

In general, virtual currencies can be acquired and used in numerous ways.  Simple purchases with real money, to gambling, to sweepstakes, allow users to exchange it for other real-world products and services.  Furthermore, there are “dual currency” models which limit the conditions regarding how the currencies may be spent and earned.

As we discussed in the previous post, jurisdiction often becomes a key issue. Sometimes, simply offering a virtual currency to someone within a given jurisdiction is enough to trigger the application of that jurisdiction’s laws.  There are a number of areas of law that can be triggered jurisdictionally.