Federal Law and Cryptocurrency

Cryptocurrency is fairly new and is rapidly gaining attention in the financial and legal sectors of the world. The federal government, on the other hand, is trying to tackle this new form of money and regulate it as best as possible.

As of right now, the laws controlling and regulating cryptocurrency are in their infancy, meaning that the legislature and the courts have not had a chance to fully flesh out what works and what does not work when it comes to law and digital currency.

With this in mind, hiring a lawyer will be essential to your defense if you have been charged with, or under investigation for, a crime involving cryptocurrency. An experienced lawyer should be able to flesh out the issues in your case and find the weak spots in the laws that you have been accused of violating.

What is Cryptocurrency?

The dictionary defines Cryptocurrency as “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.” Essentially, this means that cryptocurrency does not physically exist but instead rely on their respective networks to collect and record all transaction information.

The “block,” which is similar to the bank record, keeps track of all transactions involving the cryptocurrency. The block is a digital register of everything that happens within the cryptocurrency network.

The block is, necessarily, a network of computers that all have the same history of transactions. This means that the list of transactions is held on every computer and every transaction that is completed gets validated by every computer, so it’s constantly updating itself. This form of currency, and storing currency, has become popular because it provides enhanced security, the possibility of anonymity, and it makes global business more accessible because there is no exchange rate necessary.

If cryptocurrency does not physically exist, how is there not an infinite amount of it?

Cryptocurrencies are self-regulated and make it so that users have to do some “work” in order to receive the currency. Cryptocurrencies are generated by the networks to incentivize the peers, also known as nodes and miners, to work to secure the network and check entries made in the block.

Each form of cryptocurrency has its way of generating and distributing the currency to its users.

For example, Bitcoin peers, called “miners,”  are rewarded for solving blocks. This “solving” means that the miners find the hash that connects the blocks. In simpler terms, Bitcoin miners are rewarded when there are able to connect a new grouping of data to the older groupings of data.

Is Bitcoin the only form of cryptocurrency?

No. While Bitcoin is by far the most well known there are many other types of cryptocurrency including Litecoin, Dash and Ripple, and Ethereum. Technically, there could be unlimited forms of cryptocurrency. As of right now, any person or company could create their way of cryptocurrency and put it into the marketplace.

Each form of cryptocurrency uses the same general blockchain format and provide the same general benefits as any other, like security and anonymity. The difference comes in operation – aka how the currency is found and disbursed between users. The other difference comes in the valuation in “real” currency, currency most commonly used and which is backed by a country.

The valuation of a particular type of cryptocurrency may fluctuate heavily based on a number of factors. These factors include:

• The number of nodes, or active wallets participating with the cryptocurrency,
• The technology behind the cryptocurrency,
• The safety of the cryptocurrency, like if it is vulnerable to hackers; or
• The current demand of the cryptocurrency.

Cryptocurrency and the Law          

As with most technological advances the United States Legislature has had trouble keeping up with cryptocurrency. Due to this delay, there is little when it comes to actual laws or regulations on the books dealing with cryptocurrency. One example of actual on-the-books regulations is the Securities and Exchange Commission’s regulations on “Initial Coin Offerings” (ICOs). Under these regulations, ICOs are to be treated similarly to Initial Public Offerings (IPOs).

An ICO, like an IPO, is the first offering of a stake, or a coin, in a business or municipality in order for that business or company to raise capital. IPOs are heavily regulated by the SEC because of how much money can be made, and lost, based on them. With the rise of cryptocurrency, many companies and business are seeing that ICOs may prove to be just as profitable. It is here that the SEC stepped in.

The SEC has stated that ICOs, based on the specific facts behind the particular ICO, may be considered securities offerings. Due to this, trading in cryptocurrencies would be subject to the securities fraud law, which is discussed in more detail below. While the legislature has battled to figure out just how to regulate the cryptocurrency and the activities that involve it, the courts have had to shape the old laws in order to hear cryptocurrency cases that are currently being brought. Many alleged crimes have been charged against people due to their activity with and participation in the cryptocurrency world.

Below are a few of the most frequent criminal charges that cryptocurrency has been associated with.

Charges Most Frequently Alleged in Connection with Cryptocurrency

• Securities Fraud (18 U.S.C. § 1348)

Securities fraud is the knowing execution, or attempt at execution, to defraud any person in connection with a security that is required to be registered under section 12 of the Securities Exchange Act of 1934 or to obtain under false or fraudulent means, any of the same securities. If convicted of securities fraud, you would face up to 25 years in prison, a fine of up to triple the amount gained from the fraud or a combination of both a prison sentence and a fine.

This is, perhaps, the most difficult law to flesh out on paper when it comes to cryptocurrencies. This is because, as stated above, the determination of whether a cryptocurrency or ICO is to be considered security is based on factors specific to the ICO or cryptocurrency.

If you traded cryptocurrency in any capacity, it would be in your best interest to contact an attorney so they could review your cryptocurrency activity and decide based on the most recent SEC and court holdings.

• Money Laundering (18 U.S.C. §1956)

Money laundering is the use of money gained from unlawful conduct in a financial transaction with the intent that the money supports the continuation of that unlawful activity or the knowledge that the transaction is designed to conceal the source of the money. If convicted, this crime carries with it a fine of up to $500,000 or twice the value of the property involved in the transaction, a prison sentence of not more than 20 years, or both a prison sentence and fines.

Many of the benefits that draw people to cryptocurrency also are what make it subject to abuse. With money laundering, for instance, the anonymity provides another barrier investigative authorities have to break through in order to track down how the cryptocurrency has traveled.

There have also been laundering mixing services that allow people to contribute money into a combined pool that scrambles them, so it becomes nearly impossible to track who put what money into the pool.

It has been predicted that by the end of 2018 over $1.5 million dollars will be laundered throughout the United States, almost triple the amounts laundered in years past. This jump is credited to the increased popularity of cryptocurrencies. As a result, the government has begun to craft special task forces of agents dedicated to monitoring the different blockchains and tracking transactions. They will also investigate what they believe to be suspicious activity.  

• Attempt to Evade or Defeat Taxes (26 U.S.C. §7201)

Any person who willfully acts in an attempt to avoid paying taxes to the United States government is guilty of a felony. If convicted, this crime carries with it a penalty of a fine of up to $100,000 for an individual, or $500,000 for a corporation, a prison sentence of up to 5 years, or both. In addition, the guilty party is responsible for the costs of prosecution.

Due to cryptocurrency typically operating outside the sphere of government and the fact that the value of any cryptocurrency can fluctuate heavily from day to day, there have been many issues when it comes to taxing it. Cryptocurrency has allows those who utilize it to act as a multinational corporation, meaning that they can keep untaxed income hidden. The government has caught on to this act, though, and has now begun to look through different cryptocurrency blockchains in order to follow where money is going.

The Internal Revenue Service is still just beginning to figure out how they can go about cracking down on the individuals who use cryptocurrency to evade taxes, but so far the courts have been on their side. In November 2017, for example, a judge held that a cryptocurrency exchange, Coinbase, must turn over all of the information it had on accounts with at least $20,000. The judge held that the government had a legitimate interest in the information because only about 800-900 taxpayers reported cryptocurrency gains on their returns between 2013 to 2015 while over 14,000 Coinbase users had made gains of over $20,000 in that same time period.

• Bankruptcy fraud (18 U.S.C. §157)

Another issue the courts are currently grappling with is how to deal with cryptocurrency when it comes to bankruptcy proceedings. Cryptocurrency, because of its anonymity, could be used to hide money from creditors who are pursuing someone who is declaring bankruptcy.

Bankruptcy fraud is when an individual, with the intent to defraud, files fraudulent documents in relation to a proceeding under title 11 of the bankruptcy code. If convicted, this crime carries with it the possibility of up to 5 years in prison, a fine of up to $250,000 for individuals or $500,000 for corporations, or both a prison sentence and a fine.

Bankruptcy courts are trying to tackle how exactly to treat cryptocurrency in proceedings, and there have been several proposals, including treating cryptocurrency the same as a foreign currency.  Since the idea of cryptocurrency in bankruptcy proceedings so so novel, so the court has had to rule on it. For now, the standard has yet to be set.

Additional Potential Charges

• Operating an ATM Without a License

This charge will fall under state law because each state has different regulations for the proper licensure necessary to operate Automatic Teller Machines (ATMs).

With the rise of cryptocurrency has come the need for ways to access their value in a moments notice.  While a few stores have begun to accept cryptocurrency as a valid form of payment, the vast majority do not. In comes, cryptocurrency ATMs, many of which allow you to both buy and sell different forms of cryptocurrency.

In New York City, for instance, a cryptocurrency ATM is treated the same as a regular, cash ATM and thus, you must have a proper license to operate one within the city limits.

When Should I Contact an Attorney?

If you have been dealing in cryptocurrency at all, it may be smart to at least consult with a lawyer about your transactions. Since the laws are in their infancy, there may be something legal today that becomes illegal tomorrow. While laws are not retroactive, if you are not constantly checking the state of cryptocurrency laws you may miss something crucial that could affect you.

In addition, you can be taking part in conduct that you do not know is illegal because of how courts are interpreting old laws in terms of cryptocurrency. Being on the cutting edge of something also means that you could become the example that the government makes a person when making groundbreaking prosecutions. It is far better to be safe than sorry when it comes to your activities with cryptocurrencies.

Contact an attorney who will be able to guide you through the current laws and interpret the new cryptocurrency laws and regulations as they are created and put into place.

Crypto Case Law

1. Federal Judge in NY says SEC Rules and Securities Laws Apply to Cryptocurrencies and Initial Coin Offerings.

In September of 2018, U.S. District Judge Raymond Dearie made the decision to allowed a case of crypto fraud to move forward against the defendant, Maksim Zaslavisky. This is significant because Zaslavisky is being charged under U.S. Securities laws, despite the fact that the allegations against him stem from his involvement in a fraudulent cryptocurrency scheme.

Wait for what?

Exactly.

This is the first case of its kind to address the matter of whether a defendant accused of fraud involving cryptocurrencies could be tried under U.S. securities laws.

So what’s the problem?

The controversy stems from the very definition of what a cryptocurrency is. U.S. courts, legislative bodies, and government agencies have all been struggling to come to a conclusion as to whether U.S. laws are applicable for prosecuting crypto fraud allegations.

So, is it security?

Judge Dearie seems to think so.