Digital Assets and Blockchain Technology: U.S. Law and Regulation PDF
Preview Digital Assets and Blockchain Technology: U.S. Law and Regulation
DIGITAL ASSETS AND BLOCKCHAIN TECHNOLOGY Cheltenham, UK • Northampton, MA, USA DIGITAL ASSETS AND BLOCKCHAIN TECHNOLOGY US LAW AND REGULATION DANIEL T. STABILE Adjunct Professor, University of Miami School of Law, USA Partner, Shutts & Bowen LLP, USA KIMBERLY A. PRIOR Adjunct Professor, University of Miami School of Law, USA Partner, Shutts & Bowen LLP, USA ANDREW M. HINKES Adjunct Professor of Law, New York University School of Law, USA Adjunct Associate Professor, New York University Stern School of Business, USA Of Counsel, Carlton Fields, P.A., USA Cheltenham, UK • Northampton, MA, USA © Daniel T. Stabile, Kimberly A. Prior and Andrew M. Hinkes 2020 Cover image: Ula Movchan, Untitled, oil on board, 2020. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2020938607 ISBN 978 1 78990 743 8 (cased) ISBN 978 1 78990 745 2 (paperback) ISBN 978 1 78990 744 5 (eBook) CONTENTS Full contents vi Acknowledgments ix Table of cases x Table of legislation xviii 1 Introduction 1 2 Overview of distributed ledger technology and terminology 7 3 The regulation of virtual currency businesses 27 4 Fundraising and securities 127 5 Offers and sales of tokens under US securities laws 189 6 Smart contracts 215 7 The taxation of digital assets 268 8 Virtual currency and criminal law 298 Appendix: recommended sources 343 Bibliography 344 Index 355 FULL CONTENTS Acknowledgments ix Table of cases x Table of legislation xviii 1 Introduction 1 2 Overview of distributed ledger technology and terminology 7 2.1 The Genesis moment: Satoshi’s white paper 7 2.2 “Wallets” and “keys” 17 2.2.1 Public and private keys 17 2.2.2 Wallet types 18 2.3 Consensus mechanisms 20 2.3.1 Bitcoin’s proof of work 20 2.3.2 Proof of stake 22 2.4 The wide world of cryptoassets 23 2.4.1 The growing world of cryptocurrencies and similar assets 23 2.4.2 Public versus private systems 24 2.4.3 Coin/token types 24 2.4.4 Smart contracts 26 3 The regulation of virtual currency businesses 27 3.1 The principal US federal regulators 28 3.1.1 The Financial Crimes Enforcement Network 28 3.1.2 The Securities and Exchange Commission 57 3.1.3 The Commodities Futures Trading Commission 68 3.2 The states 89 3.2.1 New York 90 3.2.2 Florida 108 3.2.3 Texas 120 3.2.4 Wyoming 125 4 Fundraising and securities 127 4.1 What is a security? 128 4.2 Is a token a security: early SEC guidance 129 4.3 Simple agreements for future tokens and the SAFT Project 157 4.4 A “framework” for analyzing whether a token is a security 166 4.5 Tokens that are not securities: early SEC no-action letters 174 FULL CONTENTS vii 5 Offers and sales of tokens under US securities laws 189 5.1 Securities Act registration requirements 189 5.1.1 Overview of the securities registration process 190 5.1.2 Overview of material public company requirements 192 5.2 Exemptions from the SEC registration requirements 194 5.2.1 Regulation A 194 5.2.2 Regulation D 197 5.2.3 Regulation S 199 5.2.4 Regulation Crowdfunding 200 5.3 Other legal considerations when conducting a security token offering 202 5.3.1 Application of the anti-fraud provisions 202 5.3.2 Exchange Act registration requirements 203 5.3.3 Broker-dealer registration requirements 203 5.3.4 Investment Company Act registration requirements 204 5.3.5 Registration as a money services business with FinCEN and/or state securities regulators 207 5.3.6 Securities Act anti-touting provisions 209 5.3.7 State law securities registration and other requirements 213 5.3.8 Foreign securities laws 214 5.3.9 Tax and accounting considerations 214 6 Smart contracts 215 6.1 History 216 6.2 Defining smart contracts 216 6.3 How smart contracts work 218 6.4 Types of smart contracts 220 6.4.1 Single party smart contracts 221 6.4.2 Degrees of integration into traditional contracts 221 6.4.3 Smart legal contracts 222 6.5 Oracles 222 6.6 When are smart contracts also legal contracts? 224 6.6.1 Are smart contracts legally enforceable? 226 6.6.2 Identifying the terms of the agreement 227 6.6.3 B2C2 v. Quoine, and interpreting smart contracts 228 6.7 Drafting smart contract code 252 6.8 Are smart contracts inherently incompatible with the legal system? 253 6.8.1 Is code law? 254 6.8.2 Smart contracts as self-help 256 6.8.3 Challenges created by automated execution 256 6.9 External factors may impact smart contracts 258 6.9.1 Governance of blockchain systems 258 6.9.2 Software libraries 261 viii DIGITAL ASSETS AND BLOCKCHAIN TECHNOLOGY 6.9.3 Forks 261 6.10 Use of smart contracts to create new structures 262 6.10.1 DeFi using smart contracts 262 6.10.2 Decentralized entities and organizations 263 6.11 United States legislative approaches to smart contracts 265 7 The taxation of digital assets 268 7.1 Preliminary IRS guidance 269 7.2 IRS efforts to uncover failure to report gains 274 7.3 Supplemental IRS guidance 284 8 Virtual currency and criminal law 298 8.1 The Silk Road: online marketplaces for illicit goods 299 8.2 Virtual currencies created for improper purposes 315 8.3 Criminal securities fraud 331 Appendix: recommended sources 343 Bibliography 344 Index 355 ACKNOWLEDGMENTS The authors are indebted, foremost, to their students at the University of Miami School of Law, the New York University School of Law, and the New York University Stern School of Business. Without you, there would be no reason to write this textbook. And through your participation in class, you sharpened our thinking about many key issues that we address. We also thank Edward Elgar Publishing for the opportunity to publish our thoughts, and our law firms – Shutts & Bowen and Carlton Fields – for supporting our efforts by giving us the time to assemble them. Thanks also to Rochelle Hall for providing substantial research assist- ance and to Eli Rodrigues for checking our work on tax. Daniel would like to thank his family, especially his wife, Gina, for permitting him to work on this project while she was running two businesses and primarily responsible for two young children, and his mother, Monica, who taught him what it means to be a teacher. Kim would like to thank her family, in particular her husband, Dan, for his support and pa- tience throughout this project and always. Drew would like to thank Professor David Yermack and New York University for believing these topics are worth teaching to some of the world’s brightest young minds. Mostly, he owes his thanks to Michelle; her unending love and patience made this possible. Finally, the authors wish to thank Satoshi, wherever he, she, or they may be. We hope you are looking at the revolution you have unleashed with pride. If you are reading, please know that we are doing our best to make sure that the legal community do es not destroy the gift you left for us.
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