Bench & Bar

SEP 2018

The Bench & Bar magazine is published to provide members of the KBA with information that will increase their knowledge of the law, improve the practice of law, and assist in improving the quality of legal services for the citizenry.

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23 BENCH & BAR | C ryptocurrency has been making mainstream headlines in recent years. Fortune and Forbes regularly cover the cryp- tocurrency market and the rise and fall of Bitcoin's value. And Fast Company and Time have been following a case that could determine whether cryptocurrencies are securities subject to regulations. From a legal perspective, cryptocurrency is certainly covering new ground. But that's not uncommon when it comes to technology and the law, reports my colleague Lars Smith. Professor Smith has written about the block- chain—technology that functions as a virtual ledger, tracking Bitcoin transactions. He spoke with me about some of the current legal issues facing cryptocurrency. "e problem of the people who invented Bitcoin is that it doesn't exist outside of the legal system. e inventors of Bitcoin wanted to get rid of banks and they wanted to have no single government have control over the system," he says. "But governments don't regulate dollars—they regulate human beings. ey regulate what we do, so if we use cryptocurrency in a way that it violates some rule, then it's illegal. It doesn't escape it. e very first way we learned that is with the money transmittal business." He points to the Federal Trade Commission and the New York State Department of Financial Services, which decided to regulate Bitcoin exchanges as money transmittal businesses in 2015. "e money transmittal business is, in many states, a regulated industry. In New York, you need a license to do it. And if you don't have a license, you have violated New York state law in having an illegal money transmittal business," Professor Smith says. "So that was the first time that the law really stepped in, and the cryptocur- rency industry was kind of shocked." Federal laws against money laundering also apply to cryptocurrency, Professor Smith says. "e federal government has a rule: Any company involved in the business of transmitting money has to know their customer," he says. "So if you're a money transmittal business, you have to comply with the Know Your Customer and the anti-laundering rules. "at was the first shock to the system: that these regulations apply." Another legal issue facing cryptocurrency: Are these currencies a security? Says Professor Smith: "We don't know. ey could be. A security is a partial ownership in some business represented by some share." "If you set up a cryptocurrency to have an ownership interest attached to it in some business, then it's a security." Professor Smith is referring to the emergence of initial coin offer- ings (ICOs). Like initial public offerings, ICOs offer businesses a way to raise money. But while securities, of course, are regulated by the SEC, enterpris- ing entrepreneurs use ICOs to sell coins. "e sale of an asset isn't a security. A coin is just like a piece of property, so it's not a security," concludes Professor Smith. "Except, what are they doing? ey're raising money to help fund the opera- tion of a business. ey're not selling an actual thing; they're selling this coin which doesn't actually exist except as a series of numbers. Boy, does it look like the issuance of stock. e question is: Is there a tie between the coin and a right to share in the profits of the business? at's what these cases are about." He is referring to US v. Zaslavskiy, a case before the United States District Court for the Eastern District of New York. In US v. Zaslavskiy, the SEC and the Department of Justice are accusing a businessman of violating anti-fraud and registration provisions of federal securities laws after launching two ICOs that the agencies argue were fraudulent. "is is the challenge for the legal system: People call it a coin but it's actually an electronically maintained ledger account of data," Professor Smith says. "We call it a coin but that's just because the guy who invented it called it a coin. We don't have to call it a coin. We can call it a widget. And that widget can do a lot of things. And many of those things are regulated by law." Whatever the outcome of the case in New York is, one thing is for certain: There will surely be new technology in coming years that the law will need to address. At the Brandeis School of Law, we are proud, under the guidance of Professor Smith and other colleagues, to be training this next generation of lawyers who will be ready to do just that. Regulating CRYPTOCURRENCY Brings New Questions for Lawyers BY: DEAN COLIN CRAWFORD " Law always trails technology, " says Professor Smith, Associate Dean for Academic Affairs and Samuel J. Stallings Professor of Law. COLUMNS Lars Smith

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