Updates
February 19, 2020

When is a digital asset a security or a commodity? Are SAFTs safe? Does hyping blockchain create an expectation of profit? Is blockchain a trademark, trade secret or neither? Are free tokens tax-free? Who is Satoshi Nakamoto? Does cryptocurrency guarantee semi-anonymity even in discovery? Can blockchain demonstrate membership in a class action? Are blockchain regulatory bodies real or bogus? Can election candidates incentivize engagement with cryptocurrency? Do companies have a duty of care in managing customer tokens? Does hyping blockchain create an expectation of profit? These questions and many more were the subject of FinTech litigation in 2019.

2019 saw a wave of blockchain litigation in U.S. Federal District Courts, enforcement actions at the Securities And Exchange Commission (SEC), orders by the Commodity Futures Trading Commission (CFTC), and revenue rulings by the Internal Revenue Service (IRS) and advisory opinions by the Federal Election Commission (FEC). While securities fraud remains the most active area for blockchain litigation, other areas of law saw an uptick in activity, including intellectual property, unfair competition, contracts, class actions, consumer privacy, consumer protection, commodities, tax, public utilities, immigration and elections law. So what have we learned about blockchain law in 2019 and what lessons can we carry forward in the decade ahead? Part one of this article covers lessons from U.S. District Court litigation, while part two focuses on learnings from SEC, CFTC, IRS and FEC administrative determinations. Part one of this article covers lessons from U.S. District Court litigation, while part two focuses on learnings from SEC, CFTC, IRS and FEC administrative determinations.

To summarize some of the takeaways from 2019, there are about a dozen different ways to get in trouble offering, selling or promoting tokens or coins that are unregistered and non-exempt. Self-reporting an unregistered ICO can save from civil penalties, while failing to disclose paid promotion of an ICO is a net loss. The penalty for noncompliance by a billion dollar ICO is pennies on the dollar, while the penalty for civil contempt is billions. A coin reward program is not necessarily an ICO. Tokens for “testing” may not count as “investing”; free tokens are not tax-free; but issuing tokens to incentivize election engagement is permitted. In addition, companies that manage customer tokens may need to exercise reasonable care.

We also learned that blockchain may be a protected mark, but not a protected trade secret. Blockchain regulatory bodies are bogus, so beware. To have a claim, invest on advice from social media moguls, if you dare. Public utilities can discriminate customers engaged in cryptocurrencies, but credit card companies cannot. Cryptocurrency guarantees semi-anonymity until a court orders discovery. A distributed ledger with no identifying information can show membership in a class action. A proof-of-concept and an office is enough to bring over a blockchain engineer on an H-1B visa. Hyping platform performance creates an expectation of profits; misrepresenting advisors is more serious than a mishap; and failing to verify accredited investor foregoes SAFT exemption.

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