Keyword: Other Regulatory Issues (tax, anti-money laundering, OFAC, and antitrust)

Federal Reserve Requires Banks to Provide Notice Regarding Crypto-Asset-Related Activities

Federal Reserve Requires Banks to Provide Notice Regarding Crypto-Asset-Related Activities

The Federal Reserve Board (“FRB”) announced a significant shift requiring FRB-supervised banking organizations to disclose any current crypto-asset-related activity and to notify FRB in advance of entering into any such business activities in the future. This notification requirement may add some friction to the bank adoption of crypto-asset activities. This announcement follows the OCC’s previous direction to its supervised entities to “notify its supervisory office, in writing of its intention to engage in a range of crypto related activities.” With similar direction aimed at Federal Reserve banks that more regularly interact with crypto projects, legal and regulatory compliance diligence will be even more important.

What Happened

  • On August 16, 2022, FRB issued a letter to all of its supervised banking organizations requiring those institutions to notify their lead FRB supervisory point of contact if such banking organization is engaged in or intend to engage in “crypto-asset-related activities” in order to “ensure such activity is legally permissible and determine whether any filings are required under applicable federal or state laws.”
  • “Crypto-asset-related activities” include crypto-asset safekeeping and traditional custody services; ancillary custody services; facilitation of customer purchases and sales of crypto-assets; loans collateralized by crypto-assets; and issuance and distribution of stablecoins.
  • The letter also specifically referenced stablecoins as potentially posing risks to financial stability if adopted at large scale.

How Will This Affect Banking Organizations?

Supervised banking organizations must:

  • Ensure the Activities Are Legally Permissible
    • Supervised banking organizations must assess the legality of the proposed crypto-asset-related activities under state and federal laws and determine whether any filings are required under federal banking laws, including The Bank Holding Company Act, Home Owners’ Loan Act, Federal Reserve Act, and Federal Deposit Insurance Act.
    • If permissibility is not clear, supervised banking organizations are directed to consult their point of contact at the FRB prior to the commencement of such activities.
  • Notify the Federal Reserve
    • If a supervised banking organization is already engaged in crypto-asset-related activity, it should disclose all activities to its lead supervisory point of contact promptly.
    • Supervised banking organizations must notify their lead supervisory point of contact prior to engaging in crypto-asset-related activity.
  • Enact and Maintain Proper Controls
    • FRB’s letter emphasizes the importance of supervised banking organizations enacting and maintaining adequate risk management and controls related to crypto-asset-related activities, including:
      • Having adequate systems in place to identify, measure, monitor, and control the risks associated with crypto-related activities on an ongoing basis; and
      • Ensuring that these systems cover “operational risks (for example, the risks of new, evolving technologies; the risk of hacking, fraud and theft; and the risk of third-party relationships), financial risk, legal risk, compliance risk (including, but not limited to, compliance with the Bank Secrecy Act, anti-money laundering requirements, and sanctions requirements), and any other risk necessary to ensure the activities are conducted in a manner that is consistent with safe and sound banking and in compliance with applicable law, including applicable consumer protection statutes and regulations.”
    • Consider Notifying State Regulators
      • FRB encourages state member banks to also notify their state regulators prior to engaging in crypto-asset-related activity.

Why Does This Matter?

  • If you are a supervised banking organization that is currently involved in active crypto-asset activities, re-confirm that your activities are compliant and take another look at your service providers to ensure their compliance;
  • If you are a potential partner of a supervised banking organization, expect an even more robust diligence process, time to execution may be extended, and you may face increased ongoing reporting and information disclosure requirements; and
  • For all participants in the crypto-asset space, this is another example of the growing all-hands on deck approach to the regulation of crypto spurred by the Executive Order from earlier this year. The Executive Order’s first objective was to “protect consumer, investors, and businesses,” and we expect to see further action from the FRB and other regulators.

Digital Assets Executive Order Brings Regulation Closer Than Ever

President Biden issued a sweeping executive order in 2022 acknowledging the key role digital assets will play in the global financial system. It embraces crypto as the wave of the future – while setting the stage for increased oversight, regulation and enforcement.

What It Means

  • Businesses that have seen themselves in a legal gray area may find themselves subject to many of the same regulations as traditional financial service providers.
  • The order calls for an “unprecedented focus of coordinated action” to address the illicit use of digital assets. This will likely lead to increased criminal enforcement, including holding companies accountable for illegal activity perpetrated through their networks.
  • Numerous agencies are developing policies and regulatory frameworks to protect consumers, investors and businesses in the crypto sphere.
  • The order directs agencies to coordinate with international partners on approaching and responding to risks. That may involve cross-border investigations and prosecutions.

In More Detail: The Executive Order’s Six Priorities

Citing the explosive growth in digital assets, the order makes the case for stronger oversight and increased regulation of cryptocurrencies. It announces six key priorities:

  1. Protecting Consumers, Investors and Businesses
    • The Treasury Department and others will develop recommendations to address the risks and opportunities of digital assets. The Attorney General will report on law enforcement’s role to detect, investigate and prosecute crypto crime and recommend regulatory or legislative action.
  2. Protecting U.S. and Global Financial Stability
    • The Financial Stability Oversight Council will identify economy-wide financial risks digital assets pose and develop proposals to address them and associated regulatory gaps.
  3. Mitigating Illicit Finance and National Security Risks
    • The order emphasizes the growing use of digital assets to facilitate cybercrime, money laundering, terrorist and proliferation financing, fraud, theft, and corruption. It asks agencies to evaluate how regulation can mitigate risk.
    • The plan addresses how investigators can increase compliance with laws against money laundering and financing terrorism, focusing on decentralized financial ecosystems, peer-to-peer payments and obscured blockchain ledgers.
  4. Reinforcing U.S. Leadership in the Global Financial System
    • The Commerce Department will work with other agencies on a framework to drive U.S. competitiveness and leadership in and use of digital asset technologies.
    • The Treasury Department will facilitate international engagement on issues like global compliance and standards.
  5. Promoting Access to Safe, Affordable Financial Services
    • The Treasury Department will report on the future of money and payment services.
  6. Supporting Responsible Innovation
    • Several agencies will support advances in the development, design and implementation of digital asset systems.
    • One goal: Ensuring such technologies emphasize privacy and security, defend against illicit exploitation and reduce negative climate impacts and environmental pollution from cryptocurrency mining.

On the horizon

  • The order puts the “highest urgency” on research and development of a U.S. Central Bank Digital Currency.[1] It says that may support efficient and low-cost transactions and greater access.

Signs of Increased Regulation

  • The Justice Department’s National Cryptocurrency Enforcement Team
    • Biden’s March 2022 executive order came months after the Justice Department announced a National Cryptocurrency Enforcement Team.
    • The team investigates and prosecutes crimes like money laundering, ransomware and extortion schemes, and trading on dark markets for drugs, weapons and hacking tools.[2]
    • The task force’s creation suggests the Justice Department has the resources and will to investigate allegations of crypto wrongdoing.
  • The SEC has eyed regulating crypto trading platforms
    • When asked in January if the SEC will start regulating crypto trading platforms in 2022, Chairman Gary Gensler said “…I sure hope so.”[3]
    • He also said: “To the extent that folks are operating outside the regulatory perimeter, but are supposed to be inside, we will bring enforcement actions.”[4]
    • Gensler has said he sees most cryptocurrencies as securities subject to SEC regulation.[5]
  • Other agencies are also marching toward regulation
    • The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency have conducted interagency “policy sprints” focused on crypto assets.[6]
    • The goal was to analyze if and how existing regulations apply to crypto activities and to establish a road map for the future.
    • They promised to “provide greater clarity on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible” and articulate expectations for compliance with existing laws.
    • Our 2021 Year-End Crypto Roundup details other regulatory initiatives.
  • Regulators are getting more tools – and power
    • Until now, regulators approached crypto misconduct with outdated laws that didn’t always fit. Now regulators are getting more tools and power.
    • Even without a coordinated strategy or crypto-specific regulatory framework, agencies have held companies and people accountable for misconduct.
    • The SEC has brought numerous enforcement actions for fraudulent and unregistered digital asset offerings,[7] and the DOJ recently arrested two people on charges they tried to launder $4.5 billion in stolen cryptocurrency.[8]
    • FinCEN and the Commodity Futures Trading Commission reached a $100 million settlement with cryptocurrency exchange BitMEX last year. The exchange’s founders pleaded guilty to charges stemming from the company’s failure to establish, implement, and maintain an anti-money laundering program.

 

 


[1] See Board of Governors of the Federal Reserve, Money and Payments; The U.S. Dollar in the Age of Digital Transformation (Jan. 2022).
[2] U.S. Dep’t of Justice, Press Release, Deputy Attorney General Lisa O. Monaco Announces National Cryptocurrency Enforcement Team (Oct. 6, 2021).
[3] Jennifer Schonberger, SEC’s Gensler wants crypto exchange regulation in 2022, warns on stablecoin, Yahoo Finance (Jan. 20, 2022).
[4] Id.
[5] Cheyenne Ligon, Gensler’s Crypto Testimony: 6 Key Takeaways, CoinDesk (Oct. 6, 2021).
[6] Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (Nov. 23, 2021).
[7] See U.S. Securities & Exchange Commission, Cyber Enforcement Actions.
[8] U.S. Dep’t of Justice, Press Release, Two Arrested for Alleged Conspiracy to Launder $4.5 Billion in Stolen Cryptocurrency (Feb. 8, 2022).

Non-U.S. Crypto and Other Money Services Businesses: Have Customers in the U.S.? Beware of AML and Sanctions Compliance Risk

Two recent guilty pleas involving a cryptocurrency exchange serve as a reminder to all money services businesses (“MSBs”)—including those ostensibly located outside the United States but that conduct business there—of the importance of implementing anti-money laundering (“AML”) programs and registering as MSBs with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Last week, two founders and executives of BitMEX—a virtual currency derivatives exchange whose parent company was registered in the Seychelles but operated globally, including in the United States—pled guilty to criminal Bank Secrecy Act (“BSA”) violations stemming from the company’s willful failure to establish, implement, and maintain an AML program.[1]

The BitMEX enforcement action also highlights sanctions non-compliance risks. Without a Know Your Customer (“KYC”) program, BitMEX carried out transactions for customers based in Iran, a jurisdiction comprehensively sanctioned by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). As OFAC has made clear, sanctions compliance obligations remain the same regardless of whether transactions are denominated in virtual currency or fiat. A focus on sanctions compliance may become even more critical for cryptocurrency companies in the wake of the new far-reaching Russia-related sanctions imposed by the United States, the EU, and the UK, among other governments, in response to Russia’s invasion of Ukraine. OFAC and the New York State Department of Financial Services (“NYSDFS”) have warned that as sanctioned persons and jurisdictions “become more desperate for access to the U.S. financial system,” they are likely to turn to cryptocurrency to minimize the crippling effect of sanctions.

BitMEX Founders’ Guilty Pleas

The two BitMEX founders’ guilty pleas on February 24, 2022 follow the company’s settlement with U.S. regulators in August 2021, which was one of the largest-ever resolutions with a cryptocurrency exchange. While BitMEX was incorporated in the Seychelles, it had connections to the United States, including maintaining offices there and soliciting and accepting orders from U.S. customers. FinCEN and the Commodity Futures Trading Commission found that BitMEX was operating as an unregistered futures commission merchant under the BSA, and that it failed to comply with the BSA’s AML program requirements, including by failing to maintain an adequate customer identification program.  BitMEX resolved the allegations for $100 million, with a $20 million suspended penalty pending the company’s remediation and prevention measures, including ending all operations within the United States and no longer serving any U.S. customers.

The Department of Justice charged four of the company’s founders and executives in October 2020. In announcing that two of them, Arthur Hayes and Benjamin Delo, had pled guilty to willfully violating the BSA, the Department of Justice alleged that these two founders “closely” followed the U.S. regulatory developments and were aware of their BSA obligations due to U.S. customers’ trading on BitMEX. Yet, they allegedly took affirmative steps purportedly designed to exempt BitMEX from the application of U.S. laws like AML requirements and KYC requirements. For example, according to prosecutors, “the defendants caused BitMEX to formally incorporate in the Seychelles, a jurisdiction they believed had less stringent regulation, and from which they could still serve U.S. customers and operate within the United States without performing AML and KYC.” Without “even basic” AML policies in place, BitMEX became “in effect a money laundering platform” and a “vehicle for sanctions violations.”

Takeaways

This development illustrates the significant risks to which foreign-located MSBs expose themselves if they have U.S. customers but fail to comply with the BSA. Incorporating in a “friendlier” jurisdiction, like the Seychelles in the BitMEX case, does not protect an MSB from BSA liability if it operates in the United States. The BSA applies to MSBs “wherever located” if they conduct business “wholly or in substantial part within the United States.” Thus, all MSBs, including those transmitting cryptocurrency—with any U.S. nexus—should take note of the BSA requirements. Those include registering with FinCEN; implementing a written AML program with policies, procedures, and internal controls, including regarding customer identification and verification; and controls to detect and report suspicious activity. The AML programs must be commensurate with the risks posed by the location, size, nature and volume of the services provided by the MSB and be effective in preventing the MSB from being used to facilitate money laundering and the financing of terrorist activities.

An effective AML/KYC program will also help ensure compliance with sanctions regulations. As noted, cryptocurrency exchanges will likely face increased sanctions risks due to the sweeping sanctions recently imposed against Russian banks, entities, and individuals by the United States, EU, UK, and other governments, and additional measures that may be imposed in the coming days or weeks. As such, cryptocurrency exchanges may face, and must address, “unique risks.”

By implementing a KYC program, which includes sanctions screening, cryptocurrency companies can help ensure they do not engage, directly or indirectly, in transactions prohibited by sanctions, such as dealings with blocked persons or property, or engaging in prohibited trade- or investment-related transactions. To ensure compliance, cryptocurrency exchanges should also employ geolocation and IP-address blocking to prohibit access by parties from sanctioned jurisdictions, perform transaction monitoring to detect suspicious activity, and file required reports with FinCEN and OFAC. Exchanges operating outside the United States that do not yet have but want to attract U.S. users should also consider implementing such measures.

[1] Also last week, on February 25, 2022, BitConnect founder Satish Kumbhani was indicted in a cryptocurrency Ponzi scheme, which the government alleges deprived investors worldwide, including in the United States, of over $2 billion. According to the indictment, to avoid regulatory scrutiny and conceal BitConnect’s fraudulent scheme, Kumbhani evaded and circumvented U.S. regulations, including those enforced by the FinCEN. Among other things, BitConnect never registered with FinCEN, as required under the BSA.

Proof-of-Stake Rewards: Payment for Services or a Baked Cake?

Against the backdrop of rapidly evolving blockchain technology, the IRS has oftentimes been slow to update its related tax guidance, leaving participants in the blockchain ecosystem uncertain about their tax obligations. Perhaps nowhere is this lethargy more pronounced than in the context of the consensus mechanisms that drives the entire blockchain network. Whereas, traditionally, coins rewarded pursuant to proof-of-work mechanisms have been treated as payment for services, an alternative class of consensus mechanisms, called proof-of-stake, may just be different enough to result in deferred taxation. Whether this is true is the subject of a recent legal claim that may, once resolved, shed light on the tax treatment of the increasingly popular proof-of-stake consensus mechanism.

Proof-of-Work Taxation

In 2014, an IRS Notice stated that a person that mines new blocks in a blockchain through a proof-of-work consensus mechanism must include any virtual currency received in connection with such activities in the miner’s gross income at the virtual currency’s fair market value. The ruling had an immediate impact on blockchains, such as Ethereum and Bitcoin, that depend on miners to add new data or ‘blocks’ to the chain. Through the proof-of-work consensus mechanism, miners are challenged to be the first to identify the missing number needed to solve a staggeringly complex hashing algorithm. For the lucky few who succeed, thousands of dollars’ worth of Ether or Bitcoin are awarded and—according to the IRS—taxable on receipt.

In the years following the IRS’s ruling, however, the taxation of mining has been complicated by the gradual adoption of an alternative consensus mechanism referred to as proof-of-stake. Under this method, miners—now typically called validators—are required to “stake” their holdings of a blockchain’s native coin in order to be eligible to win the right to add a new block to the chain. The more coins that a validator stakes, the greater the chance that they will be selected by the blockchain’s validation algorithm to add a new block to the chain. If the selected validator proposes an invalid block, however, the validator’s coins (or portion thereof) will be destroyed. This risk of loss in proof-of-stake validation adds a layer of complexity that is not present under the proof-of-work model, which simply involves the payment of virtual currency in exchange for the use of raw computational power to solve the mathematical puzzle. In addition, token holders will often stake their holdings to allow a third party, a validator, to use their tokens to validate the transaction as part of the proof-of-stake consensus mechanism. A welcome feature of proof-of-stake validation is that it requires considerably less energy than proof-of-work validation.

Whether this new feature is enough to challenge the taxability of any tokens or coins generated by the validation process has remained an open question that has only recently been publicly considered by the IRS.

The Jarretts—Answers at Last?

Sometime in 2019, Joshua Jarrett decided to participate on the Tezos blockchain as a validator. Jarrett staked his holdings in the native coin—Tezos—and as luck would have it, he won the right to propose new blocks on the Tezos chain. In return for validating the next block on the Tezos chain via the proof-of-stake consensus mechanism, Jarrett received 8,876 Tezos coins and dutifully paid $3,293 in federal taxes on the gain reported on his and his spouse’s joint federal income tax return.

A year later, the Jarretts had a change of heart and sought a $3,293 refund by filing an amended tax return. The Jarretts took the belated position that the coins were not taxable, using the “creation of an asset” theory. They argued that “new property—property not received as payment or compensation from another person but created by the taxpayer—is not and has never been income under U.S. federal tax law.” The Jarretts further reckoned that “[l]ike the baker or the writer, Mr. Jarrett will realize taxable income when he first sells or exchanges the new property he created, but the federal income tax law does not permit the taxation of the Jarrett’s [sic] simply because Mr. Jarrett created new property.”  The IRS denied the Jarretts’ refund claim, and the Jarretts filed a refund suit in the Middle District of Tennessee. Had the Jarretts taken the position on their original return that the reward was not taxable upon receipt, the IRS would have had been required to assess the unpaid tax. If the Jarretts wanted to challenge the assessment, they would have had to do so in the Tax Court. The IRS (and often many taxpayers) prefers to litigate technical issues in the Tax Court because of the court’s technical expertise.

The government countered that Joshua Jarrett never created new Tezos coins. Rather, in line with the tax treatment applicable to proof-of-work, the government argued that “Jarrett exchanged Tezos tokens for goods and/or services during 2019.” As such, Jarrett received the coins as payment for successfully proposing new blocks to the Tezos chain, and those coins were indeed taxable on receipt.

In something of an about-face, at the start of 2022, the government relented and offered to refund the Jarretts, as they had initially requested. However, unwilling to accept the government’s offer, the Jarretts have since elected to press on in order to force a definitive ruling on the taxability of virtual currency generated from proof-of-stake consensus mechanisms. The case is scheduled for trial in March 2023, and a final ruling may not take place until then.

Nonetheless, the Jarretts’ case is important to the blockchain industry as many chains have adopted, or are in the process of migrating toward, a proof-of-stake consensus mechanism, including Ethereum. The government’s initial concession appears to provide some basis to argue that perhaps an alternative tax treatment is appropriate, but the IRS may simply want to identify a taxpayer that did not report the tokens as taxable, assess a deficiency and force the taxpayer to sue in Tax Court. Blockchain participants, however, will have to wait for a firmer, and much needed, answer.

2022 Is the Year of Sweeping Changes for Cryptocurrency and Other Digital Asset Transfers

What to look out for in the proposed new Chapter 12 of the Uniform Commercial Code (UCC)

The world of cryptocurrencies and other forms of digital assets (such as non-fungible tokens) is exploding. While Bitcoin is the largest and best-known cryptocurrency in the global economy, it is far from the only one. The combined total value of Bitcoin, Litecoin, Monero, Ethereum, and all the other significant cryptocurrencies exceeds $2.4 trillion. In 2021, El Salvador enacted legislation to recognize Bitcoin as a medium of exchange. Other countries are also considering adopting similar legislation. Some countries even contemplate adopting their own blockchain-based currency as a form of legal tender.

Questions have emerged among regulators and market participants whether Bitcoin and other cryptocurrencies constitute “money” and how to perfect a security interest in such virtual currency (to ensure that it can’t be claimed by another party). Other questions relate to how interests in cryptocurrencies, NFTs, and other digital assets can be transferred or monetized and how purchasers of digital assets can be protected from adverse claims.

2022 will bring major changes to commercial law in a sweeping mission to answer some of these questions and to facilitate transactions in these emerging technologies. The proposed new Chapter 12 of the UCC will govern essentially any transfer (whether intended as a sale or a financing) of virtual currencies, NFTs, and other digital assets. These provisions will affect cryptocurrency startups and companies as they purchase and sell cryptocurrency, as well as financial institutions and fintech companies interested in financing cryptoassets and investment banks underwriting issuances of securities underpinned by crypto assets.

2021 and Earlier

By current definition, Bitcoin is not money because it is not a medium of exchange created, authorized, or adopted by a domestic or foreign government, or by an intergovernmental organization or by an agreement between two or more countries. Moreover, since Bitcoin, NFTs, and other digital assets are intangible and therefore not capable of possession, under the UCC as it is currently in effect, a security interest in them can currently only be perfected (as a general intangible) by the filing of a financing statement describing the digital asset. Under the UCC as it is currently in effect, it is uncertain that control of the digital wallet for a digital asset is sufficient to perfect a security interest.

Nevertheless, some practitioners have proposed a practical “workaround” to perfect a security interest in Bitcoin by “control” if the Bitcoin is held in a “securities account,” and the secured party has control over the financial assets (including the Bitcoin) held in the securities account. In this manner, a secured party will have control if the secured party, the debtor, and a securities intermediary (holding the account in which the Bitcoin is held) enter into an agreement in which the securities intermediary agrees to comply with the instructions originated by the secured party directing disposition of the funds and other property in the account without consent by the debtor. The securities intermediary must be a person, including a financial institution, custodian, or broker that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity. The workaround provides the secured party with the amount of control that, as a practical matter, it would need to foreclose upon, and exercise its remedies with regard to the digital asset, but that control itself would not necessarily perfect the secured party’s security interest in the digital asset under the current UCC.

What is New

The proposed new Chapter 12 to the UCC will:

  1. address the transfer of digital assets/virtual currencies and also provide conforming changes to Article 9 of the UCC to address secured transactions in these assets
    • Chapter 12 is designed to govern the transfer (both outright and for security) of interests in some, but not all, electronic records (adopting a new term “controllable electronic records”) (e.g., Bitcoin/NFTs)
  2. facilitate secured lending against digital assets (e.g., virtual currency, NFTs, and electronic fiat money (i.e., central bank digital currency))
  3. provide protections for certain qualifying purchasers to take interests in virtual currency and digital assets free of conflicting property claims
  4. provide rules regarding the assignment of controllable accounts and controllable payment intangibles
  5. provide other changes including updates to the definition of chattel paper and revisions to the requirements for the transfer and perfection of security interest in chattel paper, and revisions to some rules regarding negotiable instruments and payment systems

How Will These Changes Affect Different Players in the Industry

Blockchain and Cryptocurrency Startups

Chapter 12 will impact blockchain and cryptocurrency startups and companies involved in purchasing, selling, and financing virtual currencies, NFTs, and other digital assets. Chapter 12 will govern the transfer of property rights in intangible digital assets (defined as “controllable electronic records”) that can be subjected to control. Control is the functional equivalent of “possession” of the digital asset. Companies are currently using digital assets in exchange for payment, rights to receive services, for goods or interests in personal or real property. Chapter 12 will reduce the risks among claimants to, and specify the rights in, the digital assets that the purchaser acquires and to facilitate these transactions.

Financial Institutions

Financial institutions, banks, and other lenders who finance virtual currencies and other digital assets will find it easier to arrange secured lending transactions under Chapter 12 (and conforming changes under UCC Chapter 9). A lender will have a perfected security interest if the lender has “control” over the digital asset (or the system on which the digital asset is recorded). In addition, financial institutions, lenders, and other secured parties should consider amending existing security documents. Many existing revolving credit facilities are secured by blanket or broad liens on substantially all assets of the debtor, including its general intangibles. Lenders may want to amend their security documents to provide for a security interest in virtual currencies and other digital assets to provide (a) an express grant of a security interest in “controllable electronic records”, “controllable accounts” and “controllable payment intangibles” and (b) for the lenders to obtain control over controllable electronic records, controllable accounts, and controllable payment intangibles. The amendment will mitigate the risk that the lender will lose its priority position if another party obtains control over the controllable electronic records, controllable accounts and controllable payment intangibles, and the lender has only perfected by filing a financing statement.

Investment Banks

Many securities are issued secured by rights to payment arising from the sale of amounts due under credit cards, accounts, instruments, student loans, and other lines of credit. Underwriters and investors in structured finance and securitization transactions involved in assignment of accounts and payment intangibles will want to review the Chapter 12 provisions regarding the payment obligations and conditions for discharge of obligors on digital assets (controllable accounts and controllable payment obligations). Underwriters and investors should also review the ability under Chapter 12 of a purchaser to acquire special protection as a good faith purchaser for value (a qualifying purchaser) of a controllable electronic record, controllable account and controllable payment intangible.

Parties in Equipment Finance/Lease Transactions

Parties involved in equipment finance/lease finance transactions, underwriters and investors (such as auto finance and auto securitization transactions) will want to review the other proposed changes to UCC Article 9, including the proposed changes to chattel paper. For example, the definition has been amended to provide that chattel paper is a monetary obligation that is either secured by specific goods (such as a car or furniture) or arises in connection with a lease of specific goods (such as a car or furniture). The rule regarding perfection of a security interest in chattel paper has also been revised. Under the old rule—if you had tangible chattel paper (evidenced by writing), the secured party was required to have possession of the writing, and there was confusion if there were multiple copies or what constituted a writing. If electronic chattel paper, the secured party was required to have control of the single authoritative copy, and there was confusion of what it meant to have a single authoritative copy. Under the new rule, the secured party:

  1. Can perfect its security interest by taking possession of all tangible authoritative copies and obtaining control of all electronic authoritative copies.
  2. The secured party can produce the copies in its possession and provide evidence that these are the authoritative copies.
    • Need not prove that no other tangible authoritative copies exist.
  3. For electronic chattel paper, the secured party must:
    • be able to identify each electronic copy of electronic chattel paper as authoritative or nonauthoritative,
    • identify the secured party as the assignee of each authoritative copy,
    • have the exclusive power to prevent others from adding or changing an identified assignee and to transfer control of the authoritative copies.

What’s Excluded

UCC Chapter 12 is limited in scope—it only applies to controllable electronic records (i.e., a virtual currency and other digital asset) and payment rights that are evidenced by a controllable electronic record. Chapter 12 does not address a number of federal, state, and local laws and regulatory issues that will undoubtedly interplay with these emerging technologies, including anticipated new regulations from regulators like the SEC, OCC, and the IRS. These laws and regulations are rapidly changing. We will be providing periodic updates.

Also Excluded:

  • Who has title to or rights in the digital assets
  • Federal and state securities, data privacy, cybersecurity, and other regulation
  • Banking laws
  • Taxation of digital assets
  • Anti-money laundering laws
  • Transferable records under UETA or E-SIGN

Schedule for Approval of Changes

Date Event
January 2022 Drafting committee submits draft proposed recommendations to ALI counsel
May 2022 ALI approval of draft proposed recommendations
July 2022 Uniform Law Commission approves proposed recommendations
Post-July 2022 Submission to states for adoption of proposed recommendations

Industry Comments

The drafting committee of Chapter 12 and the conforming changes to the other changes to the UCC are in the process of meeting with industry groups and other stakeholders to continue advising industry leaders and other stakeholders regarding these proposed changes. The drafting committee is continuing to work on finalizing the proposed recommendations prior to the May 2022 meeting. We would be happy to meet with you to discuss any comments or concerns that you may have with the proposed changes.

Cryptocurrency Transactions and Taxes: 5 Things to Know

The $1.2 trillion Infrastructure Investment and Jobs Act – also called the Bipartisan Infrastructure Law –garnered attention with its promise to tackle an array of projects, from rebuilding roads and bridges to broadening high-speed internet access.

Provisions in the law that relate to taxing cryptocurrency transactions, however, received less notice. Those measures seek to ensure that taxpayers properly report and pay tax on crypto-related income.

Here’s what you need to know:

1. The law redefines “broker” and views digital assets as “specified securities”

The Infrastructure Act makes two significant changes to Section 6045 of the Internal Revenue Code (IRC). That section requires brokers to report gross proceeds from transactions to the taxpayer and to the IRS. If the item subject to reporting is a “covered security,” the broker must report the customer’s adjusted basis in the security and say whether a gain or loss is long- or short-term. Covered securities are further defined to include “specified securities,” such as stocks, bonds, commodities and other financial instruments.

The Infrastructure Act:

  • Includes digital assets in a list of specified securities. The law defines “digital asset” as “any digital representation of value which is recorded on a cryptographically secured distributed ledger” or similar technology. The definition of digital asset is significant as that term is used in a number of other provisions in the Internal Revenue Code.
  • The provision covers a broad category of digital assets, including traditional cryptocurrencies like bitcoin as well as non-fungible tokens. The Treasury Secretary has authority to exempt types of transactions.
  • Modifies the definition of “broker” to include “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.”
    • The use of “on behalf another person” is perplexing because the broker already includes a “middleman” concept. On its face, the updated provision would require miners, software developers, transaction validators and node operators to provide information because they provide services in connection with crypto transactions on behalf of users of the software.

2. The law expands reporting requirements to encompass “broker-to-non-broker” transactions

IRC Section 6045A deals with reporting transactions between brokers. It requires every “applicable person” who transfers a covered security (including the “specified securities” discussed above) to a broker to furnish information so the transferee can provide required gain or loss and basis reporting information. The Infrastructure Act expands reporting to cover “broker-to-non-broker” transactions.

3. People receiving more than $10K in digital assets now need to report

IRC Section 6050I requires anyone receiving more than $10,000 in cash in a “trade or business” to report it to the IRS via Form 8300, and to provide a written statement to the payer. It also covers “to the extent provided in regulations” any monetary instrument (whether or not in bearer form) with a face amount of not more than $10,000. Failure to report cash transactions can trigger steep penalties.

The Infrastructure Act amends the Code so that the reporting requirement also applies to people receiving digital assets.

4. It’s not always easy to identify someone who buys a digital asset

Broadening IRC Section 6050I to apply to people receiving digital assets is consistent with the changes described above to Section 6045: viewing digital assets as a specified security and requiring brokers to report information on certain digital transactions.

On the surface, the law’s reporting requirement would apply to people receiving digital assets for validating transactions or other services relating to crypto transactions.

One of the problems this introduces in the world of decentralized finance transactions is the difficulty of identifying the purchaser if the transaction is made through a smart contract rather than from an identifiable person.  Often times these transactions are entered into on an “open” and “trust-less” basis (meaning that there are no limits as to who can participate in the transaction) making it difficult or impossible to report on who the counterparty is (other than by identifying the blockchain wallet address involved in the transaction).

5. Information-gathering starts Jan. 1, 2023

The changes take effect for returns that must be filed and statements that must be furnished after Dec. 31, 2023. Gathering information for that, though, should start Jan. 1, 2023.

The Next Step: FinCEN Proposes to Require Reporting of Cryptocurrency Positions Held in Foreign Accounts

FinCEN recently took another important step toward bringing virtual currency into the financial assets reporting scheme.

Taxpayers that have $10,000 or more in a foreign bank account have long been required to file a foreign bank account report (or “FBAR”) on FinCEN Form 114. The penalties for failing to report foreign bank accounts are significant: $10,000 for a non-willful failure and the greater of $100,000 and up to 50 percent of the unreported account balance for willful failures. While the rules requiring the reporting are issued under the authority of the Bank Secrecy Act, the IRS administers the rules—and the IRS has been aggressive in assessing penalties for failures to report such holdings.

The application of the filing requirement to cryptocurrency has been the subject of some uncertainty. The uncertainty arises because the reporting requirement only applies to a “financial account.” A financial account includes, but is not limited to, a se­curities, brokerage, savings, demand, checking, deposit, time deposit or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account (per 31 CFR 1010.350(c)) also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions). The regulations reserve “other investment fund,” presumably for a definition to come. However, in response to questions raised by the AICPA Virtual Currency Task Force in 2019, FinCEN stated that virtual currency was not subject to FBAR reporting. This was confirmed by FinCEN in 2020 as well.

Whether or not cryptocurrencies are subject to FBAR filing, such holdings may have to be included on the IRS’s Form 8938, Statement of Specified Foreign Financial Assets. Form 8938 is the counterpart to FinCEN 114.

Recent FinCEN Proposed Rule

On December 31, 2020, FinCEN issued Notice 2020-2 that announced a proposed rule that would amend the regulations implementing the Bank Secrecy Act regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350. The proposed rule does not specify an effective date.

The decision to treat cryptocurrency as subject to FBAR reporting significantly increases the potential penalties against those who fail to properly identify these accounts. Holders of virtual currency in foreign accounts should review this rule and prepare to report such holdings once the rule becomes effective.

Word on the Street Is That Virtual Currency Is the “New Gold,” and it’s Swiftly Moving Up the IRS Watchlist

The IRS has been increasingly active in its effort to ensure that virtual currency does not become a tool for tax evasion. This is not surprising, given that—as we started the last month of 2020—the value of Bitcoin, by far the most well-known cryptocurrency in the world, reached its highest level since 2017. Between June 2019 and July 2020, about 3.1 million active accounts were estimated to use bitcoin in the U.S.

Guidance

The IRS first started publishing guidance and notices on the federal income tax treatment of virtual currency in 2014. The first one among many was Notice 2014-21, which concluded that convertible virtual currency (virtual currencies that can be used to make purchases in the real economy and can be converted into government-issued currencies) should be treated as property for tax purposes. The next Notice, Rev. Rul. 2019-24, addressed the tax treatment of more specific types of virtual currency transactions, “hard fork” and “airdrop.” The IRS has also posted answers to frequently asked questions about virtual-currency transactions on its website. Starting with taxable year 2019, the IRS revised Schedule 1 to Form 1040 to require taxpayers to identify whether they engaged in any transaction involving virtual currency. The IRS plans on going even further as shown in a released draft of the revised Form 1040 for 2020, where it proposed placing the question about cryptocurrencies in a very prominent location—immediately below the taxpayer’s name and address.

More guidance might be forthcoming. One issue is whether the rules for broker reporting should apply to cryptocurrency transactions in the same way that they apply to trades in stocks and securities. The IRS believes that increased reporting leads to greater compliance. Earlier this year, the Chamber of Digital Commerce (the “Chamber”) submitted a comment letter to the IRS and the Department of Treasury to provide its views on potential forthcoming guidance on the reporting issue. The letter pointed out there is still some lack of clarity on the tax information reporting requirement for digital asset transactions, and that further instruction is needed for taxpayers to accurately interpret existing tax rules in the digital currency context. Some of the key areas on which the Chamber had requested clarification are: how “broker” is defined in the virtual currency context—which is critical for analyzing basis reporting requirements and certain information return filing obligations—and what factors are relevant for determining the location transactions take place, which can be a critical factor for cross-border transactions.

Enforcement Efforts

At the same time that it has been providing such guidance, the IRS has begun efforts to investigate possible tax evasion using virtual currency. The agency started its enforcement efforts in as early as 2016 when it served a “John Doe” Summons on one of the largest cryptocurrency exchanges in the country. The IRS demanded that the exchange produce a wide range of taxpayer identifying information and historical transaction records, and when the exchange refused to comply, the U.S. District Court for the Northern District of California ordered the exchange to turn over taxpayer information for those who conducted transactions worth more than $20,000 on its platform for the 2013 – 2015 period.

As part of its virtual currency compliance campaign announced in 2018 to address tax noncompliance related to virtual currency, in 2019 and again in 2020, the IRS sent thousands of warning letters to cryptocurrency holders whose tax returns did not match their virtual currency transaction records. While the IRS has not made it clear where it obtained the information about taxpayers’ transactions, one possible source of data could be Form 1099 reports from virtual currency exchanges. The IRS sent three different types of letters, varying in severity. The first type, Letter 6173, raised the possibility of an examination or enforcement activity if the taxpayer didn’t respond by a specific date and noncompliance persists. The other two, Letters 6174 and 6174-A, reminded taxpayers of their obligation to report.

According to the Internal Revenue Manual (IRM 5.1.18.20.3 (7-17-19)), the IRS uses normal investigative techniques to identify virtual currency including interviews, bank or credit card analysis, summonses of exchanges and financial institutions, review of Forms 1099-K, review of FinCEN Query reports, tracking and internet searches. While this set of instructions may appear relatively old-fashioned, the IRS’ latest moves demonstrate that it is upgrading its crypto-investigation toolbox. According to published reports, in September 2020, the IRS spent approximately $250,000 on a contract with Blockchain Analytics and Tax Services LLC, which will give the IRS access to blockchain analysis tools to track cryptocurrency transactions. Earlier in the summer, the IRS also signed a deal to purchase access to certain blockchain-tracing software for a year.

Despite the industrywide complaint that the IRS’s expectations with regards to holders of virtual currency are vague and unclear, this year, the IRS and the Department of Justice have started taking more proactive actions to prosecute taxpayers who allegedly committed a greater scale of tax evasion related to the use and trade of virtual currency. In October 2020, the Department of Justice charged software pioneer John McAfee with alleged evasion of tax by using cryptocurrency. In addition, on December 9, 2020, the SEC charged Amir Bruno Elmaani, founder of cryptocurrency called Oyster Pearl, with tax evasion. Elmaani allegedly evaded tax on millions of dollars of profits from cryptocurrency transactions and using shell companies and pseudonyms to conceal his income.

Increasing Regulation and Enforcement

All indications are that regulation and enforcement of the law with respect to virtual currency is increasing. On the regulatory side, earlier this month, a new U.S. congressional bill called the “Stablecoin Tethering and Bank Licensing Enforcement Act” was introduced that aims to regulate digital currencies by requiring certain digital currency issuers to obtain a banking charter and obtain approval from the Federal Reserve. Different government agencies are working in parallel to clarify tax payment and reporting obligations with respect to cryptocurrency, and the latest movements indicate that the enforcement actions are continuing.

We expect to see more enforcement actions in the upcoming administration. In November, the president-elect Joe Biden appointed Gary Gensler, a former Commodity Futures Trading Commission Chair under the Obama administration, to its presidential transition team. Gensler has testified before Congress about virtual currency and blockchain on several occasions, and while little information is known about Biden’s stance on cryptocurrency, Gensler called blockchain technology a “change catalyst” in a 2019 CoinDesk opinion and is generally considered to be “Bitcoin-friendly.” While it is generally unclear what Gensler’s long-term official position under the Biden administration will be, he is also on top of a list of potential picks for the SEC chair. Another clue that may provide some insight with regards to Gensler’s attitude towards cryptocurrency is his 2019 statement that Facebook’s proposed digital token, Libra, should be treated as a “security,” which establishes the basis for increasing regulatory oversight. (Cryptocurrency’s uncertain status as a security for tax purposes raises other tax issues.) The general industry consensus is that, while there is a growing acceptance of the legitimacy of cryptocurrency, it is likely that more regulatory and enforcement actions will continue by the SEC against issuers and intermediaries, and by the IRS against taxpayers. More regulation is not necessarily negative—it can create clearer guidelines and landscape for exchanges and virtual currency holders and enable them to better understand the regulatory and tax authorities’ expectations. That being said, it will be important for exchanges and taxpayers to closely follow the latest government guidelines with respect to virtual currency and ensure they comply with reporting and tax payment obligations.

A “Key” OCC Interpretation – National Banks Can Provide Cryptocurrency Custody Services

Banking regulators took a significant step toward the mainstreaming of cryptocurrency recently when the Office of the Comptroller of the Currency (OCC) provided guidance about how a bank can provide custody services for cryptocurrency. In Interpretive Letter #1170, published on July 22, the OCC concludes that “a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.”

The OCC’s Letter arrives at an opportune time, when, according to CipherTrace’s recently published findings, the majority of cryptocurrency transactions are cross-border and, on average, each of the top ten U.S. retail banks unknowingly processes an average of $2 billion in crypto-related transactions per year. Providing custody services might help bring more of these transactions in to the open.

The OCC Interpretive Letter

The Interpretive Letter—which was issued just a few short months after the former Coinbase chief legal officer Brian Brooks became the Acting Comptroller of the Currency—is a breakthrough in terms of bringing cryptocurrency within a regulated environment. The OCC outlined three sources of market demand for banks to provide cryptocurrency custody services: (1) cryptocurrency owners who hold private keys want to store them securely because private keys are irreplaceable if lost—misplacement can mean the loss of a significant amount of value; (2) banks may offer more secure storage services than existing options; and (3) investment advisors may wish to manage cryptocurrencies on behalf of customers and use national banks as custodians.

The OCC recognized that, as the financial markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers. The OCC pointed out that cryptocurrency custody services fit neatly into the long-authorized safekeeping and custody services national banks provide for both physical and digital assets.

With respect to cryptocurrency, the Letter states that national banks may provide fiduciary and non-fiduciary custody services. Non-fiduciary custodial services typically entail providing safekeeping services for electronic keys, which, as discussed above, fit neatly into the types of activities national banks have historically performed. Specifically, the OCC explains that a bank that provides custody for cryptocurrency in a non-fiduciary capacity typically would not involve physical possession of the cryptocurrency but rather “essentially provide safekeeping for the cryptographic key that allows for control and transfer of the customer’s cryptocurrency.” Fiduciary cryptocurrency custody services (such as those where the service provider acts as trustee, administrator, transfer agent, or receiver, or receives a fee for providing investment advice) are permissible if conducted in compliance with the National Bank Act and other applicable laws and regulations (such as 12 CFR Part 9 and 12 U.S.C. Ch. 2). Banks are authorized to manage cryptocurrency assets in a fiduciary capacity just as they manage other types of assets in a fiduciary capacity.

Banks that provide cryptocurrency custody services have to comply with existing policies, laws, and regulations, and conduct its custody services in a safe and sound manner, including having adequate systems in place to identify, measure, monitor, and control the risks of its custody services. In particular, banks should ensure they assess the anti-money laundering (AML) risk of any cryptocurrency custodial services and update their AML programs to address that risk. It would be advisable for AML compliance personnel to be well-integrated in the development of cryptocurrency custodial services. Banks must also implement effective risk management programs and legal and regulatory reporting practices for these services. Cryptocurrency custody services may raise unique issues identified by the OCC, including the treatment of blockchain forks, and consideration of whether technical differences between cryptocurrencies (for example, those backed by commodities, those backed by fiat, or those designed to execute smart contracts) may require different risk management practices.

The OCC Letter points out that different cryptocurrencies may be subject to different regulations and guidance. For example, some cryptocurrencies are deemed securities and therefore are subject to federal securities laws and regulations. In addition, because crypto assets are thought of as offering a greater level of anonymity or as falling beyond the ken of centralized banking systems, they have been associated with illicit activity including money laundering. Consequently, banks must ensure that their AML programs are appropriately tailored to effectively assess customer risk and monitor crypto-related transactions. Just yesterday, the Financial Crimes Enforcement Network published an advisory warning that “[f]inancial institutions dealing in [cryptocurrency] should be especially alert to the potential use of their institutions to launder proceeds affiliated with cybercrime, illicit darknet marketplace activity, and other [cryptocurrency]-related schemes and take appropriate risk mitigating steps consistent with their BSA obligations.”

While there has been limited enforcement of federal law against banks for crypto-currency related activity, earlier this year, the OCC brought its first crypto-related enforcement action, against M.Y. Safra Bank for deficient AML processes for digital asset customers. The OCC concluded that the Bank’s deficiencies included its failure to: (1) appropriately assess and monitor customer activity flowing to or from high-risk jurisdictions; (2) conduct ongoing testing of its due diligence processes; (3) implement sufficient controls for its digital assets customers, including cryptocurrency money service businesses (MSBs); (4) address the risk created by the significant increase in wire and clearing transactions created by the cryptocurrency MSB customers; and (5) notify the OCC of its significant deviation from its previous business plan. In the Matter of M.Y. Safra Bank, SFB, AA-NE-2020-5, Consent Order (Jan. 30, 2020).

The OCC’s Letter should give comfort to many banks that have been bystanders to the growth of the cryptocurrency market. Now banks can offer more cryptocurrency-based financial services with more certainty, although many questions will likely be answered through greater participation. More marketplace involvement by traditional banks will in turn have a beneficial effect. Smaller businesses wishing to engage in cryptocurrency-based transactions now may do so by interacting with large, stable, and well-regulated banking institutions.

OCC’s Consideration of an MSB Regime

OCC’s Interpretive Letter may be part of a broader movement by the OCC to promote greater integration of cryptocurrencies into mainstream financial services. Acting Comptroller of the Currency Brooks announced on a podcast on June 25 that the OCC intends to unveil a new bank charter including a national payments charter that will pave the way for nationwide participation by cryptocurrency payments companies. As contemplated, that charter would be equivalent to FinCEN’s MSB registration process and stand in (under the doctrine of preemption) for individual state-level MSB licensing requirements. It also should answer questions like how the Community Reinvestment Act might apply to banks that do not take deposits and how the OCC will impose capital standards on companies that do not bear credit risk.

New York Looks Like it Might Loosen Up on Its Virtual Currency Regulation

On June 25, the New York State Department of Financial Services (NYDFS) published a “Conditional BitLicense” proposal for reforming its licensing framework that would make it easier for virtual currency businesses to obtain permission to operate in New York. The proposal was developed as part of a broader effort to respond to industry changes and concerns that NYDFS identified in its five-year review of its cryptocurrency licensing regime (which originally took effect in June 2015) under which more than two dozen cryptocurrency companies have been approved to do business in New York. Under the proposed regulations, a virtual currency firm will be authorized to operate in New York even if it does not have a full BitLicense from the state if it obtains a “conditional BitLicense” and partners with a firm that does have a full license. (To note, the conditional BitLicense has always existed, but this is the first time that the NYDFS has announced clear rules to help companies access the license.)

The NYDFS’s proposal is likely a welcome development. New York’s process for obtaining a full BitLicense is considered one of the toughest in the country and has long been unpopular with blockchain startups. Among the complaints: steep paperwork requirements and lengthy approval times. Under the proposed conditional licensing regulation, a cryptocurrency firm that wishes to operate in New York can bypass the difficulties of applying for a full license and instead apply for a conditional BitLicense, which would grant it operational privileges so long as it partners with another cryptocurrency firm that is fully licensed. Currently, the NYDFS envisions that under such a partnership, the licensed firm can assist in providing various services and support, including “those relating to structure, capital, systems, personnel, or any other support needed.”

The proposed application process is simple: In order to apply for such a license, the unlicensed cryptocurrency firm would need to inform the NYDFS of its intention to apply and provide a copy of the service agreement between the unlicensed cryptocurrency firm and the licensed cryptocurrency firm, as well as additional documentation. It is clear, however, that the NYDFS views this licensing framework as a temporary stepping stone; the NYDFS stated that it expects firms who obtain such conditional licenses to then apply for a full license within 2 years.

It is not entirely clear how the conditional license will operate in practice. It does not appear that any other state makes conditional licenses available. To that end, the NYDFS is inviting comments on its proposed regulation, including:

  1. What type of cryptocurrency firms would benefit the most from such a conditional license?
  2. What type of licensed firms would be best and most effectively able to partner with unlicensed firms under the terms of a conditional license?
  3. What types of services and support should a licensed firm provide for the firm with the conditional license?
  4. Should there be limits placed on the types of services that a licensed firm can provide?
  5. Should there be caps and limits on the total number of conditional arrangements that a licensed firm can enter? What other checks should be in place?
  6. Should the licensed firm be held accountable for initial due diligence of the firm wishing to obtain a conditional license and to what extent?
  7. Should ongoing due diligence be required?
  8. How should the licensed firm and firm with the conditional license divide responsibilities and obligations for ensuring compliance with legal and regulatory requirements?
  9. What is the best way to check for and resolve conflicts of interest between the two firms involved?
  10. What is the best way to structure such collaboration to limit any potential adverse effect on the markets?
  11. Are there other methods besides a conditional license that the NYDFS should consider?

NYDFS requests that all comments by submitted by August 10, 2020. Given that cryptocurrency regulation is generally uncharted territory, virtual currency firms should consider submitting comment to the NYDFS to assist it in developing this regulation further so that it is effective and workable.