Articles Posted in Virtual Currency

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Another set of Bitcoin-related arrests for failing to comply with the Bank Secrecy Act.
http://www.cnbc.com/id/101366511

Interestingly,
investors in one of the companies include the Winkelvoss twins. Anyone who is involved in Bitcoin or other virtual currency endeavors needs to ensure that they understand and comply with the law. This includes getting licensed when necessary and complying with all disclosure obligations. While there are many legal, sound investment opportunities in this space. Investors should be particularly careful in conducting legal diligence in these companies before investing.

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On January 28th and 29th, the New York Department of Financial Services (DFS) will hold hearings to discuss the regulation of virtual currencies, including the potential issuance of a “BitLicense” specific to virtual currencies.  The DFS previously expressed concern about virtual currencies remaining a “virtual Wild West for narcotraffickers and other criminals….”   Despite this concern,
the DFS, like FinCEN, has indicated a willingness to work with the virtual currency industry and other stakeholders to establish “appropriate regulatory guardrails to protect consumers and our national security.”  The DFS “is concerned that – at a minimum – virtual currency exchangers may be engaged in money transmission as defined in New York law, which is an activity that is licensed and regulated by DFS.”  Thus, even though the DFS has stated that it has not made a determination at this point about the necessary regulatory guidelines for virtual currencies, one might anticipate that, at a minimum,
these guidelines will include additional oversight and licensure “to bring virtual currencies out of the darkness and into the light of day.”

The upcoming hearings will be held in New York City and will include some high-profile players in virtual currency, such as Cameron and Tyler Winklevoss, Principals of Winklevoss Capital Management, Barry Silbert, Founder & CEO of SecondMarket and Founder of the Bitcoin Investment Trust, Fred Ehrsam,
Co-Founder of Coinbase, and Cyrus R. Vance, Jr., District Attorney of New York County.

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On January 16, 2014, The Sacramento Bee in its article Kings will be first pro sports franchise to accept online currency Bitcoins announced that by March 1, 2014, Sacramento Kings fans “will be able to purchase team merchandise and tickets using Bitcoins through BitPay.”  Bitcoin is a virtual currency which can be transferred through various exchanges.  In the article, Vivek Ranadive, the Kings managing partner and founder of the Silicon Valley tech firm Tibco Software Inc., confirms that “he wants the team to be among the most technologically-advanced franchises in the world. He calls his philosophy ‘NBA 3.0.'”  Among other technological advancements the Kings plan are a technology-rich proposed new arena and “a new Kings app for smartphones that allows fans to upgrade their seats at games, provides detailed maps of Sleep Train Arena and includes a virtual noise-making cowbell.”  Their approach is intended to make “the experience for those fans more seamless and hassle free.”

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The Singapore tax authority has issued guidance
which confirms the viability of certain Bitcoin transactions. Like the central bank in China, the Inland Revenue Authority of Singapore (IRAS) took the position that Bitcoin is not a type of money or currency. This is still an unsettled question in other jurisdictions.

Even if Bitcoin is not currency, transactions in Bitcoins can lead to profits which the Singapore authority is happy to tax, at least in some situations. According to the IRAS guidance, short-term speculative transactions in Bitcoins will be taxed, while capital gains generated from long-term investment will be tax free.  The IRAS guidance also distinguishes using Bitcoins in purchase of physical goods (taxable) and of virtual goods (not taxable).

The IRAS guidance has been warmly welcomed within the Bitcoin community in Singapore for being “rational and well thought-out.” Some observers believe that, given the embryonic state of the Bitcoin economy, an incremental and pragmatic approach to regulation makes more sense than attempts to impose blanket definitions or characterization, let alone any outright prohibitions, on transactions in this new and emerging unit of value.

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The taxation of virtual currencies has garnered increasing attention, in part due to the princely fortunes some are making from the rapid increase in the price of Bitcoins. Yet, the U.S. IRS has issued little guidance in this area. This is likely to change soon. In May 2013, the GAO issued a report on Virtual Economies and Currencies. In part, the report states:

Transactions within virtual economies or using virtual currencies could produce taxable income in various ways, depending on the facts and circumstances of each transaction. For example, transactions within a “closed-flow” virtual currency system do not produce taxable income because a virtual currency can be used only to purchase virtual goods or services. An example of a closed-flow transaction is the purchase of items to use within an online game. In an “open-flow” system, a taxpayer who receives virtual currency as payment for real goods or services may have earned taxable income since the virtual currency can be exchanged for real goods or services or readily exchanged for government-issued currency, such as U.S.
dollars.

More recently, the 2013 National Taxpayer Advocate Annual Report to Congress notes the increasing use of virtual currencies, particularly Bitcoin and that the IRS has yet to issue specific guidance addressing the tax treatment or reporting requirements applicable to virtual currency transactions. The report concludes that IRS-issued guidance would promote tax compliance, particularly among those who want to report virtual currency transactions properly, and it would reduce the risk that users of virtual currencies will face tax consequences that they did not anticipate.

Despite noting that the IRS website suggests that existing guidance covers these transactions, it states that this guidance did not explain when the transactions are sufficiently analogous to be covered by existing rules. Among the remaining questions it identified the following:

1.    
When will receiving or using digital currency trigger gains and losses?

2.    
When will these gains and losses be taxed as ordinary income or capital gains?

3.    
What information reporting,
withholding, backup withholding, and recordkeeping requirements apply to digital currency transactions?

4.    
When should digital currency holdings be reported on a Report of Foreign Bank and Financial Accounts (FBAR),
or Form 8938, Statement of Specified Foreign Financial Assets?

In the interim, our Social Media Team’s tax gurus are monitoring the issues.

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Based on some recent articles, a number of people have asked whether Bitcoin might be declared illegal under an archaic law known as the “Stamp Payments Act.” According to a recent Congressional Research Service report, the answer is …. likely not.

The Stamp Payments Act of 1862 states:

Whoever makes, issues, circulates, or pays out any note, check, memorandum, token, or other obligation for a less sum than $1, intended to circulate as money or to be received or used in lieu of lawful money of the United States, shall be fined under this title or imprisoned not more than six months, or both.

It is questionable whether Bitcoin is an “obligation” and if so who is obligated. It is also not clear whether Bitcoin is a note, check, memorandum or token. The CRS report states:

It does not seem likely that a currency that has no physicality would be held to be covered by  this statute even though it circulates on the internet on a worldwide basis and is used for some payments of less than $1. The language of the statute, “note, check, memorandum, token,” seems to contemplate a concrete object rather than a computer file; moreover, a digital currency such as Bitcoin, without a third-party issuer, cannot be said to be an obligation.

Of course, a clever legal mind can always develop a legal argument to the contrary.

One of the more famous cases brought under this act related to the Monongahela Bridge company which issued tickets (worth less than $1) good for one trip over the bridge. The court found that this practice did not violate the act, noting:

these tickets have no resemblance or similitude in shape, design or material, to the coin of the United States, nor to the postage currency, the free and untrammeled circulation of ·which it was the design of the act to advance and protect….They do not contain a promise to pay money, they are not the representatives of money, and therefore cannot be said to circulate, or be intended to circulate as money. Money is the medium of exchange among the people. Its peculiar characteristic is, that it is the one thing acceptable to all men, and in exchange for which they will give any commodity they possess.

Another interesting issue presented is who would be liable. To the extent that a Bitcoin miner “issues” a coin, as long as the price of a coin remains greater the $1, they would not seem to violate the express requirement of the statute that the token be less than $1. Assuming for the sake of argument that the Act did otherwise apply, to the extent that a recipient of a coin uses a partial Bitcoin for a transaction less than $1, then the feds perhaps could go after the user.  But going after users who engage in transactions less than $1 does not seem to be a prudent or effective way to stop Bitcoin use. Assuming the vast majority of the transactions were valued at over $1 it would seem to be a pretty ineffective way to shut down Bitcoin.

If the Federal Government wanted to take action against Bitcoin, it would more likely take action to do so directly through new legislation (or perhaps some other existing legislation) rather than chance an iffy interpretation of an ancient statute that was primarily enacted for another purpose and which might only, at best, provide a basis to go after users in small transactions.

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All types of businesses are leveraging new and emerging business models around virtual currencies and virtual goods. Check out our video where we discuss the various legal issues that need to be addressed to safely and profitable capitalize on these significant business opportunities:

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2013 was an incredibly active year for social media legal issues. Below are selected highlights on some of the more interesting legal issues that impacted social media, along with links to reference material relating to the topics.

1. Virtual Currency/Bitcoin

FinCEN Virtual Currency Guidance and Enforcements – FinCEN published legal guidance on virtual currency making clear that existing regulations regarding money transmitter and anti-money laundering laws apply to certain virtual currency activities. Shortly after issuance of the guidelines,
a wave of enforcements shut down non-complying entities. [BLOG]

Congressional Hearings on Virtual Currency – Congressional hearings were surprisingly more friendly and receptive of Bitcoin and other virtual currencies.

2. Privacy – Guidance and Enforcements

COPPA – The FTC issued new guidance
and FAQs for children’s online protection due to evolving technology and changes in the way children use and access the Internet, mobile devices and social media.

CA Privacy Law
– California passed new privacy laws.

3. Intellectual Property/Patents

Patents – The number of social media patent filings continued to increase. The America Invents Act (AIA) fully kicked in, providing a greater ability to challenge patents believed to be invalid without going through district court litigation. The Fast Track
process to get patents issued more rapidly (often in less than a year)
continued.

Ownership of Social Media Accounts and Followers – Despite a number of cases (including ones involving LinkedIn and Twitter) relating to ownership of social media accounts, the law remained murky and fact specific.
This uncertainty can be avoided by proper attention to social media policies before issues arise.

4. Employment Law and Social Media

National Labor Relations Board (NLRB) – The NLRB continued to issue surprising guidance and decisions on social media usage. In many cases, some or all provisions of employers’ policies governing the use of social media by employees were found to be unlawful. [BLOG] The NLRB affirmed that workers have the right to discuss work conditions freely without fear of retribution,
whether the discussion takes place in the office or on Facebook. But later in the year it actually found some uses of social media for employment (firing) decisions to be okay.

Employer Access to Social Media User Names and Passwords – By year end, 36 states had passed or initiated legislation prohibiting employers from requesting personal social media account information or passwords in connection with employment decisions.

National Conference of State Legislatures Report – Some states have similar legislation to protect students in public colleges and universities.

5. Online Gaming

First mover states
forged forward with online gambling.

·        Nevada – Legalized online poker and granted its first licenses for interactive gaming.

·        New Jersey – In February, passed legislation (signed into law by Governor Chris Christie) allowing on-line wagering. Subject to certain limitations, licensed operators are permitted to offer online versions of a wide variety of games currently permitted in Atlantic City casinos (e.g., roulette, craps, black jack, and slots).

·        Delaware – On October 31, launched what Delaware officials call a “full suite” of internet gambling.

Zynga – In September,
Zynga withdrew its bid for a gambling license in Nevada

Federal Gambling Legislation
– The prospects for a federal law for online gambling remain elusive.

6.
Mobile Health Applications

FDA Guidance
– The Food and Drug Administration (FDA) issued guidance that focused on applications that present a greater risk to patients if they do not work as intended or that cause smartphones or other mobile platforms to impact the functionality or performance of traditional medical devices.

FTC Guidance
– The FTC issued guidance in April focusing on truthful advertising and privacy.

7.
Gamblification/Sweepstakes

Florida prohibited
gaming promotions in a cause-related marketing campaign (where purchase of a good or service benefits a charitable cause).

Internet Sweepstakes Café Conviction in Florida – Lawyer Kelly Mathis was convicted on 103 of 104 counts related to illegal gambling based on his role in Internet Sweepstakes Cafés in Florida. He faces up to 30 years in prison. CA, OH, SC and other states moved quickly to shut down similar operations.

8.
Equity-based crowd funding legalized in the United States

SEC Rules
– In October, the SEC voted unanimously to propose rules under the JOBS Act to loosen the rules and permit companies to offer and sell securities through equity crowd funding.

Note:
Equity crowd funding is much like crowd funding, which has been popularized in the United States through sites such as Kickstarter and Indiegogo. The difference is that instead of individuals supporting campaigns through donations, numerous investors are purchasing small stakes in startups or small businesses.

Critics Emerge
– Critics of equity crowd funding worry that the industry will be rife with Ponzi schemes or that having too many investors will hurt startups’ prospects for future funding.

Pillsbury originally discussed this in a January 2012 client alert and March 2012 Blog Post.

9.
Endorsements

FTC Enforcements on Fake Endorsements – In February, the FTC permanently stopped a fake news website operator that allegedly deceived consumers about acai berry weight loss products. The settlements will yield more than $1.6 million and conclude a sweep against online affiliate marketers and networks. The sites falsely claimed endorsements from ABC, Fox News, CBS, CNN, USA Today and Consumer Reports.

Many companies’ understanding of and compliance with the FTC Endorsement Guidelines remains lacking, yet enforcements continue.

10.
Wearable Computing Lawsuit

Google Glass Liability? – In what may be a foreboding development, a California woman received a traffic ticket for wearing Google Glass while driving. Many states have broad distracted-driving laws or bans on certain monitors that may apply to Google Glass and similar wearable computing devices.

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The intersection of social games and gambling is moving forward at a torrid pace. Yet, there are many blurred lines with respect to the legal boundaries for permissible game mechanics used in social games and online gambling offerings. The use of virtual goods and virtual currency further complicates the analysis. Additionally, some companies are pushing the envelope with various forms of prediction markets and online sweepstakes/contest-based business models. Florida recently adopted new rules to close some perceived loopholes. Will this prompt other states to act as well?

Check out our video:

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bitcoin_euro.pngOn July 23, 2013 the Securities and Exchange Commission (“SEC”) announced it was bringing charges in a Texas federal court against Trendon Shavers for allegedly using a Bitcoin Ponzi scheme to defraud investors between September 2011 and September 2012.  For those who may not know, Bitcoins are anonymous, decentralized, non-government-backed electronic currency.  Bitcoins were originally created by an unknown hacker in 2009 as a worldwide payment method with low processing costs and have become a much ballyhooed currency among the Technorati.  

The SEC is accusing Mr. Shavers, using the online handle “pirateat40,” of advertising the Bitcoin Savings and Trust and accepting 700,467 Bitcoins, worth approximately $4,592,806, as investments while promising a 7% weekly return.  Mr. Shavers allegedly promised to pay such returns to investors by trading the Bitcoins online.  In the SEC’s Complaint Mr. Shaver is alleged to have instead used funds from new Bitcoin investments to pay out the promised returns to older investors.  Additionally, the SEC alleged that he converted roughly $147,000 worth of the Bitcoins in order to pay personal expenses including “rent, car-related expenses, utilities, retail purchases, casinos, and meals.

Concurrent with the filing of the SEC’s Complaint, Andrew Calamari, director of its New York office, was quoted as saying. “[f]raudsters are not beyond the reach of the SEC just because they use Bitcoin or another virtual currency to mislead investors and violate the federal securities laws.”  The SEC also recently  issued an investor alert warning of scams involving virtual currencies, stating “[w]e are concerned that the rising use of virtual currencies in the global marketplace may entice fraudsters to lure investors into Ponzi and other schemes in which these currencies are used to facilitate fraudulent, or simply fabricated, investments or transactions.”

Shavers quickly moved to dismiss the SEC’s Complaint and argued that the SEC has no authority to bring this action, as the Bitcoins linked to his website were not securities because “Bitcoin is not money, and is not part of anything regulated by the United States”. In response the SEC said the investments were both contracts and notes, and so were securities that can be regulated, according to regulatory documents.  Judge Amos Mazzant of U.S. District Court in the Eastern Division of Texas, disagreed with Mr. Shavers’ arguments and found for the SEC in a ruling on August 6, writing, “[i]t is clear that bitcoin can be used as money” and “[t]he court finds that the [Bitcoin Savings & Trust] investments meet the definition of investment contract, and as such are securities.”.  Therefore, this historic SEC case will continue. 

Ironically, individuals who had simply bought and held Bitcoins from September 2011, without relying on Mr. Shavers services, would have made significant returns.  The average Bitcoin value from September 2011 to September 2012 was approximately $6.56 but thereafter skyrocketed to a high of $266 before settling down to the current value of approximately $95.30.   In fact, the700,000 Bitcoins at issue in this case are arguably worth around $65 million at their current value.