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Lawyer's view: cryptocurrency and tokens – means of payment, assets, the right of anything?

07 September 2017 21:00, UTC
Dmitry MACHIKHIN, partner of GMT Legal, IMMO evangelist
Since the state carries out money creation, it has a monopoly on this process. Nevertheless, there are other, non-monetary means of payment with a special regulation. Today, there is a number of payment means that exist virtually, that is, digital money in a broad sense. At its core, non-cash money on the card is digital money as well, but they are tied directly to a real bank account. How to deal with the digital currency, that has nothing to tie to or rely on, except market demand and supply, as well as the efforts of its creators – miners? This is article will focus on digital currencies, such as cryptocurrency and cryptocurrency tokens.

Cryptocurrency can be given unambiguous definition – it's a cryptographically protected and decentralized digital currency based on blockchain. This technology helps to register and keep all transactions. However definition of tokens is not so easy, as it will depend on its essence and purpose.

Not all of the issued tokens has become full-fledged cryptocurrency such as bitcoin or ethereum.

In most cases owners of crypto tokens can't use them to pay for goods or services. However they can be used for payments within the application/project where they are issued. The owners can also expect some dividends from the project income. Their volume depends on the number of tokens that user has.

Different states have different approaches to the regulation of cryptocurrencies and tokens, including ICO (initial coin offering). Many of them still do not have a clear position on this issue, and the statements made by the authorities are incompatible with the legal practice. Some countries has already legalized cryptocurrency that gave them greater opportunities for development. For example, Japan, where bitcoin and other cryptocurrencies are recognized as a medium of exchange. In Hong Kong it is a commodity. In the US its status vary across different states and there is no common federal position on the matter.

Speaking of ICO as a form of tokens distribution, its legality for the companies depends on the type of token and local securities legislation. However, given the inclusiveness of the ICO this procedure may deal not only with local regulator's position. Rules and recommendations of other bodies must be taken into account as well. In this regard, the benchmark of law enforcement is the US Securities and Exchange Commission, that published a large-scale investigation against the DAO, by having recognized its token as a security. The SEC applied a special Howey test for this purpose.

The Howey Test determines if the token can be considered a security by the simultaneous presence of three independent parameters:

  • There is a fact of investment.
  • Funds are invested in a common enterprise.
  • Profit is expected mainly as a result of the activities of third party.

The DAO became infamous on 17 June, 2016 when the unknown attacker stole more that $50 million (in ethereum) from the project by using a flaw in the protocol. One of the biggest consequences of the DAO attack is the appearance of the ethereum fork – Ethereum Classic. The second is the investigation led by the US Securities Commission (SEC). The SEC decided that DAO tokens were in fact securities and were subject to US federal laws. According to them companies that produce blockchain-based assets should register transactions. Although no charges were raised against the issuers of DAO tokens, the case became a precedent for all players in the cryptocurrency market who were warned that regardless of whether the company is virtual or real and whether it carries out transactions in digital or fiat currency, Federal securities laws apply to all transactions with assets in the US.
Editor's Note

For individuals, the risks of participation in ICO and the use of cryptocurrencies are minimal due to the anonymous nature of blockchain. To learn who made a transaction by the number of the cryptocurrency wallet is almost impossible. Nevertheless, a number of states restrict the use of cryptocurrency by individuals, for example, Thailand.

It is too early to talk about the unification of the law on cryptocurrency, until most of the developed countries settle the issue at the national level. In Russia, everything goes to the adoption of a law on the regulation of the cryptocurrency. A number of experts, including the head of the interdepartmental working group on risk assessment of cryptocurrency turnover in Russia Elina Sidorenko, point to the publication of the draft law this fall. In addition, proper judicial and law enforcement practice is necessary. Unfortunately, is always step behind the technologies. In our opinion, it will take at least 2 years until there is a full understanding how cryptocurrency and ICO must be regulated.