This page summarizes some of the different types of blockchain products and services that are currently available in the United States. Digital assets can be subject to various laws and regulations governing anti-money laundering, commodities, money transmitter licensing, securities, taxes, and secured transactions.
Cryptocurrency exchanges in the United States must comply with expensive multi-state money transmitter licensing requirements, and must have anti-money laundering compliance programs in place. Cryptocurrency exchanges in the United States that provide custodial cryptocurrency accounts include Binance US (based in San Francisco), Bittrex (based in Seattle), Coinbase (based in San Francisco), CoinZoom (based in Salt Lake City), Gemini (based in New York City), itBit (based in New York City), and Kraken (based in San Francisco). Shapeshift (based in Denver) permits users to trade one cryptocurrency for another from the customer's own non-custodial cryptocurrency wallet.
Debit cards are available that can be loaded with cryptocurrency transferred from a linked cryptocurrency wallet. Bitpay (based in Atlanta) offers a MasterCard debit card (issued by Metropolitan Commercial Bank) that is linked to a user's non-custodial cryptocurrency wallet. CoinZoom (based in Salt Lake City) offers a VISA debit card (issued by Evolve Bank & Trust) that is linked to a user's custodial cryptocurrency exchange account.
Companies are now making loans that are secured by a borrower's cryptocurrency. Companies making cryptocurrency-backed loans include Blockfi (based in Jersey City) and SALT (based in Denver). Loan companies must comply with state registration and consumer disclosure requirements, which vary among the states. In order to perfect a security interest in cryptocurrency, a loan company must meet the state law requirements for digital assets set forth in the Uniform Commercial Code.
A merchant or other business can utilize a third party payment processor to (i) accept payments from their customers in cryptocurrency and (ii) have the cryptocurrency payments converted into an ACH into their bank account. Bitpay (based in Atlanta) permits merchants to accept cryptocurrency payments by website, by email invoice, or by in-store smartphone or tablet transaction.
Blockchain technology is an enhanced method of maintaining a ledger. Blockchain software creates a transaction ledger database that is secured by cryptography and shared by a distributed network of computers. Blockchain software records and stores every transaction that occurs on the computer network. All of the computers on the network can view all of the blockchain records, and to the extent any change to the distributed ledger is made, it is visible to everyone.
Centralized and permissioned blockchain software is used in the creation of secure and high-speed recordkeeping by businesses and governments. A significant amount of centralized blockchain software development is being done using (i) Corda software developed by R3, (ii) Factom Harmony software developed by Factom Inc., and (iii) Hyperledger Fabric software developed by IBM. Access to a centralized blockchain is restricted, with only known participants being permitted to process and view records on the blockchain. Centralized blockchains are usually distributed among fewer computer nodes.The advantage of centralized blockchains is that they can currently process records and transactions at a higher speed, and with a lower energy cost, than decentralized blockchains.
Securities token standards and platforms are currently being developed to permit companies to issue tokenized securities that are compliant with U.S. federal and state securities laws. Startups that are engaged in the development of securities token software include: Abacus, AlphaPoint, Arca, Harbor, OpenFinance, Polymath, Securitize, Swarm, Templum, Tokensoft, Tokeny, tZERO, and Vertalo.
There are currently several different standards that are being developed for security tokens. These standards include DS (Securitize), ERC-1404 (Tokensoft), Ravencoin (Ravencoin), R-Token (Harbor), ST-20 (Polymath), and S3 (OpenFinance). These securities tokens are being developed with more functionality than generic ERC-20 tokens.
Companies are also offering internet platforms and software for the issuance of non-tokenized securities under the SEC Rule 506(c) and Regulation Crowdfunding exemptions. These internet platforms include SeedInvest and StartEngine. Companies can also can utilize software, such as Carta, Certent and KoreConx, to manage their cap tables. The startup, Liquifi, is engaged in the development of software that will permit companies to both manage their cap tables and provide for liquidity to their stockholders.
Several startups — such as OpenFinance and tZERO - have launched SEC-registered alternative trading systems ("ATS") to permit the trading of securities tokens in compliance with U.S. securities laws. An ATS is a trading system that meets the definition of “exchange” under federal securities laws, but is not required to register as a national securities exchange, pursuant to the exemption provided under Rule 3a1-1(a)(2) of the Securities Exchange Act. To operate under this exemption, an ATS must (i) register as a broker-dealer, (ii) file an initial operation report with the SEC on Form ATS prior to commencing operations, (iii) comply with FINRA reporting requirements, and (iv) comply with the additional requirements of SEC Regulation ATS. A list of registered ATS exchanges is set forth on this SEC website.
In addition, several startups have acquired or formed broker-dealer affiliates that are licensed with the SEC and FINRA. These include Coinbase (which acquired Keystone Capital Corporation), Circle (which acquired SI Securities, LLC and its affiliate, SeedInvest), Harbor (which formed Harbor Square Investments), StartEngine (which formed StartEngine Primary LLC to facilitate Regulation A offerings), and Chainstone Labs (which formed Watchdog Capital LLC).
On October 28, 2019, Paxos Trust Company, LLC, a New York non-depository trust company, received a no-action letter from the SEC that permits it to test a blockchain-based securities settlement and clearance service for listed U.S. equity securities trades. Paxos Settlement Service will initially conduct a limited number of securities settlement transactions for Credit Suisse and Société Générale. On February 20, 2020, Paxos announced that Paxos Settlement Service can now settle certain U.S. listed equity trades between broker-dealers Credit Suisse and Instinet, LLC through the utilization of blockchain technology.
U.S. Dollar Tokens. Certain New York and Nevada non-depository trust companies, which are supervised by state bank regulators, have acted in a fiduciary capacity to (i) administer the purchase and redemption of U.S. dollar-backed tokens and (ii) deposit the funds received from token-holders into a custodial account at an FDIC-insured bank. A non-depository trust company that issues stablecoin tokens must comply with multi-state money transmitter licensing requirements, and have anti-money laundering compliance programs in place. Examples of non-depository trust companies that administer stablecoin tokens include: (i) Gemini Trust Company, LLC, a New York trust company, which has issued Gemini Dollar (GUSD), (ii) Paxos Trust Company, LLC, a New York trust company, which has issued Paxos Standard (PAX) and administers Binance USD (BUSD), and (iii) Prime Trust LLC, a Nevada trust company, which administers HonestCoin (USDH), Stable USD (USDS), and TrueUSD (TUSD). In addition, Circle Internet Financial, Inc., which has received a New York Bitlicense, but is not a non-depository trust company, has issued USD Coin (USDC).
Gold Tokens. Paxos Trust Company, LLC, a New York trust company, has issued to U.S. residents Paxos Gold (PAXG) tokens, which are backed by gold bullion that is stored in third-party vaults.
There are several online software options for the calculation of capital gain and loss for federal income tax purposes. These include (i) cryptotrader.tax, (ii) cointracker.io and (iii) zenledger.io.
In the United Staters, income taxes are owed on any realized gains in the value of cryptocurrency upon the following events:
• Sale of cryptocurrency for cash.
• Purchase of goods and services with cryptocurrency.
• Exchange of one cryptocurrency for another cryptocurrency.
• Receipt of cryptocurrency through an airdrop or hard fork.
Ordinary income tax is also owed for the “fair market value” of any cryptocurrency that has been mined by the taxpayer. If the mining is done as a hobby activity, then the value of the cryptocurrency on the date of mining would be reported in the “other income” line of the taxpayer’s Form 1040.
In general, if your capital losses have exceeded your capital gains during 2019, the amount of the capital loss that you may deduct for the 2019 tax year on your U.S. Individual Income Tax Return is capped at a maximum of $3,000 ($1,500 if married filing separately). If your net capital loss is more than the $3,000 annual limit, you can carry forward to later years the portion of the loss that exceeds the annual limit.
This website provides general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to retain an attorney for advice on specific legal issues.