Digital Coins & Virtual Currency: The Legal Aspect

Virtual Currency

Token is the currency of the future, for now. The token can be either security and currency within the realm of cryptocurrency. It is the topic of legislative attempts at regulation designed to both encourage development of cryptocurrency and blockchain and to protect consumers from financial scams and fraud.

Cryptocurrency, which may have many names and forms including Bitcoin, is not regulated by traditional banking systems, it is “locked” into place by blockchain technology, a computer code that records transactions and transfers credits following transactions. This allows for anonymous interactions across international borders to anyone with an account. The infamous “Dark Web” site called Silk Road originally used Bitcoin for transactions but was shut down by the F.B.I. in 2013 and its founder charged with drug trafficking and money laundering. Bitcoin survived the backlash and rebounded in spades, making it a choice investment for those unafraid of risk.

Token vs. Coin

Some use the terms “coin” and “token” interchangeably when referring to the blockchain, but that is inexact. The coin is the same as currency, with monetary value. The token is of value within a specific realm only, as an asset or utility, providing the holder access to the network. Of course, the items, including the ones that are part of international token grant compensation, have no physical presence like a traditional minted piece, as they are simply values traded or sold virtually. The safe use of these valuable items requires research and secure passwords, as there is much to learn, including whether the coin you purchase could be tainted, and therefore its value defaced, by the actions of a previous owner.

Things for newcomers to cryptocurrency to be wary of include Initial Coin Offering (ICO), which is similar to a stock offering in that it provides interest in a company, a product, a venture—or a cryptocurrency – in exchange for financial investment. Also, the binary option ploy, in which an investor wagers on a price being above or below a threshold at a specified time, which has been outlawed in the U.S. as gambling.

Regulating Virtual Currencies

The U.S. Securities and Exchange Commission is the body with authority to govern aspects of cryptocurrencies within the country, and it has been criticized for not doing enough as well as for doing too much. There is speculation that the SEC won’t develop real teeth until it takes its lead from states that have promulgated regulation in its absence. The SEC has only recently defined the characteristics of securities as applied to coin.

States like New York, Texas, California, and Illinois have taken the lead in creating regulation and laws for cryptocurrencies. One of the catalysts for the action is the ability to collect state sales taxes on transactions made with the virtual funds. It is believed that the SEC will catch up to the states and even use their regulations as a basis for its role in shaping the future of cryptocurrency. Such regulations are expected to have a positive effect, including:

  • reducing volatility in the market;
  • providing a path for large institutional investors to follow;
  • standardizing cryptocurrency exchanges, which may eliminate some, and
  • requiring transparency for ICOs, which could reduce fraud.

The ICO Problem

Token Vs Coin

In 2017 the number of ICOs skyrocketed, with around $3 billion invested in start-ups in October of that year alone, more than the entire previous year. In 2018 another $20 billion of coin were purchased through ICOs. But with that explosion in growth came some unscrupulous characters: about $687 million of the total offerings in 2017 were scammed from people enthusiastic but uneducated about joining the Wild West of the cryptocurrency world in just 10 fake ICO events. By the same estimate, over 600 of the ICO events in 2018 were likely scams, separating many people from their money, except for those perpetrating the fraud.

Scams take on many forms, including a simple credit card purchase of untraceable coin that duped Apple cofounder Steve Wozniak, depriving him of $70,000. Indeed, because the world that is controlled by blockchain gatekeepers is removed from most traditional laws and processes as well as from the legal system as we know it, investing in crypto coin or token requires putting one’s faith in technology that is not infallible. 

In addition to the challenges posed by scams, the emergence of blockchain technology has also attracted various legitimate players in the form of dApp developers, contributing to the growth of decentralized applications that aim to reshape industries.

It is estimated that $9 million is lost daily in coin scams, whether through hacking, phishing, or outright fraud.

As a result of the widespread scams, many platforms, including Facebook, LinkedIn, and Mailchimp, banned users from launching ICO campaigns because they were falsified (although Facebook loosened its restrictions around the same time it announced its own form of cryptocurrency, Libra). The website catalogs the disappearance of founders, the abandonment of websites, and the demise of many moneymaking ICO schemes, which are plentiful.

Suggestions for spotting a fake ICO include:

  • researching the founders and other team members behind the offering, including their roles in similar companies in the past;
  • tracing any photos on the company website to determine if they’re stolen or fake;
  • disregarding those ICOs in which the founders are unresponsive to inquiries;
  • analyze the company’s whitepaper or business plan for completeness and even for coherency, and
  • determining if other investors are real or if they’ve been offered incentives to inflate the perception of interest in the offering.

The U.S. SEC  is attempting to go after some of the pirate schemes that were only designed to scam. To educate the public they created a fake ICO called  complete with celebrity endorsements and inflated promises of returns on investments. 

While the Howeycoins site was helpful to consumers, the SEC is criticized for being late to formulate coherent guidelines for companies hoping to do an ICO. The agency is suing one app company, Kik, for offering a fake ICO despite much evidence that its campaign suffered from poor timing and the SEC’s rules were unclear. Many believe that the lawsuit just serves to muddy the waters for future projects.