Blockchain and the Law

Can We Pay Our Employees in Cryptocurrency? A 2022 Update.

As cryptocurrencies continue to make their way into mainstream consciousness, individuals—even beyond those in the tech sector—have been interested in receiving their pay (or a part of it) in cryptocurrency.  This has prompted an increasing number of employers to consider, compensating their employees with Bitcoin, Ethereum, or other cryptocurrencies.  While a cryptocurrency compensation scheme may help spark everyday usage of these currencies and attract tech-savvy talent to a company or organization, it may also place the employer at risk of wage and hour violations, and implicate additional regulatory regimes such as federal securities laws.  Although lawsuits on such “crypto-compensation” issues have yet to materialize, employers should stay ahead of the curve by protecting themselves against these potential pitfalls.

Read the full post on our Law and the Workplace blog.

As Regulators Double Click on Crypto, CBDC and Stablecoins Remain Favorites

Back in January, the U.S. Board of Governors of the Federal Reserve (the “Federal Reserve”) released its long-awaited discussion paper, “Money and Payments: The U.S. Dollar in the Age of Digital Transformation” (the “Report”), beginning a public dialogue about central bank digital currencies (“CBDCs”) and weighing the merits of a U.S. CBDC.

For the purposes of the Report, a CBDC is defined as a “digital liability of a central bank that is widely available to the general public” and further, a “digital form of paper money.” In this respect, a CBDC is like a stablecoin because a CBDC also seeks to maintain a stable value and become an alternate payment mechanism that can be used to facilitate trading and lending, lessen the friction surrounding cross-border payments, and help foster more financial inclusion. However, unlike a stablecoin backed by reference assets like a national currency, commodities, or another digital asset, a U.S. CBDC (i.e., a digital dollar) would be backed by the full faith and credit of the United States in the same way as a physical dollar and, as described in the Report, would be digital money that is “free from credit risk and liquidity risk.” Thus, as discussed in our recent post on stablecoins, a CBDC enjoys many of the same benefits as stablecoins and, as described in the Report, “could spur innovation by banks and other actors and would be a safer deposit substitute than many other products, including stablecoins and other types of nonbank money.”  Still, the Report suggests that CBDCs may bring their own risks to the safety and stability of the monetary system, particularly during times of financial stress, and otherwise affect the Fed’s ability to implement monetary policy. Plus, there is the added complexity of harnessing and updating the government’s infrastructure to launch such a digital dollar.  On the whole, the Report cautions that a CBDC “could fundamentally change the structure of the U.S. financial system.” Continue Reading

Roots of Confusion Over “v1” CryptoPunks NFTs Raise Key Copyright and Practical Considerations for NFT Minters, Acquirers and Platform Operators

Minters of collectible non-fungible tokens (NFTs) have taken a wide range of approaches. In addition to variations in the means of distribution, token standards, governing smart contracts and platforms on which initial sales or transfers are made, the terms, conditions and content licenses (or lack thereof) under which users take possession of an NFT often differ from project to project. The recent delisting by OpenSea of the original (or “v1”) version of the popular “CryptoPunks” NFT art collection in light of a takedown notice issued pursuant to the Digital Millennium Copyright Act (DMCA) by the collection’s creator, Larva Labs, and the ensuing DMCA counter-notification by v1 owners, illustrates some of the challenges that can result from the absence of clear written legal terms governing an NFT distribution. Continue Reading

Will NFT Piracy Compel Changes to the Digital Millennium Copyright Act?

So you bought an NFT. You now own what is effectively an immutable electronic deed meant to record ownership of an asset, often a digital artwork. You probably paid for the NFT upfront—and if the artist is popular, you may have paid a substantial sum. This is one factor that has made the NFT market so attractive for artists working in digital mediums, many of whom struggle to effectively monetize their work. Like traditional art gallery sales, NFT sales allow creators to reap substantial profits from one-time instantaneous transactions, offering a lucrative alternative to gradually generating revenue through licensing, merchandizing, or streaming (though many NFTs also allow an artist to reap a percentage of future downstream sales, too).

But while NFTs have created a new outlet for many artists, the technology has also been a boon to digital content thieves. Pirates can mint knockoff NFTs with nothing more than a digital file and some cryptocurrency, then sell those knockoffs to unsuspecting collectors. Forged art is as old as art itself, but because they feature exact copies of their stolen works, knockoff NFTs are often indistinguishable from their genuine counterparts. Moreover, unlike other online infringers (think purveyors of illegal streams or unauthorized t-shirts), an NFT pirate only needs one unwitting buyer to take the “one-of-a-kind” virtual bait before disappearing with the oft-substantial payment into anonymity, meaning the entire scam can happen in hours or even minutes. Amidst the resulting piracy boom, it falls to creators to protect both their fans and their IP by scanning platforms for infringing NFT sale listings and issue takedown requests. But even when they succeed in getting a sale listing removed, the knockoff NFT itself remains immutably on its blockchain and the infringing content usually remains elsewhere on the web.

Undoubtedly, digital creators will fight to protect their work. The question is, are current copyright protection procedures—specifically, those under the DMCA—up to the task? Continue Reading

Cryptocurrency in 401(k) Plans? Might be More Like “Crypto-nite,” Says the DOL in Its Latest Release

Kryptonite is a fictional substance that causes the mighty Superman to lose all his strength. According to a recent release from the U.S. Department of Labor Employee Benefits Security Administration (“DOL”), cryptocurrency might carry similar dangers for otherwise strong and healthy 401(k) plan accounts. That is, in DOL’s view, the benefits of cryptocurrency in 401(k) plans may prove to be just as fictional as kryptonite, thereby causing significant risks of losses for retirement security.

On March 10, 2022, DOL issued Compliance Assistance Release No. 2022-01 (the “Release”) to caution plan fiduciaries to exercise extreme care before considering whether to include investment options like cryptocurrency as part of a 401(k) plan’s investment menu. In so doing, DOL raised five key concerns associated with offering these types of investment options. Continue Reading

President Biden Issues Executive Order Detailing National Policy Objectives for Digital Assets

On March 9, 2022, the President issued an Executive Order (the “E.O.”) that articulates a high-level, wide-ranging national strategy for regulating and fostering innovation in the burgeoning digital assets space.  The strategy is intended to encourage innovation yet still provide adequate oversight to control systemic risks and the attendant investor, business, consumer and environmental concerns.

The E.O. is very broad in scope.  It focuses on the myriad of issues associated with “digital assets,” a term defined in a way to capture a wide variety of existing and emerging “crypto” implementations.  Specifically, the E.O. defines digital assets to include “all central bank digital currencies (CBDCs), regardless of the technology used, and to other representations of value, financial assets and instruments, or claims that are used to make payments or investments, or to transmit or exchange funds or the equivalent thereof, that are issued or represented in digital form through the use of distributed ledger technology.” Significantly, the E.O. does not make an attempt at defining the regulatory status of digital assets and notes a digital asset “may be, among other things, a security, a commodity, a derivative, or other financial product.”

While the E.O. itself doesn’t really set forth any new requirements, it puts into motion a process that may yield specific regulatory approaches to digital assets.  Of course, this process is happening in parallel with other initiatives by the Securities and Exchange Commission (“SEC”) and Congress itself and thus, there is a possibility that the E.O will result in approaches that are in ways inconsistent with other ongoing regulatory developments.  For example, in January 2022 the SEC released a proposal that would enhance investor protections and cybersecurity for alternative trading systems that trade Treasuries and other government securities.  The proposal prompted a dissenting statement from SEC Commissioner Hester Peirce (often referred to as “Crypto Mom” for her advocacy of the industry), who objected to the speed and breadth of the January 2022 proposal.  The E.O. sidesteps some of the controversial issues addressed in the SEC proposal, such as how “exchanges” should be defined, as well as the greater issue of how different digital assets should be classified (and therefore, which financial regulatory agencies have jurisdiction over various digital products and platforms). At the same time, there seems to be some amount of bipartisan interest in Congress to pass its own legislation regulating certain aspects of cryptocurrency and related technologies (e.g., in the stablecoin area), Whether or not that legislation would be consistent with the results of the E.O.-driven processes is also hard to tell. Continue Reading

Congress and the IRS Make Moves to Improve Taxpayer Compliance for Cryptocurrency Transactions

IRS Commissioner Charles Rettig, testifying before Congress in April 2021, estimated the gap between taxes owed and taxes collected in the United States to be close to $1 trillion.  While there is some debate as to how much lax reporting on cryptocurrency transactions contributes to this so-called “tax gap,” with a market capitalization hovering at the time of writing around $2 trillion, cryptocurrency investments have increasingly become an object of regulatory scrutiny.

Virtual currency disclosure on Form 1040

Beginning with Notice 2014-21, the IRS has consistently taken the view that cryptocurrencies are property for U.S. federal income tax purposes.  Absent any specific statutory or regulatory exception, U.S. individual taxpayers are generally required to report gains realized on the sale of property (including cryptocurrency) and pay tax on these gains.  To remind taxpayers of this requirement, Form 1040 now specifically asks taxpayers whether they have received, sold, exchanged or otherwise disposed of any financial interest in any virtual currency.  (The instructions define “virtual currency” for this purpose as a digital representation of value other than a representation of a “real” (i.e., fiat) currency that functions as a unit of account, a store of value, or a medium of exchange.  Cryptocurrencies are included in this definition).  The question on Form 1040 requires an affirmative answer of “yes” or “no” from all taxpayers.

A version of the virtual currency question was included on Schedule 1 of Form 1040 when it was introduced in 2019 but, beginning with the 2020 tax year, the question has had a more prominent position on page 1 (and, at that time, asked: “At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”).  The wording of the question has been modified for the 2021 tax year to remove the word “send” and replace “otherwise acquire” with “otherwise disposed of,” consistent with the IRS’s focus on identifying taxable events involving cryptocurrency.  Generally any transaction involving cryptocurrency during the tax year will require a taxpayer to answer “yes” to this question, with the exception of purchases of virtual currency with real currency (with no further activity). Continue Reading

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