A few years ago, Bitcoin—today the most widely recognized form of digital cryptocurrency—was considered a gamble, a brilliant but untested archetype of universal currency, and in some cases even a fraudulent scheme. Quickly embraced by criminal elements due to the impossibility of tracing transactions, Bitcoin fell further into the margins of public conversation. Then it came roaring to the forefront with surprising speed. This autumn, Bitcoin investors have experienced some of the dizzying highs and lows that can make investing in cryptocurrencies feel like a night in a high stakes casino. Here are some of the questions we’re asking about cryptocurrencies with our clients at Comar LLP:
The Rise of ICOs
There’s been a lot of press on the rise of “Initial Coin Offerings” or “ICOs,” where companies are offering and selling coins as a way of making money. The SEC has offered guidance on ICOs, and in particular, they are asking people to determine whether or not the way coins are being makes them securities. If the coins are securities, then the sale and purchase of coins has to comply with US securities laws. We are analyzing coin offerings with our clients to help them structure the offerings to remain compliant with US securities laws, including appropriate disclosures to potential investors.
One of the exciting things about cryptocurrency is its ability maintain a public “ledger” through a blockchain. Blockchain provides companies an interesting way to manage and control data. Note that you can separate out the concept of a blockchain from cryptocurrency, but their combination provides interesting ways to verify transactions and provide information to the public. As with all forms of information management, the structure of how a blockchain is implemented should be vetted by counsel.
Investing in coin
Because this is such an exciting frontier space, there is a lot of experimentation by companies as they try and figure out the best way to develop and sell coin. While there is a lot of honest experimentation going on, investors should be advised of the existence of fraud in the market place. In many ways, the explosion of ICOs is reminiscent of previous bubbles, and companies may be incentivized to make exaggerated claims regarding their coin in order to cash in on the excitement. Before you purchase new coin, make sure you have a handle on the technology and understand the regulatory and other risks associated with the purchase of cryptocurrency. The ethereum hack is a reminder that with new frontiers bring new risks, and that very early stage technologies can be particularly exposed to risk.
Feel free to reach out to us at Comar LLP for more information about cryptocurrency, and check back for more updates and further analysis as we start to provide more materials on legal and regulatory issues surrounding cryptocurrency.