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U.S. Regulators Weigh In On Virtual Currencies

The use of Initial Coin Offerings, in which participants send Bitcoin or other virtual currency in exchange for digital tokens, have become...

Written by Amit Singh · 3 min read >

The use of Initial Coin Offerings, in which participants send Bitcoin or other virtual currency in exchange for digital tokens, have become an increasingly popular way for businesses to raise money. And U.S. regulators have taken notice, with various agencies having weighed in on these types of virtual currency transactions. Here’s a look at what each has had to say.


The Securities and Exchange Commission has said that virtual tokens can be securities – and therefore subject to federal securities laws – in certain situations. The commission’s findings were published in a report last summer analyzing an ICO offered by an organization called The DAO. The SEC in that report relied upon a test, called the Howey Test, that was outlined in a 1946 U.S. Supreme Court ruling and is used to determine whether an investment contract exists under federal law.

Whether an investment transaction involves the offer or sale of a security will depend on the particular facts and circumstances. Typically, if a coin is merely a prepayment for services or products, it will not be deemed a security. However, if the coin represents a right to revenue or profits from a project or company, or a right to acquire a security or money on a specified event, it is likely a security. In that case, the coin needs to be registered with the SEC or an exemption from registration must be found.

The SEC has taken various enforcement actions in recent months related to virtual currencies, including charging two companies with violating anti-fraud and registration provisions of federal securities laws in connection with a pair of ICOs. It has also warned that celebrity endorsements of ICOs could be illegal if compensation for the personalities is not disclosed.


In 2015, the Commodity Futures Trading Commission for the first time said virtual currencies are commodities under the Commodity Exchange Act. The CFTC has said its jurisdiction is implicated when a virtual currency is used in a derivatives contract, or when there is fraud or price manipulation involving a virtual currency traded in interstate commerce.

The CFTC doesn’t believe there is any inconsistency with the SEC’s recent analysis, even though a security is not a commodity, saying “the CFTC looks beyond form and considers the actual substance and purpose of an activity when applying the federal commodities laws and CFTC regulations.”

In January, the CFTC filed lawsuits against three virtual currency operators and accused them of defrauding customers.  The agency also recently warned customers to beware of pump-and-dump schemes whereby phony demand is created for virtual currencies and digital tokens, then quickly sold. The CFTC said it has received complaints from customers who lost money in these types of schemes. In addition, the agency has launched a resource page with information about the possible risks with investing in virtual currencies.


The IRS, for its part, has stated that virtual currency is treated as property for federal tax purposes. Therefore, general tax rules that apply to property transactions will apply to transactions involving virtual currency. Per the IRS, this means that, among other things:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.


The Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, has released guidance addressing “convertible” virtual currency, which either has an equivalent value in real currency or acts as a substitute for real currency. The guidance stated that a user of convertible virtual currency (i.e., someone who uses it to purchase goods or services) is not a “money service business” and is therefore not subject to the registration, reporting and recordkeeping regulations. However, an “administrator” or “exchanger” is an MSB and unless an exemption applies.

An administrator is someone engaged as a business in issuing a virtual currency and has the authority to withdraw that currency from circulation. An exchanger, meanwhile, is someone engaged in the exchange of virtual currency for real currency, funds or other virtual currency. These individuals are required to register with FinCEN as “money transmitters” and are subject to the applicable regulations.

Last summer, FinCEN announced a $110 million civil penalty against BTC-e and the arrest of on its operators, a Russian national. BTC-e is one of the largest virtual currency exchanges in the world, dealing with currencies such as Bitcoin and Ethereum. FinCEN alleged it facilitated transactions involving ransomware and drug sales on the dark net, among other things.


While the SEC’s recent enforcement actions have gotten many of the headlines, there are various rules and regulations that companies using virtual currencies need to be aware of. For example, the SEC may not consider a token a security but it could be a commodity under the CEA.   

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