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Cryptoassets: Are you exposing yourself to criminal liability?

Updated: Jul 8, 2020

This article was originally published on on November 29, 2018.

“To the moon!”

If you are familiar with anything relating to Bitcoin, cryptocurrency or cryptoassets, you recognize this phrase. Welcome to a new market, where you now have the ability to invest in startup companies before they release a product, before they become “the next Amazon,” before they are even registered with the SEC.

ICO’s or Initial Coin Offerings have been a very popular way for those in the know to make a quick buck, or million. An ICO is a fundraising mechanism in which new projects sell their underlying crypto tokens. It’s similar [in a sense] to an Initial Public Offering (IPO) in which investors purchase shares of a company. By purchasing a token through an ICO, you are helping to fund the project/startup, but also stand to make a lot of money if/when the project is successful.

But is that money legal? Have you turned a profit and now actually have criminal liability and not just tax liability?

I am incredibly optimistic about the future of blockchain and cryptocurrency.

If you haven’t stopped to think about your criminal liability in the cryptospace, you are doing yourself a disservice. Simply complying with the Anti Money Laundering and “Know Your Customer” requirements of a given exchange will not absolve you of a well known adage in crypto: DYOR, Do[ing] Your Own Research.

First, most of these coins are unregistered securities. A quick google search will reveal many articles on whether a cryptoasset is a cryptocurrency, a security token, an equity token, etc., but simply deciding for yourself what the asset is will not make it true. The SEC has made it clear that all ICO’s they have seen are in violation of the SEC’s regulations. Participant liability in an unregistered security sale is complex. Simply buying the cryptoasset [unregistered security] will not trigger criminal or personal civil liability, but it also does not afford you protection under the law that is extended to registered securities. However, if you resell those unregistered securities, you may become complicit. An excellent article on this issue can be found here: Next, consider the projects you are investing in. Sure, Stellar Lumens (XLM) is a great project that is partnered with IBM, but other projects are not so above board. Consider this: as a U.S. Citizen, you are subject to the laws of your country, no matter where you travel to, or no matter where you send your money to. If you are investing in a cryptoasset whose business model is based on activity that is criminal in the United States, and you are profiting from the cryptoasset, you could be considered to be a participant in criminal activity. The perfect example lies in a cryptoasset called “PinkDate.” Their platform is loosely described as the “Uber for Escorting.” It is a platform designed for sex work, and in exchange for purchasing the PinkDate Token, the investor will also earn dividends from the profits PinkDate earns. Labeling it “escorting” does not legalize the activity we know is occurring: prostitution. Prostitution is illegal in all fifty (50) U.S. States. By investing money into an enterprise based on prostitution, you are funding illegal activity. When you take dividends from an enterprise based on prostitution, you are committing an act of money laundering, as well as deriving profit [and presumably financial support] from prostitution. In Florida, the law expressly prohibits deriving support or maintenance from profits of prostitution. This means if a person pays for their car, hotel room, rent, phone, dinner, etc. from the profits of prostitution, they are committing a second degree felony offense punishable up to 15 years in Florida State Prison. Perhaps you are thinking, "but I am not going to do anything except let those profits grow for now so I am in the clear." No, you are not. In the state of Florida, receiving money that you know is in whole or in part derived from felonious criminal activity is money laundering. As far as I am concerned, simply being paid a dividend by PinkDate will satisfy this requirement.

Sports betting ventures are also currently illegal in many states. In May 2018, the United States Supreme Court struck down a federal ban on sports betting, which did not automatically legalize sports gambling, but instead provided individual states to make the decision for themselves. See Murphy v. National Collegiate Athletic Association, 584 US _ (2018) . Currently, Nevada, Delaware, Montana, New Jersey and Oregon allow sports betting. If you reside outside of those states but invest in a cryptoasset that enables gambling or bookmaking, you could face liability depending on the particular laws of your state, the extent of your investment and profit gained.

Finally, pay attention to new regulation in the cryptospace. There are thousands of cryptocurrencies listed on various exchanges, most of which are unregistered [both the asset and the exchange]. In the U.S. Securities and Exchange Commission’s (SEC) latest annual report, it is clear that reducing the number of cryptoasset-related scams is currently among the SEC’s top priorities, and that it is not limited to ICO regulation. The SEC just recently reached a settlement with EtherDelta, a decentralized crypto exchange, for operating an unregistered security exchange. The SEC found that this platform was subject to registration requirements because it brought together the orders for securities of multiple buyers and sellers, and it used established, non discretionary methods under which such orders interact with each other, and the buyers/sellers agreed to those terms.While this did not expose users to personal liability, it does mean the exchanges you are using could be subject to investigation and even be shut down-- jeopardizing any holdings you may have on those exchanges.

I am incredibly optimistic about the future of blockchain and cryptoassets, but I am anxiously awaiting more regulation to help govern this space, as well as bring much needed stability. Are you an investor in crypto? What are your feelings on the market?

#cryptocurrency #SEC #ICO

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