As previously discussed, in addition to the State Regulations and FinCen Rulings pertaining to Digital Assets and Cryptocurrencies, there are a host of other federal agencies with regulations that affect the industry. The Internal Revenue Service (“IRS”) determines how Digital Assets and Cryptocurrencies are taxed and the Commodity Futures Trading Commission (“CFTC”) has oversight regarding the derivatives built around Cryptocurrencies. Additionally, the Securities and Exchange Commission (“SEC”) has the authority to regulate all assets deemed a security, which can include a variety of Digital Assets depending on the characteristics of the specific asset. This article provides a high-level overview of the SEC’s stance on Cryptocurrencies, Initial Coin Offerings and Cryptocurrency Exchange Traded Funds (“ETF”).

The SEC is a federal agency that regulates the securities markets within the United States. The SEC enforces certain disclosure requirements and financial filings in the name of protection against market manipulation. Issuers of securities need to be registered with the SEC, as well as financial service firms and the professionals of those firms. The SEC has regulation over securities, and a security is generally defined as a financial instrument that holds some type of monetary value. This includes instruments such as stocks, bonds, options and investment contracts among many other instruments. More specifically in terms of Cryptocurrencies, the determination of whether a Cryptocurrency is an investment contract is critical. If the Cryptocurrency is determined to be an investment contract, and therefore a security, it is subject to SEC regulation and must either be registered or be subject to an exemption from registration.

The Howey Test and Cryptocurrency

The Howey Test is the standard to determine whether a financial instrument is an investment contract, and is therefore subject to SEC Regulation. This is a three-part test in which the Supreme Court determined that an investment contract exists when there is (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others. If an asset does not meet all three prongs, it is not an investment contract, and not a security. Importantly, the SEC has stated that neither bitcoin nor ether are securities under the Howey test, but also specified that whether a digital asset is an investment contract at a particular time is unique to both the asset and the facts and circumstances at the it is being sold or resold. If the Howey Test is satisfied, then the issuance of the asset must be registered with the SEC, or be eligible for an SEC exemption.

Payment for a Cryptocurrency with either fiat currency or a different Cryptocurrency has been held to satisfy the first prong of the test. The second prong can be met in one of three ways. First, if two or more investors pool their contributions and receive profits on a pro-rata basis, there is a horizontal commonality. Second, if there is a common interest between the investor and the promoter or a third party in which all of the investor’s success is tied to the expertise of the promotor or third party, there is a vertical commonality. Third, if the investors and the promoter share in the profits, there is a narrow vertical commonality. So, if the asset, the investor funds, or the control over the asset is not held by a central entity; or there is not one person to whom the success of the asset can be tied to, the second prong of the Howey Test is not met. The third prong is the cornerstone of the Howey Test. An expectation of profit is likely when the asset gives the holder rights to share in the issuer’s income or profits, or to realize gain from the price increase of the asset. Statements by the issuers or promoters promising a return can lead to investors expecting profit as can marketing and selling the asset to members of the general public. If the increase in value of the asset is derived from the efforts of an identifiable third party, it is more likely to satisfy this prong as opposed to if the increase is from general market changes. Additionally, the activity of the developers after a digital asset is launched can be indicative as to whether the last prong of the Howey Test is met. Therefore, when the developers need to play a crucial role post launch in the maintenance and growth of the digital asset, it is much more likely to satisfy the last prong. On the other hand, generally the success of a purchase of a commodity depends on the general market changes, not on the efforts of an individual and will not satisfy the last prong.

An example of a cryptocurrency that does not meet the Howey Test and is not a security is bitcoin. Purchasing bitcoin definitely satisfies the first prong of the Howey Test, because it is an investor giving money for the asset, bitcoin. However, the second and third prongs of the Howey Test are not satisfied by the purchase of bitcoin. Bitcoin does not have a horizontal commonality because each investor acts on their own accord when purchasing bitcoin, there is not a pooling of funds among the investors. Additionally, bitcoin does not have a vertical commonality because there is no promoter or third party who controls the investor’s success when dealing with the purchase of bitcoin. The third prong is not satisfied because the success of an investor who purchases bitcoin is tied to the market price of bitcoin, and not the efforts of others. Accordingly, bitcoin does not satisfy the Howey Test because there is no common enterprise that all the investors are pooling their funds into, there is no promoter or issuer, and the success of the investor does not depend on the efforts of others.

As previously stated, a digital asset can have its status as an investment contract change over time. For instance, when ether (the token for Ethereum) was first launched, there was an investment of money (an investor purchased ether with bitcoin), in a common enterprise (all of the ether was sold from one entity,, with a reasonable expectation of profit (the set price of ether from the pre-sale increased after the first two weeks it was available for purchase), and the expectation of profits could be said to have been dependent on others (the investors were trusting the Ethereum developers to use the bitcoin to develop Ethereum). Therefore, it could be argued that ether satisfied the Howey Test when it was first launched. However, over time ether was no longer sold via an entity but rather was obtained via mining, in a manner similar to bitcoin. Recognizing the change in the Ethereum network, in 2018 William Hinman (at the time the Director of the Division of Corporation Finance for the SEC) stated that notwithstanding the fundraising that accompanied ether, based on the current state of ether, the Ethereum network and its decentralized structure, current offers and sales of ether are not securities transactions. Clearly, the changes a cryptocurrency undergoes throughout its lifetime can change its classification as a security. There is speculation as to whether Ethereum 2.0 will be classified as a security given that Ethereum is changing from a mining system to a staking system, but as of this writing there has been no definitive statement one way or the other by the SEC.


Cryptocurrency and The Howey Test

Prong Satisfaction Cryptocurrency Example
1. An investment of money Payment of fiat or digital currency for an asset Buying a digital coin with US Dollars
2. In a common enterprise

·   Investors pooling assets for pro-rata profits

·   Common interest between the investors and promoters

·   Investor and promoter share in the profits

·   A company is raising funds via the sale of a digital coin

·   Both want the digital coin to increase in value

·   Both receive profit from the performance of the company

3. With a reasonable expectation of profit derived from the efforts of others Asset grants the holder the right to share in the issuer’s income or profits, or realize gain from the price increase of the asset The purchasers of a coin reasonably believed that the coins would increase in value based on the issuer’s efforts

Initial Coin Offerings

An Initial Coin Offering (“ICOs”) is a method a company can use to raise funds. The coin itself can represent a stake in the company or specific project, or may have some utility in using the product or service the company is offering. The SEC has classified that ICOs can be considered an investment contract, and therefore a security, because the tokens being offered can represent an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others. The SEC has found that the common enterprise aspect typically exists in the case of digital assets generally, as does the investment of money in a common enterprise. If the ICO promoter is responsible for the ongoing development, operation and promotion, there is a higher likelihood of finding the ICO as a security. Another factor indicative of an ICO being a security is if the promoter controls the creation or issuance of the coin, or acts to limit the supply to support the price. Notable examples of the SEC pursuing unregistered ICOs include actions against Ripple Labs Inc. (XRP), Telegram Group Inc., and Kik Interactive Inc. in addition to 73 other actions against various individuals or entities since 2013.

Cryptocurrency ETF

An ETF is a type of security that tracks an index or an asset and can be bought or sold on a stock exchange just like any other stock, and as a security, the SEC has the ability to regulate ETFs. In the last few months, there has been growing speculation as to whether or when the SEC will approve a Cryptocurrency ETF, mainly a Bitcoin ETF. As of this writing, there have been over a dozen applications submitted the SEC for a Bitcoin ETF including applications by Fidelity, VanEck, ARK Invest, SkyBridge Capital, Valkyrie and NYDIG among others. There have also been a few Ethereum ETF applications submitted. Additionally, in foreign countries such as Canada, ETFs for Bitcoin and Ethereum have already been approved and are actively trading. In a 2018 staff letter, the SEC stated that there were a number of investor protection issues precluding the approval of a Cryptocurrency ETF including the valuation of the ETF’s assets, the liquidity of the ETF’s assets, the custody of the ETF’s assets, arbitrage between the ETF price and its net asset value, and potential manipulation. However, Hester Peirce, an SEC commissioner, has stated that the prior rationale for not approving a Bitcoin ETF keeps getting weaker and that if the same standards were applied to Bitcoin ETFs as other products, at least one Bitcoin ETF would have already been approved. One concern that Gary Gensler, the SEC Chairman, has voiced is that none of the exchanges where Cryptocurrencies are traded are regulated by the SEC. In any event, a SEC ruling is expected to happen this year on one or more of the Bitcoin ETF applications, although the anticipated decision dates have been delayed numerous times. For example, the VanEck Bitcoin ETF has had its decision date delayed once in April and again a second time in June.


The rules determining whether an asset is a security, and therefore subject to SEC regulation, are extremely technical and very fact specific. This rings even truer in an emerging industry like Cryptocurrency. If you are considering pursuing an opportunity in Cryptocurrency, you should make sure to determine whether you will need to register with the SEC or if you qualify for an exemption from registration. If you are required to register with the SEC, and fail to do so, an ensuing action by the SEC can be very problematic and costly. These regulations and the SEC’s stance on Cryptocurrencies are subject to changes, specifically regarding whether it will approve an ETF. In fact, just this week Chairman Gensler spoke about regulation regarding digital tokens, Cryptocurrency trading platforms, and a Bitcoin ETF among other aspects.  Please feel free to reach out with any questions.


The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

There are multiple regulatory schemes to be aware of when considering or pursuing opportunities within the Digital Asset and Cryptocurrency industries beyond the various State Regulations and the FinCen Rulings. In what looks like a bowl of alphabet soup, there are a host of other federal agencies with their own rulings and restrictions pertaining to Cryptocurrencies including the Commodity Futures Trading Commission (“CFTC”), the Internal Revenue Service (“IRS”), and the Securities and Exchange Commission (“SEC”). This article will provide a high-level overview of the IRS’s stance on Cryptocurrencies.

In the IRS’s view, Cryptocurrencies are considered to be convertible digital tokens, a virtual currency that can be exchanged for other fiat or virtual currencies. As of this writing, the IRS treats Cryptocurrencies as property and therefore Cryptocurrencies are subject to general tax principles for property transactions. This means that generally Cryptocurrencies, including bitcoin, are treated as a capital asset and are subject to the capital gain and loss rules.

Regarding Cryptocurrencies, converting a Cryptocurrency to a fiat currency, converting a Cryptocurrency from one coin to another, or using a Cryptocurrency to pay for goods or services are all considered to be a taxable event. Accordingly, if you acquire a Cryptocurrency and hold it for longer than one year, if or when you eventually dispose of it, your gain or loss will be subject to long term capital gain rules. If you dispose of the Cryptocurrency within a year of acquiring, the gain or loss will be subject to short term capital gain rules. The holding period to determine whether a gain or loss on the exchange or use of the Cryptocurrency starts on the day after acquisition of the Cryptocurrency, and ends on the day you exchange or use it. An exception to this general rule of Cryptocurrency being taxed as property is when a business holds Cryptocurrencies to sell to customers in the ordinary course of business. Importantly, moving Cryptocurrency from one wallet that you control to another is not a taxable event.

Additionally, if you are paid for goods or services that you provide in Cryptocurrency, that constitutes income at the fair market value of the Cryptocurrency received (as measured in U.S. dollars on the receipt date). A donation of Cryptocurrency to a charity is eligible for the charitable contribution deduction, and is equal to the fair market value of the Cryptocurrency at the time of the donation provided you held the Cryptocurrency for at least one year. If the donated Cryptocurrency has been held for less than a year, the deduction is the lesser of the basis in the Cryptocurrency or its fair market value at the time of the contribution. From time to time a Cryptocurrency goes through a “fork” which occurs when certain miners who work on the blockchain of a specific Cryptocurrency decide to implement a new protocol. Some of the miners accept the new rule, others do not, and that is how a fork occurs. Bitcoin Cash is an example of a fork from the Bitcoin blockchain. Sometimes, when a fork occurs, holders of the original Cryptocurrency receive the new Cryptocurrency. A receipt of a new currency from a fork is considered income, and is taxable. Below is a chart providing an overview of potential actions and whether a taxable event is created.

Cryptocurrency and Potential Taxable Events
Action Is it Taxable? Calculation of Gain or Loss
Purchase of a cryptocurrency with US Dollars No No gain or loss
Transfer of cryptocurrency from an exchange to a wallet you control No No gain or loss
Sale of a cryptocurrency for US Dollars Yes Fair Market Value of sold cryptocurrency less its cost basis
Exchange of one cryptocurrency for another Yes Fair Market Value of acquired cryptocurrency less cost basis of transferred cryptocurrency
Spending cryptocurrency on goods and services Yes Fair Market Value of received goods and services less cost basis of the cryptocurrency
Earned cryptocurrency Yes Fair Market Value of received cryptocurrency

When determining the gain or loss on Cryptocurrency, you can either specifically choose units of the currency that you sold, exchanged or used, or use the first in first out basis (“FIFO”). In order to specifically identify a unit of Cryptocurrency being sold, exchanged or used, you must show (1) the date and time each unit was acquired, (2) the basis and fair market value at the time of acquisition, (3) the date and time the unit was sold, exchanged or used, and (4) the fair value of each unit when sold, exchanged or used and the amount of money or value of the property received for the unit. The FIFO method results in treating the unit that sold, exchanged or used as being the first unit of the specific Cryptocurrency you acquired. This is an important distinction because it can have massive implications as to calculating the gain or loss on your Cryptocurrency. For instance, assume that you acquired one bitcoin in 2016 for $1,000, a second bitcoin in 2019 for $10,000, and a third bitcoin in 2020 for $25,000. You then sold one bitcoin in 2021 for $60,000. Depending on which method you choose, your taxable income on the 2021 sale can be as high as $59,000 or as low as $35,000.

As Section 1031 like-kind exchanges are now only available for real property, 1031 transactions are not available for Cryptocurrencies. At one point there was a grey area as to whether the exchange of one type of Cryptocurrency for another could qualify as a 1031 transaction, but the IRS has now made it clear that a Cryptocurrency exchange is not a 1031 transaction.

As the saying goes, the only two things certain in life are death and taxes. Accordingly, it is very important to be aware of how Cryptocurrency is taxed if you are considering investing the industry. Cryptocurrency is taxed as property, is subject to capital gains taxes, with a holding period determined as the day after acquisition to the day of disposition, and is not eligible for Section 1031 transactions. However, any Cryptocurrency that you earn is taxable as ordinary income. This includes Cryptocurrencies earned through mining and Cryptocurrencies acquired from the forking of a blockchain. These rules are subject to change, and it is very important to be aware of any potential changes. If you are considering entering the Cryptocurrency industry and have questions on the above material, do not hesitate to reach out.


The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

In recent months notable investors, wealth managers, and banks have begun to explore (if they were not already invested in) bitcoin and other cryptocurrencies. Many banks are beginning to offer cryptocurrency investment options to high net worth individuals, and there are multiple bitcoin exchange traded fund applications pending with the Securities and Exchange Commission.

If you are interested in exploring different avenues to become invested in the digital assets and cryptocurrency space, whether on a personal or a business level, in addition to being aware of the various state regulations there are a number of important Financial Crimes Enforcement Network (“FinCen”) rulings to be aware of. Depending on the type of business opportunity you wish to pursue, these rulings can impact you from a regulatory standpoint. The below chart is a non-exhaustive overview of some of the FinCen rulings. Please contact us with any questions, or to discuss how we can help you pursue any opportunities.

Regulation Scenario Ruling
FIN 2014 R001 A company mines bitcoin, the mined coins have not yet been used or transferred, but the company may decide to: (a) use the coins to purchase goods or services; (b) convert the coins into a currency of legal tender; and/or (c) transfer the coins to the owner of the company. The company as described is a user of bitcoin and not a money services business provided that the mined coins are used to: (a) pay for the purchase of goods or services, debts previously incurred, or distributions to owners; or (b) purchase fiat currency or another virtual currency provided the currency is sued solely to make payments or for the company’s investment purposes.
FIN 2014 R002 A company will produce a piece of software that facilitates the company’s purchase of virtual currency from sellers by automating the collection of the virtual currency and the payment in currency of legal tender. The company will limit its activities to investing in convertible virtual securities for its own account. The company will purchase the virtual securities from a seller and sell them when it is sensible for the company’s business plan. The company as described is a user of the currency and not a money transmitter when it invests in a convertible virtual currency for its own account and then realizes the value of the investment. However, any transfers to third parties at the behest of the company’s counterparties, creditors, or owners who are entitled to direct payments should be closely scrutinized as these could cause the company to become a money transmitter.
FIN 2014 R007 A company will rent mining computer systems to third parties, allowing the third party to mine virtual currencies. The company developed a system that mines cryptocurrencies and the third party gives the company information about the mining pool. The company enters the third-party information into the system for enabling the third party to benefit directly and exclusively from the mining pool. All virtual currency mined by the third party remains with the third party The company is not a money transmitter solely by virtue of renting a computer system to a third party allowing the third party to obtain convertible virtual currency to fund activities as an exchanger. The rental activity by itself does not qualify the company as a money transmitter.
FIN 2014 R011 A company will set up a platform consisting of a trading system which will buy and sell virtual currency for currency of legal tender and a maintain a set of book accounts in which customers can deposit funds to cover their exchanges. Customers deposit funds into the funding accounts, and once funded a customer can submit an order to purchase or sell the deposited currency. The platform will attempt to match each purchase order to a sell order. The company will not allow inter-account transfers, third party funding of a customer accounts, or payments from a customer to a third party The company qualifies as a money transmitter because the company here is an exchanger of virtual currency and not a user because it accepts convertible virtual currency from one person and transmits it to another as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.
FIN 2014 R012 A company will set up a virtual currency payment system to provide payments to merchants who wish to receive customer payments in bitcoin. The company will provide virtual currency based payments to merchants who wish to receive payments for goods or services sold in a currency other than legal tender in the merchants own jurisdiction. The company would receive payment from the buyer or debtor in a currency of legal tender and transfer the equivalent amount of bitcoin to the seller or creditor The company qualifies as a money transmission because it accepts currency, funds, or other value that substitutes for currency from one person and transmits currency, funds, or other value that substitutes for currency to another location or person.
FIN 2015 R001 A company provides internet-based brokerage services between buyers and sellers of precious metals, will buy and sell precious metals on its own account, and will hold metals for buyers via a digital wallet on the Bitcoin blockchain ledger. The company receives a transaction fee on transfers of digital certificates and a custody fee for the metals held in custody. The company qualifies as a money transmitter because there is a transfer of funds between a customer and a third party to fund the account, there is a transfer of value from a customer’s currency or commodity position to another’s account, and there is a closing out of a customer’s position with a transfer of proceeds to a third party.


The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

As digital assets, and cryptocurrencies specifically, have continued to gain worldwide popularity, you might be wondering whether you can pursue opportunities within the industry. The answer in large part depends on what type of involvement you seek to achieve, and where you plan on pursuing such opportunity. For convenience and ease of use, attached here is a chart of the regulations surrounding cryptocurrencies and digital assets on a state-by-state basis. Please note that while this chart is comprehensive, it is not an exhaustive list. Additionally, this chart does not detail regulations by country, but those vary significantly and frequently change as well. For instance, El Salvador recently became the first country to consider bitcoin as legal tender, and now there are reports of a few other countries contemplating doing the same.

At a very high level, forty-nine of the fifty states, and Washington D.C., have at least one proposed or enacted regulation as it pertains to digital assets and cryptocurrencies. Regarding licensing requirements, thirteen states have a proposed or enacted regulation. Twenty-five states have a proposed or enacted marketplace facilitator regulation and nine states have a proposed or enacted money transmitter law. Additionally, forty-two states have a proposed or enacted law that regulates digital assets and cryptocurrencies and twenty-three states have a proposed or enacted regulation to create a sandbox or committee to study the implementation and use of digital assets and cryptocurrencies. Outside of those five overarching categories (Licensing Requirements, Marketplace Facilitator, Money Transmitter, Regulation and Sandbox) thirty-seven states have other proposed or enacted regulations which range from tax regulations to inclusion in the Uniform Commercial Code of the State.

The regulations vary greatly by state and are frequently changing. Depending on what type of business opportunity you plan to pursue, you may be subject to federal regulations (for an overview of FinCen rulings click here) beyond the various state regulations listed on the chart provided in the first paragraph. If you are considering pursuing opportunities within the digital asset or cryptocurrency industry, please do not hesitate to contact us with any questions, or to discuss how we can help you pursue any opportunities. Additionally, if you would like to receive the chart as it is updated, please let us know.


The information provided herein is general in nature and is purely for informational purposes and does not constitute legal advice, nor does it create an attorney-client relationship. You should accept legal advice only from a licensed legal professional with whom you have an attorney-client relationship.

Many transactions begin with the delivery by one party to the other of a letter of intent (“LOI”).[1]  The LOI is a document setting forth the parties’ intent to enter into a transaction and summarizing certain salient business terms.  If the parties cannot agree, it would be better to learn that early on during the LOI stage rather than later after expending substantially more time and resources.  In many cases, LOIs include both non-binding and binding terms, each of which should be clearly delineated to avoid ambiguity.

A signed LOI can ignite deal momentum, comfort parties with respect to key terms, and facilitate and serve as guide for the preparation of definitive agreements.  The LOI can be as specific or vague as the circumstances require, but typically includes some understanding or a proposal with respect to the following areas:

  1. Structuring.  Most acquisition transactions are structured as stock purchases, asset purchases, or mergers.  Each transaction structure carries with it differing tax treatment and legal distinctions that can have an impact both on risk-allocation between the parties and speed/certainty of closing.  In addition, at times, advance tax structuring may be required due to tax complications of a transaction.
  2. Purchase Price and Payment. Customarily, the LOI will include the buyer’s proposal with respect to the purchase price which may include, without limitation, an upfront cash payment, deferred payments payable in installments post-closing, earnout payments based on the achievement of agreed financial targets, and equity in the buyer or a parent company of the buyer (commonly referred to as rollover equity and customarily between 10% and 20% of the total transaction consideration).  It is also common to include a basis on which the purchase price was calculated (for example, some multiple of the seller’s EBITDA or revenues).
  3. Closing Conditions. The LOI will often include conditions precedent to closing which can include financing, diligence and other contingencies such as obtaining any required third-party consents.
  4. Due Diligence. By the time the LOI is negotiated, the parties will likely have exchanged some preliminary diligence material subject to a confidentiality agreement (see below). Once the LOI is signed, the buyer will undertake a more comprehensive review of the target.  The LOI may include basic parameters of such further review and a timeline for completion.
  5. Confidentiality. Again, parties may exchange diligence prior to the execution of the LOI and in such case, it is imperative for the seller to have a binding confidentiality agreement in place prior to sharing any diligence.  The LOI should either refer to an existing confidentiality agreement or include binding confidentiality provisions absent such prior existing agreement.
  6. Exclusivity. In exchange for dedicating resources to a transaction, the buyer will want comfort that the seller is not simultaneously negotiating with other potential buyers.   Accordingly, it is customary for an LOI to include a binding agreement that the seller will not, for some period of time after signing the LOI, discuss or pursue a transaction with any other prospective buyer.  Many times this is related to the due diligence period plus a period of time following completion of due diligence with an extension right.

Some parties will opt to front-load the negotiation of certain other deal points for inclusion in the LOI, addressing matters such as the scope of indemnification, caps, baskets, deductibles, and survivability of representations, warranties, and covenants.  In general, sellers prefer a more comprehensive LOI to limit the buyer’s positioning later on and to ferret out any preliminary issues.  Conversely, buyers prefer a less comprehensive approach to the LOI to provide for flexibility, account for what they have learned in due diligence, and preserve leverage for later on.

The LOI is the first step in a long process.  Often times the business principals negotiate the LOI without counsel, resulting in lack of specificity or key terms.  If you are planning to send out or anticipate being in receipt of an LOI, the earlier you involve counsel the better suited you will be to negotiate your transaction.

[1] This article focuses on letters of intent; however, in some instances, discussions are memorialized or proposals are made under a term sheet, an expression of interest or a memorandum of understanding.