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Lawyer’s Guide to Understanding The Legal Risks of ICOs
Tuesday, April 3, 2018

Where there are profits to be won, lost or stolen, then governments and their rules, regulations, and laws surely follow. So it is with cryptocurrency and ICOs.

The first bitcoin appeared on the cyber-scene in 2009 when the anonymous person or group called Satoshi Nakamoto created the first Bitcoin block. Since then, the exchange of Bitcoin, Ethers and other cryptocurrencies have reached a fever pitch, with millions of currency being won and lost sometimes in a matter of minutes.

The foundation of cryptocurrency is based on blockchain. Simply put, blockchain is an immutable, anonymous, unhackable, decentralized ledger technology system held on millions of computers, simultaneously, throughout the world.

ICOs, or initial coin offerings, are deliberately based on IPOs, but without the laws and regulations attached to IPOs. Hence, we have the financial version of the Wild West Show. That show is about to be closed down.

As an Attorney, if your client is involved in ICO’s, be prepared for the genesis of government systems designed to reel in some of the wild out of the cryptocurrency frontier. Several governments worldwide are carefully hashing out the complicated, uncertain web of laws and regulations that may apply.

Is it a Security?

The most active United States government entity to involve itself in the free-for-all is the Securities and Exchange Commission. The single most important question for the SEC asks whether a particular ICO represents a security. If an ICO is a security, then that ICO is subject to SEC regulation.

In July 2017, the SEC issued a report that concluded that The DAO tokens are securities because they fell under the Howey Test. According to the American Bar Association, the Howey Test is where:

  • an investment of money has been made,
  • in a common enterprise and,
  • the investor has the expectation of profits, which profits are expected to arise solely, or substantially, from the efforts of the promoter or third party.

The SEC and the Department of Justice have brought charges against Maksim Zaslavskiy. The SEC charged Zaslavskiy with “defrauding investors in a pair of so-called initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds.” The diamonds and real estate did not exist.

The DOJ filed a criminal complaint charging the New York businessman with “securities fraud conspiracy in connection with engaging in illegal unregistered securities offerings and fraudulent conduct and misstatements designed to deceive investors.”

Zaslavskiy filed a motion to have the lawsuits dismissed on the grounds that the tokens or coins were not securities. The case is ongoing in a federal court in Brooklyn, NY.

Meanwhile, if your client is setting up in ICO, be sure to very carefully word the White Paper documents spelling out the ICO. You want to be sure the ICO does not fall under the Howey Test. Likewise, if your client is thinking about purchasing tokens from in ICO, look closely at the Whitepaper documents.

Speaking of securities, the Securities and Exchange Act of 1933 allows investors to sue a seller who peddles unregistered securities. If the buyer wins, then all of the investor-base might have to be refunded the entire amount.

The Taxperson Always Cometh

And he or she is out for The People’s share of your client’s Bitcoin. When only 802 people ’fess up’ and pay their taxes on cryptocurrency, the IRS is bound to get “testy”. On Feb.8, Bloomberg reported that the IRS has assigned 10 crack investigators to track down those who are not paying taxes on their cryptocurrency property.

Having issued guidelines in March 2014, the agency expected more compliance with the clarifications. Four years later on March 23, the IRS released a memo reminding taxpayers (or supposed to be taxpayers) that cryptocurrency is reportable as property on their income tax returns.

There’s More…

Other areas where your ICO client will need your advice include consumer protection law, corporate governance, and contract law, among other areas of law.


It is important that you do your homework in this cryptocurrency world. It may seem relatively straightforward, but this new area of law can be quite complex. For those of you who like to be part of developing law, ICO law is definitely the scene for you.

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