Cryptocurrencies and Crypto-Crowdfunding

It seems that entrepreneurs do not simply want to capitalize on local markets anymore.  An international impact is achievable with the connections available through internet and technology (e.g., e-commerce).  A startup company can now achieve that international presence by utilizing cryptocurrencies and crypto-crowdfunding.  Using cryptocurrencies allows a company to do business in any country without worrying about foreign exchange fees or limitations.  Crypto-crowdfunding can help a new company raise capital by creating its own currency in exchange for real money or other cryptocurrency. Are you starting an online business and want an international presence? Do you want to raise money fast for your new company? If so, then cryptocurrencies and crypto-crowdfunding may be helpful.

What is Cryptocurrency?

Cryptocurrency is digital or virtual currency that uses cryptography as its security. These currencies are not issued by central banks, and therefore, immune from government intervention and manipulation. Because there is no government intervention into these crypto-markets, many national cyrptocurrencies are beginning to emerge. European countries with struggling central banks and economies are experiencing the emergence of national cryptcurrencies, such as Spaincoin in Spain and Aphroditecoin in Cyprus. These currencies are easily traded and provide entrepreneurs with the ability to circumvent foreign exchange controls. Whether these currencies are privately started or nationally motivated, they can connect people anywhere in the world while keeping governments out of the picture.

What is Crypto-Crowdfunding?

Crypto-crowdfunding combines the benefits of cryptocurrencies and the quick capital infusion from crowdfunding. One of the first entities to foster this idea is Swarm.  The process works by a startup company creating its own cryptocurrency. The new company then trades this currency for real money or other cryptocurrencies. If the company is popular or successful, then its newly created currency is more valuable and can be traded to a third-party for a profit. The company benefits because it receives fast capital in many forms, and those who purchase the new cryptocurrency also have a share in the success of the company because they own its currency.

What Are the Legal Issues of Crypto-Markets?

In general, governmental agencies participate in the regulation of these markets—e.g., Financial Crimes Enforcement Network (“FinCEN”), Securities and Exchange Commission (“SEC”), and Internal Revenue Service (“IRS”).  Cryptocurrencies provide an opportunity for money laundering, and FinCEN has announced that anti-money laundering regulations apply to virtual currencies. Under FinCEN guidelines, an exchange service that allows a user to buy a cryptocurrency with real currency and sell cryptocurrency for real currency must register with FinCEN. A federal court held in SEC v. Shavers that cryptocurrency is a type of security covered by the Securities Act of 1933. Therefore, fraudulent trades in the crypto-markets come under the regulatory control of the SEC. On March 26, 2014, the IRS issued the IRS Virtual Currency Guidance to explain the tax obligations of cryptocurrency. The IRS has stated that “virtual currency is not treated as currency that could generate foreign currency gain or loss for U.S. federal tax purposes.” So, using cryptocurrency may help a new company avoid capital gains tax obligations.

As such, these markets are still in development, and the regulatory agencies and laws are not always up-to-date. You may contact us to discuss the applicable laws and regulations.