Criminal And Legal Risks Of ICO In The USA: What Laws Can Be Violated When Conducting a Crowd Aale (Article and Video)

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Criminal And Legal Risks Of ICO In The USA: What Laws Can Be Violated When Conducting a Crowd Aale

Criminal and legal risks of ICO in the USA: what laws can be violated when conducting a crowd sale

The US is already trying to control the cryptocurrency market through the Securities and Exchange Commission (SEC) and federal securities laws, equating an ICO project token to the issuance of securities (for example, The DAO). Therefore, participants in an ICO project can be brought to civil and criminal liability. It is worth noting that the virtual currency market is very diverse, so tokens may not always have security characteristics.

According to American law, security is recognized as such if four principles are observed: an investment contract, a reasonable expectation of profit, managerial efforts of third parties, and investment of money (which can take various forms) - this concerns the Securities Trading Act of 1934. But even if some of these requirements do not fit, you also need to focus on each state's laws, which may have their specifics of defining legislation for cryptocurrency.

The Securities Commission has the right to investigate if it detects the following violations to securities: implausible or incomplete information, price manipulation, unfair treatment of clients, trading based on inside information, sale of securities that have not registered.

To avoid liability, at a minimum, the issuer must fully disclose information about itself and the activities of its business, by section 13 of the Securities Trading Act of 1934 and section 3 of the Securities Act of 1933. This is provided to protect a potential investor from possible risks in the future.

Also, section 12 of the Securities Trading Act of 1934 states that no transaction in respect of securities can occur until they are registered. Also, brokers who deal with securities transactions must be registered.

Section 21 of the Securities Trading Act of 1934 provides for administrative liability for violating any clause of the law. It can be three-level, depending on the severity:

  1. for each violation, the amount of the fine should not exceed $ 5,000 (individual) or $ 50,000 (any other person);
  2. if, in addition to the first point, there is also a fraud, deception, manipulation or deliberate disregard of regulatory requirements, then the fine will not exceed $ 50,000 (natural person) or $ 250,000 (any other person);
  3. if a significant loss or risk of loss for third parties added to the first two points of violations, then the fine should not exceed USD 100,000 (individual) and USD 500,000 (any other person).

There is also criminal liability for violation of these principles, set out in section 32 of the Securities Trading Act of 1934. It says that any person who knowingly violates the provisions of this Act or regulation to it may be fined $ 5 million (individual) and not more than $ 25 million (legal entity), or imprisoned for no more than 20 years old. The same article also provides for a penalty of $ 100 for each day if the submission of reports on the issuer's activities was delayed.

One note in this paragraph differs significantly from Russian law: if a person who has broken the law in America can prove not knowing the person who has broken the rule, then such a person cannot be imprisoned.

An example is a case against Behruz Sarafraz on May 15, 2014, who sold securities in the oil and gas sector and not registered as a broker-dealer in the commission. He had to pay a fine totaling about the US $ 22 million.

But in practice, about the registration of exchange funds tied to Bitcoin, the Securities and Exchange Commission is in no hurry to give permission (like the Winklevoss Bitcoin Trust), because this market has not yet been fully explored, regulated and not mature enough. Which, in turn, can expose investors to risks.

It is also worth noting that you need to pay attention to the taxation of cryptocurrencies to not be held liable for tax evasion. The IRS defines virtual currency as property. Therefore the same taxation principles apply to transactions using virtual currency as to property transactions. That is, if you buy goods or services for bitcoins, exchange them for cash or other altcoins, you must pay tax.

A special feature is that you also need to report to the tax office if you are mining. It is worth noting that depending on whether mining is a business or a hobby, there will be different taxation. In the first case, there is reporting on schedule C, according to which the taxpayer is engaged in regular and continuous activities to generate income. In the second case, you need to report according to schedule A under the category "other income".

All of the above features give an overall picture of cryptocurrency regulation in the United States. At the same time, each state has its legislative aspects: from the definition of cryptocurrency to its regulatory requirements. Let's look at some states as an example.

The New York State Department of Financial Services (DFS), back in 2014, defined virtual currency as any type of digital unit used as a medium of exchange or a form of digital value incorporated into payment system technology. In general, virtual currency has a wide interpretation, including digital units of exchange that:

  • have a centralized repository or administrator;
  • are decentralized and do not have a centralized repository or administrator;
  • or can be created or obtained by calculation or production.

The Department also obliged companies to obtain BitLicenses for the following activities related to the virtual currency:

  • transfer of virtual currency;
  • storage or control of virtual currency on behalf of third parties;
  • buying and selling virtual currency as a business client;
  • performing exchange services as a business client;
  • management, administration, or issuance of virtual currency.

The state of Washington passed a bill in June 2017 where virtual currency refers to a digital representation of value used as a medium of exchange, a unit of account, or store of value, but does not have legal tender status recognized by the United States government. "Virtual Currency" does not include software or protocols that govern the digital transmission of value or other uses of virtual distributed ledgers to verify ownership or identity in digital communications when virtual currency is not used as a medium of exchange.

Washington State also requires a license for virtual currency-related activities, which can be obtained from the Washington State Department of Financial Institutions. Also, persons who undertake to store virtual currency must provide an independent audit of their data as part of their licensing. Their clients must necessarily receive information that relates to the following points:

  • whether the products are insured and have a guarantee;
  • obligations of the company (organization);
  • currency transfers are irrevocable;
  • all fees.

Also, all participants in the cryptocurrency market must comply with the new rule regarding licensed and trade names: if the name already exists, licensing may be rejected.

Article and video on the topic: Criminal And Legal Risks Of ICO In The USA: What Laws Can Be Violated When Conducting a Crowd Aale.

Author: Jonathan Burroughs