Blockchain Week in Review - March 2021

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Weekly Focus:

  • The nominee for chairman of the Securities and Exchange Commission, Gary Gensler, testifies before the Senate Banking Committee.
  • The NY attorney general issues industry alerts citing risks in cryptocurrency investments and emphasizing registration requirement for industry members.
  • IRS clarifies and limits virtual currency disclosure question on Form 1040.
  • Kentucky legislature advances crypto mining incentives bills.
  • Kings of Leon to release its next album as an NFT.

The nominee for chairman of the Securities and Exchange Commission, Gary Gensler, testifies before the Senate Banking Committee.

The Senate Banking Committee held a hearing on the nomination of Gary Gensler to serve as chairman of the Securities and Exchange Commission. The hearings covered a range of topics from political spending, climate risks, blockchain, technology, and recent controversies around GameStop stock.

Gensler praised cryptocurrencies for fostering financial innovation and inclusion, as well as the need to balance any innovation with investor protection. Speaking specifically about Bitcoin, he noted it was a commodity with jurisdiction falling to the Commodities Futures Trading Commission (CFTC) or for Congress to define, and left open that other cryptocurrencies may be similarly situated. This is a continuation of the current regulatory approach, which, as Gensler noted, provides the SEC with oversight of investment contracts, not cryptocurrencies more broadly. More generally, Gensler opined on the need to balance investor protection with innovation and capital formation. Gensler brings a background as a former CFTC chair, and presently is a professor on technology and finance at MIT.

Gensler’s written testimony is available here. As of March 5, 2021, the Senate Banking Committee has not voted on his nomination.

The NY attorney general issues industry alerts citing risks in cryptocurrency investments and emphasizing registration requirement for industry members.

On March 1, 2021, New York Attorney General Letitia James issued two industry alerts and a two part press release for cryptocurrency investors and industry members.

The alert to investors urged “extreme caution” when investing in virtual currencies, noting risks such as volatility, conflicts of interest, market manipulation, money laundering, and tax evasion. The press release accompanied a separate investor alert with “5 common sense tips” to avoid frauds, and a link to the Investor Protection Bureau complaint form.

The alert to industry members cited provisions of the New York State law dealing with securities and commodities, known as the Martin Act, which gives the office of the attorney general jurisdiction over securities and commodities in the state of New York. The attorney general cited a registration requirement for certain commodities broker-dealers, salespersons, or investment advisors, noting that failure to register is subject to both civil and criminal penalties.

The July 9, 2020, Appellate Division decision in James v. iFinex, included language stating that the Martin Act definition of a commodity was broader than that used by the CFTC, while also stating that Tether, and very likely a broad range of cryptocurrencies, fall within the Martin Act definition of a commodity. The attorney general’s office cited that decision in its alert as requiring registration of certain broker-dealers, salespersons, or investment advisors in the cryptocurrency space, while noting “significant non-compliance with registration obligations.”

IRS clarifies and limits virtual currency disclosure question on Form 1040.

In December of 2020, the IRS updated its Form 1040 to include as the first question, “At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?”

On March 2, 2021, the IRS updated its frequently asked questions to clarify that merely purchasing and holding virtual currency, does not require disclosure. Stating:

Q5.  The 2020 Form 1040 asks whether at any time during 2020, I received, sold, sent, exchanged, or otherwise acquired any financial interest in any virtual currency. During 2020, I purchased virtual currency with real currency and had no other virtual currency transactions during the year. Must I answer yes to the Form 1040 question? (3/2/2021)

A5.  No. If your only transactions involving virtual currency during 2020 were purchases of virtual currency with real currency, you are not required to answer yes to the Form 1040 question.

Moving the tax question to 1040, and as the first question, makes it difficult for filers to miss. This update in the FAQ defines the scope of the question to omit merely buying and holding. The IRS FAQ is available here.

Kentucky legislature advances crypto mining incentives bills.

On March 3, 2021, the Kentucky General Assembly approved House Bill 230 in a 82-15 vote. This bill would eliminate sales tax on electricity costs and tangible personal property directly used for commercial mining of cryptocurrency. The bill was advanced to the Senate on March 4, 2021, where it will be taken up alongside Senate Bill 255. This legislative effort seeks to attract commercial cryptocurrency mining operations citing an “opportunity to become a national leader in [an] emerging industry,” and specifically citing cheap and abundant electricity. The legislative initiative also includes similar incentives for tech focused business such as data centers.

This follows a 2019 Kentucky House Resolution seeking a comprehensive study on the use of blockchain, and a 2020 Senate Bill creating a Blockchain Technology Working Group in Kentucky.

Kings of Leon to release its next album as an Non-Fungible Token

The band Kings of Leon announced its next album would be released along with three types of NFT tokens offering different incentives. Per TheBlock “The first type of token will be a special album package, the second will offer holders perks like front-row tickets for life, and the third will be for ‘audiovisual art.’” The technical release, including smart contracts, is being managed by blockchain startup YellowHeart.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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