CRYPTOCURRENCY REGULATIONS AND ENFORCEMENT IN …

1 CRYPTOCURRENCY REGULATIONS AND ENFORCEMENT , 45 W. St. L. Rev. 1 2018 Thomson Reuters. No claim to original Government W. St. L. Rev. 1 Western State Law ReviewFall, 2017 ArticleScott D. Hughesa1 Copyright 2017 by the Western State University Law Review Association, Inc.; Scott D. HughesCRYPTOCURRENCY REGULATIONS AND ENFORCEMENT IN cryptocurrencies are a new type of technology that can be used in several applications, such as transferringmoney, recording data, and investing. Unlike most businesses that can be invested in, decentralized cryptocurrencies donot have a specific legal entity that is responsible for consumer protection.

2 The virtual and decentralized nature of thistechnology makes the application of traditional legal frameworks untenable. Furthermore, the absence of a specific legalentity makes ENFORCEMENT of any new legal framework tenuous. For these two reasons, the current regulatory status ofdecentralized cryptocurrencies, or digital currencies, is enigmatic. This article contributes to the increasingly importantdiscussion on the patchwork body of law pertaining to virtual currencies and blockchain technology. The maincontribution of this article is to provide a systematic literature review of the governmental guidance releases, agencies,task forces, and proposed and approved bills pertaining to virtual currencies.

3 This article explores the various definitionsof virtual currencies provided by local, state, and federal governing bodies. Also, an in-depth review of the enforcementactions taken is documented for the following agencies: the Commodity Futures Trading Commission, financial CrimesEnforcement network , Securities Exchange Commission, Department of Justice, Internal Revenue Service, and theFederal Trade Commission. The current legal status in five states that has pioneered the path to regulating Bitcoin andother virtual currencies is examined.

4 These states include New York, California, Washington State, Florida, Hawaii, andArizona. The difficult challenge for lawmakers is to design laws that stimulate innovation while protecting consumerwelfare and satisfaction. This article hopes to help solve this challenge by synthesizing the large body of disparateliterature on virtual currency regulation in the OF CONTENTSINTRODUCTION2I. AN OVERVIEW OF CRYPTOCURRENCIES AND THE BLOCKCHAIN TECHNOLOGY3A. Cryptocurrencies4B. Blockchains6II. THE LEGAL DEFINITIONS OF CRYPTOCURRENCY AND BLOCKCHAIN7A.

5 The Three Traditional Types of Money7B. Electronic Money8C. Virtual Currency9 III. FEDERAL LAWS PERTAINING TO CRYPTOCURRENCY AND THE BLOCKCHAINTECHNOLOGY11A. Commodity Futures Trading Commission11B. financial Crimes ENFORCEMENT Network13C. Department of Justice16D. Securities Exchange Commission18E. Internal Revenue Service19 CRYPTOCURRENCY REGULATIONS AND ENFORCEMENT , 45 W. St. L. Rev. 1 2018 Thomson Reuters. No claim to original Government Federal Trade Commission20IV. STATE LAWS PERTAINING TO CRYPTOCURRENCY AND THE BLOCKCHAINTECHNOLOGY21A.

6 New York21B. California22C. Washington State23D. Florida24E. Hawaii25F. Arizona26G. Uniform Regulation of Virtual-Currency27V. CONCLUSION28*2 INTRODUCTIOND ecentralized virtual currencies and blockchain technology are becoming household words. Companies andgovernments are exploiting this technology for its touted ability to reduce transaction costs and increase are investigating blockchain's potential to settle interbank transactions. Research consortiums, such as DigitalAsset Holdings, and exchanges, such as NASDAQ, are investigating if blockchain technology can improve securityissuance and trading.

7 Furthermore, several companies are using initial coin offerings (ICOs) to raise venture capitalfor new start up businesses. Due to the diversity of use cases, regulatory bodies in the United States have weaved apatchwork response of sometimes redundant or contradictory judgments. The difficult question of how to legally treatvirtual currencies is being determined independently by each agency. Instead of developing a new set of governing rulesfor virtual currencies, each case is being tried according to laws that were intended to regulate conventional paymentsystems, financial services, and The majority of legal cases pertaining to bitcoin and other cryptocurrenciesstem from criminal prosecutions and disputes *3 between bitcoin companies.

8 2 however, a growing number of casesare being brought forth by governing bodies such as the Commodity Futures Trading Commission (CFTC), the FederalTrade Commission, and the financial Crimes ENFORCEMENT network (FinCEN). The local, state, and federal governingbodies are trying to achieve regulatory goals such as consumer protection and anti-money laundering policy withoutstymieing innovation in financial key challenges exist for regulators. First, most cryptocurrencies have a decentralized structure that is not confinedto one legal While legislators can make consumers and businesses within a specific geographic locationsubject to regulation, a decentralized blockchain is difficult to regulate.

9 Therefore, legislation should specifically statewho is bound by the policy. Secondly, legislation should aim to be technology neutral. For example, the New YorkBitlicense legislation is atypical because the Bitlicense doesn't regulate a particular business model but instead regulatesthe use of a specific technology. Legislation that targets a particular CRYPTOCURRENCY may lead to the success or the demiseof a particular CRYPTOCURRENCY irrespective of that CRYPTOCURRENCY 's particular merits on the market. Thirdly, the goalsof the legislation should be clearly formulated and transparent for market participants.

10 In order to reduce compliancecosts, governments can provide suggested guidelines for consumers and businesses that are subject to the new article contributes to the increasingly important discussion on the patchwork body of law pertaining to virtualcurrencies and blockchain technology. In the first section, a brief summary of the technical aspects of cryptocurrencyand distributed ledger technology is presented. Following the overview of the technology, the myriad of legal definitionsthat have been applied to these technologies by federal and state agencies is presented.