Earlier this week the Wyoming House of Representatives unanimously passed two bills that would exclude or exempt certain cryptocurrencies from certain state regulatory requirements. Namely, one bill exempts qualifying “open blockchain tokens” from the registration requirements of the Wyoming Securities Act. The other exempts the buying, selling, or issuing of virtual currencies from Wyoming’s Money Transmitter Act. For some, these actions reflect a positive step forward towards the broader deregulation and “legitimization” of cryptocurrencies. Others have been skeptical, thinking celebration of the bills is premature and that the Wyoming legislature’s actions will have little impact on the regulation of cryptocurrencies nationally. I am in the latter camp. Here’s why:
1. I’m Just a Bill.
The bills have not yet become law, even in Wyoming. Though the bills have passed the Wyoming House, they have not yet cleared the Wyoming Senate. Until the bills become law, celebration is premature. Just for fun, I include here the legendary School House Rock (“I’m Just a Bill”) video on how a law is made (the video applies to federal laws, but you get the idea). Plus, see points 3 and 4 on how federal law interacts with state law in this context.
2. No Strings Attached? Not So Fast
There are some caveats to the exemption from securities registration requirements. For example, in order for someone to claim issuances of a blockchain token qualify under this exemption, they must meet the following conditions: (1) the token is not marketed as an investment; (2) the token is exchangeable for goods and services; and (3) the developer or seller of the token has not actively made efforts to create a secondary market for the token by entering into a repurchase agreement or agreeing to locate buyers for the token. These caveats will make it difficult for an issuer of an ICO to capitalize on investors’ fervor to buy-in early on The Next Bitcoin. Without that, what is the benefit of conducting an ICO?
3. Federal Law > State Law
The Supremacy Clause of the United States Constitution establishes that federal laws are the supreme law of the land. When a federal law conflicts with a state law, and where the federal law is more restrictive than the state law, federal law will trump. Unless and until there is a successful, national legislative effort to exempt tokens and virtual currencies from federal securities and money transmitter laws, the Wyoming law will only apply to transactions occurring within Wyoming, the country’s least populous state. In every instance where someone within Wyoming offers a token or virtual currency to someone anywhere outside of Wyoming, that person will need to comply with federal securities and money transmitter regulations (as well as other states’ laws).
4. States “Legalizing” Cryptocurrencies is not analogous to States “Legalizing” Crowdfunding
There may be temptation to analogize a state securities exemption for blockchain tokens to a state securities exemption for crowdfunding campaigns. This is not a good analogy. State legislative efforts to exempt qualifying crowdfunding offerings from securities registration requirements were largely driven by the JOBS Act of 2012, which marked a significant policy shift at the federal level. The JOBS Act required federal regulations to be amended and created to permit securities crowdfunding under federal law. State legislative efforts were then built around (and to comply with) federal requirements, with the Securities and Exchange Commission (SEC) proactively and openly stepping out of the way of these state efforts.
Conversely, the SEC has been proactive and open in warning issuers of blockchain tokens and ICOs that they must comply with federal securities laws. The SEC has taken significant, well-publicized enforcement actions in this space in recent months, and only show signs of increasing those efforts. Here are a few examples of companies subject to SEC enforcement actions related to transactions in cryptocurrencies:
PlexCorps – Fraud Charges/Asset freeze (12/4/2017)
AriseBank – Asset Freeze (1/30/2018)
BitFunder—Civil fraud and securities law violations (2/21/2018)
5. A fraud by any other name would still stink.
Finally, exempting the issuer of a blockchain token or virtual currency from securities registration or money transmitter laws does not also exempt that issuer from anti-fraud provisions of state or federal law. If a blockchain token or virtual currency is marketed and sold based on misleading, puffed up claims about financial returns, and a consumer experiences financial harm as a result, the consumer could allege to a regulator (or via a plaintiff’s attorney) they were defrauded. A fraud is a fraud is a fraud, and the penalties for committing fraud can be significant.
Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen clients the ability to “speak regulator,” having spent several years working for federal and state regulators in Washington D.C. and Saint Paul, MN before entering private practice.
Rachell Henning is a third-year student in the Mitchell Hamline School of Law's innovative Hybrid program. Rachell is an Avisen Fellow alum who enjoys spending time with her husband and two young daughters when she is not working or studying.