Blockchain and Cryptocurrency

Blockchain technology, along with cryptocurrencies such as Bitcoin, are disrupting the marketplace in a manner similar to the early days of the internet. Seemingly every industry, including finance, could be affected by new methods of payment and decentralized technology. The growth of Blockchain and cryptocurrencies also promises to introduce cutting-edge legal and regulatory issues. We are one of the first 20 law firms to join the most prominent and influential Blockchain trade group, the Chamber of Digital Commerce and are part of the Token Alliance, which focuses on legal issues and best practices around launching tokens and Blockchain ecosystems. We have advised a number of companies in the Blockchain space and have assisted in structuring token offerings surrounding Blockchain applications.

The Blockchain ecosystem has introduced a whole new set of legal issues to for attorneys, regulators, and entrepreneurs to consider. One of the threshold issues, which has engendered spirited debate, is whether a token, often issued pursuant what has been called an Initial Coin Offering (ICO), is a security or not. Whether or not an instrument is considered a security is a fact-specific inquiry (it’s irrelevant what you call something; its substantive features are what matter) based upon a test called the Howey Test, which was fashioned from a 1946 Supreme Court case by that name. The Howey Test looks at whether there is (1) an investment, (2) an expectation of profits, (3) the investment is in a common enterprise, (4) and the return is based upon the efforts of a third party. The distributed nature of many Blockchain applications and the fact that many are designed to accept tokens as the currency to utilize the platforms have led to creation of the “utility token” concept. Many argue that utility tokens fail the Howey Test and hence should not be considered securities, which means that their initial issuance and secondary transfers are generally unrestricted. While the SEC has not issued definitive regulations on the question of utility tokens, various statements by SEC officials indicate a healthy skepticism (to say the least) of the notion that utility tokens are not securities. However, other statements by SEC officials have shed light on factors that may render an instrument not a security and have also indicated that something can be a security at one point but cease to be later.