Category Archives: Crypto

Blockchain General Counsel

Over the past year, I have attended a number of blockchain networking events in Manhattan.  A message I hear repeatedly from the software community is there is no clear case law for companies to follow in order to market coins to finance new software businesses.

Understandably, many new companies are running into legal problems. A few have ask me about legal guidance with regard to this new technology which is why I am writing this blog.

Here is the context. Small companies are offering coins — referred to as initial coin offerings — in order to develop software because the usual methods of financing are too onerous and expensive. Typically, these newer coins are paid for with Bitcoin or other established cryptocurrency.


Nuanced messages from the government typically occur with most newer legal issues. It is very rare that your facts and the facts of cases and regulations will fit together exactly.

For those not in the legal profession, it helps to know that the law is backward looking. Lawyers and courts will defer to the past to garner what relevant facts they can to build an argument that something does or doesn’t fit in the current legal framework. This deference creates stability in the development of the law, which is very slow moving.

The government is going to look back at case law that doesn’t exactly fit, but the cases are in line with reasoning regulating the industry.

With regard to coin offerings to finance software development, the legal cases to date offer up facts that typically relate to shares sold in a company. The subject matter for these cases are orange fields and whiskey futures. None of the cases relate to computer code because they haven’t been litigated yet.

Look for patterns in enforcement. This is an emerging pattern now.


The SEC (like the IRS and ICE in the Department of Homeland Security) will follow up on an anonymous tip. Anyone attending a networking event from the public could be a potential source. Anybody working in the company can make an anonymous tip.

Recently, a high level Security and Exchange Commission Official clarified which factors  the SEC may looks at in order to regulate a blockchain software company offering coins. (Source: )If a company is unregistered and doing these things, it  is very likely that there will be an enforcement investigation should there be a tip.


1. Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation?

Answer: If your company is offering over a million tokens (selling them on exchanges that people in the US and all over the world have access to) and you have only two formal users of your software product, the token is not commensurate with the needs of users. In this case, the token would be a security.

2. Are independent actors setting the price or is the promoter supporting the secondary market for the asset or otherwise influencing trading?

Answer: If there is a person or coordinated group that is working actively to develop or guide the development of the infrastructure of the network – this person or group could be founders, sponsors, developers or “promoters” in the traditional sense – then it is a securty.

3. Is it clear that the primary motivation for purchasing the digital asset is for personal use or consumption, as compared to investment?

Answer: For example, when someone buys a housing unit to live in, they are using it. When somebody buys a “token” and is not able to use it in a software application immediately (can only hold and sell it later for investment) it is a security.

Have purchasers made representations as to their consumptive, as opposed to their investment, intent? Are the tokens available in increments that correlate with a consumptive versus investment intent?

Answer: See answer to #1 above, regarding a million tokens and two users.

4. Are the tokens distributed in ways to meet users’ needs? For example, can the tokens be held or transferred only in amounts that correspond to a purchaser’s expected use? Are there built-in incentives that compel using the tokens promptly on the network, such as having the tokens degrade in value over time, or can the tokens be held for extended periods for investment?

Answer: If you don’t know the answers to these questions, you probably have a security.

SEC Chairman Jay Clayton has stated… entities that allow for payment in cryptocurrencies, allow customers to purchase cryptocurrencies on margin or otherwise use cryptocurrencies to facilitate securities transactions should exercise caution, including ensuring that their cryptocurrency activities are not undermining their anti-money laundering and know-your-customer obligations.

5. Is the asset marketed and distributed to potential users or the general public?

Answer: Can you say who has your token now? If the answer is no, then you are marketing to the general public. I would also use the example of the networking event I attended in Manhattan. If coins were marketed to a seamstress or beauty salon owner investing and trading in her free time, you may have a difficult time arguing this investor is utilizing the token in the blockchain.

6. Are the assets dispersed across a diverse user base or concentrated in the hands of a few that can exert influence over the application?

Answer: It is easy to apply the Supreme Court’s “investment contract” test to an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. Where the purchasers are passive, relying on the efforts of others for a return, this is an investment contract. In an important case, the Supreme Court stressed: “… the emphasis [is] placed upon economic reality.” Calling something a “utility token” will not take it out of the enforcement environment.

7. Is the application fully functioning or in early stages of development?

If you have a fully functioning application – with, for example, long term technology licensing and royalty streams and utility tokens that only function within the software environment with an incentive to use and not sell or transfer – you are probably on the right track!


I hope this article will answer some of the questions that apply to financing a start up blockchain business and reveal possible SEC investigation triggers .

Cryptocurrency, Tax and Non-Immigrant Employment

The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.

The development of new forms of income (cryptocurrency) raises questions about how a non-immigrant employee should report and categorize this.


Is trading crypto currency considered “employment income” if I trade on my H visa in the US?


It depends. For people who use Bitcoin mainly as an investment, capital gains, as you may know, are taxed at lower rates than ordinary income. Think about Bitcoin in terms of common stock. If you sell stock within a year of buying it, the profit is taxed as ordinary income. But if you hold that stock for longer, it is taxed at the capital gains rate.

In IRS Notice 2014-21, the character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

According to the IRS, when a taxpayer successfully “mines” Bitcoins and has earnings from that activity whether in the form of Bitcoins or any other form, he or she must include it in his gross income after determining the fair market dollar value of the virtual currency as of the day he received it.

If a bitcoin miner is self-employed, his or her gross earnings minus allowable tax deductions are also subject to the self-employment tax.



Despite the lack of consumer protection regulation, the IRS taxes Bitcoin.  Virtual currency can be treated as income for the purpose of tax reporting and as property for capital gains tax.

When examining the IRS approach to the taxation of virtual currencies, the most basic question is whether they will be treated as currency or property.


In IRS Notice 2014-2, wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.


In IRS Notice 2014-21, payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.


Virtual currency issued to fund software development projects is relatively new.  Not relying on the usual venture funding or traditional bank lending, software project managers seek financing directly from investors.   This is called crowdfunding.

The virtual currency is offered to the public in a coin offering.  It can be sold on an exchange or held in a wallet.  In pre-offer sales it must be held for a specified period of time.

The reason this new business financing paradigm developed was to free newer software projects from the usual financing framework (banks) and level the playing field.  Further, many investors view mining and exchanging this virtual currency as the new frontier for making money.

Bitcoin is one of over 2,500 different of virtual currencies. Virtual currency value often fluctuates by the hour. In some environments, virtual currency operates like “real” currency but it does not have legal tender status in any jurisdiction.


In order to purchase virtual currencies, you must buy directly from someone who owns them or through an exchange platform. These platforms tend to be unregulated.

Cybersecurity crime in the US continues to rise. The FBI reports 22,000 complaints per month in 2014, totaling $800 million in consumer losses per year (Source:

While securities accounts at U.S. brokerage firms are often insured by the Securities Investor Protection Corporation (SIPC) and bank accounts at U.S. banks are often insured by the Federal Deposit Insurance Corporation (FDIC), bitcoins held in a digital wallet or Bitcoin exchange currently do not have similar protections.

Dena Wurman is a New York licensed attorney who has practiced federal law since 2005. She blogs on topics that explain new federal regulations and how they relate to business. She was told at a recent blockchain meet-up event in Manhattan that there is a big need for good legal counsel in the blockchain space. She decided it’s worth exploring. This is a first in a series of articles.