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Published by: 21:32, 02 December 2020

Legal library participants in crypto projects

This legal framework is made up by lawyers of the protocol 0x specifically for the creators, participants and users of crypto-projects, tokens, cryptocurrency. Some laws and regulatory acts regulating a crypto community included in legal libez.

Organizers and participants in Crypto projects are useful to deal with legal issues, sooner or later they may face the need to comply with these laws and regulations.

A wide variety of projects that can be built using the integration with the 0x protocol means that today there are no uniform legal standards applicable to the crypto community.

At the same time, there are certain legal norms that are more likely than others will affect the projects that make up the Ecosystem 0x and any other crypto projects.

The information below is not a legal document. This is general legal information compiled for the 0x ecosystem, which is part of the global crypto community. To understand how this information can specifically affect your project, you will need the help of a good lawyer.

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All legislative acts approved to regulate cryptoasset exchange transactions are still evolving, ambiguous and require careful consideration. For additional knowledge, we suggest you familiarize yourself with the 0x legal library, which contains links to important cases, regulatory statements and other legal comments related to the cryptoasset industry.

United States of America. Federal Securities Ordinance

In the United States, a complex web of laws and regulations applies to activities involving financial instruments that meet the legal definition of a security. There are laws governing everything from how and where securities can be sold, who can own certain types of securities, and what should be disclosed to investors in securities. As a result, anyone who deals with cryptoassets has to answer an important threshold question: which transactions are related to securities.

Legal educational program. What is a security?

So what exactly is security? Unfortunately, even federal courts have found that the definition of a security is "broad and ambiguous.". Consequently, it is difficult to draw up a clear rule with which one can easily distinguish a security from an unsafe one. Instead, the courts have developed a flexible test that is designed to "conform to the myriad and varied schemes devised by those seeking to use others' money against the promise of profit.".

Specifically, the US Supreme Court has outlined a four-part test to determine if a transaction qualifies as a form of security called an "investment contract.".

Originally set out in SEC v. Wj howey co., The court clarified that a transaction is an "investment contract" when it involves (1) investing money (2) in an ordinary enterprise (3) with the expectation of profit (4), which will be obtained from the efforts of other users.

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There are many interpretations as to whether various financial instruments meet this definition of a security, including everything from bank certificates of deposits to interest in whiskey barrels. Collected here are some of the most important cases. However, there are many more cases analyzing various elements of the Howey test, each of which depends on the specific facts of a particular transaction.

As evidence of the inherent difficulty of defining a clear line between what is a security and what is not its price, there have been numerous cases where courts have applied the Howey test to seemingly similar transactions and produced different results.

For example, there are several cases where certain real estate leases are considered securities when they are drafted in a certain way.

Likewise, there are many known cases where the sale of a tangible asset, such as the sale of beavers, could be offered as part of a securities transaction. These cases demonstrate that courts pay less attention to the nature of the main product sold. The focus is on the way the asset was sold.

Application of legislative acts in the cryptoasset industry

It is important to understand that the main way of development of law in the United States is the application by the courts of the existing legal precedent to cases that represent new models of facts that have not been previously considered. As of the beginning of 2019, very few American courts tried to resolve the situation in which the Howey test should be applied to transactions with cryptoassets, so it is still unclear how the boundaries separating securities from non-securities will be drawn.

Several cases are currently pending, which could lead to decisions directly affecting the crypto industry. Inevitably, there will be high-profile cases in the future, in which teams will appear using the sale of cryptoassets as a way to sell future profits to third parties.

At the moment, most of the respondents agree that the founders of projects and developers who create projects in the crypto industry lack legal literacy.

Moreover, even among lawyers, there is considerable confusion as to how Howey should be applied in the context of secondary market transactions in which the original token issuer is not directly involved.

Legal educational program

Even if the initial sale of the token had some of the distinguishing features of the offering of securities, it is unclear if the subsequent transaction of the token holder, for example, the exchange of a token for a cryptocurrency, is a transaction in securities. This confusion stems in part from the fact that virtually every historical use case for Howey involves a transaction in which a promoter promises a counterparty some form of financial profit.

In the context of this unclear regulatory environment, it remains for developers integrating 0x to make good faith efforts to comply with securities law. For many crypto projects offering clients a portal or platform for trading cryptoassets, a legally competent analysis of each token and its underlying network is required before placing those assets on the platform.

The following are questions for analyzing legal risks:

  • How the initial sale or distribution of tokens was conducted, including what the development team presented to potential token buyers?
  • How the token participates in the work of the created network, including whether its design is intended to provide a certain financial profit to the token holder or will instead be used in some consumer way?
  • What is the current status of the development of the core network or project, is there any participation of third-party developers in the development of the project, other than the team that issued the tokens?

The proposed structure is not exhaustive, and depending on the nature of the project being developed, it may be useful to work with lawyers to develop an algorithm that will provide adequate protection.

Legal educational program. SEC current position

The Securities and Exchange Commission (SEC), the main regulator of the US securities market, has been actively voicing its views on some of the activities in the cryptoasset industry. The first major SEC foray into the industry came in July 2017 in the form of a report that said the sale of DAO tokens constituted a sale of securities. Since then, the SEC has reached settlements with several industry players and has issued several statements on when certain industry activities may be subject to securities regulations.

Complete list of these documents can be found here.

Notably, some SEC members said they believed the vast majority of tokens were sold as part of fundraising efforts (so-called "ICOs").

In March 2019, the SEC's Strategic Center for Innovation and Financial Technology (aka FinHub) issued a framework designed to help those in the cryptoasset industry assess which assets can be considered by SEC employees as securities.

FinHub identifies numerous factors that need to be considered when analyzing whether selling a crypto asset matches the last two questions from the Howy test, i.e.e., whether there is an expectation of profit based on the participation in the work of a third party.

The focus is on the factors used to determine if there is an “Active Member” that provides “the necessary management efforts that affect the success of the venture, and investors reasonably expect to profit from these efforts”.

Currently, one of the biggest discussions surrounding the Securities and Exchange Commission's position on the cryptoasset industry is how it plans to apply the securities law to trading secondary market tokens that might originally have been sold as part of the offer. valuable papers.

The SEC's corporate finance director expressed the opinion that "strictly speaking, a token - or a coin, or whatever the digital information package is called - is not a security in itself.". At the same time, the director aptly noted that a “thorough and factual legal analysis” of secondary market trading is needed, focusing on how the token is offered and sold, including reasonable expectations of buyers. The director proposed one standard for determining when a token is not a security, based on whether the network in which the token exists is sufficiently decentralized.

Legal educational program

In his presentation on the proposal for this standard, the director also outlined several factors that could be considered to determine if a token is “decentralized enough”.

FinHub's later formulation also addresses this issue, but does not use the term "decentralized enough". Instead, the framework outlines several factors that need to be analyzed, whether the value of the asset is still dependent on the efforts of the "Active Participants" and to what extent the underlying networking technology is fully functional.

The main takeaway from these statements is that the SEC has recognized that a crypto asset previously sold as part of a securities offering may, under certain circumstances, be subsequently sold in the secondary market as part of non-securities transactions.

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However, there are still many questions about the standard that the SEC will use to distinguish between securities transactions and non-securities transactions in cryptoassets.

In addition, despite the fact that SEC advocated a detailed analysis of the network of each tokeny to make a decision, this analysis did not affect the forced measures that it took against certain participants in the industry.

Instead, SEC issued orders for settlement cases with the participation of buyers of the secondary market, in which it without additional explanations argued that the tokens themselves are securities.

Consequently, serious disputes are undergoing about the general position of the Cryptoacive Commission and Exchanges. Many have encouraged the Securities and Exchange Commission to make more clarity in the industry and to avoid compulsory regulation.

In particular, for the first time in history, the cryptoproekt, who under the sight of the SEC, decided not to agree with her decision, and instead filed a lawsuit against SEC to court.

The SEC filed a federal court complaint alleging that Kik Interactive conducted an unregistered securities offering when it sold Kin tokens for roughly $ 100 million in virtual assets.

legal educational program 0x cryptocoinexpert kik

Kik's statement to the SEC arguing that Kik should not be sued has been made public, and together, the two documents represent a dramatic difference of opinion that some in the industry are taking with the SEC's current approach to cryptoassets.

The Kik case will go to court and could potentially lead to court decisions that will further clarify how the securities law will be applied in the future. However, attempts were also attempts outside the judicial sphere and even some of the first legislative bills in the Congress, calling for the creation of standards, more clearly defining the border between securities and non-securities.

Important note: All statements of the Securities and Exchange Commission, such as statements cited in this review, as well as all orders of the Commission on Securities and Exchanges, which are the result of sanctions to alleged offenders, are not allocated to individual laws, and should usually be interpreted How just reflecting the position of the Securities and Exchange Commission. To what extent the courts applying the law will agree or disagree with the position of SEC, we still have to see.

Legal Likbez

What is Exchange?

Most discussions on securities law to date have focused on the threshold question of what securities are. This makes sense as there is no need to consider other aspects of securities law if the transaction is not related to the security. But while the question of which cryptoassets might be securities remains unclear, it is important to consider some of these other areas of securities law as well.

For projects integrating 0x, one area of ​​focus should be on what the stock exchange is.

A stock exchange is defined as “any organization, association, or group of individuals that: (1) combines orders from multiple buyers and sellers; and (2) employs established non-discretionary methods (either through the provision of retail space or through the establishment of rules) whereby such orders interact with each other and buyers and sellers placing such orders agree to the terms of trade. ".

Any platform that meets the definition of a securities exchange usually must register with the SEC and comply with a number of restrictive rules.

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The current rules adopted by the SEC regarding exchanges were formulated in 1998 in response to statements by market participants, including technology developers, that the current “regulatory framework, developed more than six decades ago, is not Envision."

Obviously, the pace of technological development has only increased since 1998, and some of the concepts outlined in the official interpretation of the SEC rule are difficult to apply, especially to the concepts represented by blockchain technologies.

In November 2018, the SEC settled a lawsuit with the founder of the EtherDelta trading platform on the grounds that the platform is an unlisted securities exchange. In its settlement order, the SEC claimed that some of the 500 tokens listed on EtherDelta were securities, but did not specify which ones.

The SEC then stated that EtherDelta operates like an exchange because:

EtherDelta consolidates orders by receiving and storing token orders in the EtherDelta order book and displaying the top 500 orders (including symbol, token size and price) as bids and offers on the EtherDelta website. EtherDelta provided the technical capability for these orders to interact and execute through the combined use of the EtherDelta website, order book, and preprogrammed trading protocols defined in the EtherDelta smart contract. These established non-discretionary methods allowed users to agree on the terms of their token transactions on EtherDelta during an appropriate period.

Legal educational program

As explained above, such orders are optional. Moreover, each case depends on the facts, so this order cannot answer how the SEC will treat markets where different functions work in different ways, are distributed between different parties or where all tokens are not offered to users indiscriminately. However, it provides a first practical idea of ​​what issues the SEC focuses on when analyzing trading platforms, and these should be carefully considered by any trading platform.

Federal regulation of commodities and derivatives

When we talk about commodities, historically the term was used to refer to agricultural products such as wheat, corn and sugar. However, US law has evolved. For a broader definition of the concept of goods, the document also included the clause "all services, rights and interests ... in which contracts are concluded for a future supply at present or in the future". As a result, almost everything (except onions) can be considered a "commodity" according to this definition.

The Commodity Futures Trading Commission (CFTC) is the primary regulator of "commodity interests". The CFTC has taken the position that some virtual currencies like Bitcoin are a commodity, and there are already court decisions in history that agree with this position. Based on the broad definition discussed above, it is possible that virtually every crypto asset can be legally defined as a commodity.

Legal educational program

From a practical standpoint, it seems that the CFTC is deliberately taking an approach to the cryptoasset industry and is not actively expanding its jurisdiction where, for example, the SEC may first want to identify an asset as a security. Moreover, it remains to be seen if the CFTC will define some kind of commodity limitation for assets such as non-fungible (non-convertible) tokens and cryptographic collectibles.

Commodities are regulated very differently from securities. Indeed, just because something is a commodity does not mean that it is subject to certain rules, such as requirements for securities governing who can buy them, how they should be offered, etc. d.

Historically, the spot market for commodities trading has been significantly smaller than the market for commodity derivatives. Most people don't trade real corn stalks for money. Instead, most people trade contracts based on the future price of corn (or other commodities), that is, futures contracts. However, in the case of crypto assets, most of the exchange activity takes place in the spot market.

There are no laws directly regulating spot market transactions for goods (i.e.e. operations that include full payment of the purchase price and the simultaneous delivery of the goods at the time of the conclusion of the transaction by the parties). CFTC has limited powers to control the spot markets from fraud and manipulations, but cannot accept the rules that directly control how participants in the spot market make transactions.

The US legislation establishes detailed restrictions on a wide range of operations on the unbound market, including operations with derivative commodity tools, future deliveries or financing, leverage or margin. As a result, CFTC is actively regulating emerging futures markets on products such as Bitcoin.

In addition, CFTC closely monitors applications for smart contracts and makes applications that explain that certain participants must comply with applicable rules when using smart contracts to facilitate regulated transactions in the interests of commodities, such as forwards, futures, options and swaps.

In practice, a transaction regulated by CFTC can only be carried out on regulated exchanges, which include, depending on the type of transaction, markets with designated contracts ("DCM") and means of the execution of swaps ("SEF"). Exceptions from this requirement can be applied, but in general these exceptions are available only for certain experienced market participants or wealthy.

In addition, CFTC directly regulates intermediaries who promote transactions adjustable by CFTC, including representing brokers, merchants of futures commissions, dealers for swaps, operators of commodity pools or consultants for trade in goods. The application process for becoming a DCM, SEF or an adjustable mediator is expensive and complex, and adjustable stock exchanges and intermediaries are subject to permanent permanent supervision by CFTC.

Legal Likbez. Sanctions ofac

The Office of Foreign Assets Control of the US Treasury Department (OFAC) maintains a list of persons with whom US citizens are not allowed to conduct any transactions. This list can be divided into two categories:

1) people from certain embargoed countries and geographic areas such as Iran, North Korea and Syria;
2) people from the list of specially designated citizens (SDN), which consists of individuals responsible for particularly serious offenses, such as human trafficking or government corruption.

Unlike most other US financial laws, which set rules based on processes to be followed, OFAC sanctions simply prohibit certain activities, such as doing business with people on the sanctions list.

Accordingly, sanctions laws impose strict liability. However, the historical consequences for those who deliberately evade or ignore sanctions laws are much more serious than those who try to avoid transactions with the person subject to sanctions. After all, the consequences can be as serious as criminal prosecution and imprisonment.

In practice, most companies implement risk-based processes individually for their business to avoid sanctions violations. A convenience store in Michigan has little or no risk of doing significant business with sanctioned individuals and therefore probably does not need a Know Your Customer (KYC) program.

On the other hand, a US-affiliated bank operating in high-corruption countries will likely need to be able to conduct thorough due diligence on customer data to ensure compliance with US sanctions laws.

OFAC sanctions are one legal regime that does not suffer from significant ambiguity when applied to most cryptoasset projects. Any person in the United States implementing such a project is potentially liable if the person subject to the sanctions uses its services.

For more information, OFAC has posted a few frequently asked questions about virtual currencies on its website. Specifically, OFAC states that it can identify certain virtual currency wallet addresses belonging to persons on the SDN list so that US persons can block transactions with that address. The first such practice occurred in November 2018: 2h3n OFAC identified bitcoin wallet addresses belonging to two individuals added to the SDN list.

The degree of risk of the impact of sanctions on individuals and countries can vary widely from project to project and may depend on variables such as the type of asset offered, the volume of facilitated transactions, the areas in which the service is provided. In stock. Ultimately, there is no one-size-fits-all approach to OFAC sanctions compliance, but it is a matter that every project must consider.

Federal Anti-Money Laundering Ordinance

U.S. law requires certain intermediaries in the financial system to help detect and prevent money laundering and terrorist financing. Specifically, the Banking Secrecy Act (BSA) requires certain “financial institutions” to assist the US government, for example, by implementing risk-based anti-money laundering (AML) programs and filing reports with the government when these programs identify suspicious transactions.

Legal educational program

The types of financial institutions covered by BSA are very diverse and include everything from banks to casinos. It is important to note that for developers working with cryptoassets, the BSA applies to "money service businesses", a category that is further subdivided into "money translators".

The Financial Crimes Enforcement Network (FinCEN), which is the primary federal regulator responsible for BSA compliance, has interpreted certain businesses involved in crypto assets as falling within the definition of remittances so that they must comply with BSA.

Who falls under the definition of "sender of money"?

"Sender of money" is defined as any person who is involved in "accepting currency, cash or other assets that replaces currency from another person, and transfers those currencies to another place or to another person by any means.".

Legal educational program

By adopting this language, FinCEN confirmed that the reference to “another asset replacing currency"Was intended to refer to informal value systems that do not involve the transfer of fiat currency.

BSA rules determine whether someone is a sender of money based on specific "facts and circumstances", which is a signal in the legal world that the definition should be broad and flexible.

In 2013, FinCEN issued guidance, partly related to the cryptoasset industry, which defines the criteria for FinCEN to classify certain cryptocurrency companies as a means of transferring money.

In particular, FinCEN distinguishes between three categories of users associated with the so-called "convertible virtual currencies".

FinCEN provisionally defines a convertible virtual currency as a "medium of exchange" that "either has an equivalent value in real currency or acts as a substitute for real currency".

Legal educational program

It should be obvious from this broad definition that most tokens widely available in the market likely fit this definition, especially most ERC-20 tokens.

However, we can also see that a non-fungible (non-convertible) token in the form of a cryptographic asset may not fit this definition, as it is difficult to imagine how we could use something like CryptoKitties as a medium of exchange, despite the fact that each of them potentially has some fiat value.

Legal educational program

Where is the border between what is convertible and what is not, is not yet clearly defined. At the moment, there have been only a few court cases in which they considered which tokens meet the definition of a convertible virtual currency. Several court decisions have confirmed Bitcoin is a convertible virtual currency. 

In turn, Ripple settled a case brought by the government, which was based on the fact that XRP is a convertible virtual currency. With regard to the ever-growing number of tokens available on the market, the only source of guidance is FinCEN's definitions and statements, which indicate that they interpret the term broadly enough to cover many token standards.

Now suppose we are dealing with a token that meets the definition of a convertible virtual currency.

The guide outlines certain actions using convertible virtual currencies, which are money transfers. In particular, FinCEN distinguishes between the following categories:

  • User - a user is defined as a person who receives a convertible virtual currency to purchase goods or services. In subsequent statements by FinCEN, this definition has been expanded somewhat to include those who buy convertible virtual currency as an investment for their own account.
  • Exchange office - is a person who exchanges virtual currency for real currency, funds or other virtual currency by 1) receiving and transmitting convertible virtual currency or 2) buying and selling convertible virtual currency.
  • Administrator - an administrator is defined as a person engaged in the issue (release into circulation) of a virtual currency and who has the right to redeem (withdraw from circulation) such virtual currency. Since most cryptoassets are issued without the possibility of forced redemption, this definition is usually not so relevant for our purposes.

Since the release of its original guidance in 2013, FinCEN has clarified these definitions in Administrative Orders:

In one of these administrative orders, FinCEN clarified that a person exchanging virtual currency at their own expense, for themselves, and not as a business service to third parties, is considered a user and not an exchanger.

In another ruling, FinCEN stated that "the production and distribution of software is not itself an acceptance and transfer of value, even if the purpose of the software is to facilitate the sale of virtual currency.".

Legal educational program

For teams operating on 0x, there is a strong case that the definition of an exchanger does not apply to someone who does not take control of another person's virtual currency. This rule is explained in the Coin Center report:

A non-custodial exchange is probably not an exchanger or money order. For example, Craigslist, or any other classified advertising service on the Internet, is a business that helps individual buyers and sellers find and communicate with each other, but it never “accepts and transfers” tokens or bitcoins to its users, nor does it “purchase” or sale "tokens or bitcoins. This activity can be regarded as an exchange, since it deals with information related to the exchange (for example, order books, offers, acceptances, communication between buyers and sellers), on the other hand, this company never performs the actual currency conversion or does not process the actual tokens or money; it all happens on a peer-to-peer network.

Another way characterizes what these companies are doing: developing web-based software tools (such as a website) that facilitate peer-to-peer exchange. As we said earlier, FinCEN's Software and Investment Ruling describes simple software development and distribution as outside the scope of BSA regulation.

Legal educational program

The facts and circumstances of any particular project, including 0x, may affect the analysis written above. Our review (legal advice) is intended only for introductory acquaintance with the requirements of regulators. To get real legal assistance on any specific project or situation, you should hire a qualified lawyer.

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