⛱ Blockchain: Worldwide Regulations and Case Studies Series #4
Hello friends! 👯♀️
My name is Elif Hilal! I produce content in the fields of blockchain, software, smart contracts, and law. If you are reading my articles for the first time, welcome to my world 🎀 I am sharing the fourth article of my series with you.
🙂 Now you are about to read the fourth article of the series. I hope you’re excited, it’s okay if you’re not, the important thing is to offer you different ideas and perspectives on Blockchain🐝
For those who have not read my previous articles, I am adding the other two articles of my series:
1- ⛱ Blockchain: Worldwide Regulations and Case Studies Series #1
2- ⛱ Blockchain: Worldwide Regulations and Case Studies Series #2
3- ⛱Blockchain: Worldwide Regulations and Case Studies Series #3
In my previous article, I told you about some international Blockchain and ICO cases. For example, I mentioned the Swiss FINMA decision and the SEC’s attitude towards ReCoin. Now, I want to continue with the other cases. Before moving on to some of my favorite cases, I will talk about the reasons for the delays of the Regulations, the difficulty of the regulations, and the current situation in the web3 and crypto ecosystem.🙂
If I were to summarize the content of this article in the shortest way:
✅Difficulty of regulations in the crypto
✅SEC Chairman Gary Gensler
✅Skatteverket v. The David Hedqvist Case
✅SEC v. Ripple (XRP) Case
✅SEC v. Trendon T. Shavers and Bitcoin Savings and Trust (BTCST) Case
✅NextBlock Global Ltd. and the Alex Tapscott Case
Who do you think a crypto regulation will affect?👻
In fact, it affects many individuals and organizations. But it seems that the biggest effects will be on the following people and institutions:
⊷ Exchanges (KVHS — crypto-asset service providers)
⊷ End users (anyone who trades)
⊷ Miners
⊷ Validators
⊷ Internet Service Providers
⊷ Core developers (core developers)
⊷ Intermediary institutions and organizations
This will affect institutions and individuals in many ways. for example, its accounting, taxation, purchase-sale, inheritance, mortgage, classification, storage, use as an investment, etc…… many situations. We’ll talk more about these below.
📌 What Are the Challenges of Regulations for Crypto Assets?🎀
If you remember, I talked about the difference between Tokens and Coins in the first article of the series. I’ll even add that image right below.
Now, let’s take a look at these challenges.
In the simplest terms, even in the image you see above, there are many different types of tokens, all with different functions and different uses! Some token projects are only benefit-oriented, while some projects are only income-oriented. Wouldn’t it be weird if they were both subject to the same clause in the same Regulation?
Regulatory Challenges?💻
Classification👣
It is still unclear how to classify it, especially if there is a dispute regarding crypto assets, for example, are cryptocurrencies movable? Is it a security? is it money? Is it a capital market instrument?…. We can multiply such questions. For example, is it more correct to evaluate crypto assets with money characteristics according to the provision of electronic money instead of qualifying them as goods?
As you can see, there are too many question marks and uncertainties about classification even at the very beginning. 😒
Not Local, Global 💬
Another problem is that crypto assets emerge on an international rather than national scale.
✅A crypto asset project developed in Turkey can be recognized all over the world within three weeks. Or the opposite could be said. For example, it may be possible that a crypto project produced in Singapore or Estonia will soon be recognized by the whole world and started to be traded ✌🏻
✅When it comes to custody services of crypto assets, appointing certain institutions is actually against decentralization, which is a completely different problem in essence.
✅The first state to tax crypto assets in 2018 was the state of Ohio in the USA. but when we look at the general picture, these assets will need to be classified again in terms of taxation. for example, they may qualify as money, investment vehicles, securities, commodities, or otherwise.
When we think within the scope of tax law, in order for an asset or a transaction to be taxable, its legal nature must first be revealed.
There is a great report published by IOSCO in 2020. I am attaching this report below.
In the report, IOSCO makes a great point and says that even when talking about crypto assets, the thing to remember is that it is not just one kind of asset. In other words, there are many different types and functions of crypto assets. For this reason, when it comes to regulation or legislation, the type, function, structure, task, and scope of the crypto asset should be examined.
As I mentioned in previous articles, even when we say tokens, dozens of tokens come to our minds. Or to put it simply, even though Bitcoin and Ethereum did not appear to have the same function, they have many different features from each other.
For this reason, it is best to evaluate a crypto asset on its own axis and categorize it on a case-by-case basis.
✅ For example, the first team to attribute value to crypto assets is actually the whitepaper writers, in a way, to what extent and to what extent will they be responsible?
✅ Austria, Canada, and Indonesia describe crypto assets as commodities, while Spain, Sweden, Switzerland, and the UK refer to them as intangible national assets. In the US, there is already no common cross-state consensus.
✅ The concepts that will take the discussion to another point are hot and cold wallets. If it is decided to tax crypto assets, the storage and transfer features of wallets will be on the agenda again.
Or another point, the earnings that are defined as income according to the Income Tax Law are as follows:
-business earnings
-agricultural earnings
-fees
-self-employment earnings
-real estate capital gains
-securities
-other earnings and revenues
In fact, I would like to tell you about an interesting and remarkable case that has been brought about exactly the taxation of crypto assets:
📌Skatteverket v. David Hedqvist Lawsuit
This lawsuit, which was opened in 2014, was concluded in 2015. 🙂 BUT THIS CASE HAS A VERY IMPORTANT CONSEQUENCE!!
The case in court concerns Mr. Hedqvist, who wants to trade Bitcoin. This lawsuit was filed in Sweden; It led Swedish courts to seek clarification from the European court. And the issue went all the way to the European Court of Justice.
In this case; On October 22, 2015, the European Court of Justice ruled that the purchase of Bitcoin or other cryptocurrencies is exempt from Value Added Tax (VAT) for European Union member states. ( Skatteverket v David Hedqvist Case C-264/14)
We know that VAT is applied throughout the European Union Member States. But to date, there has been no consistency in the approach to VAT considered to be charged on a Bitcoin or other cryptocurrencies trading within the EU. In some places, Bitcoin is subject to VAT; others are exempt. Some states already have no clarity on how Bitcoin will be taxed. But this decision, namely the Skatteverket v David Hedqvist Case, resulted in member states explaining that they should exempt their Bitcoin supplies from VAT 👻👻👻
The court (following the Attorney General’s opinion) stated that Bitcoin exchange/trading is subject to Article 135 of the VAT Directive. It has been decided that it falls within the scope of exemption according to subparagraph 1-e.
This exempts transactions “related to legal currency, banknotes and coins” from VAT.
While this decision is limited to the activities of a Bitcoin exchange, there seems to be no reason why such currency should not be applied equally to other virtual currencies unless it has a purpose other than being a means of payment. For example, in Switzerland and the EU, the situation is that this decision will also apply to other altcoins.
If you were to ask what has changed in Europe, Norway has stopped imposing VAT on crypto offerings and trading as a result of this lawsuit. In Switzerland, after this lawsuit, crypto asset transactions were exempted from VAT.😉
Now, I would like to talk about Blockchain cases that I love and follow with interest:
Example Blockchain Lawsuits 🍀
👉🏻 SEC Chairman Gary Gensler, who is he?
Even in a small part of this article, I would like to talk about the SEC chairman and his background in an interesting way.
— Sixty-four-year-old Gensler has a long history in government and on Wall Street, and I was surprised when I researched it. He is constantly selected for important economic posts 🤨 He spent eighteen years at Goldman Sachs, where he worked as an M&A banker, becoming one of the firm’s youngest partners at the age of thirty.
— Previously nominated by President Bill Clinton as Assistant Secretary of the Treasury. In 2009, under President Barack Obama, Gensler was appointed chairman of the Commodity Futures Trading Commission (CFTC), which regulates derivatives markets.
— After leaving the CFTC, in 2014 Gensler became a professor at MIT’s Sloan School of Management. During his time there, much of his teaching focused on cryptocurrency. What do you think was your first lesson? 😅 “Blockchain and Money”! A whole semester course covering the development and potential uses of blockchain! I am providing this information because it will make it easier for us to understand the SEC’s point of view or moves. Knowing the background of the SEC chairman will also offer a secondary perspective.
📌 SEC v. Ripple (XRP) Case
This lawsuit has been going on for months 🙂 When we talk about the ongoing legal battle between the SEC and Ripple, both sides debate why XRP is a security and why it isn’t. (We see this all the time in other SEC cases as well)
- Ripple Labs is the developer firm of XRP, and the lawsuit between the SEC and Ripple has been on the agenda in the web3 ecosystem for a long time. So what happened? In 2015, XRP became the first regulated cryptocurrency in the United States, when the Department of Justice Civil Division and Financial Crimes Enforcement Network (FinCEN) signed on with Ripple and declared XRP a “convertible virtual currency,” it was a big deal indeed. BUT,
- On December 22, 2020, exactly five/5 years after FinCEN classified XRP as a convertible virtual currency and seven and a half/7.5 years after XRP was publicly traded in the US, on the last day of SEC Chairman Jay Clayton. The SEC states that XRP can be considered an investment contract (aka security or security token) with Ripple and is suing😒. I leave the lawsuit petitions here.
- The SEC sued Ripple Labs and its 2 executives on 12/22/2020, claiming that Ripple Labs generated $1.3 billion in revenue by using XRP as an unapproved stock. The main argument of the SEC is that XRP is a security.📄
- On January 1, 2021, Ripple Labs filed a petition for this lawsuit to be stayed by the higher court.
- If we look at the SEC’s indictment, Ripple executives Bradley Garlinghouse and Christian Larsen say that they raised capital from the market by using XRP to use in their company business and to finance the company.
- In addition, Ripple executives used XRP to pay for advertising and labor costs, sold $600 million of XRP from their personal accounts, the sold XRP was used as an unregistered stock by the SEC, and this is in line with US capital market laws (remember the howey test and the first article of my series) He says it’s inconsistent.
Ripple Labs CEO Garlinghouse made the following statements in his statements:
No need to worry. We are right. We will fight against the SEC’s claims.
In this process, many cryptocurrency exchanges, including Coinbase and Blockchain.com, decided to stop depositing, withdrawing and trading XRP. The CEO also wrote a petition to the SEC with the signature campaign he started and asked for support from his investors. Ripple Labs CEO Garlinghouse once again said in a statement:
If a decision is made that XRP is a security, we will need to identify everyone who owns XRP. It’s the SEC’s obligation. Stakeholders will need to find them all. This is not possible either.
Justice delayed is justice denied. How about closing the Ripple case as quickly as possible without further delay?
What is the Status of the Case in the Latest Situation?
Ripple Labs company executives, who made harsh statements about the SEC’s continuous postponement of the case, demanded that the situation be clarified as soon as possible, and the last postponement request was directly accepted by the SEC. Ripple lawyer Jeremy Hogan shared a document on Twitter in March, suggesting that the case could be concluded by November of this year (2022).
However, according to the estimates, it seems that Ripple will not take much damage from the lawsuit.✌🏻
📌 SEC v. Trendon T. Shavers and Bitcoin Savings and Trust (BTCST) Case
The SEC and securities again 😂
On September 18, 2014, the SEC announced that a United States District Court in Sherman, Texas has given its final ruling against Trendon T. Shavers and Bitcoin Savings and Trust (“BTCST”), the cryptocurrency project created and used by Shavers. So how and why?
According to the SEC, the BTCST project was operating the Ponzi scheme, thereby defrauding investors with over 700,000 bitcoins. The court’s decision requires Shavers and BTCST to pay more than $40 million in installments and advance interest and orders each Defendant to pay a $150,000 fine 👻👻.
- How were the developments? The Commission and Court found that from February 2011 to August 2012, Shavers offered and sold investments in BTCST over the internet.
- Operating under the internet name “pirateat40”, Shavers has summoned investors in online chat rooms and the Bitcoin Forum, an online forum dedicated to Bitcoin, promising up to 7% weekly returns based on trading bitcoin against the US dollar.
- In reality, Shavers used new bitcoins from BTCST investors to pay off the supposed returns on their outstanding BTCST investments and diverted BTCST investors’ bitcoins for personal use.
The Court’s decision disqualifies Shavers and BTCST under Sections 5 and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934; they ordered Shavers and BTCST to pay a fine of $150,000 each.
📌 NextBlock Global Ltd. and the Alex Tapscott Case
Now, here are two interesting names. 👻 SEC’s NextBlock Global Ltd. and I’d like to tell you about an administrative lawsuit he filed against Alex Tapscott. If you are familiar with the world of blockchain thought leadership or books written in the field, then you must be familiar with the name Tapscott. because Alex Tapscott is the son of Don Tapscott and together they are the authors of a book called Blockchain Revolution which was published in 2016. In fact, they are blockchain influencers.
✅ — Institutionally, they are interested in the blockchain world and cooperate a lot in this sector. Therefore, I would like to tell this case and keep it in your mind. 🙂🙃
✅— NextBlock was a blockchain-focused investment fund founded in Canada in June 2017 by Tapscott (Alex) and three others. NextBlock began raising resources and funds for investments in Canada, the US and elsewhere.
✅— In fact, NextBlock filed for Form D exemption with the SEC on August 11, 2017. They talked about themselves and asked for an exemption. Because they were raising funds, they were working on the blockchain, and they were doing it without knowing the SEC. I’m leaving the case files here. ✌🏻
As part of their fundraising effort, the NextBlock team claimed that their team is four leading blockchain advisors.
I can say it starts here! 💥
The 4 advisors they mentioned during their exemption application to the SEC do not actually exist. News of this came out in November 2017 and sparked an interesting discussion. This news exploded in the middle of a second fundraising round for NextBlock. The teams closed the fundraising round and began the process of liquidating the company in Canada and returning investor funds.
What exactly did NextBlock do that caused the SEC to initiate proceedings? What if you claim to have advisors who aren’t actually advisors, is it okay? It is a flagrant violation of Section 17(a)(2) of the Securities Act🤨
“Obtaining money or property through any false statement of material fact, or neglecting to state an important fact necessary to ensure that statements made are not misleading”
In this case, the SEC is right. NextBlock and Tapscotts already admitted that these violations took place, and Tapscotts paid a $25,000 fine.
In the meantime, you can sign up for my Meetup page, join my Telegram group, and follow me on Twitter to be informed about the events I organize in the Blockchain ecosystem!
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