Palgrave Studies in Financial Services Technology Regulation of Cryptocurrencies and Blockchain Technologies National and International Perspectives Rosario Girasa Palgrave Studies in Financial Services Technology Series Editor Bernardo Nicoletti Rome, Italy The Palgrave Studies in Financial Services Technology series features original research from leading and emerging scholars on contemporary issues and developments in financial services technology. Falling into 4 broad categories: channels, payments, credit, and governance; topics covered include payments, mobile payments, trading and foreign transactions, big data, risk, compliance, and business intelligence to support consumer and commercial financial services. Covering all topics within the life cycle of financial services, from channels to risk management, from security to advanced applications, from information systems to automation, the series also covers the full range of sectors: retail banking, private banking, corporate banking, custody and brokerage, wholesale banking, and insurance companies. Titles within the series will be of value to both academics and those working in the management of financial services. More information about this series at http://www.palgrave.com/gp/series/14627 Rosario Girasa Regulation of Cryptocurrencies and Blockchain Technologies National and International Perspectives Rosario Girasa Lubin School of Business Pace University Pleasantville, NY, USA Other publications by the author writing under the name of Roy J. Girasa Cyberlaw: National and International Perspectives Corporate Governance and Finance Law Laws and Regulations in Global Financial Markets Shadow Banking: Rise, Risks, and Rewards of Non-Bank Financial Services Palgrave Studies in Financial Services Technology ISBN 978-3-319-78508-0 ISBN 978-3-319-78509-7 (eBook) https://doi.org/10.1007/978-3-319-78509-7 Library of Congress Control Number: 2018942528 © The Editor(s) (if applicable) and The Author(s) 2018 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. 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The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland To a most remarkable family Giorgio, Concetta, Rita, and Giuseppe Alescio Preface Most people who have read about Bitcoin and numerous other imitators have noted the incredible rise in monetary value of these offerings, lead- ing to questions such as “What in the world is Bitcoin?”, “Why is there such madness among individuals purchasing and engaging in not only Bitcoin but also in the technology underlying it?”, “What is the identity of its creator?”, and many other related questions. Having written several volumes on finance law topics, it was bewildering to come across an entirely new mode of financial transactions that contradicts almost all of the established norms of safety provided by governmental backing of cur- rencies, rules and regulations that essentially keep wrongdoers at bay in their attempts to take advantage of fault lines in the system, and other safety nets. This author’s interest was sparked in part when his undergraduate stu- dents spoke about Bitcoin but he was also alerted to the many types of digital coins and tokens, their investment, and the immediate sizeable profits gained through their purchase. It was the first time in decades of teaching when students not only expressed interest in the subject matter of cryptocurrencies but were also investing in them. Thus, this author believes there was little choice but to learn about the new phenomenon and hopefully aid others interested in the subject matter. Inasmuch as there are innumerable articles that assist the reader in understanding both the nature and how to invest in Bitcoin and other vii viii Preface cryptocurrencies, there is little need for a volume repeating what is already widely known. This author, in each of his prior books, was interested in the government’s role in safeguarding investors and consumers. Thus, the focus of this volume is the protection of purchasers of the new currencies from the inevitable fraud and other malfeasance that accompanies the world of finance. Although the concentration is on regulations that have and will arise in the United States (U.S.), the actions of other nations are also examined in an attempt to comprehend how nations grapple with Bitcoin, and its offspring. We will review governmental efforts to ban, significantly control, or simply tolerate the inevitable use of cryptocur- rencies that cannot be prevented any more than government endeavors to control the use of the Internet. Regardless of how Bitcoin and other coins and tokens fare in the marketplace, it is beyond any reasonable doubt that the underlying technology will profoundly affect how the manifold types of business transactions and social activities transpire. Having researched alone all of the materials indicated herein, any errors are mine alone. The ideas expressed are not unique but are based on hundreds of articles and sources downloaded from numerous websites globally. It is hoped that this volume brings together the collective under- takings in a manner that both the experienced entrepreneur and average reader will comprehend. Thanks to all at Palgrave Macmillan who assisted in the publication of this work especially Alison Neuberger for her input, Tula Weis for numerous correspondence and seeing this through, and Ruth Noble for final comple- tion of the administrative details of the text. Thanks also to D. Pavithra Muralikrishna at SPi Global for supervising the production process. Please note. This volume is not intended to offer legal advice but rather is the author’s analysis and opinions based on the numerous articles, commentaries, speeches, regulations, and other material read and downloaded in an attempt to understand the new technologies and provide a text in readable form for students and all others inter- ested in the subject matter. Personal legal questions should be referred to knowledgeable counsel. Pleasantville, NY, USA Rosario Girasa Contents The Digital Transformation 1 Technology Underlying Cryptocurrencies and Types of Cryptocurrencies 29 Legal Issues of Digital Technology 57 Federal Regulation of Virtual Currencies 71 States’ Regulation of Virtual Currencies 115 Criminal Prosecutions and Civil Litigation Concerning Virtual Currencies 139 Crowdfunding and the Taxation of Virtual Currencies 169 International Regulation 199 Conclusion: The Future of Cryptocurrencies 247 ix x Contents Appendix 1: How Bitcoins Enter into Circulation and Are Used in Transactions 253 Appendix 2: SEC Commissioner Jay Clayton’s List of Questions Investors Should Ask Before Engaging in Cryptocurrencies 255 Index 257