Legal professional Adella Toulon Foerster has carved out a unique niche exploring regulatory and legislative issues undergirding Bitcoin, cryptocurrencies, and the blockchain. Given that she’s an advisory board member with Coinstructive, we thought we’d take a moment to check in with her about on a few emerging trends in cryptocurrency landscape.
Tell us a little about your current work and professional interests?
I’m currently spearheading the crypto/alternative currency practice at Cogent Law Group in Washington, D.C. While our primary work is with individual startups, we’ve also been working with think tanks, governments, and NGOs to explore banking solutions involving emerging blockchain technologies.
What is it about this space that keeps you jazzed?
I consider myself a bitcoin maximalist but also find myself equally excited about projects like DASH. Following emerging tech in the industry is my passion. I believe that innovations ensuing from it will ultimately disrupt legacy banking, benefitting billions of underserved, underbanked and disenfranchised populations around the globe. Cryptocurrencies offer people an new alternative to fiat: a chance to transact peer-to-peer with no middle man. That’s powerful.
How did you initially get into the world of cryptocurrency?
Great question. I started out in the alternative currency space in 2001, when I co-founded LongLever Consulting. My co-founder had been involved in e-gold, which some may remember as the dominant online alternative currency at that time. We worked with others to start an offshore alternative, which became problematic after 9/11. I, however, retained my interest in alternative money and its regulatory aspects, especially after the founder of e-gold was convicted of various financial crimes. I subsequently received two law degrees, focusing on tax havens for my first degree in law, and on Bitcoin in particular for my LLM.
What sorts of emerging regulatory and legislative developments are you keeping an eye on these days?
One trend I’m watching are guidelines on the treatment of digital currencies that are being laid out by various federal, regulatory agencies. “Blockchain technology” is clearly at a “Peak of Inflated Expectations” stage which has resulted in a lot of money is being poured into that industry. As a result regulatory agencies that have been grappling with the “what” are moving into the “how.”
So what do you believe is the endgame of all of this?
Money Service Business companies in the space should probably pay close attention to FinCEN’s Banking Secrecy Act (BSA), Anti-Money Laundering laws (AML), and Know Your Customer (KYC) rules. They should adopt the appropriate risk-based compliance programs which would include filing Suspicious Activity Reports (SARs) in the appropriate situations. Also expect to see more from the U.S Commodity Futures Trading Commission (CFTC) for activities on predictive market platforms and the U.S. Securities and Exchange Commision (SEC), weighing in on Initial Coin Offerings (ICOs) and tokens. All of this might make the 2016-2017 transition a tough time for innovators. The legal gray areas will undoubtedly for many raise the question of asking for permission or begging forgiveness.
Can you share a few perspectives about the much talked Espinoza case ruling?
It’s not often that a state circuit court judge gets to wrestle with legal philosophical interpretations, but that’s what Judge Pooler faced in the Espinoza case. The defendant, Michell Espinoza, was charged with being an unauthorized money transmitter and laundering money. All of this was based on his sale of Bitcoin to two undercover U.S. federal agents who had indicated that they would use the acquired virtual currency to purchase stolen credit card numbers. The philosophical issue the judge faced involved the definition of money itself, and whether Bitcoin meets that definition. Fortunately, she listened to the testimony of expert witness Dr. Charles Evans of Barry University, one of the foremost experts on the economic and finance aspects of cryptocurrency. It was amazing to watch a judge take advice from an economist highly versed in these issues and actually applying it to the case in the most practical way possible.
What do you think the long term implication of this will be?
Frankly, I’m not sure how things will evolve. It would seem that a common sense decision could throw us right back onto shaky legal ground. And a bad decision, well, that could negatively affect many small businesses and innovators in the industry.
In this ruling, the judge noted that “bitcoin has a long way to go in order to be considered money.” What are your thoughts on this?
The cryptocurrency industry can certainly handle it if the decision is made to regulate it either as either money or as property. But consistency would be very helpful, because markets hate uncertainty. I believe that bitcoin can be used as money. However, if it becomes money, then do any and all mediums of exchange become money?
It’s interesting to note that the Constitution does provide Congress with the power “to coin money and regulate the value thereof”. Bitcoin however is neither coined nor is its value regulated by the feds. It is a peer-to-peer protocol and its value is determined by many different factors in the market. So at the end of the day, I just don’t believe that bitcoin as a currency fits the traditional definitions of money. Ultimately though, judges will grapple with this and I would not be surprised if this issue ultimately makes it all the way to the Supreme Court.
So what would happen if bitcoin was ultimately taxed as money?
Unless specifically exempted, anything received as payment for goods or services would be considered taxable income. So if you were to get $100 worth of bitcoin in exchange for a service or good, you would have to report that as income.
The IRS currently deems a gift as any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return. Taxpayers are exempt from paying taxes on gifts of up to 14,000/year in most cases. However, there are some exceptions to this rule. Non taxable gifts are: gifts that are not more than the annual exclusion for the calendar year, tuition or medical expenses you pay for someone, gifts to a spouse and gifts to a political organization.
Also, gifts to qualifying charities are deductible based on the value of the gifts made. This is particularly interesting because it raises a key issue, namely whether bitcoin’s tipped anonymously on reddit or other platforms would be considered a “tip” or a gift. I expect that bitcoin treated as money would follow these same rules.
Any final thoughts on where this crypto regulatory landscape is headed?
I don’t think bitcoin needs more regulation. I believe it needs smarter regulation and that is our focus in Latin America and the Caribbean. The Bitlicense effort for example chased many businesses and jobs away in New York by imposing expensive and restrictive measures on virtual currency based businesses. Clearly imposing draconian regulatory measures is counter-intuitive in terms of fostering and preserving innovation.
Michael Scott is a journalist specializing in emerging digital economy trends and is CoinStructive’s resident blogger.