Cryptocurrencies, such as Bitcoin and Ether, are virtual, digital money that have no government or central bank backing. They are based in encrypted, decentralized blockchain technology. Over the past decade, their use has grown globally as a variety of businesses have begun to accept cryptocurrencies as payment for goods and services, and digital payment systems have started developing their own blockchains. Active exchange markets have been established to trade Bitcoins, Ether, and other cryptocurrencies against traditional currencies. An estimated $6 billion in digital tokens is exchanged daily. Derivatives and structured products based on cryptocurrencies are being introduced.
Additionally, many new private funds investing in cryptocurrencies and their derivatives have been founded in the past year and new funds appear weekly. The legal and regulatory environment surrounding both cryptocurrencies and blockchain-based financial products and services evolves rapidly. The sector involves overlapping investment management, banking, trade, privacy, and tax considerations. Our cryptocurrency practice assists fund managers launching funds in the digital currency field and related blockchain-based assets (such as initial coin offerings or “ICOs”). We are aware of the importance of customized attention to each manager’s cryptocurrency strategy. We provide assistance in all aspects of the fund formation process with particular attention to the unusual and challenging aspects of an offering in this new sector, including:
- Preparing technologically savvy offering documents including private placement memoranda, limited partnership agreements, and subscription agreements;
- Reviewing marketing materials for compliance with securities regulations;
- Working with managers to accurately describe cryptocurrency and blockchain-dependent investment strategies;
- Assisting with seed capital arrangements, third-party fundraising agreements, crowdfunding, and other capital raise structuring and compliance;
- Advising managers regarding general fund structure matters including side letters, including manager compensation, liquidity terms, appropriate risk disclosures, and other matters with attention to challenges presented by the cryptocurrency space;
- Providing updates to managers regarding the latest regulatory developments, including relevant releases by the Securities and Exchange Commission (SEC) and the Commodity Futures and Trading Commission (CFTC) regarding their respective authority to regulate existing cryptocurrencies, ICOs and/or cryptocurrency derivatives;
- Offering offer ongoing support for the key regulatory challenges facing the cryptocurrency investor, including the question of whether ICOs are considered securities under U.S. federal and state laws;
- Assisting managers in finding administrative, brokerage, and audit service providers with experience and interest in cryptocurrency investment;
- Advising on AML and FCPA compliance issues involved in the formation of cryptocurrency funds; and
- Guiding managers in situations when cryptocurrency derivatives and other products based on blockchain technology come under federal commodities futures and currency market regulations, and when coin exchanges may be regulated as securities exchanges.