Legal Issues Surround Cryptocurrency Mining Operations

Video transcript:

So, I was asked today with regards to the Bitcoin mining operation, what are the legal applications and concerns that you need if you wanted to start a mining application. So, just thinking about what a mining operation really is, is that you know, you’re solving these complex algorithms. It’s all dependent on computing power and effectively all that’s happening from a technical standpoint is you are adding records to the block chain and at some point it and it, you know, puts itself into a cryptocurrency.

From that perspective, there’s inherently nothing wrong with it. Cryptocurrency’s a property in some places, in some places it’s a commodity. Bitcoin’s a commodity in the United States. So, it’s not an inherently a process by itself. There’s really isn’t as many legal implications, I would say. If there are issues such like these, places like Iceland, where it’s illegal to convert the local currency to Bitcoin or places like Russia, where it’s just banned, well obviously, if cryptocurrency’s banned or there’s you know a decided regulation in cryptocurrency, then your ability to [inaudible 00:01:13] currency is also going to be an issue.

So, that’s something to consider. Now, if you’re going to start a mining operation for purposes of raising money and developing that operation, obviously, security’s lost [inaudible 00:01:29] it may be commodities laws depending what you’re mining.

Obviously, you’re gonna set that up much like you would a hedge fund where you have the mining operation and investments and offers kind of return. In those cases, you’re most likely going to have to follow Regulation D. An issue, you know, some sort of limited partnership interest, and go through the whole machinations of 504, 505, or 506, of Right D, which relates to the amount of money that you can raise, how you can raise that money. And the whole credited and not accredited investor thing.

Because if you’re going to do a 505, you’re stuck at $5 million max raised and you can sell to only 35 unaccredited investors. Whereas if do 506 which is any amount of money, you can’t sell to any non-accredited. So, you have to consider that if you’re doing a mining operation, it’s not like an ICO. Where the ICO, we can define that total being sold as not being security, outside the ambit of securities laws.

This is decidedly, when talking about mining, it’s decidedly its own enterprise, right? And it’s the entity that is controlling the mining is ultimately the one that’s soliciting the investment. That investment would undoubtedly have to be some form of common stock partnership interest and vice-versa.

So, you know, that’s definitely something to consider. Another thing to consider and there’s really a hole in the law about this, is that the CFTC, the Commodity Futures Trading Commission, has come out and declared, some years ago now, that bitcoin is a commodity. So, if you are in fact, during your Bitcoin mining operation, the question becomes, are you structuring a hedge fund of sorts or an entity of sorts? Or is that more of a commodity pool? And do you need licensure as a commodity training device? I think where this falls apart is that the CFTC is never defined Bitcoin to be a future’s contract, or a swap, or some sort of currency, currency option. So, it’s blatantly or sort of weighing long, long term scale said, well, Bitcoin is a cryptocurrency, it hasn’t actually defined what type of, I’m sorry, Bitcoin as a commodity, the CFTC hasn’t defined what type of commodity it really is.

So there’s this vast, vast hole that, you know, it really needs to be addressed and it’s not necessarily going to be addressed in the context of a mining operation more of like I think in the Bitcoin ETF or a [inaudible 00:04:19], a hedge fund. But’s it’s something to consider because you may have some securities obligations, but there may be an implication regarding commodities act. If you’re [inaudible 00:04:32] commodity. So I’ll post this up on my website, TracyFirm, T-R-A-C-Y-F-I-R-M.com, and I’ll talk to you later on there.

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Adam S. Tracy, J.D., M.B.A. Attorney At Law
Adam S. Tracy, J.D., M.B.A.

Bitcoin attorney, Adam S. Tracy , J.D., M.B.A. is an authority in the law of blockchain technology with keen understanding of the regulatory issues facing crypto currency industries and can help you navigate regulatory waters in the field where innovation collide with the law and taxation issues. Located in Chicago, Adam has built his career in one of the world's great financial hubs while helping clients locally and around the world managing the complex process of cryptocurrency compliance.

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