Starting a Legally Compliant Cryptocurrency Exchange
So, I was asked today, in regards to the Bitcoin mining operation. What are the legal applications you need to start if you want 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 your computing power, and effectively all that’s happening from a technical standpoint is you are adding records to the blockchain at some point, you know, get yourself into a cryptocurrency.
From that perspective, there’s inherently nothing wrong with a cryptocurrency’s property in some point [inaudible 00:00:53] commodity. Bitcoin is a commodity here in the United States. So, it’s not inherently the process by itself. There really isn’t many legal implications I would say if there are issues 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 is banned or there’s, you know, decided regulation of cryptocurrency, then your ability to buy cryptocurrency is also gonna be an issue, so that’s something that you need to consider.
Now if you’re going to start a mining operation for purposes of raising money and then developing that operation, obviously securities laws can be applied, maybe commodities laws depending on what you’re mining. Obviously you’re going to set that up much like a hedge fund where you have the mining operation as investments and offer some kind of return, and in those cases, you’re most likely gonna have to follow Regulation D and issue, you know, some sort of limited partnership interest and go through the whole [inaudible 00:02:02] of funds 504, 505 and 506 of Reg D which relates to the amount of money that you can raise, how you can raise that money, and the whole credit or non-credit investments. Because if you’re gonna do 505, you’re stuck at $5 million max raise and you can sell to only 35 uncredited investors whereas if you do 506 which is any amount of money, you can 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 is not being security outside the gambit of securities laws. This is decided when you talk about mining, it’s decidedly it’s own enterprise and it’s the entity that is controlling the mining is ultimately the one that’s soliciting the investment. The investment would undoubtedly have to be some form of common stock partnership interest and the vice versa, so, you know, that’s definitely something to consider.
Another thing to consider and there’s really a whole law about this is that the CFTC, The Commodity Future Trading Commissions come out and declared as it did some years ago now, that Bitcoin is a commodity, so if you are in fact doing your Bitcoin mining operation, the question comes, are you structuring a hedge fund of sorts or entity of sorts? Or is that more of a commodity program? And do you need licensure as a commodity trading adviser?
I think what…where this falls apart is that the CFTC is never defined Bitcoin to be future’s contract or a swap or some sort of currency option, so it’s, well it’s on a blank, or sort of a long-term skill set. Well, Bitcoin is a cryptocurrency, it hasn’t actually defined what type of…I’m sorry, Bitcoin is 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 I think in a sort of the Bitcoin ETF or a Bitcoin type hedge fund but it’s something to consider because you may have some securities obligations but there may be an implication regarding the commodities act if you’re going to, you know, be operating Bitcoin which is [inaudible 00:04:42] commodities, so I’ll post this up on my website tracyfirm, and I’ll talk to you later.