Cryptocurrency is a wildly popular, swiftly growing financial technology that has long passed the “trend” phase. As an emerging market, it is in many ways charting unknown waters. That, coupled with the extremely fast growth, makes regulation a challenge. 

As a result, this industry is rife with scams, schemes, and fraud as criminals use old tactics in new ways to separate people from their money. In 2022 alone $3.7 billion was lost due to illicit use of cryptocurrency. Amid outcry for increased consumer protection, states are creating laws to offer more protection while federal laws are analyzed to fit crypto in by setting new precedents.

Regulations in this space are evolving but not fast enough. Today’s entrepreneur who is embarking on a cryptocurrency business venture needs to not only have a solid understanding of current laws but also keep their ear to the ground for new laws on the horizon. An attorney who is experienced in cryptocurrency law is absolutely vital for the survival of the business.

Whether you are starting a cryptocurrency business or investing in one, you need the skill, training, and experience of the legal team at The Litvak Law Firm.

Types of Cryptocurrency Businesses

Cryptocurrency businesses are vast and varied with a number of different opportunities. Experts, noting the exponential growth of the industry, cite many of these business types as quite viable and poised for growth. While many believed crypto would flash bright and then die out, that has not been the case. These are some of the top ideas for a crypto business.

Crypto Day Trader – This is one of the riskier ideas, but it is an opportunity that just about anyone can do and begin with a very low start-up. But whatever you put in, make sure it is money that you can afford to lose. This is more of a side hustle than an actual business, but some people do make it into an entrepreneurial career.

Cryptocurrency Exchange – Starting your own crypto exchange is more of a formal business venture. This involves creating a platform where people can sell or buy crypto. Revenue will be generated from the transactional fees for transfers, trades, withdrawals, and deposits. Within this crypto business type, there are subtypes which include:

    • Binary options exchanges
    • Decentralized exchanges
    • Clone script-based crypto exchanges
    • White-label crypto exchanges
    • Centralized exchanges
    • Ads-based exchanges
    • Hybrid exchanges
    • Order book exchanges

The startup for this type of business is not as simple as others. It involves a good bit of capital, finding a payment processor, and an exchange software provider. It is also a good idea to hire a very good lawyer to help you stay compliant with state and federal cryptocurrency laws.

Cryptocurrency Payment Gateway – The rise in popularity of crypto means that it would be in the best interest of most businesses to accept it as a form of payment. However, this means that, like credit card processing, they need to complete the transaction through a third-party provider. A crypto payment gateway is that third-party provider. The payment gateway converts the crypto payment to fiat currency thus stabilizing its value. It then oversees the transaction as it is routed through the issuing bank and then to the merchant.

This too is a more complex startup due to the capital needed as well as compliance with regulations. A good crypto attorney is a must.

Crypto Asset Management – This is an offshoot of crypto trading, only you manage other investors’ crypto portfolios. It operates like a traditional financial management service, but it deals in cryptocurrency. When a client comes to you with crypto they want to invest, you will help them build a customized portfolio based on their own risk tolerance and investing needs.

Sell Products and Services for Cryptocurrencies – Many people who use crypto don’t want to simply invest it, they want to buy things with it. Most businesses aren’t set up to accept crypto as a form of payment. By selling goods for crypto, you can tap into a very underserved consumer base. This type of business can be operated online, and you can use drop shipping which means you have no inventory. Again, you need a good attorney to help you stay compliant with federal and state laws.

Accounting Services for Cryptocurrency Investors – As a CPA who specializes in crypto, you can command higher rates because most accountants are not qualified to fill this niche. 

There are a number of ways to put your knowledge of crypto to work for you. Getting into this industry while it is in its infancy can be an advantage as well as a challenge. You will be breaking ground as a big fish in a small pond, but you also have the burden of keeping up with rapidly changing laws and regulations. Before wading into these waters, you should get an attorney so that you can stay up to date on all those changes and you don’t find yourself in any legal hot water.

Regulatory Challenges of Cryptocurrency

The regulatory challenges that cryptocurrency businesses face are not all that different from other types of businesses. The difference is this is a space that is only now being explored and the existing laws on the books do not definitively name cryptocurrency or digital assets. This is pushing lawmakers to provide clarity and create laws in several key areas, including:

  • Licensing
  • Consumer protection
  • Chartering
  • Financial crimes risk
  • Investor protection
  • Fraud 

As crypto businesses connect with banks and other traditional financial systems, that infrastructure must be put in place. This is currently happening, but as the industry grows and expands, standardized systems must be in place. The SEC has taken steps to assume authority over cryptocurrencies as they are considered securities.

But the real challenge is that this is potentially a global issue. Crypto is an industry that spans borders and touches various legal systems, foreign and domestic. As with many online American businesses, the audience often extends beyond the US jurisdiction can get muddy. 

Cryptocurrencies as Securities

The SEC recognizes that while crypto is a viable asset type, the markets lack regulations that traditional capital markets have. The agency acknowledges that crypto can be a security offering. When that occurs, then they are under the jurisdiction of the SEC and applicable federal securities laws. This means that typically they will have to be registered with the agency.

The SEC is very focused on consumer protection and has regulations in place to prevent fraud. The weak areas are being identified and addressed with the proposal of new, more specific regulations.

As a market professional, you must determine if your coins fall under the Securities Exchange Act of 1934, meaning that they must be registered as well as other requirements. If the securities laws apply to your business, your attorney can tell you exactly what to do to remain compliant.

The Howey Test

The test to determine if an asset is subject to U.S. securities laws because it qualifies as an investment contract is called the Howey Test. It is based on a ruling from the 1946 Supreme Court case SEC v. W.J. Howey Co. It was a landmark case that brought forth definitive properties that an asset must possess to be considered a security and fall under the SEC’s jurisdiction. The Howey Test consists of four criteria that the asset must meet:

  • It involves an investment of money
  • It is in a common enterprise
  • There is an expectation of profit 
  • The profit will be derived from others’ efforts

Although crypto and bitcoin are very difficult to categorize, the SEC has found that many do pass the Howey Test and are indeed securities. 

The SEC and Fraudulent Crypto

The SEC actively pursues and prosecutes fraudulent crypto companies. There are many hoops to jump through – and more prosecutions are coming as new laws are passed. Even if your crypto business is not fraudulent, certain actions can raise red flags for the SEC as well as consumers:

  • Guarantees and Promises – Be careful what you promise or guarantee, especially when you are talking about investment returns. Be careful with your language when presenting your investment opportunity because it can backfire.
  • Licensing and registration – If you have to be licensed or registered, make sure that you do it. This not only keeps you compliant with the law, it also gives you credibility with investors.
  • Don’t Fake Returns or Account Values – This will put you on the SEC radar and you want to avoid that kind of scrutiny.
  • Give Your Clients Transparency – You don’t even want to appear that you are trying to hide something, especially in an industry that is still evolving legally.

If you operate your business according to the law, it will keep you out of trouble. The problem is that the laws change. That is why having an attorney is so important. The attorney will help you stay in compliance and in business.

Experienced Securities Lawyer Specializing in Cryptocurrencies

Not sure if you need an experienced cryptocurrency lawyer for your business? Chances are you do. Your attorney can advise you on various compliance issues like anti-money laundering. They can help with registration and certification and help you keep your business in operation.

Anytime you deal with other people’s money, it’s serious business. You can expect certain regulations that protect the consumer from financial damage. 

At the Litvak Law Firm, we specialize in cryptocurrency and bitcoin businesses. We are committed to putting our experience, skills, and talents to work for our clients. When you put your business in our hands, you can rest assured that we will help you keep to the letter of the law. 

If you have a crypto business or are considering opening one, give us a call at 718-989-2908, and let us help you stay in regulatory compliance.