Tales from the Cryptocurrency

In 2017, as business activity surrounding virtual currency and blockchain-based ventures reached a fever pitch, Capes Sokol became the first firm in St. Louis to start a digital currency and blockchain technology practice group. 

“We wanted to let our clients know that we didn’t just see this practice area as an offshoot of other practice areas, but as a legitimate branch of law that is not only complex, but growing,” says Sandy Boxerman. 

Cryptocurrency, an agreed-upon form of electronic money shared by a group, is available in many forms, with bitcoin being the most popular. Cryptocurrency is mined by super computers that process algorithms to track the rise and fall in value, and blockchain is the technology that validates the existence of cryptocurrency, as well as its rightful owner. 

Boxerman says his team, which includes attorneys Michelle Schwerin and Andrew Blackwell, is faced with the challenge of working in a practice area that’s new to everyone—including fellow attorneys, judges and government agencies. 

“One of the first cases we worked [in 2014] involved a state investigation into a bitcoin-mining operation,” says Schwerin. “Essentially, the case addressed whether certain business relationships were investments under the securities laws. It was one of the first cases where we had the opportunity to educate ourselves on cryptocurrency businesses—in particular, with how the new technology relates to securities laws.” 

The Capes Sokol group has also turned its attention to advising clients on initial coin offerings and the proper tax treatment of virtual currency transactions. Schwerin sees this as an area that will affect cryptocurrency users and investors as well as cryptocurrency miners—those running the specialized computer programs that solve algorithmic problems needed to release new currency.

“The IRS has offered limited guidance regarding virtual currency, and we’ve seen very few tax returns that report gains based on cryptocurrency transactions,” says Schwerin. “But once the IRS processes these returns and analyzes the data it is receiving from third parties, we expect to see an influx of audits. We could see a huge uptick, and likely some criminal investigations from the IRS and other government agencies. In the meantime, we offer the best counsel we can to minimize risk to our clients.” 

As for theft? “With bitcoin, all transactions between public addresses are recorded on a public blockchain, an immutable ledger,” says Blackwell. “Depending on a number of factors, lost or stolen bitcoin is potentially recoverable by identifying the fraudulent transfer on its blockchain. Other cryptocurrencies, like monero or Zcash, offer users more anonymity and do not have public blockchains. If these cryptocurrencies are lost or stolen, you have no way to identify the location of your assets and they are not recoverable.”

The Capes Sokol team has already responded to various grand jury subpoenas and formal government requests involving cryptocurrency. 

“When a client receives a subpoena because they are third-party record keepers, it is clear that some prosecutor or investigator believed the client was involved with cryptocurrency on some level,” says Boxerman. “Our goal at that point is to have a dialogue with the government, and basically say, ‘Here is what you’re after, how can we get there with minimal burden?’”

Bit by Bit: A cryptocurrency timeline

2008

The “Banksy” of the tech world, Satoshi Nakamoto is credited with inventing bitcoin, but no one knows who Nakamoto is—or if he’s even just one person 

2009

An exchange rate values bitcoin at US$1 = 1,309.OC BTC

2010 

The first real-world bitcoin transaction. The big purchase? Two cheese pizzas for 10,000 BTC

2013 

The Feds bust the Silk Road—an online black market for drugs and other products—and seize 26,000 BTC

2014 

Microsoft accepts bitcoin to buy Xbox games and Windows software

2015 

The number of merchants accepting bitcoin exceeds 100,000

2016

Bitcoin ATMs number 771 worldwide

2018

The crash. Experts say cryptocurrency’s 80% plunge is worse than the dot-com crash. “It just shows what a massive, speculative bubble the whole crypto thing was, as many of us at the time warned,” Neil Wilson, chief market analyst in London for Markets.com, told Bloomberg. Bitcoin is down, but not out. “It’s very likely a winner-takes-all market—bitcoin currently most likely,” Wilson said.