On February 10, 2022, the Missouri One-Hundred First General Assembly introduced 2022 Missouri House Bill No. 2672 titled “Changes the law regarding virtual currencies.” Sponsored by Representative Phil Christofanelli (R), it replicates enactments in the State of Wyoming that (1) exempts “virtual currencies” from both taxation for state, county, or local purposes and the state money transmitter law; and (2) provides safe harbors from state securities laws for the sale of “open blockchain tokens.”
The reason for the bill is to distinguish among digital assets for regulatory purposes. This field has been muddled by pronouncements by the U.S. Securities and Exchange Commission (the S.E.C.”) in its attempt to differentiate between digital assets that act like currencies, which are exempt from federal securities laws, and those that serve as investments for speculative purposes, which are not. By relying on the four-pronged[1] “investment contract” analysis of the so-called “Howey test” after the U.S. Supreme Court’s SEC v. W.J. Howey Co., case,[2] the S.E.C.’s Strategic Hub for Innovation and Financial Technology issued its legal “Framework for ‘Investment Contract’ Analysis of Digital Assets” that focused on the third prong of the Howey test, which requires the reasonable expectation of profits, and concluded, in summary, (1) that digital assets that give the holder rights to share in the enterprise’s income or profits or to realize gain from capital appreciation are securities; and (2) where the value of the digital assets has shown a direct and stable correlation to the value of the good or service for which it may be exchanged or redeemed act like currencies and are not.
Which brings us back to House Bill No. 2672, which in the first instance would exempt “virtual currency” from both taxation for state, county, or local purposes pursuant Section 137.100, RSMo. (2020), and from the state’s money transmitter laws[3] pursuant Sections 361.700 and 361.705, RSMo. (2020). The House bill defines “virtual currency” as “any type of digital representation of value that: (a) is used as a medium of exchange, unit of account, or store of value; and (b) is not recognized as legal tender by the United States government.” Consequently, consistent with S.E.C.’s analytical framework, virtual currency would not be a security under Missouri because it is used “as a medium of exchange.”[4]
Second, the House bill would add new Section 324.1160, RSMo. (Supp. 2022), which includes the definition of a “digital security,” defined as “a digital asset that constitutes a security, as defined under Section 409.1-102,[5] but shall exclude digital consumer assets[6] and virtual currency.” A security “as defined under Section 409.1-102” in this context means an “investment contract” pursuant to the Howey test, denoting the reasonable expectation of profits if the digital security would give the holder rights to share in the enterprise’s income or profits or to realize gain from capital appreciation.
Third, the House bill introduces the concept of the “open blockchain token,” which is neither virtual currency nor a digital security by definition but constitutes “intangible personal property,” provided (1) the predominant purpose of the token is consumptive; (2) the developer or seller did not market the token to the initial buyer as a financial investment;[7] and (3) either (a) the developer or seller reasonably believed that it sold the token to the initial buyer for consumptive purpose; or (b) the token has a consumptive purpose that is available at or near the time of sale and can be used at or near the time of sale for a consumptive purpose; or (c) the initial buyer of the token is prohibited by the developer or the seller of the token from reselling the token until the token is available to be used for a consumptive purpose; or (d) the developer or seller takes other reasonable precautions to prevent an initial buyer from purchasing the token as a financial investment. If your digital asset qualifies as an “open blockchain token,” then the House bill provides a safe harbor for its sale in Missouri without violating Chapter 409 that regulates the sale of securities, which exemption requires a notice of intent to sell to be filed electronically with the secretary of state of Missouri on the form prescribed by him with the payment of a filing fee of $1,000.00.
The problem with the House bill lies in the definition of “consumptive,” which is defined as “a circumstance when the token is exchangeable for, or provided for the receipt of, services, software, content, or real or tangible property, including rights of access to services, content, or real or tangible personal property,” which is not distinguishable in any meaningful way from the definition of the House bill’s definition of a virtual currency, which includes “a medium of exchange.” How the secretary of state of Missouri and its division of securities enforcement will distinguish between these two definitions invites litigation.[8]
Consequently, if faced with questions regarding the enforcement of House Bill No. 2672 when enacted, you may wish to consult with experienced Missouri securities enforcement counsel at Cosgrove Law Group, LLC.
[1] The (1) investment of money,(2) into a common enterprise, (3) for a reasonable expectation of profits, (4) derived from the efforts of others.
[2] SEC v. W.J. Howey Co., 328 U.S. 293 (1946). See also United Housing Found., Inc. v. Forman, 421 U.S. 837 (1975).
[3] Sections 361.700 to 361.727, RSMo. (2020) also known as the “Sale of Checks Law.”
[4] The virtual currency exemption from Missouri money transmitter laws, however, seems more like a giveaway, considering at the federal level, the exchange of virtual currency is subject regulation by the Financial Crimes Enforcement Network (“FinCEN”). See, FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (Mar. 18, 2013).
[5] Chapter 409 – Regulation of Securities.
[6] Not defined.
[7] Defined as “a contract, transaction, or arrangement where a person invests money in a common enterprise and is led to expect profits solely from the efforts of a promoter or a third party,” or in other words, the Howey test.
[8]The S.E.C. has granted Bitcoin and Ethereum with its imprimatur that each is a virtual currency, which Ripple is using as a defense in its S.E.C. enforcement proceeding against it because the S.E.C. has not granted its XRP digital asset the same leniency. The outcome of this case will go a long way in defining what constitutes a virtual currency.