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Md. commission considers case for regulating cryptocurrencies

This April 3, 2013 file photo shows bitcoin tokens in Sandy, Utah. (AP Photo/Rick Bowmer, File)

This file photo shows bitcoin tokens in Sandy, Utah. (AP Photo/Rick Bowmer, File)

ANNAPOLIS — Maryland will have to consider how its current laws interact with the new and occasionally wild frontier of cryptocurrencies and blockchain technologies, a state commission was told Tuesday.

More than 200 cryptocurrency exchanges operate within the United States and there have been more than 3,400 initial coin offerings to date. Many of these practices operate within a legal framework that was created to handle traditional securities and currency, not these digital properties.

“As things currently stand, this world is largely noncompliant with investor protection laws and various protection laws around the globe,” said Gary Gensler, chair of Maryland’s Financial Consumer Protection Commission.

Gensler also took a post this spring at the Massachusetts Institute of Technology, where one of his primary roles will be teaching on blockchain management and its role in the financial sector.

The commission is taking a look at cryptocurrencies, initial coin offerings, cryptocurrency exchanges and other blockchain technologies and will include its discussions and recommendations in a report for the General Assembly next year.

In addition to Bitcoin’s dramatic rise as an investment last year, initial coin offerings have become a popular way for startups and other entities to raise money outside of traditional venture capital.

But because these new technologies exist largely outside of current regulatory schemes, there can also be risks, including fraud. There have been estimates that anywhere between 25 percent and 81 percent of initial coin offerings are fraudulent.

Last month, the Maryland Attorney General’s Securities Office issued a cease and desist order against Browsers Lab, LLC as part of a national “Operation Cryptosweep” targeting fraudulent initial coin offerings.

“The offering had many characteristics in common with a typical ICO, including a white paper that we allege poorly describes the offering,” Melanie Lubin, the state securities commissioner, said.

But initial coin offerings and cryptocurrencies can also be legitimate investment vehicles that need to be regulated through an appropriate mechanism.

“You should be protected by some sort of basic investor protection laws because it is an investment,” Gensler said.

Much of the regulation will likely come at the national level, and many current regulations, including Securities and Exchange Commission regulations, could cover the crypto and blockchain technologies.

“Even if you can get 80 percent or 90 percent of the way there just by applying existing regulations … that last 20 percent can be hard,” said Jonah Crane, a fintech adviser. “Where should we draw the line in terms of what is a security and not a security under the Howey test?”

The Howey test, established 70 years ago by the U.S. Supreme Court, basically asks, “Did you give somebody money with an anticipation of profit based on their efforts?”

Current laws on securities, including federal and Maryland law, could cover the technologies as securities.

On the other hand, to protect consumers, Maryland may want to pass new laws specifically for the new technologies, said state Sen. James C. Rosapepe, D-Prince George’s and Anne Arundel, and a member of the commission.

“We have a new set of financial products that are not contemplated by the 19th-century and 20th-century law,” he said. “I think that’s what we’re looking at. Do we need a new approach to our law?”

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