Legal

Smartcash Deemed Not a Security Under Singapore Law

The SmartCash Community received good news today as it was announced that SmartCash tokens are unlikely to be considered a financial “security” under the Singapore Securities and Futures Act.

Additionally, SmartCash is unlikely be defined as a “share”, “debenture”, “collective investment scheme”. This means that local securities laws, which can slow down adoption of the new payment platform, should not apply.

Obtaining legal opinion letters is a requirement to list on the top exchanges in the region in order to comply with local financial regulations. With the confirmation that SmartCash is indeed not a security the process for listing on exchanges within the jurisdiction of Singapore can continue.

In order to establish the legal basis for the SmartCash token, SmartCash Outreach had engaged the Singapore law firm, Christopher Bridges Law Corporation, to provide their legal opinion regarding the whether the SmartCash tokens are securities under the Singapore Securities and Futures.

SmartCash Outreach continues to work with with other law firms and exchanges in other jurisdictions throughout the world to in order to expand the global reach of the SmartCash platform.

How the Law Applies to SmartCash

One of the most common questions we receive is How are smartnode operators treated under the US tax laws?

Tax Treatment

Block rewards

As many already know, block rewards are paid to smartnode operators in exchange for validating transactions on the SmartCash network. The IRS has stated unequivocally that “when a taxpayer successfully ‘mines’ virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income.” To be sure, smartnode do not “mine”, but the IRS considers using computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger to constitute “mining”. By analogy, a smartnode operator should also treat as regular income the fair market value of the block reward.

SmartCash Collateral

A SmartCash user may demonstrate to the network his or her control over 100000 SMART in order to run a smartnode. These tokens never leave the user’s control. If at any point during the user’s tenure as a smartnode operator, the user disposes of any or all of the 100000 SMART, the network automatically strips the user of his or her status as a smartnode. Under the US Internal Revenue Code, gain or loss is realized only on the “sale or exchange” of property. The term “sale” generally means the transfer of all right, title, and interest in the property transferred. A number of factors typically are considered to determine whether a sale has occurred, the most important being whether the benefits and burdens of ownership of the transferred property have passed from the transferor to the transferee. In SmartCash, the smartnode operator retains control of the 100000 SMART and simply demonstrates that control to the network. Therefore, the holding of the 100000 SMART for purposes of qualifying as a smartnode operator should not cause a taxable event to occur because the user has not transferred any of the benefits and burdens of ownership.

Capital Gains

Assuming that the 100000 SMART are sold, whether that SmartCash is a “capital asset” will determine the tax treatment of the sale. Stocks, bonds and other investment property for example, are generally treated as capital assets. Inventory, depreciable property, and stock in trade, though, are not. Assuming the smartnode operator held the 100000 SMART either for investment purposes or for purposes of qualifying as a smartnode operator, the IRS would likely treat gain or loss on the sale of those SmartCash tokens as capital in nature. Therefore, SmartCash held for a long enough period of time could be subject to the lower “long term capital gains” tax rate.

Legal Liability

As with cash or any other currency system, users may use SmartCash in connection with illegal activity. A common question we receive is whether smartnode operators can also be liable for criminal activity, simply by relaying transactions related to that activity. The fundamental legal requirement of mens rea makes criminal liability unlikely for smartnode operators.

Primary Liability

Almost all crimes require that a defendant have a defined mens rea at the time of an offense. Mens rea is a mental state like purposefulness, knowledge, recklessness or negligence. For example, to act with “purpose” is commonly understood as desiring as your “conscious object” the result of a crime. “Knowledge” is a less culpable mindset than “purpose” – acting with “knowledge” requires general awareness that your actions will bring about a particular crime. “Recklessness” requires disregard of a substantial risk. Finally, a person acts “negligently” if they should have been aware of a substantial and unjustifiable risk of a particular consequence of their actions, but were not.

Most smartnodes have no awareness, while relaying SmartCash transactions, of the identity of the users involved, the ultimate destination of users’ funds, or any other circumstances of SmartCash transactions. As such, it would be difficult for a prosecutor to demonstrate that a smartnode operator who facilitated an illegal transaction merely by relaying the transaction would have a culpable mens rea.

Secondary Liability

Even if someone is not the principal actor in the commission of a crime, that person can be secondarily liable for their involvement in it. As such, we are sometimes asked whether smartnode operators, by their involvement in relaying SmartCash transactions, could be “aiding and abetting” or “conspiring” to commit a crime that might involve SmartCash. Generally speaking, aiding and abetting requires that the defendant (i) seek by his action to make the crime succeed and (ii) act with the same mens rea as required for the principal offense.

No matter the requisite mens rea of a particular principal offense committed by a SmartCash user, it is unlikely that a mere smartnode operator, without more, could be found to have “aided and abetted.” To be sure, the smartnodes do provide assistance in the principal offense – in that smartnode action is required to process all SmartCash transactions. However, the smartnodes would not have the requisite mens rea to satisfy the requirements of aiding and abetting liability. smartnode operators have no readily available information about the purpose or consequences of users’ SmartCash transactions, or even the originating identity of the sender of funds. As such, so long as a sufficient diversity of non-criminal transactions occur on the SmartCash network, they would not harbor even the least culpable mens rea (i.e. negligence) with respect to a user relaying or receiving SmartCash in furtherance of a particular crime.

“Conspiracy” liability is even less likely. Conspiracy generally requires i) an agreement to commit a crime, ii) knowledge of the unlawful purpose of the agreement, iii) intent to further the unlawful purpose, and iv) an act in furtherance of the conspiracy. None of these requirements are met by mere smartnode operators.

Exchange Liability

The Bank Secrecy Act (BSA) is the law that primarily governs exchanges in the United States. The BSA does not contain any prohibition on supporting SmartCash transactions. Indeed, the BSA take a flexible, risk- based approach to regulation and contemplate that financial institutions will enter into lines of business with new risks. This risk-based approach requires, at the outset, an independent risk assessment. By and large, the risks faced by exchanges who begin to support SmartCash will be similar to the risks associated with other virtual currencies.

• Exchanges should consider revising their risk assessments and AML policies to account for the unique characteristics of SmartCash. For example, including blockchain addresses in Suspicious Activity Reports (SARs) will be less descriptive and effective for investigations based on such addresses. Exchanges might consider adding additional context and explanation in SARs.

ATM & Fiat Compliance

Introduction

An aspect that required legal research is what are the compliance requirements to facilitate SmartCash-fiat exchange. This can be in the form of running ATM kiosks or using other mechanisms to personally offer SmartCash to fiat exchange services.

For this purpose we found Christopher Bridges, who have a lot of experience working in compliance for digital money services. They have put together a compliance program that will be shared with anyone launching a SmartCash service if they require it. This includes:

• A finCEN BSA compliant written Principal MSB/KYC AML Program designed to prevent the Principal MSB from being used to facilitate money laundering and the financing of terrorist activities
• A comprehensive risk based assessment by a third party compliance consultant expert
• Banking Secrecy Act (BSA), Anti-Money Laundering (AML), and Know Your Customer (KYC) regulations
• FinCEN requirements and guidance
• Written and on-going AML compliance programs
• State-by-state money transmitter laws and licensure requirements

We now have full documentation of the program from Cogent Law, the package includes:

• BSA AML Compliance training
• KYC CDD Policy
• AML Program
• Risk Assessment
• Surveillance and Monitoring Policy
• Different Reports to file in different situations

The documents have a format as if they were created for the fictional company “Initech” and then the interested SmartCash entrepreneur would have to replace it with their real corporation. We believe that some counsel would still be advisable for an investor launching a service but this will help provide a solid understanding of the requirements and get them 80% of the way. This should also be highly educational and help the SmartCash investor be more at ease as it enlightens a typically obscure topic for most crypto enthusiasts.

This program is directed at SmartCash investors that are interested in running a compliant service in regulated markets. If some users prefer to run services without a compliance program or don’t need one, we completely respect that too.

SmartCash ATM Compliance Program

1. Please first read the Quick Guide To Operating a Virtual Currency Kiosk. This guide will guide you through the initial steps of registering as an MSB. It is crucial you start here.
2. Listen to the Audio Guides on BSA AML and read the BSA AML Training Manual
   • BSA AML Compliance Training manual
   • AML 101
   • AML In Depth
3. Get familiar with the documentation you will need by looking at the following templates
   • Surveillance and Monitoring
   • KYC CDD Policy
   • AML Program
   • Risk Assessment
4. Get familiar with some of the reports you may need to file as part of operations. In the Quick Guide in Step 1, we go through registration on the E - BSA filing system. This step also provides example CTR (Currency Transaction Report) and SAR (Suspicious Activity Report) report samples. SmartCash operators should be familiar with these as they may need to file them as part of operations. Sample reports:
   • Currency Transaction Report
   • Suspicious Activity Report
5. If you would now like to move forward with your project, we recommend getting in contact with Christopher Bridges Law Corporation, our recommended legal counsel. Preferential rates are available for SmartCash users. Please email: seccbridges@cbridgeslaw.com