Blockchain Technology: Revamping the Agriculture Sector and Key Considerations

With the publicity around initial coin offerings (“ICOs”) and figures that present the total amount of funds raised via ICOs as doubling or even tripling the volume of capital raised in traditional financings, most tend to focus on the amount raised rather than the nuances and practicality around integrating a digital asset versus integrating the blockchain technology into a developing or preexisting business model.  Companies in the agriculture sector have been looking for innovative technologies to streamline transaction times, verification processes, and ultimately effectuate B2B and B2C transactions as soon as practicable, especially on an international scale.  This is where most believe blockchain technology will come in to save the day.

As most know, there are a handful of U.S. regulatory agencies you should be mindful of before hiring legal counsel and advisors to help launch an ICO.  At the outset of these offerings, U.S. securities laws tend to be at the forefront of everyone’s mind and compliance is viewed as one of the biggest hurdles.  However, when taking a wholistic view of these business models from start to finish, the U.S. securities laws are not actually the most difficult to comply with.  Most businesses going the ICO route will raise capital at the outset via investment contracts, which are subject to traditional securities laws.  After compliance at this stage, the looming question then is:  What are the characteristics of the token upon conversion of these investment contracts?

In the event a platform-specific token will be treated as a platform-specific cryptocurrency, which would allow B2B transactions to take place on the platform without the added complexity of placing fiat in escrow and/or converting one currency to another, from a U.S. regulatory perspective, these companies may likely be considered money services businesses at the federal level and/or money transmitters at the state level.  Although compliance at the federal level can be relatively painless, determining whether you are a money transmitter under the laws of 49 states, applying for these licenses if necessary, and submitting the required surety bonds, may be more than these companies have bargained for.

An additional level of complexity arises if you will allow B2B and/or B2C transactions to take place on your platform that involve futures interest in the platform-specific tokens being sold, which may trigger registration and compliance with the rules and regulations of the Commodity Futures Trading Commission (“CFTC”).  The CFTC has provided guidance that bitcoin and other virtual currencies are commodities under the CEA’s definition of commodity, which basically covers all goods, rights, articles, interest and services in which futures contracts are or may be traded.

Now, if these companies are looking to integrate the blockchain technology into a developing or preexisting business and determine traditional financing is the best route to get the platform up and running, you do not have the complexity of a token offerings, but it is still pertinent to determine whether or not your platform will need a token as a means of streamlining transaction times and conversion of different currencies, or if you can utilize third party services and simply benefit from the data collected from the open ledger.  For example, earlier this year, the Money Transmitter Division of the California Depart of Business Oversight (“DBO”) issued opinion letters responding to questions from payment processors about the Money Transmission Act (“MTA”).  These businesses were looking for guidance as to whether the payment processor services they provided to companies required them to obtain money transmitter licenses.  The DBO decline to opine on the applicability of the “agent of payee” exemption cited by these payment processors, stating their lack of comment was due to regulations concerning the payee exemption that will be proposed in the near future.  If particular exemptions for third-party payment processors will be rolled out at the state level, these companies looking to revamp the agriculture market may no longer find it worth the time and effort to issue platform-specific tokens and may see a greater benefit in utilizing the underlying blockchain technology to streamline international transactions, collect valuable data, and much more.

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Jennifer Han
jhan@rroyselaw.com

Jennifer Han received her LL.M. in Taxation from the University of San Francisco School of Law in 2015. She received her J.D. from McGeorge School of Law in 2013. Her areas of focus within the tax practice include corporate transactions, business structure planning, deferred compensation, and federal and state tax compliance. Ms. Han also assists the estate planning team with domestic and international tax planning research.
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