By: Steve Masur
Wyoming, generally known for its great skiing and cowboy culture, is also quickly becoming an oasis for blockchain technology-based companies. The Wyoming legislature recently passed three blockchain-friendly laws—totaling 13 in the past two legislative sessions—that allow corporations structured under the Wyoming Business Corporations Act (“WBCA”) to facilitate transactions involving digital assets. By defining digital assets as both “virtual currency” and “utility tokens,” Wyoming is now the first state to place blockchain-based assets into their own distinct asset class, seemingly positioning itself as the go-to destination for blockchain-based commercial activity.
Wyoming’s blockchain-friendly ecosystem entices companies to incorporate in its state, such that competition with Delaware is imminent. Although Delaware still offers a tax and corporate-friendly environment for businesses, it has yet to establish a friendly legal framework for companies engineered around digital assets and virtual currencies. Other states have either labeled digital assets and virtual currencies as a “security” or a “commodity.” Since the Securities Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) have defined virtual currencies as “securities” and “virtual commodities”, respectively, businesses that are incorporated under Delaware law or transact with virtual currencies face the specter of answering to these agencies, potentially jeopardizing their operations.
The Wyoming legislature, by contrast, has taken the reins on defining digital assets as “virtual currencies” and “utility tokens”, placing these mediums of exchange into their own unique terminology buckets under Wyoming law. Since these benefits under Wyoming law only apply to businesses incorporated under the WBCA, blockchain-based companies have begun heavily considering Wyoming as their entities’ state of organization. Should Wyoming keep its current pace of enacting blockchain-friendly legislation, we can expect a paradigmatic shift in the number of companies, especially blockchain-based ones, spurning Delaware to incorporate in Wyoming.
Wyoming’s legal classification of digital assets as “virtual currencies” and “utility tokens” provides these assets with the same legal treatment as money under Article 9 of the Uniform Commercial Code (“the UCC”). Under UCC 9-332(a), “[a] transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Eliminating the security interest requirement allows blockchain-based companies to issue, lend, and borrow virtual currency without the need of a financial intermediary, such as a bank. In the context of issuing blockchain-based tokenized assets, cutting out the middle person may incentivize Wyoming-based companies to conduct more token offerings as a capital raising strategy.
The lack of clarity in defining these tokens at the federal level puts digital currency exchanges, such as Coinbase and Gemini, under vast scrutiny when conducting token-based offerings, since courts have interchangeably classified these currencies as both “securities” and “commodities.” This has impeded courts’ ability to clearly establish the rights of investors in these offerings, as many have received a fraction or nothing of what they were promised in the offering. By treating virtual currency and fiat currency as the same, legally speaking, Wyoming has legitimized token-based offerings bilaterally for issuers and consumers, as Wyoming-based exchanges may now conduct token-based offerings sans a financial intermediary and provide consumers with established rights under these offerings. Eliminating the hassle of dealing with a financial intermediary, while also providing greater security for prospective token offering investors, makes Wyoming an attractive destination for future digital currency exchange startups.
Wyoming’s legislative treatment of digital assets as money under the UCC has exempted owners of blockchain-based digital assets from paying property taxes on these assets. That is, Wyoming will treat these assets like fiat currency, but they will not have the same tax implications of United States currency, as the legislature does not recognize digital mediums of exchange as legal United States fiat currency. This is the icing on the cake for Wyoming-based blockchain companies, as their digital assets can be placed in a Wyoming bank as a store of value, free of any state property tax concerns.
Given Wyoming’s friendly treatment and definition of digital consumer assets, we will likely see a sharp increase in blockchain-related commercial activity in the state. In fact, Wyoming’s flurry of blockchain-friendly legislation indicates that the state is positioning itself to be the virtual currency hub of the United States. Should other states follow suit? If Wyoming’s economy creates a gold rush environment, we could see a legislative arms race among the different states to emulate Wyoming’s virtual currency legislation.
We would like to thank Armando E. Martinez for his contribution to this article.