.. meta::
:description: Legal and tax information on the Dash cryptocurrency, block rewards, collateral and ATMs.
:keywords: dash, marketing, designs, presentations, brochures, logo
.. _legal:
=====
Legal
=====
How the Law Applies to Dash
===========================
The purpose of the Dash DAO is to promote, protect and standardize Dash.
In the course of our mission, we have received inquiries into how some
aspects of Dash are treated under United States law. The purpose of
this document is to address the most common of these inquiries and
explain how we believe the laws apply to Dash. This is not meant as a
legal opinion, and you should consult your own attorneys before relying
upon it. However, it is meant to state our position on the law, and how
the law should be properly interpreted.
One of the most common questions we receive is *How are masternode
operators treated under the US tax laws?*
Tax Treatment
-------------
Block rewards
^^^^^^^^^^^^^
As many already know, block rewards are paid to masternode operators in
exchange for validating transactions on the Dash 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, masternodes 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 masternode operator should also
treat as regular income the fair market value of the block reward.
Dash Collateral
^^^^^^^^^^^^^^^
A Dash user may demonstrate to the network his or her control over 1,000
DASH in order to run a masternode. These tokens never leave the user’s
control. If at any point during the user’s tenure as a masternode
operator, the user disposes of any or all of the 1,000 DASH, the network
automatically strips the user of his or her status as a masternode.
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 Dash, the masternode operator retains control of
the 1,000 DASH and simply demonstrates that control to the network.
Therefore, the holding of the 1,000 DASH for purposes of qualifying as a
masternode 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 1,000 DASH are sold, whether that Dash 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 masternode operator held the 1,000 DASH either for
investment purposes or for purposes of qualifying as a masternode
operator, the IRS would likely treat gain or loss on the sale of those
Dash tokens as capital in nature. Therefore, Dash 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 Dash in
connection with illegal activity. A common question we receive is
whether masternode 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 masternode 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 masternodes have no awareness, while relaying Dash transactions, of
the identity of the users involved, the ultimate destination of users’
funds, or any other circumstances of Dash transactions. As such, it
would be difficult for a prosecutor to demonstrate that a masternode
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 masternode operators, by their
involvement in relaying Dash transactions, could be “aiding and
abetting” or “conspiring” to commit a crime that might involve Dash.
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 Dash user, it is unlikely that a mere masternode
operator, without more, could be found to have “aided and abetted." To
be sure, the masternodes do provide assistance in the principal offense
– in that masternode action is required to process all Dash
transactions. However, the masternodes would not have the requisite
*mens rea* to satisfy the requirements of aiding and abetting
liability. Masternode operators have no readily available information
about the purpose or consequences of users’ Dash 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 Dash
network, they would not harbor even the least culpable *mens rea*
(i.e. negligence) with respect to a user relaying or receiving Dash 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 masternode operators.
Exchange Liability
------------------
Exchanges have asked whether they can be held liable for criminal
activity connected with Dash PrivateSend transactions.
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 Dash 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 Dash will be
similar to the risks associated with other virtual currencies. One
significant difference concerns PrivateSend transactions, and we focus
on this difference below:
- PrivateSend transactions obfuscate the source and destination
addresses of funds, thus blockchain forensic techniques like
clustering analysis may be less effective. To the extent that
exchanges rely on such blockchain forensics tools for their
information collection, reporting and reporting obligations under the
BSA, they should consider alternative means.
- PrivateSend transactions are used for legitimate purposes and are
often required to achieve personal or commercial privacy for sensitive
transactions. The use of PrivateSend transactions is not inherently
suspicious. Combination with other factors, including those identified
in the exchange’s own risk assessment, may raise PrivateSend
transactions to the level of suspicious activity.
- Exchanges should consider revising their risk assessments and AML
policies to account for the unique characteristics of Dash. 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.
- When conducting Enhanced Due Diligence on customers and transactions,
exchanges should account for the presence of PrivateSend transactions
and update their AML policies accordingly. For example, identifying
counterparties to a PrivateSend transaction may be more difficult than
identifying counterparties to transactions in other virtual currencies
when relying on blockchain forensics.
PrivateSend Legal Position
==========================
Dash’s transaction rules are identical to Bitcoin, and therefore for
regulatory and compliance purposes Dash can and should be treated
identically to Bitcoin. `BlockchainIntel `__
and `Coinfirm `__ are KYC/AML service
providers that offer services covering the Dash blockchain.
This PDF document offers a full overview of the `Dash PrivateSend Legal Position `__.
ATM & Fiat Compliance
=====================
Introduction
------------
An aspect that required legal research is what are the compliance
requirements to facilitate Dash-fiat exchange. This can be in the form
of running ATM kiosks or using other mechanisms to personally offer Dash
to fiat exchange services.
For this purpose we hired **Cogent Law**, 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 Dash
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
Our lawyer for this project is **Adella Toulon-Foerster** who has
extensive experience in this field including:
- 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 Dash 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 Dash
investor be more at ease as it enlightens a typically obscure topic for
most crypto enthusiasts.
This program is directed at Dash 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.
Dash ATM Compliance Program
---------------------------
#. 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.
#. 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 `_
#. Get familiar with the documentation you will need by looking at the
following templates
- `Surveillance and Monitoring `_
- `KYC CDD Policy `_
- `AML Program `_
- `Risk Assessment `_
#. 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. Dash 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 `_
#. If you would now like to move forward with your project, we recommend
getting in contact with `Cogent Law `_, our
recommended legal counsel. Preferential rates are available for Dash
users. Please email: atoulon@cogentlaw.co