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?
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.
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.
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.
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.
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.
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.
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¶
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
- Get familiar with the documentation you will need by looking at the following templates
- 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:
- 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: email@example.com