Blockchain and the Law

ESG Issues and Opportunities Arise as Companies and Asset Managers Hone in on Blockchain-Based Technology Investments

Beyond the wider adoption of cryptocurrencies by consumers in recent years, companies and organizations have also shown increased interest in crypto-assets in the past year. A myriad of industries, from sports to fashion to art to videogames to music, are entering NFTs, which, depending on the marketplace, may be minted on a PoW or PoS blockchain. Financial institutions are exploring how to compete with decentralized finance products by offering services on blockchains to provide more security and less friction in an effort toward safer and faster transactions. Depending on how such platforms are structured, such services will also be on a PoW or PoS network. This increase in investments in blockchain-based products and services by numerous and varying shareholders has resulted in increased due diligence on how much investments are complying with ESG mandates.  Corporate balance sheets are increasingly filled with cryptocurrencies, presumably as an inflation hedge or broad investment strategy, potentially impacting their ESG practices. At least one financial firm has announced that employers may soon have the option to offer workers the option to place a portion of 401(k) retirement savings in Bitcoin. Also, potential ESG issues can arise not only when investing in a cryptominer or in cryptocurrencies verified with a PoW consensus mechanism, but also with an investment in an exchange that transacts in certain energy-intensive cryptocurrencies.

Simply put, with the increased use of these types of emerging technologies, ESG concerns are likely to arise. It remains to be seen how such emerging technologies will balance innovation, while complying with ESG issues.   Continue Reading

New York Financial Regulator Publishes Stablecoin Guidance

There have been a number of developments swirling around stablecoins in the past month, including, earlier this week, the recent introduction in the U.S. Senate of a bill (the “Responsible Financial Innovation Act”) that would put in place a regulatory framework for digital assets and enact certain requirements and consumer protections surrounding stablecoins. The topic of stablecoins’ utility and risk has been in the headlines and on the minds of both legislators and state and federal financial regulators. In a timely move, the New York Department of Financial Services (NYDFS), released its “Guidance on the Issuance of U.S. Dollar-Backed Stablecoins” meant to set foundational criteria for USD-backed stablecoins issued by DFS-regulated entities on the issues of redeemability, assets reserves and attestations about such reserves. The NYDFS is the first state regulator to release such guidance. With the fate of Congressional action on stablecoins this year uncertain (and equally uncertain whether federal agencies or banking regulators will step in to offer certain guardrails), it will likely be left to the states (and the industry itself) to establish certain baselines that offer consumer protection and stability without harming innovation. Given NYDFS’s experience in the virtual currency space and its prominence, its latest guidance may be influential to other regulators around the country.  Continue Reading

Three Questions Brands Must Ask about Trademarks and the Metaverse

Web 3.0 and the promise of the metaverse has generated excitement about new markets for businesses large and small. But as with any technological frontier, legal uncertainties cause new risks to emerge alongside the opportunities. One area currently full of legal questions is trademark law. We will examine what we see as three of the biggest open questions that should make anyone entering the metaverse tread carefully—issues that should even make organizations staying IRL to begin to consider how to protect their brands from unexpected challenges in the virtual world.

Read the full article at The Drum.

From Cryptic to (Some) Clarity: English Law and Policy Rising to the Challenge of Cryptoassets (Part 3)

In the first two instalments of our series we examined the progress of English law to provide a secure and certain legal infrastructure for cryptoasset investment and management. In particular, we looked at how recent English case law has addressed the following questions:

(1) Are cryptoassets property and (2) Can cryptoassets be held on trust? (see Part 1 here)  (3) Where are cryptoassets located for the purposes of securing jurisdiction over claims and remedies? (see Part 2 here).

To recap, a line of recent cases has now made clear that English law recognises cryptocurrencies as property. Although there is no direct English decision on this point yet, there appears to be no reason why cryptocurrencies could not be held on trust. In terms of the location of cryptocurrencies, and therefore securing jurisdiction of the English courts, whether that is the place where the person or company who owns them is domiciled, or where they are resident probably remains open for debate.

In this third (and final) part of the series, we preview potential legal initiatives which are designed to continue building the legal infrastructure for digital assets in the UK, including initiatives such as the UK Law Commission’s Digital Assets Project and the UK Jurisdictional Taskforce’s (UKJT) Digital Dispute Resolution Rules. Continue Reading

From Cryptic to (Some) Clarity: English Law and Policy Rising to the Challenge of Cryptoassets (Part 2)

In the first part of this series of articles, we examined the progress of English law to shape and build an infrastructure to support the development of a secure and certain environment for investment in digital assets. We considered how recent English case law has addressed the questions of whether cryptoassets are property, and whether they can be held on trust.

In this second instalment, we review jurisdictional issues relating to digital assets.

Where are cryptoassets located?

Where assets are located in the eyes of the law is relevant to questions of what governing law applies to them, the Court’s determination of its own jurisdiction (including the appropriate forum for a claim to be resolved) and questions of service of court documents outside the jurisdiction. Crypto-disputes raise questions of where cryptocurrency exchanges are located, the identification and location of defendants, and where cryptoassets (which have no traditional physical form) are situated.

The law of the jurisdiction in which property which is subject to litigation is located is referred to as the lex situs of the property. In general terms, Courts determine the lex situs of land and chattels based on their (physical) location, and in respect of enforceable personal rights over property (known as choses in action) where they are recoverable or can be enforced. Given their intangible nature, determining the lex situs of cryptoassets is a question the English Courts have needed to grapple with sooner or later.

The Ion Science Ltd v Persons Unknown (unreported, 21 December 2020) case presented an opportunity to do so. It suggested that for the purposes of English law the lex situs of cryptocurrency is the place where the person or company who owns it is domiciled.[1] This approach was followed in Fetch.ai Ltd and another v Persons Unknown Category A and others[2] as part of the Court’s consideration of whether to grant permission for the claimants to serve proceedings outside the jurisdiction. (In that case, the claimants were then able to obtain a worldwide freezing order and proprietary injunctive relief against unknown fraudsters, among other orders.) Continue Reading

Biden Administration Proposes Changes to the Taxation of Cryptocurrency Transactions

On March 28, 2022, the Biden Administration proposed certain very limited changes to the taxation of cryptocurrency transactions. The proposals do not change the current treatment of cryptocurrency as property for federal income tax purposes, and do not address any of the fundamental tax issues that cryptocurrency raise.

Read the full post on our Tax Talks blog.

From Cryptic to (Some) Clarity: English Law and Policy Rising to the Challenge of Cryptoassets (Part 1)

Sir Geoffrey Vos, the Master of the Rolls, wants English law to be at the forefront of developments relating to cryptoassets and smart contracts. In his thought-provoking foreword to the government-backed UK Jurisdictional Taskforce’s (UKJT) Legal Statement on Cryptoassets and Smart Contracts, he explained that English law should aim to provide “much needed market confidence, legal certainty and predictability in areas that are of great importance to the technological and legal communities and to the global financial services industry” as well as to “demonstrate the ability of the common law in general, and English law in particular, to respond consistently and flexibly to new commercial mechanisms.” He returned to the same theme in a speech on 24 February 2022 at the launch of the Smarter Contracts report by the UKJT in which he said “[m]y hope is that English law will prove to be the law of choice for borderless blockchain technology as its take up grows exponentially in the months and years to come”.

The law defines whether and how an owner can find and recover a stolen asset, whether a contract about an asset can be enforced and whether rights are owed between parties in relation to an asset.  English law has traditionally been very flexible in fashioning remedies to uphold contracts and to allow parties to preserve and follow (trace) assets – by interim protective relief in the form of injunctions, disclosure orders against third parties (Banker’s Trust orders), by recognising trusts over assets and by the English Courts accepting jurisdiction over claims in the first place.  If English law allows owners of cryptoassets to access these remedies, it should provide the “market confidence, legal certainty and predictability” described by Sir Geoffrey Vos. In this article, we explore the extent to which recent developments in English law have furthered these objectives and address in turn:

  • Are cryptoassets property?
  • Can cryptoassets be held on trust?

In the second part of this series, we will review recent developments concerning jurisdictional issues relating to digital assets and in the third part we will preview key legal and policy developments which are in the pipeline. Continue Reading

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