Blockchain and the Law

Crypto Crackdown – SEC Imposes Broker-Dealer and Investment Company Registration Provisions on Token Traders and a Crypto Fund

The SEC announced a pair of settled orders on Tuesday extending additional provisions of the securities laws over ICOs and other digital assets – the agency’s first ever enforcement actions of their kind. As the SEC has been suggesting for over a year, because digital assets offered and sold in initial coin offerings (“ICOs”) are likely to fall under the definition of securities, businesses that invest in them, or that offer, sell or trade them need to consider their obligations under the Investment Company Act, the Advisers Act and the Securities Act. Continue Reading

Betting Big on Blockchain

Blockchain and sports gambling seem to be a natural fit. Sports gambling has been at the forefront of the news cycle since the U.S. Supreme Court struck down a federal statute that banned states from authorizing sports gambling in Murphy v. NCAA. Since then, New Jersey, Delaware, Mississippi and West Virginia have passed laws allowing wagering on the results of certain sporting events. New York, Pennsylvania and Rhode Island are quickly moving towards the legalization of sports gambling and a number of other states are expected to follow.

Blockchain has already proven to be a reliable partner for online casino gambling. In the past few years, a fruitful relationship between online casino gambling platforms and blockchain technologies has developed. Satoshi Dice, which first gained popularity in 2012, allows users to gamble their cryptocurrency through a blockchain-based, peer-to-peer dice prediction game. Virtue Poker, a ConsenSys-backed, decentralized poker platform, uses blockchain to ensure that casino operators (the “house”) cannot tamper with the integrity of a wager. And ZeroEdge uses smart contracts and blockchain to eliminate the “house” fee that is typically passed on to gamblers.

Thus, given the opening for sports gambling, it is easy to imagine a relationship forming between sports betting and blockchain technologies. Blockchain may allow casino operators and other entities to reduce transaction fees, speed up payment processing, increase gambler anonymity and flag problematic transactions. Some sports betting entities, such as daily fantasy sports behemoth FanDuel, have already begun exploring such opportunities.

However, even within states that have already legalized sports gambling, there are still a number of factors to consider for those aiming to utilize blockchain technologies within their sports betting platforms. Such considerations include, for example: Continue Reading

Federal Judge Rules Securities Laws May Cover ICOs

U.S. District Judge Raymond Dearie of the Eastern District of New York has ruled that initial coin offerings (ICOs) may be subject to securities law. The ruling came in the court’s denial of defendant Maksim Zaslavkiy’s motion to dismiss an indictment that alleges that he committed securities fraud for selling tokens that he claimed represented shares in a real estate venture and a separate diamond business. Zaslavskiy’s motion to dismiss argued that the investment schemes and their related ICOs did not involve securities and are beyond the reach of federal securities laws and that the securities laws, specifically the Exchange Act and SEC Rule 10b-5, are unconstitutionally vague as applied to this case. Continue Reading

Crypto Exchanges Join Virtual Commodity Association Seeking to Establish Industry Standards

Despite the recent setback of having their Bitcoin ETF rejected by the SEC for the second time, the Winklevoss brothers remain undeterred in their efforts to bring cryptocurrency into the investment mainstream.

Their latest project is the Virtual Commodity Association (VCA), a self-regulatory organization (SRO) for the virtual currency industry aiming to serve in the same capacity as SROs such as FINRA and the NFA currently serve for the securities and derivatives industries, respectively. On its website, the VCA lists its mission as “to work toward the goal of establishing an industry-sponsored, self-regulatory organization (SRO) to oversee virtual commodity marketplaces,” an ambition which ostensibly goes beyond Bitcoin but explicitly disclaims security tokens. Trading in the spot market of commodities is generally considered to be exempt from the jurisdiction of the Commodity Futures Trading Commission (CFTC), aside from anti-fraud and anti-manipulation enforcement.

The Winklevoss brothers published an article in March proposing the VCA. Currently, the VCA is a working group of four cryptocurrency exchanges: bitFlyer (based in Japan), Bitstamp (based in Luxembourg), Bittrex (based in Seattle) and Gemini (based in New York and founded by the Winklevoss brothers). Once capitalized and operational, the VCA seeks to issue reports on cryptocurrency trading and establish global standards. The VCA would require its members to adhere to best practices in eight areas: custody, customer communication, trading transparency, market rules, cybersecurity, market surveillance, information sharing and regulatory cooperation (with the CFTC and other potential regulators).

Should the VCA achieve its stated objective, it would address many of the concerns about the existing cryptocurrency industry that led the SEC last month to reject the application of Winklevoss Bitcoin Trust, a Bitcoin ETF, to be listed on the BZX Exchange. In its July decision, the SEC cited numerous comment letters that led it to conclude that Bitcoin exchanges are currently unable to “prevent fraudulent and manipulative acts and practices and to protect investors and the public interest” in accordance with Exchange Act Section 6(b)(5).

First Decision in Class-Action Context Concludes Digital Tokens Can Be Securities

For digitally savvy investors itching to know whether U.S. courts would treat crypto-tokens as securities subject to the regulatory requirements of the Securities Act of 1933, the wait is over—sort of. The first federal judge to decide the issue in the class-action context landed on the same side as the SEC did back in 2017, finding that the virtual tokens in the case could be characterized as securities. We discussed the SEC’s 2017 report in a previous articleSee Margaret A. Dale and Mark D. Harris, The SEC Concludes that Digital Tokens May Be Securities, NYLJ, Aug. 8, 2017.

On June 25, 2018, Magistrate Judge Andrea M. Simonton of the Southern District of Florida issued this cutting-edge opinion in Rensel v. Centra Tech. Her Report and Recommendation (R&R) considered a motion for a temporary restraining order to safeguard the proceeds from an initial coin offering (ICO). The underlying shareholder class action alleged that Centra Tech, a Florida-based technology start-up company, and several of its founders and executives, had violated various provisions of the Securities Act. To reach her decision, Judge Simonton analyzed whether the tokens Centra Tech offered during the course of its ICO were securities for purposes of the Securities Act (despite the defendants conceding the point for purposes of the motion). Continue Reading

Modernizing Real Estate Records With Blockchain

Despite dealing in one of the most valuable asset classes in the world, the real estate industry largely relies on outdated real estate interest recording systems requiring paper-based filings with local government offices. The administrative burdens, inaccuracies and security issues raised by such systems are well known. Increasingly, both government actors and private parties have recognized the potential for key attributes of blockchain technology to modernize real property conveyance and improve processes for recording deeds and other related instruments:

  • Greater efficiency due to digitization. The deed recording processes currently employed by many U.S. localities impose burdensome administrative costs. Typically, a physical deed must be delivered to a government employee at the local recording office, where it is subsequently scanned onto the county’s centralized database. Data points from the deed are then manually input onto a public index, which is relied upon to determine ownership of each piece of property recorded thereon. Any subsequent transfers of, or claims to, real property must be manually reconciled with this public index. Blockchains, on the other hand, are entirely electronic data structures. As such, their implementation could greatly reduce, if not eliminate, the constant need for scanning documents, printing labels and organizing physical files in local recording offices – enabling local governments to reallocate human resources to areas where they can be employed more productively.
  • Accurate record of ownership that updates in real time. The manual indexing process described above is not just costly and time-consuming. It is also prone to human error, where inputting mistakes may cause future difficulties in accurately tracing chain of title. Since blockchains have the potential to consolidate conveyance and recording of real property rights into a transaction, they can greatly increase the likelihood that the public record accurately represents each conveyance, and do so in real time.
  • Tamper-proof and disaster-resistant decentralized ledger. Finally, centralized databases, where recorded deeds are currently stored, are vulnerable to malicious attacks by third parties (or government insiders) seeking to steal, erase, forge or alter existing records. By design, blockchains may ensure that any such endeavor to corrupt the information contained “on-chain” is prohibitively costly. Further, localities typically do not have the resources available to implement a robust back-up system for their property records. Therefore, in the case of a natural disaster destroying physical files or a malicious cyberattack wiping a database, the entirety of the record could be permanently lost. A blockchain, meanwhile, may store recorded data on nodes spanning both geographies and populations, alleviating concerns of lost records, while concurrently reinforcing the integrity and security of the data with each additional node.

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New York State Department of Financial Services Eases Backlog and Approves More BitLicense Applications

On June 14, 2018, the New York State Department of Financial Services (the “DFS”) announced that the agency granted a virtual currency license (or “BitLicense”) to bitcoin wallet and vault provider Xapo, Inc., and authorized the blockchain financial services company Paxos Trust Company LLC to expand their business to offer exchange and custodial services to cryptoassets beyond bitcoin. Days later, the DFS announced that it had approved the BitLicense application of financial services and mobile payment provider Square, Inc. (which already possessed a state money transmitter license and whose Cash App offers a method to trade bitcoin). These developments followed last month’s approval of Gemini Trust Company to provide additional virtual currency products and services (including custodial services and trading of Zcash, Litecoin and Bitcoin Cash). With the latest approval of Square, the DFS has granted a total of nine virtual currency charters or licenses. Continue Reading

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