Blockchain and the Law

Practice Note: Blockchain and Supply Chain Management

Proskauer authored a Practice Note published by Practical Law, which provides an overview of the use of blockchain and smart contracts in the supply chain context, including the legal issues, concerns, benefits and risks associated with its use. It includes, among other topics, information on key distinctions between public and private blockchains and important considerations regarding the use of blockchain consortia.

The full text of our Practice Note is available here: Practice Note: Blockchain and Supply Chain Management

Airfox and Paragon Settle with SEC for Unregistered ICOs: Civil Monetary Penalties Imposed; Rescission and Registration Required

On November 16, the SEC announced that it settled charges against CarrierEQ, Inc. (“Airfox”) and Paragon Coin, Inc. (“Paragon”) for securities offering registration violations in connection with their respective initial coin offerings (“ICOs”).

The settlement orders represent the first time the SEC has imposed civil penalties against ICO issuers solely for securities offering registration violations (i.e., without any allegations of fraud or misrepresentation) and notably, require Airfox and Paragon to make remedial undertakings that include offers of rescission to token purchasers pursuant to Section 12(a) of the Securities Act of 1933 and registering with the SEC under Section 12(g) of the Securities Exchange Act of 1934.

The two issuers, both of whom conducted their ICOs in 2017 after the release of the SEC’s DAO Report, will be subject to $250,000 in civil penalties. The settlements were entered into by the companies without any admission or denial of the SEC’s findings.

The full text of the settlement orders are available here:

First Punch: Floyd Mayweather and DJ Khaled Settle with SEC Over Unlawful Touting of ICOs

The SEC recently announced its settlement of charges against boxer Floyd Mayweather and producer DJ Khaled for their failure to disclose payments they received for promoting Initial Coin Offerings (ICOs) on their social media accounts.

The federal securities laws contain an “anti-touting provision,” which regulates paid promotions of securities offerings. Specifically, Section 17(b) of the Securities Act of 1933 makes it unlawful for a person to “publish, give publicity to, or circulate any notice…or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received…without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.” Importantly, the provision applies even to those not directly offering a security for sale. The SEC’s orders instituting cease-and-desist proceedings against Mayweather and Khaled both cited violations of Section 17(b).

According to the charges, Mayweather failed to disclose $300,000 he received from three ICO issuers. He received $100,000 from Centra Tech Inc. for posting on his social media accounts that “Centra’s…ICO starts in a few hours. Get yours before they sell out, I got mine and as usual I’m going to win big with this one!” Mayweather promoted ICOs on his social media accounts a number of other times and even dubbed himself “Floyd Crypto Mayweather” in one post (not to be confused with his usual moniker, Floyd “Money” Mayweather). Khaled also received $50,000 from Centra for posts calling Centra an “ultimate winner” and a “game changer.” Centra has been the subject of its own SEC scrutiny, with the SEC filing a civil action against Centra’s founders and the U.S. Attorney’s Office for the Southern District of New York filing corresponding criminal charges. Continue Reading

Is Blockchain Technology Compatible with GDPR? French Data Protection Regulator Provides Guidance

Uncertainty regarding the compatibility of blockchain technology and the European Union’s General Data Protection Regulation (GDPR) has often been highlighted as a potential obstacle to the development and widespread implementation of blockchain systems involving personal data.

To address tensions between blockchain technology and the GDPR, Commission Nationale de l’Informatique et des Libertés (CNIL), the French data protection regulator, published an initial report analyzing certain fundamental questions regarding the interaction between blockchain technology and the GDPR’s requirements (the “Report”). The Report was the first guidance issued by a European data protection regulator on this topic.

CNIL’s Approach to Identifying Blockchain Data Controllers and Data Processors

The Report highlights the challenges of identifying data controllers and data processors in the blockchain context – an important distinction that determines which set of regulatory obligations applies.

In discussing the likely classification of the various types of persons and entities involved in a blockchain, the CNIL primarily distinguished between (i) participants (i.e., those who transact on the blockchain) that have the ability to determine what data will be entered into a blockchain or have permission to write on it or cause data to be written to it, and (ii) miners or other validators (i.e., those who do not transact and instead validate transactions submitted by participants). The CNIL also provided an analysis as to how to classify smart contract developers and natural persons who enter personal data in a blockchain, distinguishing, with respect to the latter, between those engaging in personal or household activities and those engaging in professional or commercial activities. Continue Reading

Ohio is the First US State to Allow Payment of Taxes Using Bitcoin

Today, Ohio reportedly becomes the first US state to allow taxes to be paid in the form of bitcoin. Although the program, which is spearheaded by Ohio Treasurer Josh Mandel, will not be available to individual taxpayers until a later time, businesses operating in Ohio are now able to register on OhioCrypto.com to pay 23 types of Ohio state taxes using bitcoin.

In the Office of the Ohio Treasurer’s own words, this initiative represents Treasurer Mandel’s belief “in leveraging cutting-edge technology to provide Ohioans more options and ease while interfacing with state government. The Treasurer’s office is also working to help make Ohio a national leader in blockchain technology.”

Bitcoin tax payments submitted on OhioCrypto.com will be processed through BitPay, a payment processing service provider, which will convert the bitcoin into US Dollars and then remit the cash to Ohio’s coffers. To address bitcoin market price volatility, BitPay reportedly will lock the exchange rate for a 15-minute window once a business begins the payment process. The Ohio website’s FAQs indicate the Treasurer’s intention to add other cryptocurrencies to the tax payment options in the future.

As we noted in an earlier post, the making of a payment using digital assets such as bitcoin can itself be a taxable event, a consideration which businesses should factor into their analysis of whether (and when) to take advantage of Ohio’s new option.

Registration Requirements for “Decentralized” Exchanges under the Federal Securities Laws: The Case of EtherDelta

On November 8, the SEC announced that it settled charges against Zachary Coburn, founder of EtherDelta, a type of non-custodial digital asset trading platform commonly referred to as a “decentralized exchange” or “DEX.” Coburn was charged with causing EtherDelta to operate as an unregistered securities exchange in violation of Section 5 of the Securities Exchange Act of 1934 (the “Exchange Act”) during the period between July 12, 2016 (the date Coburn launched EtherDelta’s website) and December 15, 2017 (the date Coburn ceased collecting fees from EtherDelta users following its sale to foreign buyers).

The conclusions set forth in the SEC’s order contain several key components, including that, during the relevant period:

  1. EtherDelta operated as an “exchange” within the meaning of the Exchange Act;
  2. Coburn “caused” EtherDelta to violate the Exchange Act; and
  3. At least some of the digital assets bought and sold on EtherDelta were “securities.”

We analyze these findings in more depth below. Continue Reading

CFTC Commissioner: Code Developers May be Accountable for Smart Contracts

Recently at a conference in Dubai, Brian Quintenz, who is a Commodity Futures Trading Commission (CFTC) Commissioner, expressed his personal opinion (rather than the views of the CFTC) on the conceptual challenges in applying the CFTC’s regulatory oversight to, and fostering accountability for, smart contracts that reside on decentralized blockchains. In particular, Quintenz conveyed his belief that smart contract developers could potentially be held liable for aiding and abetting activity that violates CFTC regulations through the use of a smart contract that they programmed, if they “could reasonably foresee, at the time they created the code, that it would likely be used by U.S. persons in a manner violative of CFTC regulations.”

At a high level, a smart contract is computer code encoded on a blockchain that is programmed to automate the execution of a transaction upon the occurrence of a triggering event. The CFTC regulates the U.S. derivatives markets and thus has oversight authority over futures and swaps markets, including derivatives on commodity cryptocurrencies. Among the many potential applications of smart contracts, Quintenz identified as a regulatory concern the ability of smart contracts to emulate traditional financial products, such as binary options or derivative contracts. For example, through a smart contract on a blockchain, one could bet on the outcome of a sporting event and, if the prediction is correct, the smart contract could be programmed to automatically settle the bet using a cryptocurrency transfer without the involvement of an intermediary. Applications such as this, Quintenz stated, resemble “prediction markets” and “event contracts,” which may fall within the CFTC’s purview and raise regulatory issues. Continue Reading

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