Blockchain and the Law

Renren Halts Initial Coin Offering Following Pressure from Chinese Regulatory Body

Renren Inc. (NYSE ticker RENN), a Beijing-based social network company, saw rapid growth in its stock price following the release of a whitepaper (in Chinese) and publicity over its intention to engage in an Initial Coin Offering (ICO) of cryptocurrency dubbed RRcoin. However, last week Renren announced it has cancelled its ICO plans, following reports of meetings between the company and Chinese regulatory bodies. China banned ICOs back in September, but Renren, along with other overseas-listed Chinese companies, had planned to engage in the ICO on a technicality, as it is unclear if the ban applies to Chinese-owned companies that are listed on foreign stock exchanges.

This move was not a huge surprise for those familiar with Chinese treatment of ICOs over the past year. China has one of the most aggressively negative stances on ICOs. But this crackdown may not end in China, as ICOs have been drawing scrutiny in many countries. The lack of adherence to traditional securities disclosure regulations, the corresponding lack of protections for investments in ICOs and the rapid growth of ICOs in 2017 have prompted regulatory bodies from many countries, including the United States, Singapore and Canada, to warn that ICOs are risky investments and that they may be deemed securities offerings subject to regulation.

SEC Temporarily Suspends Trading of UBI Blockchain Internet, Ltd. Over Questions as to Disclosure

On Monday, the U.S. Securities and Exchange Commission (SEC) halted all trading in the stock of the Hong Kong-based firm, UBI Blockchain Internet, Ltd. (OTC ticker UBIA).  “The commission is of the opinion that the public interest and the protection of investors require a suspension of trading in the securities of the above-listed company,” the SEC said in its order. Citing questions as to the accuracy of UBIA’s recent disclosures as well as “concerns about recent, unusual and unexplained market activity” in the company’s stock, the SEC has suspended all trades until January 22nd and cautioned any potential investors to carefully review UBIA’s prior, as well as any forthcoming, disclosures.

UBIA attributes its fluctuating stock price to the recent market-wide surge and heightened interest in investing in cryptocurrencies, rather than UBIA’s own actions. Tony Liu, the CEO of UBIA, noted that while the company does utilize Blockchain technology for a food product tracking system, it does not now, nor does it plan to, use that technology to create a cryptocurrency or “coin”. Last month UBIA filed with the SEC to release an additional 72.3 million shares owned by executives into the market, while its share price posted significant gains (sometimes spiking over 1,110%), potentially due to the cryptocurrency frenzy at the end of 2017, despite the company finishing the year with an operating loss of $1.83 million and no revenues.

CFTC Releases Chairman Statement and Backgrounder on Virtual Currencies

The Commodity Futures Trading Commission (CFTC or Commission) Chairman J. Christopher Giancarlo issued a statement this week on virtual currencies.  The CFTC also released a backgrounder on its oversight of and approach to cryptocurrency futures markets.  Continue Reading

Patenting the Blockchain

Last year’s spike in the valuation of bitcoin has much of the technology world focused on blockchain, the distributed database ledger technology behind bitcoin and many other cryptocurrencies.  Lost behind the scenes, however, is a rush by some in the industry to patent inventions relating to the blockchain technology itself.  These moves come with controversy in an industry known for its culture of open-source practices. Continue Reading

Implications for Launch of tZERO, First U.S. Registered ATS

The world’s first SEC-registered cryptocurrency exchange may be just around the corner. As detailed in their October 24 Form 8-K, Overstock.com subsidiary tZERO has entered into a joint venture with The Argon Group and RenGen LLC to launch a U.S. registered Alternative Trading System (“ATS”) for digital tokens. If successful, the tZERO ATS may represent a monumental development in the evolving landscape of blockchain-based fundraising by providing secondary market liquidity for ICO tokens affirmatively offered and sold as securities.   Continue Reading

Multi-Billion Dollar Japanese Tech Conglomerate to Process Salaries in Bitcoin

GMO Internet Inc. (“GMO”) is a Japanese-based tech conglomerate with over 4,700 full-time employees and a market cap of over 200 billion yen.  Since May 2017, the organization has taken steps to enter the cryptocurrency space, including the creation of a cryptocurrency exchange targeted towards institutional investors and retail traders and the formation of a cryptocurrency mining business in Northern Europe.

Recently, GMO released a statement that domestic employees will have the option to receive part of their salary payment in bitcoin.  This announcement is both interesting and important for a multitude of reasons, particularly because Japan is one of the primary players in the cryptocurrency world.  According to jpbitcoin.com, a Japanese website serving as a central hub for cryptocurrency news and information, yen-based bitcoin trades accounted for nearly half of all bitcoin trades in November.  And while Japan’s Finance Minister recently remarked that bitcoin “has not yet proven to be credible enough to become a currency,” Japan’s Financial Services Agency confirmed that that bitcoin can be used as legally accepted payment in the country.  Continue Reading

When Smart Contracts are Outsmarted: The Parity Wallet “Freeze” and Software Liability in the Internet of Value

The recent Parity wallet “freeze” provides yet another example of a coding vulnerability in a smart contract (rather than a flaw in the underlying blockchain or cryptography) resulting in an exploit that compromises cryptocurrency worth millions. It again highlights some of the pitfalls of insecure code in the context of digital assets and raises questions regarding the extent to which software developers can be held liable to its users for losses suffered due to those oversights. As blockchain-related software that serve as storage vaults for digital assets continue to proliferate, it will be interesting to see how industry standards and the existing software liability regime in the U.S. and other jurisdictions evolve to reflect the critical role of secure software in the “Internet of Value.”

The Parity Wallet “Freeze” Explained

Parity Technologies made available, on an open source basis, multi-signature software “wallets” that users could use to store the keys to Ether cryptocurrency, which are necessary to use Ether.  Those multi-sig wallets were smart contracts built to run on the Ethereum blockchain and, unlike standard Parity “accounts” or other cryptocurrency wallets, required more than one digital signature (private key) before Ether associated with them are approved to be transferred.

On November 8, Parity Technologies announced that “devops199”, a user of the prominent web-based software development platform Github, had exploited a software vulnerability in Parity’s multi-sig wallets, resulting in Ether tied to over 500 multi-sig wallets, then valued at over $150 million, becoming completely unusable. Among impacted users were many high-profile blockchain startups that used Parity’s wallet platform to raise funds through initial coin offerings (ICOs).  This marked the second time this year that Parity’s wallet software has been compromised, with the prior time being July 19, when hackers exploited another software bug to steal over $30 million in Ether. Continue Reading

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