Blockchain and the Law

Ohio and California Join Other States in Passing Blockchain-Friendly Legislation

This past summer, Ohio adopted legislation (SB220) that primarily provides for a legal safe harbor from certain data-breach related tort claims to covered entities that implement a specified cybersecurity program that “reasonably conforms” to a recognized cybersecurity framework for the protection of personal information and “restricted information” or comply with certain industry-specific federal privacy laws. This legislation is intended incentivize businesses to adopt heightened levels of cybersecurity through voluntary action.

Beyond cybersecurity, SB220 also includes language amending Ohio’s version of the Uniform Electronic Transactions Act (UETA) to incentivize blockchain investment and innovation in the state by allowing transactions recorded on the blockchain to be recognized under it. Ohio’s UETA generally stipulates that records or signatures may not be denied legal effect solely because they are in electronic form and that a contract may not be denied legal effect because an electronic record was used in its formation (a discussion of the extent to which any provision of Ohio’s UETA is preempted by the Federal E-Sign Act (15 U.S.C. § 7001) is beyond the scope of this post). In pertinent part, SB220 amends the definition of “electronic record” under the UETA to provide that “a record or contract that is secured through blockchain technology is considered to be in an electronic form and to be an electronic record.” It also amends the definition of “electronic signature” to clarify that a signature that is “secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” While one could argue that signatures secured using blockchain are already presumably valid under the UETA, such a law expressly takes up this issue and signals the state’s pro-blockchain stance. Continue Reading

Virtual Currencies Can Be Regulated by CFTC as a “Commodity”

In a notable ruling, a Massachusetts district court declined to dismiss a complaint filed by the Commodity Future Trading Commission (“CFTC”) against an entity over an alleged fraudulent virtual currency offering, ruling that cryptocurrencies fall under the definition of “commodity” under the Commodity Exchange Act (“CEA”) and therefore may be duly regulated by the CFTC. (CFTC v. My Big Coin Pay, Inc., No. 18-10077 (D. Mass. Sept. 26, 2018)). Given that the CFTC has stated its intention to actively police the virtual currency markets, this decision is important in reinforcing the CFTC’s legal authority and jurisdiction over cryptocurrency offerings. Moreover, given that earlier this year a New York district court affirmed the CFTC’s jurisdiction over virtual currencies, this latest ruling is additional precedent in this regulatory area.

In January 2018, the CFTC brought suit against the defendant My Big Coin Pay, Inc. (“My Big Coin”), creator of the My Big Coin virtual currency (“MBC”), alleging that it was engaged in a fraudulent “virtual currency scheme” in violation of the CEA and a CFTC implementing regulation banning fraud or manipulation in connection with the sale of a commodity (17 C.F.R. §180.1(a)). Specifically, the CFTC alleged that the defendants fraudulently solicited customers by making false claims about MBC’s value, usage and trade status, and false statements that the virtual currency was backed by gold. The defendants also told investors that MBC was being “actively traded” on several currency exchanges, but, according to the CFTC, My Big Coin made up and arbitrarily changed the price of the MBC virtual currency to mimic the fluctuations of a legitimate, actively-traded virtual currency. As asserted by the CFTC, the defendants allegedly misappropriated over $6 million from customers for personal gain. The court previously issued a restraining order freezing the defendants’ assets. Continue Reading

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

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