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At last week’s Yahoo! All Markets Summit in Palo Alto, SEC Division of Corporation Finance Director William Hinman delivered a speech sure to send shockwaves through the crypto world. Applying the Howey test (which sets forth the elements necessary for determining whether a transaction involves the offer or sale of…

Virtual worlds similar to the OASIS in Steven Spielberg’s upcoming film Ready Player One may be closer than we think – and provably scarce, blockchain-based digital assets could provide the leap forward that gets us there. Already, developers are testing early implementations.

Since CryptoKitties launched at the end of 2017, promptly causing a traffic jam on the Ethereum network and proving that crypto-collectible “games” leveraging blockchains can be a hot commodity, a number of copycats have sprung up.

While interesting, this first generation of blockchain games has been a relatively simple series of experiments. Meanwhile, developers have taken note of the potential synergies between blockchain-based digital assets and the mass-market video game and virtual/augmented reality space. As they explore potential ways of using blockchain technology to make virtual worlds and interactions more immersive and to build better bridges between in-game and real-world commerce, there are a number of legal issues to consider.

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.