Regulation: State

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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:

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.

On April 17, 2018, the New York Attorney General’s Office (“OAG”) launched a Virtual Markets Integrity Initiative and sent letters to thirteen cryptoasset trading platforms requesting, through a questionnaire, disclosures on their operations, internal controls, and safeguards to protect customer assets.  The questionnaire focused on six major topic areas, including: 1) Ownership and Control, 2) Basic Operation and Fees, 3) Trading Policies and Procedures, 4) Outages and Other Suspensions of Trading, 5) Internal Controls, and 6) Privacy and Money Laundering.  The OAG characterized the initiative as a mechanism to “increase transparency and accountability” on “platforms used by consumers to trade virtual or ‘crypto’ currencies like bitcoin and ether.”  Notably, the thirteen trading platforms were only given two weeks to respond to the questionnaire.

While cryptoasset exchanges already face regulatory scrutiny from the SEC, the CFTC, and certain state regulators (including other agencies within New York), among others, the OAG determined  that their mandate to protect customers/ investors and ensure the fairness of New York’s financial markets necessitated further action.  Two of the targeted trading platforms –  Coinbase and Kraken – publicized markedly different responses to the OAG’s inquiries, the content of which sheds light on how some of the industry’s key players are approaching regulation; and perhaps, how regulators should be approaching some of the industry’s key players.

Last July, the Uniform Law Commission completed a uniform model state law, known as the Uniform Regulation of Virtual-Currency Businesses Act (“URVCBA” or the “Act”) (Steve Weise participated in the preparation of the Act).  Currently, state regulation in the virtual currency space is carried out under a patchwork of laws that typically do not directly contemplate virtual currency and blockchain technology. Attempting to bring clarity as to which types of entities require state licensure and also to encourage responsible innovation in this emerging area, the URVCBA provides a statutory framework for the regulation of companies engaging in “virtual-currency business activity.”  After carefully defining which activities fall under the Act’s purview, the uniform law requires covered entities to make the typical financial and business disclosures in its application, and also contains numerous user and consumer protections, including certain enforcement powers by the relevant state authority.

The mission of the Uniform Law Commission is to draft state laws on topics where standardized regulation across state lines is practical (e.g., the Uniform Commercial Code (the “UCC”)). Gaining final approval in 2017, the Act has so far been introduced in Connecticut, Hawaii, and Nebraska. 

On February 7, 2018, the New York State Department of Financial Services (“DFS”) issued guidance for all virtual currency entities licensed by New York State regarding the prevention of market manipulation, fraud, and other wrongdoing. According to DFS, New York has granted four licenses and two charters to virtual…

On a daily basis, companies are announcing new developments on the adoption of blockchain in core business operations.  However, many of these use cases present unique legal issues.  In order to provide some clarity on some of these issues, and perhaps to offer a blockchain-friendly environment for the operation of blockchain companies, state legislatures around the country are rushing to adopt blockchain-friendly laws.  Among the latest states to join are Florida and Nebraska.

New York Assemblyman Clyde Vanel has introduced proposals in the state legislature for four laws which, if passed, could transform how the State of New York interacts with and views blockchain technology.

The first proposal, NY A08780, would amend the state’s technology law to allow for signatures obtained via blockchain technology to be recognized as valid electronic signatures, and for smart contracts to operate in commerce by defining a record or contract secured through blockchain technology as an electronic record. This is similar to efforts in other states (see, for example, a law recently enacted by Arizona on this issue).