Alan Cohn Quoted on the Recent Blockchain Regulatory Guidance

The Street quoted Alan Cohn  in an article on August 20 titled “How Federal Regulators Are Playing Catch-Up With Bitcoin Craze.” The article looks at the most recent enforcement actions and regulatory guidance from the Securities and Exchange Commission (SEC), the Financial Crimes Enforcement Network (FinCEN), the Internal Revenue Service (IRS), and the Commodity Futures Trading Commission (CFTC). Mr. Cohn opined about the significance of the recent regulation: “What you’re seeing now is the next round of regulatory guidance, and in a sense, starting to fill in some of the gray areas and the gaps that have emerged given the pace of development in this area […] You’re seeing an advance in the regulatory framework evolving around this new asset class.”

Read the full article here.

Significant FinCEN Action Against BTC-e, Implications for Virtual Currency Exchangers

On July 26, 2017, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury assessed a civil monetary penalty of $110,003,314 against Canton Business Corporation (BTC-e), one of the largest virtual currency exchanges by volume in the world, and a $12,000,000 penalty against Alexander Vinnik, a Russian national who allegedly controlled, directed, and supervised BTC-e’s operations, finances, and accounts. On the same day, a 21-count criminal indictment against BTC-e and Mr. Vinnick was unsealed, and Mr. Vinnick was arrested in Greece.

This is the second supervisory action that FinCEN has taken against a virtual currency exchanger, and the first against a foreign entity operating as a money services business (MSB) with activities in the United States. FinCEN’s action also imposes the second highest civil monetary penalty assessed against an MSB to date. FinCEN has increasingly brought enforcement actions against MSBs and other non-traditional financial institutions, and similar actions seem likely in the future.

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SEC Begins Offering Guidance on Initial Coin Offerings

On July 25, 2017, the Securities and Exchange Commission (SEC) issued its first guidance on how it will interpret token issuances or “Initial Coin Offerings” (ICOs) under relevant securities laws.

The headlines—“SEC Finds DAO Tokens are Securities”—come from Release No. 81207, “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (July 25, 2017), in which the SEC determined that the tokens issued in association with the Distributed Autonomous Organization (DAO tokens) in April-May 2016 were securities and explored the various implications of that determination.  (See Steptoe’s analysis of this report here.)

However, the real news may be the other document released on July 25, a notice to investors titled “Investor Bulletin: Initial Coin Offerings” (July 25, 2017).  In that document, the SEC sets out several areas of concern regarding ICOs—framed as advice to investors—from which the reader can discern the SEC’s initial expectations with respect to ICOs.  Much of the guidance is not surprising, but the SEC’s statement paves the way for more certainty for companies considering ICOs. Continue Reading

SEC Weighs in on the Distributed Autonomous Organization’s Tokens

The SEC announced yesterday that “offers and sales of digital assets by ‘virtual’ organizations are subject to the requirements of the federal securities laws.”  Although not coming as a surprise, the SEC’s announcement affirms that companies seeking to involve US investors in an initial coin offering (ICO) must register offers and sales with the SEC or else qualify for an exemption.

The SEC chose the token offering by the Distributed Autonomous Organization (DAO) in April-May 2016 as the focus of the study.  The DAO was built on top of the Ethereum  blockchain by the German unincorporated organization Slock.it, and the success of its token offering ushered in the current wave of ICO activity.  Although questions surrounded the DAO offering in terms of its prospective treatment under US securities laws, the DAO made headlines when it suffered an exploitation that led to the loss of $50 million in Ether.  Although the SEC found that DAO “may have violated federal securities laws,” it decided against pursuing an enforcement action, choosing instead to use DAO as a demonstrative for future ICOs (“to advise those who would use a Decentralized Autonomous Organization … or other distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to ensure compliance with the U.S. federal securities laws”). Continue Reading

IEEE Standard Association’s Blockchain Podcast Features Alan Cohn

Alan Cohn was recently featured on IEEE Standards Association’s Blockchain Podcast Series.  In an interview with Maria Palombini, Director, Emerging Communities & Opportunities Development, Alan and Maria discuss the legal issues surrounding blockchain smart contracts. In particular, Alan opines on why government agencies find blockchain technology promising, whether or not smart contracts are legally binding, and what blockchain-based smart contract dispute resolution looks like. Listen to the podcast here.

 

 

Three ways to indemnify your business (or your client’s business) from smart contract risks

This post builds on our previous exploration of indemnification for smart contract risks.  Today, we suggest three tools to address these risks:  (1) cybersecurity insurance policies, (2) indemnification agreements with outside vendors, and (3) “make whole” agreements among the smart contract parties themselves.  Collectively speaking, insurers, vendors, and other contract parties can provide the best source of indemnification, assuming that the proper contractual arrangements are put in place. Continue Reading

Implications of S. 1241, the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017

Congress has become increasingly interested in the current state of knowledge about potential links between terrorist financing and money laundering.  In the House of Representatives, the Financial Services Committee’s Subcommittee on Terrorism and Illicit Finance held a hearing on June 8, 2017, titled “Virtual Currency: Financial Innovation and National Security Implications.”  In the Senate, Senator Grassley (R-IA), along with Senators Feinstein (D-CA), Cornyn (R-TX), and Whitehouse (D-RI), recently introduced Senate Bill 1241, titled “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017.” The bill, which generally aims to strengthen criminal money laundering statutes, is specifically aimed at fighting terrorism and terror finance.

Of particular relevance with respect to S. 1241 are the potential implications of the bill on blockchain and digital currencies. Continue Reading

My smart contract just ate $14 million—now what? Re-thinking indemnification for smart contract risks.

A Canadian digital currency exchange (QuadrigaCX) reported recently that a malfunction in a smart contract is responsible for a $14 million dollar loss of the cryptocurrency ether.  You can read more about the company’s technical explanation here, but the upshot is that a software upgrade performed by the company had an error in the code that prevented the smart contract from properly processing incoming amounts of the cryptocurrency Ether.  The error was not caught for a few days, and during that time, Ether sent to the company’s exchange was “trapped” in the smart contract.  Based on Ether’s current price, the amount of “trapped” Ether is valued at approximately $14 million.  It may go without saying, but the risk of currency becoming trapped inside a contract—and therefore rendered unusable, even though it technically remains in the possession of the owner—is not a risk traditionally associated with commercial transactions.  As the QuadrigaCX situation illustrates, smart contracts introduce novel risks that may increase exposure to financial losses.  In this post, we suggest that these risks and losses may be mitigated through proper indemnification; however, a review of existing insurance policies should be undertaken to determine if they provide coverage or, alternatively, if additional coverage should be procured.

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Finding Resiliency in Microgrids

This is the fifth and final in a series of posts that breaks down our article, “Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids,” recently published in the Georgetown Law Technology Review. We have discussed the enforceability of blockchain-based smart contracts under ESIGN and UETA and a few promising smart contract applications. We will now examine the use of blockchain-based smart contracts for microgrids. You can read the full article here.

Within the energy industry, blockchain-based smart contracts can accelerate the development of smart meters, as we discussed earlier. However, they can also help accelerate the development of microgrids. Blockchain-based smart contracts can provide the tool to give both utilities and customers the levels of efficiency and effectiveness that both strive for, while delivering both the consumer protections and individual choice that stakeholders often advocate.

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Rethinking the Energy Industry with Smart Meters

This is the forth in a series of posts that breaks down our article, “Smart After All: Blockchain, Smart Contracts, Parametric Insurance, and Smart Energy Grids,” recently published in the Georgetown Law Technology Review. We previously discussed the enforceability of blockchain-based smart contracts under ESIGN and UETA and the application of blockchain-based smart contracts for simple insurance contracts and parametric insurance. We will now examine the use of blockchain-based smart contracts in the energy industry, specifically for smart meters. You can read the full article here.

The energy industry is actively examining new models and mechanisms for delivering service to customers. Likewise, customers themselves are looking for new ways to purchase energy and to understand the origins of the energy they purchase. Blockchain-based smart contracts can provide a new, more secure basis for smart meters and, in fact, can take advantage of blockchain’s currency foundations to automate payments as well.

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