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#When Lambo? Maybe Never, But Don’t Count Out Blockchain Tech

January 2, 2019 By Bruce Antley Leave a Comment

Cryptocurrency and its dreams of riches may be dead, but blockchain technology may survive. Photo by Sam Churchill | CC BY 2.0

The New York Times remembers the heady days of a year ago when a single Bitcoin was worth nearly $20,000 and everyone was getting “hilariously rich.” The Times chronicles the downfall of cryptocurrency, while noting that some believe that the fallout is good for the development of blockchain-based products.

“It’s painful to lose money, but it’s a necessary step,” The Times quoted VC Robert Neivert as saying. “2018 was about moving from hype to product.”
Following on that theme, BTC Manager published an article positing that even the death of cryptocurrency does not mean that blockchain technology is dead.

“The truth is we are moving towards a much more mature market in which only the fundamentally strong projects survive,” the article says. “Additionally, it is distracting from a straightforward fact; blockchain remains to be the next big thing to disrupt business and industry.”

And, if you ever do move forward on that blockchain-based project, beware of the regulatory traps you could fall into. This article in CIO Review outlines some of the regulatory issues you’ll need to be aware of including money transmitter laws, securities regulations, derivatives trading requirements and tax laws.

U.S. Lawmakers Take Aim at Iranian Cryptocurrency

December 27, 2018 By Bruce Antley Leave a Comment

U.S. Congress seeks to prevent use of cryptocurrency by Iran, which has been subject to sanctions since 1979 when the U.S. Embassy in Tehran was taken over by Iranian revolutionaries. Photo of former U.S. Embassy by Ninara | CC BY 2.0

Republican lawmakers have introduced legislation in the U.S. Congress that aims to prevent Iran from side-stepping international sanctions via the use of cryptocurrency.

The U.S. has imposed sanctions on Iran since 1979 but under President Trump sanctions were tightened earlier this year. Iran announced a few months earlier that it was developing a sovereign cryptocurrency that U.S. officials fear could be used to avoid sanctions.

The Blocking Iranian Illicit Finance Act would, among other steps, would make it illegal for U.S.citizens and businesses to engage in transactions related to an Iranian digital currency. The Act also would extend sanctions to non-U.S. citizens and businesses that assist Iran in development of a cryptocurrency or engage in significant transactions involving an Iranian cryptocurrency.

“This important legislation would empower the United States and our like-minded allies to do more to end the Iranian government’s ability to illicitly finance its dangerous efforts to sponsor terrorism and militancy, to advance its nuclear and missile programs, to egregiously abuse human rights in Iran and abroad, and to suppress the Iranian people’s aspirations for self-determination,” said Republican Sen. Marco Rubio of Florida in a news release.

The legislation was introduced in the Senate by U.S. Sen. Ted Cruz of Texas and in the House by Rep. Mike Gallagher of Wisconsin. The bill is HR-7321 in the House and S.3758 in the Senate.

All I Do Is … Settle? Khaled and Mayweather Caught in Crypto Crackdown

December 1, 2018 By Bruce Antley Leave a Comment

DJ Khaled agreed to pay a $50,000 fine to the SEC for failing to disclose a payment to promote an ICO. Photo by Meghan Roberts | CC BY 2.0

The U.S. Securities and Exchange Commission announced that it entered into a settlement agreement with music producer DJ Khaled (known best for his hit “All I Do is Win”) and boxer Floyd Mayweather (known best for his hits) based on their failure to disclose payments to promote an Initial Coin Offering.

The SEC accused Khaled of accepting $50,000 to promote an ICO offered by Centra Tech Inc. and Mayweather accepting promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc. Khaled and Mayweather promoted the ICOs via social media, but did not disclose the payments they had received.

“These cases highlight the importance of full disclosure to investors,” said SEC Enforcement Division Co-Director Stephanie Avakian. “With no disclosure about the payments, Mayweather and Khaled’s ICO promotions may have appeared to be unbiased, rather than paid endorsements.”

Mayweather and Khaled did not admit to the SEC’s findings, but agreed to pay disgorgement, penalties and interest. Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest. They also each agreed to not promote any securities for a period of time.

U.S. Official Calls for International Crackdown on Cryptocurrency

November 26, 2018 By Bruce Antley Leave a Comment

Department of Justice Building, Washington, D.C. by Ken Lund| CC BY-SA 2.0

A senior official in the U.S. Justice Department has called for international law enforcement agencies to take steps to prevent cryptocurrencies from being used to commit crimes.

U.S. Deputy Attorney General Rod Rosenstein told a meeting of Interpol, the International law enforcement agency, that countries should ensure that anti-money-laundering laws are applied to cryptocurrency, according to an article on Coindesk.

“We must not allow cybercriminals to hide behind cryptocurrencies,” Coindesk quoted Rosenstein as saying.

International Roundup: New regs could stifle blockchain development in China; South Africa considers tax hike on blockchain development; Malta considers “personhood” for blockchain

November 3, 2018 By Bruce Antley Leave a Comment

Although China remains a leader in blockchain technology, new regulations threaten the blockchain industry there. BitcoinExchange Guide reports that the Chinese blockchain market is “thriving like never before.”

“China has had quite a big boom in the tech sector… where people are looking very strongly into blockchain technology,” Blockchain Exchange Guide quoted one analyst as saying. “Of course, the popularity of Bitcoin helped in terms of people understanding what blockchain is. In terms of technology, China is actually very welcoming in terms of how these things are being applied.”

But now, China is considering regulations that would, among other things, require users of blockchain services to register with their own names.

South Africa is considering legislation that could hike taxes on blockchain-related activities. Coingeek reports that the National Treasury and the South African Revenue Services introduced changes to a draft of a tax bill that suggest that cryptocurrency should be categorized as a financial instrument. The changes would mean that work on cryptocurrency would not qualify for a research and development tax credit that otherwise applies to innovative activities.

Blockchain haven Malta is considering a legislation intended to further blockchain-related innovation. Cryptoslate reports that the legislation could give legal personality to decentralized autonomous organizations (DAOs), smart contracts, and blockchains. It’s unclear how that would apply to smart contracts or blockchains, but presumably it would be partly aimed at recognizing DAOs the same way corporations has separate rights from the people who have ownership or management responsibilities for them.

SEC Probes Investment Advisers’ Handling of Crypto

November 3, 2018 By Bruce Antley Leave a Comment

U.S. Agencies continue crackdown on alleged illegal activities involving blockchain-based currencies and tokens.

The U.S. Securities and Exchange Commission is expanding its crackdown on on illegal activities involving cryptocurrencies by focusing on the activities of investment advisers, according to a report on the website Politico.

Politico reported that probe is targeting how advisers are storing cryptocurrencies, the vulnerability of crypto to hackers and possible price manipulation.

“Typically, after a sweep of this type, the SEC staff will publish its findings and observations, and that can provide very helpful guidance for advisers as they consider their compliance obligations,” Politico quoted Gail Bernstein, the top lawyer for a DC-based investment advisory trade group, as saying.

The problem is the latest in a series of actions by the SEC and the U.S. Commodities Futures Tradition Commission as they assert control over alleged illegal activity involving blockchain-based currencies and tokens.

China Advances New Restrictions on Blockchain Services

October 26, 2018 By Bruce Antley Leave a Comment

New regulations would require Chinese users of blockchain services to register with their real names. Photo by Maher Najm | Public Domain

The Chinese government has released a draft of rules aimed at regulating the use of blockchain technology, including a requirement that users in China register their real names when using the technology.

The primary regulator of the Internet in in China — the Cyberspace Administration of China — published the draft regulations on October 19. its website on Friday for public comments until November 2, reported the China Morning Post.

Blokt quoted the regulatory agency as saying the following in a translated post: “In order to standardize blockchain information service activities, promote the healthy and orderly development of blockchain information services, protect the legitimate rights and interests of citizens, legal persons and other organizations, and safeguard national security and public interests, I have formulated the Regulations on the Management of Blockchain Information Services. (Consultation Draft), is now open to the public for comments.”

According to an article posted by The Verge, the new rules not only would require users to provide their real names and national ID card numbers when registering for a blockchain service, they also would require blockchain services to:

remove “illegal information” before it spreads among users
maintain backups of information for six months and provide those backups to the police upon request.

Assuming the new regulations are adopted following the public comment period, it is not clear when they would go into effect.

Smart “Contracts”: You Keep Using that Word ….

October 24, 2018 By Bruce Antley Leave a Comment

Ethereum co-founder Vitalik Buterin recently expressed namer’s remorse at calling the applications that run on the Ethereum platform “smart contracts.”

To be clear, at this point I quite regret adopting the term "smart contracts". I should have called them something more boring and technical, perhaps something like "persistent scripts".
— Vitalik Non-giver of Ether (@VitalikButerin) October 13, 2018

Buterin’s comments followed a line of controversy about the terminology that suggests to some people that the code running on a blockchain platform reflects a legal relationship. Here’s a sample of opinions:

The “smart contract” banner is a very catchy marketing ploy. It has been instrumental as an adoption driver. It’s edgy, contrastive and highly-prescriptive: if you’re not hip to “smart contracts,” well, then, maybe you’re just not … smart.
Posted by CleanApp (To be fair, the piece actually argues against calling them smart contracts.)

Contract theory is a field of economics that is only loosely related to law and is directly applicable to smart contracts (it is also not a subfield of game theory) https://t.co/DhhboecYKZ
— Cathy Barrera, PhD (@cathybarreraphd) October 13, 2018

Although I mostly disagree with her on this point, I’ll note some of the most insightful segments of the blockchain course offered by MIT that I recently completed were interviews between one of the instructors and Dr. Barrera.

Developers refer to smart contracts as distributed applications or Dapps (pronounced dee-apps or dapps). That nomenclature avoids misperceptions about what the programs actually are, and what they can and can’t do.

So, let’s call smart contracts what they actually are: Dapps.” (footnoted citation excluded).
–Lawyer James F. Brashear

Smart contracts are not contracts in the legal sense. They are not drafted by lawyers; they are written by computer programmers—they are software.
Lawyer Amir Azaran at the CDX Academy Blockchain Brand Innovation Summit in New York.

It’s not surprising. Calling something a “contract” means something to lawyers. Maybe we see it as invasion on our territory (when we’re not counting the potential billable hours when we realize that technology that is the next BIG THING involves “contracts” and the number of lawyers who have even read about smart contracts can be counted in the double digits (I submit the traffic report from my Google Analytics account for this blog as evidence.)

But the lawyers and Buterin have a point. There’s about a 10,000 year tradition of defining a contract to include these elements: (1) an offer, (2) acceptance of the offer, (3) consideration a/k/a a promise of an exchange of value and (4) mutuality — “meeting of the minds” a/k/a a common understanding of the terms that were offered and accepted. And, if you’re about to Google my claim about the length of the tradition, please just stop. I have no idea how long that tradition goes back, but I kinda suspect it dates back to whenever humans started trading with each other, so actually more like 50,000 years ago (and, again, stop with the Googling).

It doesn’t take something very formal to create a contract. Soccer (football, for my handful of U.K. readers) superstar Leo Messi’s original contract with Barcelona, a team which he helped make into one of the greatest of all time, was written on a napkin. And, of course, this blog post would not be complete without mentioning computer scientist and lawyer Nick Szabo’s example of a vending machine as a smart contract (yeah, back in 1997 he used the term “smart contract”).

Perhaps, part of the confusion arises from associating the legal relationship — what we call a contract — from the document (or in the case of a vending machine, the system) that memorializes the relationship. I suppose that technically a 100-page asset purchase agreement that is sitting on conference room table waiting to be signed may not be a “contract” in the strictest sense since there has been no acceptance, but every lawyer would call that a contract (actually, we’d call it an agreement or an APA because that’s how we roll).

But every piece of code is not a contract. The following standing alone doesn’t reflect an offer, acceptance, consideration or mutuality (although it probably does reflect my bad Python coding skills):

if x==20 : # btw, in Python, the == means equals

print(“Hello World!”)

But what if the code reflected that if Wilma paid 20 Bitcoin to Fred, then Fred would print a banner for her that said “Hello World!” along with offer and acceptance and some evidence of mutuality That sounds like a contract to me, at least in the sense of a document or system that reflects the elements of a contractual relationship. It also sounds like a pretty bad deal for Wilma unless the value of Bitcoin goes down a lot further than it already has.

So, how about this for a compromise: we call software code a contract only when it actually is a legal contract or at least it reflects a relationship with the 4 elements of a contract, the same way a paper document reflects those elements? That doesn’t mean that computer code can’t be “smart.” That’s the brilliance of smart contracts, they effectuate at least part of the relationship formed by the contract automatically. In the vending machine example, I put my dollar in the machine and a package of those horrible (but delicious) peanut butter crackers comes out. With software, for example, funds can transferred automatically when certain events occur or a title to property recorded on a blockchain ledger can be transferred when a payment is received.

Tin Soldiers and Nixon may be Coming, but Ohio Will Recognize Your Blockchain-Based Transactions*

October 18, 2018 By Bruce Antley Leave a Comment

Starting Nov. 2, the State of Ohio will officially recognize electronic records that are generated or signed using blockchain technology.

Gov. Kasich signed SB220 , which amends the Ohio electronic transactions law in two ways: (1) “electronic records” are redefined to include a “record or contract that is secured through blockchain technology” and (2) “electronic signatures” are redefined to include a “signature that is secured through blockchain technology.”

“In Ohio, blockchain innovators can thrive in their efforts to develop new products and applications for the financial industry and beyond,” said Valentina Isakina, Financial Services Managing Director for JobsOhio, the private economic development corporation for Ohio. “Many companies looking to expand their blockchain and R&D operations are rapidly growing job creators, and Ohio is now even more attractive to these businesses.”

Ohio is one of 47 states that adopted what is known as the Uniform Electronic Transaction Act (also known as UETA). UETA is model legislation designed in the late 1990s, as the Internet was gaining mainstream adoption, to ensure that courts and state agencies would recognize transactions conducted digitally, rather than through paper contracts. Ohio joins three other states — Arizona, Nevada and Tennessee in amending its electronic transactions law to recognize blockchain-based transactions, according to a American Bar Association report. Two of the three states that have alternatives to UETA in place — Illinois and New York (Washington state is the third, in case you’re wondering) are considering amending their laws to recognize blockchain-based transactions. Florida and Nebraska also are considering amending their UETA statutes to recognize blockchain.

*The author expresses his sincere apologies to the fine state of Ohio (fine, not applying to its two professional football teams) for the allusion to Crosby, Stills, Nash & Young’s “Ohio,” which anachronistically played nightly on a mix tape in the newsroom of his college newspaper when he was a young journalist, long before blockchain, or the even the Internet, was really a thing.

Judge Orders Halt to Blockvest ICO

October 15, 2018 By Bruce Antley Leave a Comment

SEC alleges in court filing that defendants used logo of “Blockchain Exchange Commission” to mislead investors.

SEC alleges that company created a fictitious regulatory agency called the “Blockchain Exchange Commission” to aid in misleading investors.

A federal judge imposed a temporary restraining order on a planned Initial Coin Offering and pre-sales of Blockvest BLV tokens.

In an order issued October 5, Judge Gonzalo P. Curiel of the U.S. District Court for the Southern District of California issued an order that freezes the assets of Blockvest LLC and its founder Reginald Buddy Ringgold III and stops the sale of the business’s BLV digital tokens.

The complaint filed by the SEC alleges that defendants Blockvest and Ringgold:

Falsely claimed that the ICO had been “registered” and “approved” by the SEC, the Commodities Futures Trading Commission and the National Futures Associated and even used their logos in marketing materialsof the SEC on its website.
Claimed an association with the Deloitte accounting firm that did not exist.
Created a fictitious regulatory agency called the “Blockchain Exchange Commission” with its own logo and mission statement that are similar to the SEC’s and that lists its business address as the address of the SEC’s DC headquarters.

“Here, Defendant’s use of the SEC and CFTC’s seals and logos of the NFA and Deloitte create a false appearance of legitimacy for the Blockvest ICO,” wrote Judge Curiel. “Moreover, Defendant’s creation of the BEC, a false “regulator” , to promote the validity of the ICO as regulated is deceptive. Furthermore, the BEC’s adoption of the SEC’s seal, the SEC’s mission statement, the SEC’s headquarters address, and even a link to the SEC’s website created a false appearance that the ICOs are regulated when in fact, they are not.”

Judge Curiel scheduled a hearing in the case for October 18. Copies of the orders are available here:

BlockvestTRO Download

BlockVestOrder2 Download