Hello world! Thanks for checking out this first edition of Crypto Esq. The pace of innovation in the cryptocurrency, blockchain and smart contract world is tremendous. As usual, innovation is outpacing regulation. So, this email is my humble attempt to understand how the law is impacting (and being impacted by) the development of these new technologies.
The format is pretty simple: I source and summarize relevant articles and provide a link to those articles if you want to read further. Readers of my Weekend Briefing will be very familiar with the format. Right now, I’m not committing to releasing Crypto Esq at any given frequency, we’ll just see how it goes. I’d love to hear feedback on the email or topics covered in it. So, feel free to reply to this email or hit me up on Twitter @kylewestaway.
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Innovation @ SEC
In July, SEC Commissioner Hester Peirce surprisingly dissented from the SEC’s decision to deny Cameron and Tyler Winklevoss an application for a bitcoin-backed exchange-traded fund. Citing a risk of being left behind, Peirce said the decision sends a “strong signal that innovation is unwelcome in our markets.” It’s not surprising that the SEC is cautious because regulators tend to get blamed when something goes wrong, not when they go well. You can never measure the loss to investors and to the economy of us not approving things, so it’s really a lot easier for regulators to say no, no, no. Peirce noted, “I’m certainly worried every time I hear someone say the U.S. is too slow and I’m going to go overseas to do my innovation, that’s always a bad thing to hear… I think investors are losing out, and I think the economy as a whole is losing out when we lose innovative efforts to other places solely because of our regulatory environment, that’s never a thing I want to hear.” Market Watch (7 minutes)
The Brooklyn Project – An industry-wide initiative to promote token-powered economic growth and consumer protection – has proposed a taxonomy to provide a common set of labels for digital or “crypto” assets / “tokens.” The goal is to assign labels based on whether and where a particular type of token fits within existing global regulatory frameworks for securities and financial instruments. Tokens are entirely digital, programmable instruments that can represent, or facilitate the exchange of or access to, anything—e.g., any digital or real-world asset, or any set of rights, protocols, or rules. This taxonomy contains three top-level categories: 1) General Payment Tokens: Tokens whose intrinsic features and primary use are to serve as a general-purpose store of value or medium of exchange for generally any goods, services, or assets. The paradigmatic example today is Bitcoin. 2) Consumer Tokens: Tokens that are inherently consumptive in nature, because their intrinsic features and primary use are to represent, or provide access to, a limited set of goods, services, and/or content. 3) Investment Tokens: Tokens that are inherently designed or substantially marketed as a financial investment. The Brooklyn Project (14 minutes)
CA & Blockchain
The California state legislature has recently passed Assembly Bill 2658 which introduces legal definitions of “blockchain technology” and “smart contract”, and revises others like “electronic record” and “electronic signature” to legalize and facilitate record keeping using distributed ledger technology. It defines the term “smart contract” as “an event-driven program that runs on a distributed, decentralized, shared, and replicated ledger that can take custody over, and instruct transfer of, assets on that ledger.” And make it clear that “Contract”, as defined in the law, includes smart contracts. Additionally, it clarifies that records and signatures on the blockchain are legally binding. California Assembly (12 minutes)
Chinese Courts & Blockchain
In a Chinese online copyright infringement case, the Plaintiff was reportedly tech-savvy enough to capture the violating websites and their source code, and then upload that data to Factom’s blockchain platform, creating an immutable record of the copyright infringement. In this case, the court ruled that: “On the premise that the technical verification is consistent and other evidence can be mutually verified, such electronic data can be used as evidence for the infringement in the case.” And now, China’s supreme court has backed that decision, declaring that as of Friday, September 7, evidence stored and verified on blockchain platforms can be used in legal disputes. The court will consider evidence provided by defendants and plaintiffs that can be proven authentic through electronic signatures, time stamps, hash value checks, and tamper-proof verification methods stored on blockchain platforms. The courts will judge this kind of evidence on a case-by-case basis. ETH News (5 minutes)
In a bid to save Venezuela from hyperinflation, embattled President Nicolás Maduro has mandated that his Petro cryptocurrency become the nation’s second official currency and will be pegged to the newly issued currency the “Sovereign Bolivar”. It will be a second accounting unit of the Republic and will begin operations as a mandatory accounting unit of our PDVSA oil industry. Maduro confirmed that the valuations of each currency will come from the Central Bank (CBV). He also teased a new salary system built for paying wages in Petro, and a new pricing guidelines for goods and services to match, but no real details were given. In another world, we might have celebrated the adoption of a stablecoin like the Petro. Instead, it just feels like a desperate measure from a desperate man. The Next Web (4 minutes)
The Winklevoss twins launching their own “regulated stablecoin.” The Gemini dollar is an Ethereum-based crypto-token meant to be pegged to the US dollar. The twins promise not only that each circulating Gemini dollar will be backed by a real dollar in a bank deposit, but also that the deposit will be “examined monthly by an independent registered public accounting firm to verify the 1:1 peg.” Perhaps most importantly, it has earned the blessing of the New York Department of Financial Services. Gemini (2 minutes)
GC Departure at Ripple
Brynly Llyr, the general counsel of Ripple – one of the world’s leading cryptocurrency companies – has departed her post. the turnover on Ripple’s in-house legal team comes at an awkward time, given the impending case. Ripple is gearing up for a class-action battle about whether its XRP cryptocurrency is a security or not, and has bolstered its legal team by retaining heavyweights like former US Securities and Exchange Commission chair Mary Jo White and the regulator’s former director of enforcement, Andrew Ceresney. Quartz (4 minutes)
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