Stock Options

Choosing Between NQSO and ISO Stock Options for Your Business

By: Jon Avidor

Companies planning to offer options of its stock as a form of compensation generally have two choices: an incentive stock option (ISO) plan, or a nonqualified stock option (NQSO) plan. The most notable differences between ISOs and NQSOs are in their tax treatment and the advantages they provide to employers and its recipients.

ISOs can only be offered to employees. ISOs are offered an incentive for personnel to remain with a company over a long period of time and to work to increase the company’s value. With an equity option in the company, the better the company does, the more the employee’s equity will be worth. Generally, ISOs are more beneficial for employees than NQSOs for tax reasons: employees can defer recognition of income until either the grant or exercise of the shares, and the income gained via disposition of the shares is taxed more favorably as long-term capital gain.

ISOs provide a slight benefit to employers in that they are exempt from 409A valuation, with some considerations. However, ISOs offer less benefits for employers than NQSOs. Employers are generally not entitled to tax reductions for ISOs, and ISOs come with complex administrative rules; companies must also comply with a long list of requirements to be eligible to offer an ISO plan. Nevertheless, ISOs may be an attractive option for start-ups whose stock may increase significantly later down the road as their business develops.

NQSOs are typically more favorable for the employer. NQSOs can be granted to both non-employees, including non-employee directors, consultants and advisors, and employees. Employers can claim a tax deduction for NQSOs and are more straightforward to administer. There are fewer tax minefields, as it is more straightforward to determine the taxes owed on NQSOs than ISOs. One caveat is that income from an ISO is not treated as wages for employment tax purposes, while income from an NQSO plan is, requiring both employer and employee to pay employment taxes on NQSO plan payments. However, the NQSO tax deduction typically offsets this cost for the employer.

Employers should consider their unique business needs and weigh the benefits of both types of plans before utilizing options as a form of compensation.

Sexual Harassment Law

New Sexual Harassment Prevention Laws Are in Effect in New York

By: Jon Avidor and Kristen Kennedy

On April 12, 2018, Andrew Cuomo, the governor of New York, signed into law the most comprehensive anti-sexual harassment legislation in the country. Following a public comment period, on October 1, the New York State Department of Labor issued a final model sexual harassment policy, trainings, and guidance for employers to comply with the new legislation, which went into effect on October 9. All employers in New York will now be required to comply with a list of requirements which includes the following:

  • Adopt the state’s model sexual harassment policy and trainings, or establish a sexual harassment prevention policy that meets or exceeds the standard set by Section 201-G of the New York State Labor Law
  • Provide employees with a complaint form for reporting sexual harassment
  • Make the sexual harassment policy available to all employees in writing or electronically, in a language they understand, and make it publicly available
  • Hold annual sexual harassment prevention training, which must be interactive and meet the standards established by Section 201-G, for all employees by October 9, 2019; new employees should ideally be trained “as soon as possible”
  • State contractors will be required to affirm that they have an anti-sexual harassment policy in place and that all employees have been trained in sexual harassment prevention

Additionally, Section 296-d of the New York State Human Rights Law now protects non-employees such as contractors, subcontractors, vendors, consultants or others providing services from sexual harassment in the workplace. Employers who know or should have known that sexual harassment was taking place and failed to take immediate action to prevent it may be found liable for such harassment.

The New York State Civil Practice Law & Rules contain two major updates to anti-sexual harassment measures. First, under Section 5003-B, employers are no longer authorized to include nondisclosure clauses in settlement agreements or other resolutions of sexual harassment claims that would prevent the disclosure of the underlying facts and circumstances to the claim or action, unless confidentiality is preferred by the plaintiff. Second, under Section 7515, employers with four or more employees are barred from requiring mandatory binding arbitration to resolve sexual harassment claims, and mandates that such provisions will be rendered null and void. Both of these provisions became effective as of July 11, 2018.

New York City employers are required to go beyond what the new state legislation requires, as Mayor Bill de Blasio signed the Stop Sexual Harassment in NYC Act into effect on May 9. Both the city and state regulations require annual anti-sexual harassment training. However, this act expands sexual harassment protections under the city’s Human Rights Law, requiring city agencies to assess workplace risk factors for sexual harassment and report on sexual harassment incidents, and mandating that contractors and subcontractors applying for city contracts must disclose their anti-sexual harassment policies.

Policies combating workplace sexual harassment have long been a best practice implemented by major employers, in the interest of worker protection and insulation from lawsuits. New York joins several other states including Delaware, California, Connecticut, and Maine in mandating that all employers must now take proactive measures to prevent sexual harassment, and companies should take all necessary steps to ensure their full compliance with these new laws.

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We would like to thank our intern, Kristen Kennedy for her contribution to this article.

legally defining blockchain

Legally Defining Blockchain

By: Jon Avidor and Jaclyn Wishnia

The lack of U.S. federal regulations governing blockchain and the crypto industry has led some states to adopt their own interpretations of these technologies. A recent New York Times article compared the diverging regulatory theories stemming from various federal authorities to a parable about six blind men touching separate parts of an elephant, each defining the animal differently every time. Though the analogy was meant to send a message to federal agencies to compromise on standard definitions and finally resolve haphazard crypto industry regulations, the message should resonate with state governments as well. If states continue passing bills using their own terminology for blockchain, they will find themselves in the same predicament that the federal authorities are in now- saddled with fractured legislation and confusing jargon.

While many of the answers to the legal uncertainties surrounding these technologies rely on implementing uniform federal regulations, the initial problem stems from general misconceptions about how the technology operates, which directly correlates with how to properly define it for legal purposes. For instance, California’s legislature adopted a bill containing legal definitions for “blockchain technology” and “smart contract”. Specifically, the bill amends sec. 1633.2(c) of California’s civil code to define “blockchain technology” and concludes its definition by stating, “…data on the ledger is protected with cryptography, is immutable, is auditable, and provides an uncensored truth.”

This definition simply is not accurate. First, blockchains should be referred to as tamper-resistant, not immutable. Immutable means, “unable to be changed.” Blockchains are not impervious to change, it is just very challenging to do so. Second, blockchains are only auditable if they are public, or if an individual possesses a key to a permissioned network. Even if they are public, numerical identifications make it difficult to trace the person to whom the transactions belong. Finally, they do not unequivocally provide an uncensored truth, but they could. For example, fraudulent information can still be entered on a blockchain. So while that fraudulent data is truly displayed on the distributed ledger, it does not mean that the information itself is valid.

A better legal representation of blockchain can be found in a bill passed by Nevada, but it still does not negate the fact that these two states provide altered meanings within the texts of their acts. Nevada describes blockchain as, “an electronic record of transactions or other data…”, whereas California depicts it as, “distributed ledger technology that uses distributed, decentralized, shared, and reciprocal ledger.” While Nevada provides a more accurate definition than California, the issue remains that blockchain is inconsistently defined across state boarders. Not only does varying vocabulary pose an issue for understanding the technology, but as demonstrated by these two bills, it could potentially create “inconsistent regulation across subject-matter domains and jurisdictions.”

Word choice is also pertinent for assessing risk when formulating laws. For example Vermont’s bill, which under Vermont’s rules of evidence, permits blockchain records to be admissible in court. Data on a blockchain, however, may potentially be fraudulent. Fortunately, Vermont’s legislature was prudent to include a clause denoting how to challenge such information.

Though states already adopting blockchain legislation should be commended for forging ahead of their reluctant federal administrative counterparts, the best solution to prevent discrepant precedent and continue innovation in these fields must come from the top down, namely, national standard legal definitions and definitive determinations for how the technology operates under already existing laws.

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We would like to thank our intern, Jaclyn Wishnia for her contribution to this article.

Music Modernization Act

The Music Modernization Act: Bringing Copyright Law into the Twenty-First Century

By: Steve Masur and Kristen Kennedy

On September 25, Congress unanimously passed H.R. 1551, the Orrin G. Hatch Music Modernization Act. Called “the biggest update to music legislation in the past 40 years,” the bill  significantly amends the Copyright Act in several ways:

  • The Music Licensing Modernization Act creates a blanket license and a collective database for the administration of mechanical licensing of recordings.
  • The Classics Protection and Access Act guarantees that artists are compensated for the use of recordings made prior to 1972.
  • The Allocation for Music Producers Act improves royalty payouts for producers and engineers when their recordings are used on satellite and online radio.

President of the Recording Industry Association of America (RIAA) Mitch Glazier called H.R. 1551 “a bill that moves us toward a modern music licensing landscape better founded on fair market rates and fair pay for all.” In fact, virtually every sector of the music industry has celebrated the news of the Act’s passing and the critical updates to copyright law that it puts into place. This legislation more closely aligns music copyright law with the current industry, dominated as it is by streaming and satellite radio services, and ensures a fairer and more just licensing system that should benefit all parties.

Title I – Music Licensing Modernization

Section 102 of the Music Modernization Act radically modifies Section 115 of the Copyright Act by establishing a blanket license for digital use and prescribing the creation of a mechanical licensing database. A blanket license allows entities like radio stations, streaming services, and television networks to perform any works in the repertory of a performing rights society, such as ASCAP or BMI, during the term of the license for a negotiated or court set fee. Without blanket licensing, streaming services like Netflix and Hulu would find it difficult to operate, as this system provides easy access to a large body of sound recordings and removes the risk of inadvertent copyright infringement. By comparison, the system of mechanical licensing grants users the right to reproduce compositions in both physical and digital mediums, including compact disks, cassette tapes, downloads, and streaming services. The mechanical licensing system previously in place was particularly cumbersome for streaming services and helped to create a host of problems, including huge amounts of unpaid royalties for mechanical rights holders and massive lawsuits.

Previously, the lack of a centralized database caused problems for both songwriters and streaming services, and lead to many lawsuits against Spotify and other services. The introduction of a blanket license and a licensing collective should streamline the process by which digital streaming services pay mechanical royalties to songwriters. With this update, rightsholders gain access to a transparent, publisher-maintained database, which should guarantee that songwriters will always receive compensation for mechanical licenses when their compositions are streamed on digital and satellite services.

Section 102 also reforms the Copyright Act by ending the time- and paper-intensive Notice of Intent (NOI) process, which required artists to send physical letters of intent to all publishers, and implementing electronic licensing instead.

Title II – Classics Protection and Access

Songs recorded before 1972 were not retroactively covered when Congress created copyrights for sound recordings. Title II of the Act closes this loophole, establishing federal copyright protection for artists who recorded music prior to 1972. Digital services will now be required to give copyright owners notice of their use of any pre-1972 recordings and pay royalties for that use; if they fail to do so, they will be treated as copyright infringers. The Act also clarifies the expiration period for pre-1972 sound recordings, creating a clear timetable for their entrance into the public domain.

Title III – Allocation for Music Producers

Producers and engineers were previously not covered by copyright law, and could only earn royalties via Letters of Direction from artists who wished to share them; furthermore, copyright law failed to take royalties from satellite and online radio into account at all. The lack of an enforcement mechanism in place to force third parties to comply with Letters of Direction constrained producers’ and engineers’ ability to earn royalties. Title III changes that, putting in place a mandate that services such as Spotify and Apple Music must pay royalties to these groups and streamline their licensing processes. Producers and engineers will now be able to submit Letters of Direction to a designated non-profit collective, which will oversee the collection and distribution of royalties earned from compositions played over satellite and online radio. By expanding the scope of copyright law from traditional AM/FM radio to encompass these new forms of radio, the Act significantly modernizes the legal landscape.

Together, these provisions provide a critical update to the previous patchwork system of licensing, which was difficult to apply to the modern-day digital streaming business model. By establishing a centralized system of mechanical licensing, this legislation ensures that copyright owners will receive fair payment for the use of their works, and reduces the risk of litigation that streaming services and broadcasting companies currently face. The Act also provides much-needed protection for legacy artists, producers, and engineers. It’s an ambitious piece of legislation, and its unanimous passage speaks to the fact that the antiquated system previously in place was not effectively serving anyone. Virtually all players in the music industry stand to benefit from this dramatic modernizing of copyright law, and by creating a more transparent and just system of copyright enforcement, Congress and the recording industry have both achieved a remarkable victory. Ensuring that it is not pyrrhic will be about how its many parts move from paper to implementation.

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We would like to thank our intern Kristen Kennedy for her contribution to this article.

Influencers and Best Practices for Transparent Online Marketing

By: Jon Avidor

Social media platforms are some of advertisers’ most effective mediums for promoting their products and brands to audiences across the globe. We Are Social and Hootsuite reported as of January 2018 that, of the 7.593 billion people on this Earth, 4.021 billion are Internet users and 3.196 billion are social media users. Facebook’s 2.167 billion active users, YouTube’s 1.500 billion active users, Instagram’s 800 million active users, and Twitter’s 300 million active users, coupled with each of those network’s extensive analytics suites and cost-effective and easy-to-use content promotion tools, creates ripe market conditions for advertiser’s to leverage the instantly-accessible and dynamic nature of social media to get their content in front of the eyeballs of brand loyalists and engage potential purchasers who have been demographically honed with the help of the platform. Another facet is paid promotion by celebrities and social media influencers, which involves brands leveraging the goodwill of public or semi-public figures and their target-rich followings, as well as by micro-influencers who have smaller followings but focus on a specific marketing vertical that would allow brands to tap into an even more engaged audience. Anyone can be a social media influencer with enough reach.  To this, journalist Emily Nussbaum says, “In essence, every young person in America has become, in the literal sense, a public figure. And so they have adopted skills that celebrities learn in order not to go crazy: enjoying the attention instead of fighting it—and doing their own publicity before somebody does it for them.” Everyone knows that brands pay for television commercials or full-page magazine ads but, if done seamlessly, it’s often less clear to consumers whether products or services promoted on social media have been featured by a public figure because of their genuine affinity for the product or because it was a paid endorsement, which creates a novel problem from a consumer protection standpoint where truth in advertising is not as obvious.

To prevent consumer-confusion between sponsored content and an influencer’s legitimate and independent endorsement of a product or brand, the Federal Trade Commission (FTC), the government regulatory agency primarily concerned with prohibiting “unfair or deceptive acts or practices in or affecting commerce,” published guidelines for how brands and social media users should disclose sponsored content on social media. The FTC’s Policy Statement on Deception states that “a representation, omission, or practice is deceptive if it is likely to mislead consumers acting reasonably under the circumstances and is material to consumers – that is, it would likely affect the consumer’s conduct or decisions with regard to a product or service.” The main requirement for all advertising, whether native or online, is that the ad meets the FTC Act’s “clear and conspicuous” requirement, which directs advertisers to disclose truthful and necessary information about their products or brands to consumers in such a way that consumers can “actually perceive and understand the disclosure within the context of the entire ad.”

FTC Best Practices For Disclosure on Popular Social Media Platforms

YouTube
Do
– Include a video overlay at the beginning of the video with disclosure of sponsored content
– Verbal disclosure is also recommended
– Include sponsorship information above “show more button		 Don’t
– Be unclear in disclosure. For example, a simple “thank you” to the sponsoring brand is not enough to let viewers know that the content is sponsored or that the onscreen talent has been compensated either financially or via product
– Only use paid promotional tools
Instagram
Do
– Place the disclosure at the beginning of the description and before the “more” button
– Use hashtags #paid, #sponsored or #ad to disclose the partnership
– Use phrase “sponsored by” and tag the sponsoring brand in the description
– Include disclosures on Instagram Stories as well as photos		 Don’t
– Only use ambiguous hashtags like #collab #ambasador #thanks[brand]
– Include disclosure in a comment instead of in the post description
– Use paid partnership tag only
Facebook
Do
– Use hashtags #paid, #sponsored or #ad to disclose the partnership
– Use phrase “sponsored by” and tag the sponsoring brand in the description
– If sponsored content is a video, include an overlay at the beginning that clearly discloses the sponsorship in addition to a verbal mention
– Include proper disclosure when using the built-in branded content		 Don’t
– Only use ambiguous hashtags like #collab #ambasador #thanks[brand]
– Only rely on built-in sponsorship indicator tools
Twitter
Do
– Include #ad or #paid hashtags
– Tag sponsoring brand when applicable		 Don’t
– Place disclosure at the end of a sponsored tweet

A comprehensive list which includes other platforms and mediums such as blogging can be found here.

There is one big problem with these guidelines: endorsers are not following them. One source estimates that 32 of the top 50 celebrities followed on Instagram featured a sponsored post over a four-week period in May 2017, and of those posts, 93% did not meet the FTC guidelines. In April 2017, the FTC issued a warning letter to 90 celebrities, brands, and other online influencers for failing to properly disclose endorsements on their Instagram posts. In these instances, many of the violations centered on improper citing, such as not including tags in photos, lack of disclosures, and misplacement of hashtags denoting that the post is either paid for or an ad. The FTC is prepared to bring even individual representatives to court, which indicates that ignorance of their guidelines will no longer be a viable excuse. Instead, celebrities and influencers are widely cautioned to comport with their guidelines before posting any sponsored content. The FTC has teeth and has shown it’s prepared to enforce its guidelines on brands and influencers:

  • In 2015, the FTC settled a case with Machinima in connection with Xbox One videos in which the company paid two YouTubers $15,000 and $30,000 for producing videos that generated 250,000 and 730,000 views, respectively, and paid a larger group of influencers $1 for every thousand video views, for up to a total of $25,000, in all instances not requiring disclosure of the paid endorsement.
  • In 2016, the FTC settled a case with Lord & Taylor for failing to disclose that it paid for native advertising and provided 50 online fashion influencers with a dress from its Design Lab collection worth thousands of dollars in exchange for posting Instgaram pictures of themselves wearing the dress.

At what point in a highly publicized marketing campaign do the FTC’s requried disclosures become redundant or unnecessary because the press attention or marketing clearly and conspicuously acknowledge a brand-celebrity collaboration? For example, in mid-August, it was reported that Serena Williams struck a deal with designer Virgil Abloh of Louis Vuitton and Off-White to collaborate on a Williams-inspired collection for Nike, which was highly publicized in the press. While Serena did tag @Nike, @nikewomen, @Nikecourt, and @virgilabloh in a Twitter post promoting the collaboration, she did not hashtag #ad or #paid. I would argue that Serena’s tweet was not deceptive or misleading to consumers given the extensive publicity surrounding the collaboration and her tagging the brand and collaborators, even if she failed to provide the proper hashtags indicating what was likely sponsored content.

Undoubtedly, celebrities have assistants or publicists who manage their online presence so their non-compliance isn’t out of laziness. Online influencers and micro-influencers may or may not have similar resources but social media marketing is their business so it’s unlikely they are ignorant to these advertising rules. So what’s causing the non-compliance? Perhaps these public figures fear that by constantly hashtagging #ad or #paid or otherwise alluding to sponsored content will give their followers the “clear and conspicuous” that their opinions, and they themselves, are bought and sold. Would their fans rather their timelines and feeds appear genuine or spammy, regardless of the origin of the content? That said, until the FTC reevaluates its requirements in light of brand development considerations, it’s clear that the FTC is intent on enforcing its guidelines in order to promote truth and transparency in consumer advertising.

panel of people sitting at table

Blockchain & The Music Industry: Panel Discussion at the Music Business Association Tech & Law Conference (9/25/18)

By: Steve Masur

On September 25, 2018 we hosted a panel for the Music Business Association’s Entertainment & Technology Law Conference where the topic was “Blockchain & The Music Industry”.

Blockchain has the power to transform and disrupt numerous industries. In the music industry, it is already having an impact on royalty payments, ticketing platforms, streaming music platforms and more. On this panel, topics included blockchain innovation, smart contracts, global trends in tokenized assets, the regulatory landscape and more. If you missed this panel, be sure to check our site or subscribe to our newsletter. Also be sure to click on the links below to learn more about what our panelists are working on in blockchain and music.

Moderator

Steven Masur

Speakers

ICO_Crowdfunding

Crowdfunding and Jurisdiction: Tokenizing the World by ICO

By: Jon Avidor

The crypto industry has caused yet another crack in the regulatory foundation of the global landscape- this time, it’s regarding digital assets and initial coin offerings (“ICOs”). ICOs are a relatively new method of fundraising utilized by start-ups and seen as a quick way to gain capital. The surge of start-ups relying on ICOs over the past two years has sent lawmakers scrambling to address the ICO regulatory framework and its other inherent risks. However, regulators are divided on how to best regulate ICOs while also protecting investors.

The EU’s European Parliament Committee on Economic and Monetary Affairs (“Committee”) is the latest regulator to tack itself to the growing list of jurisdictions attempting to define the legal treatment of ICOs. The Committee is currently drafting new crowdfunding regulations for ICOs. Many consider this a good first step towards legitimizing ICOs and hope that this regulation will serve as proof for mitigating any potential fraud or cyber security risks for ICO investors.

ICO regulatory framework provides not only more clarity for potential investors, but it also impacts where a start-up company may choose to incorporate its business. A jurisdiction with specific ICO regulation, such as Malta and Singapore, is more likely to attract crypto-based start-up companies looking to conduct ICOs as these companies can confidently rely on ICO-specific rules and regulations in those jurisdictions.

As jurisdictions continue to regulate the crypto space, there is still a lack of overall uniformity regarding ICO regulations. According to a recent PwC report, the U.S. views ICOs as traded securities, while the EU classifies its tokens into three subsets—asset, payment, and utility tokens—which gives the buyer direct access to a product or service, as opposed to an investment.

It is yet to be determined if a worldwide consensus on ICO regulations is necessary, but ICOs could potentially morph into something similar to, if not the same as, traditional financial system currently in place, such as raising funds through venture capital or corporate debt. For now, the only universal consensus among regulators is that ICOs potentially pose a threat to both financial and economic risks, and thus, some form of regulation is required.

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We would like to thank our intern, Jaclyn Wishnia for her contribution to this article.

USPTO Blockchain Patents

Banking on Blockchain Patents

By: Jon Avidor and Jaclyn Wishnia

The U.S. Patent and Trademark Office (“USPTO”) has seen a recent tidal wave of blockchain patent filings, specifically from large banks and financial institutions, such as Bank of America and Mastercard. Though the USPTO has been receiving blockchain-related patent applications since 2012, the recent surge has many worried that a patent war is looming on the horizon.

The banking and financial sector is looking to utilize blockchain technology as a solution to inefficiencies within its industry, such as slow payment processing and a deficit of trust and transparency. If blockchain is in fact the “future for financial services infrastructure”, big banks would rather be at the forefront of this industry-wide evolution than behind it. One way to do this is to secure intellectual property rights in the blockchain innovation or blueprint through a patent.

Patents, if granted by the USPTO, afford banking and financial institutions the right to protect their innovations and have exclusive market control over their trading and banking platforms. The earlier the patent is granted, the more room there is for a company, like Barclays, to control this new market and gain leverage over other institutions.  However, the patent application process is complex and time-consuming, and it can take over two years for the USPTO to issue or reject a patent application.

There are also challenges specifically for blockchain patents. In 2014, the Supreme Court ruled in Alice Corp. v. CLS Bank Int’l that claims to a computer-implemented technique of mitigating “settlement risk” in financial transactions were ineligible for patenting. The Court clarified that a claim directed to an abstract idea is not eligible for patent protection when it “merely requires generic computer implementation” or “attempt[s] to limit the use of [the idea] to a particular technological environment.”

Blockchain technology is inherently an open-sourced network, thus, a patent based solely on a blockchain system will most likely be rejected as it is an abstract idea. Banking and financial institutions will need to ensure that their blockchain patent applications either “identify an actual patentable innovation” or describe it in such a manner that indicates their platform—built atop blockchain technology—is a “novel idea that solves a problem.”

The rise of these blockchain patents for large institutions is a double-edged sword. On one hand, the continued pursuit of blockchain-related patents helps to legitimize the blockchain industry and increases public awareness. On the other hand, issuing patents primarily to large banks and financial institutions that can afford to file and legally reserve blockchain patents may result in the hampering of technological innovations. This may discourage potential competition from smaller business and hinder the industry’s growth. As these blockchain-based patents continue to be filed, the USPTO may need to develop consistent guidelines for patent filers to follow, especially as it pertains to blockchain, to prevent any patent wars.

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We would like to thank our intern, Jaclyn Wishnia for her contribution to this article.

Is Blockchain HIPAA Compliant?

By: Jon Avidor and Jaclyn Wishnia

The healthcare industry remains one of the largest sectors to potentially benefit from blockchain technology.  By implementing its application, the healthcare industry can eliminate some of the risks plaguing its community, such as inconsistencies with patient medical records, risk of data security breaches, and inefficiencies of patient record retrieval. As with all new technology, however, companies utilizing blockchain for its potential benefits will need to learn how to navigate such a heavily regulated industry, especially when it comes to storing and protecting patient data and medical information in compliance with the Health Insurance Portability and Accountability Act, or HIPAA.

HIPAA regulations were developed to protect the privacy and security of certain health information. The regulations are two-fold: there is the HIPAA Privacy Rule, which establishes national standards for the protection of certain health information, and the HIPAA Security Rule, which establishes a national set of security standards for protecting certain health information that is held or transferred in electronic form.

Data security risks are a major issue afflicting the healthcare industry, despite HIPAA’s stringent privacy and security regulations. In 2015, the healthcare industry was the target of one of the largest security breaches. Hackers were able to breach Anthem Inc.’s record database containing personal information for nearly 80 million of its current and former customers and employees. Vulnerability to cyberattacks is due in part to the way patient information is stored.

Blockchain could provide a way for healthcare professionals to securely store patient health information.  Blockchain uses cryptographic coding through complex mathematics, allowing only the data’s intended recipients to decrypt the information. This mitigates the risk of a data breach by hackers because the information would be useless in its encrypted form. Mathematical encryption, however, conflicts with the HIPAA Privacy Rule. HIPAA prohibits the use of mathematically-derived encryption of protected health information because the encrypted information can potentially be re-identifiable. This strict regulation would seemingly render the use of blockchain in the healthcare industry non-compliant with HIPAA.

Blockchain technology can potentially be the solution to many of the problems within the healthcare system that HIPAA was designed to address and fix.  There are, however, still issues and questions regarding blockchain technology that would have to be resolved before its implementation in the healthcare industry.  For example, how certain types of medical records stored on the blockchain, such as psychotherapy notes, can remain inaccessible to its subjects, and whether there’s a way to completely anonymize patients’ protected health information, rather than cryptographically store it in a way that complies with HIPAA as it is written.

Companies, such as Timicoin and Patientory are looking to develop blockchain-based platforms to secure health data for patients, healthcare providers and medical institutions, while remaining compliant with HIPAA.  While a quick adoption of blockchain technology is not likely, its enormous benefits can be an opportunity to disrupt and transform the current healthcare industry.

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We would like to thank our intern Jaclyn Wishnia for her contribution to this article.

New Laws Make Malta a Leading Global Innovator in Digital Currency

By: Steve Masur and Jaclyn Wishnia

The Malta Parliament passed three cryptocurrency and blockchain bills into law recently, making Malta one of the first jurisdictions in the world to create a fully regulated environment specific to blockchain, cryptocurrency and digital currencies of all kinds. This legislation is significant because it assists in creating a framework that legitimizes blockchain businesses and ensures that those in the cryptocurrency market are compliant with the corresponding laws. It makes sense that Malta would act first, because they succeeded in capturing much of the worldwide e-gaming market, by creating a regulated environment for online gambling.  The hope is that the new laws will help them to capture a large cross-section of the crypto and blockchain market as well.  This article expands upon an article I wrote several months ago containing a shorter description of what makes Malta ideal for cryptocurrency initiatives.  Here are the basic components outlined in each bill:

Malta Blockchain Laws

Innovative Technology Arrangements and Services Act

The Innovative Technology Arrangement and Services Act sets out the regulation and certification requirements for technology service providers and digital ledger technology, or DLT, platforms. The specific language of formalized regulation and certification will provide crypto-exchanges with more legal certainty when operating in Malta in an otherwise globally underdeveloped area of law.

Malta Digital Innovation Authority Act

The Malta Digital Innovation Authority Act formalizes the regulatory procedures for the DLT industry.  This law creates Malta Digital Innovation Authority, or MDIA, by setting up a regulatory authority that will be responsible for overseeing the industry and supervising compliance with these newly enacted laws. It will focus on protection for consumers and promoting education for any DLT users.

Virtual Financial Assets Act

The Virtual Financial Assets Act regulates initial coin offerings by setting up requirements for companies raising capital through ICOs, such as publishing a white paper detailing the project and making past financial history available to the public. This law also includes a financial instruments test that determines whether a virtual token is a DLT asset under the law. If the virtual token is a DLT asset, meaning it has no utility, value or application outside of the platform on which it is issued and cannot be exchanged for funds on the platform, then the token is exempt from this law. If the token is not considered to be a DLT asset, the regulators will apply existing EU securities and financial law definitions to assess the token.

As resources continue to be allocated to DLT, two major crypto-exchanges creating headquarters in Malta, and now the development of these advanced regulations, Malta is poised to achieve its goal in becoming “Blockchain Island.”

This legislation, however, is not only beneficial for Malta. It also has the potential to set a global precedent for how other markets could structure their own authoritative bodies in this realm and utilize Malta’s existing laws as a model to institute regulations. These new laws enacted by Malta suggest that blockchain and cryptocurrencies are becoming a more permanent fixture within the world’s business and financial culture.

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We would like to thank our intern Jaclyn Wishnia for her contribution to this article.