Tag Archive for: blockchain

DAOs are the Punk Rock of Corporate Law

By Steven Masur and Lydia Amamoo

There’s something new and amazing happening in corporate law. Decentralized Autonomous Organizations, or DAOs. DAOs represent an evolution of corporate law that moves at the exponential speed of technology.

What is a DAO?

In its simplest form, a DAO is a self-governing group of people who control a bank account. Blockchain technology enables the rules of engagement for the DAO to be coded into smart contracts such that all participants can see transactions, and no participant can act counter to the smart contracts without the approval of all participants. The smart contracts are coded onto coins, which individuals can purchase to participate in the DAO. Because most DAOs make use of blockchain technology, the smart contracts within them can be revised and updated upon a vote of the participants, and these revisions will be immutable and transparent to all.


How are DAOs Used?

These self-governing voting trusts can be used for almost anything. A common use of a DAO is people banding together to buy something of value, like an unreleased Wu-Tang Clan record, a Stradivarius violin, a building, or even a rare original copy of the U.S. Constitution for nearly $50 million dollars. Another common use of a DAO is as a basic governance structure. Examples range from CryptoMondays’ DAO, which decides when and where a monthly event will take place and what will be discussed, to DAOs controlling the operations of an entire institution, government, or company, like the Shapeshift DAO.


Why were DAOs Created?

The SEC’s accredited investor rules, which require a net worth of at least $1 million dollars or annual income in excess of $200,000 to qualify to invest in a private startup, left normal people behind during one of the biggest wealth creation cycles in U.S. history. Only the relatively rich could participate and risk their money on a new startup with new ideas, unless they had an in – if they were either a part of the startup, or the founders’ friends or family. For those starting companies, despite intense competition among law firms doing early-stage formations, the average cost of setting up even a simple company properly ranges from as low as a few hundred to upwards of $250,000. At the lower end of this range, mistakes and omissions in the corporate documents, improperly established management structures, missed state-regulated deadlines and tax payments, and outright exploitation by those more sophisticated in corporate law, have cost founders millions of dollars. So, in a very real way, DAOs are made by and for people frustrated and disenfranchised by the current state of corporate law.


How are DAOs Changing Corporate Law?

DAOs fly in the face of established corporate law because they allow participants to directly vote their interests, instead of investing their trust in a board of directors, which in turn delegates operational duties to officers who control an ever-expanding hierarchy of managers. Traditional corporations exist and must abide by the laws of a state or country and the regulations of any territory in which they do business. DAOs are empowered by the basic human right of freedom of association, and most DAOs currently exist outside the system of states or governments. As a result, they represent a technology-driven evolution in corporate law, transcending territorial government in the same way that all internet-technologies transcend territories. DAOs open a universe of possibilities for human self-governance, decision-making, and participatory wealth creation. Hundreds of DAOs have been created for an increasingly wide variety of purposes, experimenting with new and different voting mechanisms, including tiered voting, voting on specific areas of competency, or using defined voting roles. Any conceivable voting system can now be hard-coded into the smart contracts of a DAO, tested, and then manipulated until it works as desired. The exponential growth of DAOs, and the process of iterative evolution is changing corporate law, not at the speed of legal precedent or legislative process, but at the exponential speed of technology.


So… What’s the Problem?

One problem is limited liability. As a matter of law, a corporation or LLC can limit the liability of participants to just the amount they invested. While a DAO could include this limitation in its rules of engagement, under the law of most countries, if someone outside the DAO were to sue the DAO, each DAO participant could potentially be held equally responsible for paying the full amount of any judgments against the DAO.

Another problem is a limited instruction set within a DAO for dealing with unforeseen problems. Corporations and LLCs can rely upon boilerplate protections built into their corporate documents, as well as laws and legal precedent specifically addressing the history of similar problems for prior corporations and LLCs. This lack of precedent leaves DAOs susceptible to legal claims, lacking a strong basis of guidance for what to do in the wide variety of situations that arise through normal human interactions, including business interactions.

A third problem is the potential for carelessness or outright exploitation at the hands of those programming the smart contracts. A malicious or sloppy programmer could build into the smart contracts the means to take or divert the money contained within the DAO, or even result in the DAO being hacked.


LLC-Wrapped DAOs

It is still very early, but a few states and countries are getting on the blockchain bandwagon and have adopted DAO legislation. These laws are intended to extend the concept of limited liability to DAOs.


  • Vermont was the first U.S. state to make corporate legislation tailored to companies utilizing blockchain-based technology. The Vermont Blockchain-Based LLC (BBLLC) isn’t specific to DAOs but applies standard LLC law to any company using blockchain-based technology for a material portion of their business activities. However, unlike the standard LLC, a BBLLC is required to make additional disclosures in its formation documents, such as including a mission statement and specifics on voting procedures and the blockchain technology that will be used. To determine and lock in these parameters at the outset of establishing the business may be incompatible with the innovative and ever-changing spirit of DAOs.


  • Wyoming was the first U.S. state to make legislation specifically addressing DAOs. The Wyoming DAO LLC applies the state’s standard LLC law and a few additional requirements, including specifying the extent to which management will be conducted algorithmically. Unlike the BBLLC, the Wyoming DAO LLC can propose its own definition of a quorum for voting purposes. This amendment to traditional LLC law goes with the fluidity of DAOs, where requiring a majority for all voting matters might stifle DAO member participation on a large scale. A notable deterrent to the Wyoming DAO LLC is that the DAO must take actions or approve proposals within the first year or it will be legally dissolved. Tennessee followed in Wyoming’s footsteps, creating a “decentralized organization” or DO LLC, which operates similarly to the Wyoming DAO LLC, but still requires the default 50% quorum requirements.


  • How are countries around the world doing things differently? Several countries, including Switzerland, Liechtenstein, Bermuda, Cayman Islands, the British Virgin Islands, and Singapore, are trying to become crypto-friendly hubs, but few have enacted DAO-specific legislation. Malta was the first country to introduce DAOs as a legal entity called a D corp, or decentralized corporation, but its legislation includes a hierarchical corporate governance structure that may be against the very nature of a DAO. The Republic of the Marshall Islands made its way into the crypto-arena back in 2018 when it first tried to launch a state-sponsored cryptocurrency as its legal tender. Now, the Marshall Islands have enacted a DAO regulation based on a mix of U.S. and English common law recognizing DAOs as legal entities similar to non-profit LLCs. The Marshall Islands’ statute provides for easy set-up, minimal KYC requirements, and member confidentiality, making it a highly desirable country to establish DAOs.


Conclusion: DAOs are Here to Stay

DAOs are considered by some to be a new fad that will pass by in the blowing wind. But DAOs are here to stay. The technology to implement them exists, is improving, and people will continue to use it, regardless of legality. Their motivation may be profit, or the desire to own things not otherwise accessible, or even to enjoy of the greater things in life, like smoothly operating community systems. But regardless of motivation, the old ways seem inaccessible, expensive, problematic, and difficult. People feel powerless. DAOs may be the early iteration of entirely new forms of human governance. Lawyers have a critical part in building this new infrastructure because of our knowledge of what went before and our experience with the tried-and-true methodologies that built the world in which we live today. But the world of tomorrow will be different.

closeup of ben franklin with sunglasses

NFTs: Boon or Burden for Artists and Investors?

By: Lauren Mack and Ilana Faibish

NFTs (or Non-Fungible Tokens) are the latest blockchain-based craze to take over the Internet. Memes, tweets, sports highlights, Charmin toilet paper GIFs, and yes, even quarantine flatulence recordings have been minted into NFTs and sold. But while some artists may be making millions selling NFTs, many questions still remain as to their veracity, profitability, and longevity.

What Exactly is an NFT?

Essentially, an NFT is a record that shows who owns a unique piece of digital content. It is similar to a deed to a house, except instead of a piece of paper being stored in a government building basement, the record of sale is placed on a blockchain that creates a digital and irreversible record of who owns that digital content. A blockchain is a secure network of computer systems that record and provide proof of transactions, such as the purchase and sale of NFTs. Any digital work can be minted into an NFT.

While NFTs show great promise for the monetization of digital art, they have drastically warped – and perhaps exploited – the art sale and investment landscape by creating complex and novel markets and opportunities for artists, brands, collectors, and investors. 

What Can I Do With an NFT?

The primary benefit of owning an NFT is that you have the right to exclude others from claiming ownership of the digital work evidenced by the NFT. NFTs typically do not grant copyright ownership in the art itself, however. This mirrors the ownership of physical art. When you buy a painting (or a book or a song) from an artist, you own the physical version, but the artist still owns the copyright to the work and has the right to recreate and sell it as many times as the artist wants.

That said, it is possible to be granted exclusive ownership of the copyright in the work if the author expressly conveys the copyright to you in a signed writing. Due to the nature of blockchain technology, it is unclear whether recordation on a blockchain alone is the equivalent to a “signed writing” within the context of the United States Copyright Act. When assignment of the copyright is intended, it is therefore advisable to have a written agreement accompanying the NFT that clearly transfers ownership of the copyright in the work.

Even when there is no transfer of copyright ownership, a written agreement is critical to understanding and preserving each party’s rights, including by describing how purchasers may use their digital assets and what benefits the artist receives. These agreements are often structured as a non-exclusive license to the underlying work. Depending on the circumstances, the license terms may state that others may be able to download, view, or listen to the work that was minted into the NFT, or that the buyer cannot profit from the use of the underlying work.

How is This Benefiting Artists?

Aside from the current fervor to purchase anything at all as an NFT, NFTs can be used to generate a new type of revenue for the creator. When an artist sells a physical painting, the artist is compensated only once when the painting is first sold. When the purchaser resells the painting – which may have increased in value if the artist has become more well-known – the artist does not have any say in the transaction and cannot claim any portion of the purchase price, despite being the owner of the copyright in the artwork. This is known under US copyright law as the “first sale doctrine”, and it is a limitation on a copyright owner’s exclusive right to distribute their works. When art is sold as an NFT on a blockchain, however, a commission can be attached that will automatically send payment to the copyright owner every time the NFT is resold, allowing the artist to share in the increased value of the work.

So What Are the Downsides?

The burgeoning NFT market is not without its risks and unknowns. Both the Copyright Office and the courts have determined that the first sale doctrine does not apply to digital files. This is because the first sale doctrine only applies to the distribution of a single copy. When a file is transferred through the Internet, a copy of that file is made, meaning that any digital sale necessarily includes a reproduction that the artist still has the right to control. Unless this technicality is addressed in a written license agreement accompanying the NFT, purchasers may find that they do not have the right to sell the NFT without the cooperation of the copyright owner, potentially negating any investment benefits.

There have also been several instances where an artist’s work has been minted into an NFT and offered for sale without the copyright owner’s permission, including a Jean-Michel Basquiat drawing where the eventual purchaser was given the option to destroy the physical artwork. Purchasers must be wary of fraudulent listings and do their due diligence in determining whether a seller is the rightful owner of the ability to provide a license or assign the copyright in the NFT, as the case may be. Some markets have identified this risk and will only allow verified works, or in other instances, it is clear to purchasers that the digital asset originates from the copyright owner and NFT creator. For example, purchasers can be confident that NFTs purchased from NBA Top Shot, the NFT collectible marketplace for NBA game highlights, are owned by the NBA and are being purchased from its proprietary blockchain.

Artists whose works are minted into an NFT without their permission are left having to navigate the limited number of ways in which they can protect their intellectual property and legacy in today’s digitally driven world. They can file a DMCA takedown notice or otherwise notify the NFT marketplace of the fraudulent listing, but if a takedown request is unsuccessful then creators will likely have to turn to litigation to protect their rights and artwork. And in the case of original works being destroyed after being minted into NFT, by then it may be too late.


Are NFTs a bubble ready to burst, or a new business model for artists? Perhaps both, but either way we’ll be watching closely as to how NFT sale terms develop, as well as other upcoming opportunities in the blockchain space.

The Art & Evaluation of NFTs: Virtual Panel Discussion at Digital Hollywood Spring (5/18/21)

On May 18th, 2021 Steven Masur moderated a virtual panel at Digital Hollywood Spring 2021 discussing the topic “The Art & Evaluation of NFT”.

NFT as a significant category of “Collectable Art,” while still in an “Arguable” stage of development, has nonetheless quickly established itself as the next real thing. It is hard to argue with the $69.3 Million sale at Christie’s of “Beeple’s” “EVERYDAYS.” Or the $7.5 Million for “CryptoPunk #7804” or the $6.66 Million for “CROSSROAD.” This panel includes a cutting-edge group of experts in the field of NFT Art. As a group, they have been a part of the explosion and impact of NFT Art from both the artistic and creative as well as NFT as a flourishing sector of the “Art Market.” Watch the full panel discussion on Vimeo here.


Steven Masur


SEC Regulation A+ Recent Update

By: Jon Avidor, Jason Gershenson and Danika Johnson

Prior to the 1929 stock market crash, companies and retail investors could freely exchange stock and other securities due to minimal regulation. In the wake of the 1929 crash and resulting Great Depression, the Securities and Exchange Commission (“SEC”) was created to protect retail investors by limiting their investment choices to less sophisticated products, and by requiring companies to follow specific rules and regulations in order to be eligible to sell securities to retail investors. These new protections made it more difficult for smaller companies to raise enough funds to sell its securities publicly in an initial public offering (“IPO”) or privately among retail investors that did not meet the new SEC classification of “accredited investor”. The new SEC rules distinguished accredited investors as financially sophisticated, thus having a reduced need for the protection provided by regulatory disclosure filings. Today, the two most commonly cited criteria to determine whether an individual investor is “accredited” are an individual’s net worth of at least $1 million or an individual’s income of at least $200,000 for each of the past two calendar years. On the other hand, a non-accredited investor does not meet SEC accredited investor requirements.

In 2015, the JOBS Act opened up opportunities for non-accredited investors and small companies. It included Title IV, or Regulation A (informally, Regulation A+), creating a “mini-IPO” for small-capitalization U.S. and Canadian companies that want to raise capital and for investors looking for new access to pre-IPO investment deals. Regulation A+ creates two tiers of offerings: Tier 1 for offerings up to $20 million in a 12-month period and Tier 2 for offerings up to $50 million in a 12-month period. For offerings up to $20 million, companies can elect to fall under either Tier 1 or Tier 2. Tier 1 offerings must adhere to state blue sky laws and qualification requirements. Tier 2 offerings are more stringent, requiring a company to provide audited financial statements, ongoing financial reporting, and other updates to ensure a continuous flow of information to investors and markets.

Under Regulation A, the investment capital creates a new class of stock that may be eligible for exchange on a secondary market. Since the inception of Regulation A, $9.095 billion were sought across 382 offerings qualified by the SEC. Specifically, $859 million were sought across 105 Tier 1 offerings and $8.336 billion were sought across 277 Tier 2 offerings. It is reported that 183 issuers have raised $2.446 billion, which is $230 million under Tier 1 and $2.216 billion under Tier 2. The SEC attributes the popularity of Tier 2 to the federal preemption of state blue sky laws, making it easier to follow a single set of rules. Additionally, the SEC reports that issuances of securities by companies in the real estate industry accounted for the largest share of proceeds reportedly raise in Regulation A offerings, an estimated 69% of reported proceeds in ongoing and completed offerings. Furthermore, in 2017, the SEC began to allow reporting companies to raise capital through an online offer.

Since June 2019, The SEC has collected various comments from individuals and organizations regarding the Concept Release on Harmonization of Security Exemptions. Commenters indicate that they are interested in an expansion of the regulation, requesting the extension of Regulation A eligibility to issuers organized and with a principal place of business outside the U.S. or Canada, to business development companies, and to investment companies advised by registered investment advisers. Additionally, commenters requested that Regulation A ensures inclusion of evolving financial products, such as certain digital securities that are not strictly equity, debt, or convertible debt.

Crypto Mom’s SEC Safe Harbor Proposal for New Token Offerings

By: Steven Masur and Cameron Ashby

During the 4th International Blockchain Congress in Chicago, Hester Pierce, Commissioner for the U.S. Securities and Exchange Commission (SEC) (aka, the “Crypto Mom”), announced the “Token Safe Harbor Proposal,” or the “Proposed Securities Act Rule 195 – Time-limited exemption for tokens,” (“Safe Harbor”). Up until now, token projects have grappled with the SEC’s stated viewpoint that most, if not all tokens are “investment contracts” and therefore, recognized as securities offerings under the Howey Test. Pierce’s Safe Harbor seeks to offer a “fix” for cryptocurrency projects that do not consider their tokens to be securities, and thus do not believe they must comply with the registration and disclosure requirements intended for the sale of securities.

Pierce aims to “fill the gap between regulation and decentralization” by giving utility token projects a three-year exemption from some federal securities laws, allowing them enough time to prove that their tokens are not securities, rather that they have developed into functional decentralized networks that have a function that falls outside the purview of the securities laws. After the grace period, the project’s development team must (1) determine whether their token transactions involve the offer or sale of a security and (2) confirm their tokens are actually in use to buy and sell the services for which they were intended.

Three-Year Grace Period from the First Sale

Currently, whether your token is intended to be a security or not, you have to comply with the relatively onerous and costly regulations intended to govern the sale of securities, for any US facing offering.  Many believe that this puts any offering seeking American customers or buyers at a disadvantage to offerings that do not have American buyers. By extension, this also means that products and services freely available to people outside the US are not available to American citizens.  The Safe Harbor is a step toward making it possible to legally launch a token offering in the US that is not intended to be a securities offering. To help achieve this, the SEC will provide network entrepreneurs the time to construct their networks before having to measure against a “decentralization yardstick.” Meaning, the SEC will allow new cryptocurrency projects to defer compliance with some federal securities laws, including the registration provisions of the Securities Act of 1933. However, the token development team must still meet certain conditions, including disclosing information about their project.  Also, the antifraud provisions of the Securities Act of 1933 will still apply.

Tokens come with a wide variety of different attributes and exist in different types of ecosystems.  Pierce clarifies the “Regulatory Catch-22,” of the offer and sale of tokens as they relate to federal securities laws, i.e. that a decentralized network that transcends the sale of securities and becomes something else can never develop if people cannot legally buy and sell the tokens.  The token transactions would not be considered securities transactions if the network has matured into a decentralized or functioning network on which the token is in active use for the exchange of goods or services. Furthermore, some tokens may look like securities at launch, but can mature to the point where they no longer have the attributes of a security.  Further, Commissioner Pierce states, “once the network cannot be controlled or unilaterally changed by a person, entity, or group of persons or entities, the token that operated on that network will not look like a security.” In other words, if the tokens are used to buy and sell actual intended services, securities laws will not apply.


If the Safe Harbor is accepted, it would create strict disclosure requirements for cryptocurrency projects and how they could raise funds. Specifically, the project’s initial development team would need to raise funds strictly through a token sale, and put out necessary disclosures such as, public notices, code disclosures, personal disclosures, as well any necessary paperwork. These disclosures ensure that there is full transparency between the SEC and crypto projects within The Safe Harbor. Additionally, it would also require the development team to disclose the names, relevant experience, qualifications, attributes, and skills of each member. The number of tokens held by each member and any bonuses and rewards would also be presented. Investor protection will still remain a priority. Pierce says, “The safe harbor is also designed to protect token purchasers by requiring disclosures tailored to the needs of the purchasers and preserving the application of the anti-fraud provisions of the federal securities laws.” The concept is that enough information should be made available about a token so that any legitimate American buyer can make a rational purchase decision, and that any bad actor trying to use the Safe Harbor for nefarious purposes can be found and rooted out.

Life After the Safe Harbor

By the end of the three-year grace period, the project’s initial development team must have sufficiently matured the network, so that the tokens trading within it do not constitute securities. In other words, when the project’s initial development team no longer has to perform essential functions to ensure the token’s success. Unfortunately, the SEC has traditionally held the view that tokens are securities. Therefore, it is almost impossible to demonstrate the existence of a decentralized network if the token is not put into the hands of potential users either through direct issuance or secondary trading. Pierce looks to alter this by using “liquidity” and “secondary trading” as necessary tools for the success of the Safe Harbor. Pierce states,

“Admittedly, the liquidity condition may surprise observers of SEC staff positions in which attempts to facilitate secondary trading have been viewed as indicia of a securities offering. In the context of the safe harbor, by contrast, secondary trading is recognized as necessary both to get tokens into the hands of people that will use them and offer developers and people who provide services on the network a way to exchange their tokens for fiat or cryptocurrency.”

Even when a network remains centralized, securities laws will be inapplicable where the tokens are “actually in use to buy and sell the services for which they were intended.

The Safe Harbor represents a bold proposal concerning digital asset regulation that could even the playing field between token offerings inside and outside the US.  Furthermore, Pierce herself has welcomed feedback on the draft. But, since the Safe Harbor would be subject to approval by vote of the full Commission, as well as the often time-consuming SEC rule-making process, the American public will have to wait before a concrete directive is put into place.  Nevertheless, the proposal is fair, well balanced, and a step in the right direction to allow American utility token offerings to compete on a level playing field with similar offerings from other countries.

How Private Keys Create Flexibility, Security, and Risk within Digital Exchange Platforms

By: Jon Avidor, Jason Gershenson and Armando E. Martinez

As cryptocurrency exchange activity continues to grow, it becomes increasingly more important to understand how to protect these assets. Storing cryptocurrency safely is often confusing for first-time and even experienced buyers. Popular digital exchange platforms often make it deceptively easy to assume that they provide retail cryptocurrency traders sufficient asset security.

Such “Custodial Exchanges” were the earliest digital exchange platforms, and necessary to conveniently trade Bitcoin, and the cryptocurrencies that followed. after the advent of Bitcoin. However, the cryptocurrency community at large recognizes the practical advantages of “Non-Custodial Exchanges”.

“If you don’t own your private keys, you don’t own bitcoin”.

The established mantra within cryptocurrency communities – “If you don’t own your private keys, you don’t own bitcoin” – is central to distinguishing the two types of digital exchange platforms. Every platform that facilitates the exchange of cryptocurrency ultimately places the purchased cryptocurrency in an off-blockchain “wallet” that the traders can access and continue to store cryptocurrency in.

A wallet’s public key (akin to bank account number) allows a cryptocurrency trader (and virtually anyone else) to see the funds within a wallet, as well as the history of transactions made with the wallet. Accessing this wallet to withdraw or trade cryptocurrency, however, requires a passcode known a “private key”. The private key is an auto-generated alphanumeric code, and the singular way to access and create transactions with cryptocurrency within a trader’s wallet. Private keys are difficult to remember, and there is often a risk of placing the private key in a location susceptible to theft, or forgetting where the private key was placed all together. Losing the private key for a wallet generally means permanently losing access to the assets within that wallet. Considering that the private key is the tool to control a trader’s cryptocurrency – what does it mean to not own it?

Custodial Exchanges (No Private Key Control)

Custodial digital exchange platforms are the ones that maintain possession of traders’ private keys. These exchanges are considered “custodial”, because at the time a transaction on the exchange is processed, neither the buyer nor seller are in possession of the traded assets – representations of those assets are exchanged off-blockchain, and entirely within the platform’s database. Most major digital exchange platforms, such as Coinbase, Gemini and Binance, are custodial exchanges.

Exchange custodianship of private keys allows crypto traders to access their wallets with a password, and in some cases, additional two-factor authentication via mobile phone. In addition to utilizing log-in processes that resemble most other online services that crypto trading newcomer already uses, custodial exchanges have the highest trade volume, customer support, insurance, and offer the ability to deposit and withdraw fiat currency.

Custodial exchanges also offer speed. Trading takes place off-blockchain, which means transactions can process quickly but at the expense of the transparency that publishing a transaction on-blockchain affords. In other words, when a crypto trader buys bitcoin on a custodial exchange, they technically buying a representation of Bitcoin within the exchange’s database (which the exchange fully controls). Traders only own actual Bitcoin upon withdrawal from the exchange’s wallet to the trader’s wallet. Until then, a trader is at the mercy of the centralized exchange.

Custodial Exchanges 

            Every year, millions of dollars’ worth of crypto are stolen from even the most established centralized exchanges. Aside from direct hacks to a centralized exchange’s customer funds in custody, two-factor authentication — the very method to protect a customer — can be a hacker’s segue for a cybersecurity attack. Other disadvantages that may negate the convenience of a centralized exchange include:

  • Inability to Withdraw Cryptocurrency: Website crashes and maintenance cause funds on even the most reliable centralized exchanges to be unavailable at any given time.
  • Missing Hard Forks: Hard forks occur when a single blockchain splits, resulting in twice the number of tokens — one for each blockchain  Immediately after the 2017 Bitcoin hard fork (which created Bitcoin Cash), and the 2019 Bitcoin Cash hard fork (which created Bitcoin SV), those that could access their private keys had the instant ability to trade the new tokens. However, Coinbase users had to wait weeks for Bitcoin Cash and months for Bitcoin SV, until Coinbase established an internal system supporting the two tokens.
  • False Trade Volumes / Manipulation: Since transactions take place on a central ledger and off-blockchain, trade data can be manipulated by the custodial exchange to produce a certain outcome.

For retail traders to ascertain that they are the only ones who have absolute control over their assets, even in the face of a cybersecurity attack, they must trade cryptocurrency using their private-key wallets on non-custodial exchanges.

Non-Custodial Decentralized Exchanges

            Non-custodial exchanges can take many forms, including in-person trading, linking an external wallet to a central “bank” to buy or sell cryptocurrency, linking a wallet to an exchange. In all cases, the primary feature is that each cryptocurrency trader can always remain in control of their wallet funds by way of private key ownership.

            The analogues to digital custodial exchanges — decentralized exchanges (DEXs)— are built using a blockchain infrastructure, inherently never controls users’ assets, and allows traders to conduct transactions from their own external wallet, or a wallet on the exchange’s blockchain that the user controls. On a DEX, a trader’s Cryptocurrency is deposited into a smart contract which processes then transaction, never interacting with the private key. With no centrally controlled ledger or funds accounts, exposure to hacking and theft is significantly decreased.

However, DEXs still pale in popularity compared to their centralized, custodial counterparts. DEXs often require more technical knowledge to use, exhibit slower performance (issues with scaling the blockchain), and often cannot facilitate trades “cross-chain” (e.g. Bitcoin for Ether). DEXs certainly require more effort and patience from traders, but cryptocurrency communities are committed to solving the accessibility, scaling, and transaction issues in order to increase security, and subsequently, wider cryptocurrency adoption.

When determining which type of exchange to use, prospective or current cryptocurrency traders must decide what is more valuable to them: easier access to one’s digital assets or complete, unequivocal control of these assets. Institutional traders cannot risk any of their respective clients losing access to their assets, so they might choose to operate on a custodial exchange, especially since some custodial exchanges offer insurance against cybersecurity attacks as well as other traditional client services. On the other hand, retail traders might want to overlook the convenience of a custodial exchange to ensure that they are the only ones who have absolute control over their assets by using their private keys within non-custodial DEXs.

It is still too early to determine which type of exchange is “better” for any type of trader. With creative paths to security, access, and complete control, however, both custodial and non-custodial exchanges will entice more activity within the cryptocurrency space in the coming years.

Blockchain and Insolvency: How Blockchain Can Make Matters Easier for Creditors, Debtors, and Bankruptcy Courts

By: Rob Griffitts

Digital currencies on a blockchain ledger provide enormous flexibility when conducting commercial transactions. In the capital markets, lenders and borrowers can structure credit transactions at arms-length since the lending amount need not be examined by a financial institution.

On the other hand, if a prospective borrower obtains a loan and files for bankruptcy, a creditor might face trouble in recovering the principal on the loan he or she issued to the debtor. Debtors may attempt to circumvent repayment of loan principals by exploiting the current loopholes in the U.S. Bankruptcy Code pertaining to blockchain-based digital assets. These loopholes have put bankruptcy courts, U.S. Trustees, and estates in a precarious position, as these courts have struggled to compartmentalize digital assets, credit, and blockchain-based currency into a legal framework. This uncertainty, however, allows lawyers to provide bankruptcy courts, prospective lenders and borrowers, and perhaps Congress with a schematic for ascertaining repayment and streamlining bankruptcy proceedings.

The issue with blockchain-based resources in bankruptcy proceedings begins with how to identify these resources; the SEC and the CFTC have provided a starting point as they have, respectively, defined these resources as either monies or commodities. The problem amplifies, however, when a bankruptcy court incorrectly defines the resource at issue, which could effectively prevent the trustee or creditor from recuperating the full value of the resource. 

Under 11 U.S.C.A. § 550(a) (the U.S. Bankruptcy Code), a trustee may recover the property transferred or if the court so orders, the value of such property. When the item transferred is currency, the trustee would be entitled to only the historical value at the time of the transfer; when property is transferred, however, the trustee would be entitled to receive the value of the property at the transfer date or the time of recovery, whichever is greater. The uncertainty in both the identification and valuation of these assets directly impacts how much—or how little—one might recover. For example, a Chapter 11 debtor whose primary asset is bitcoin may have sufficient assets to satisfy creditors in full one day, but the debtor may be insolvent the next.

Inevitably, this uncertainty creates some trepidation for prospective borrowers; blockchain, bankruptcy, and securities lawyers, however, should seize this opportunity to structure loan term sheets and credit arrangements for digital assets with two objectives in mind: 1) to put debtors on notice if debtors attempt to circumvent repayment by exploiting the loopholes in the U.S. Bankruptcy Code; and 2) to streamline potential in-court and out-of-court bankruptcy proceedings. Structuring these arrangements to address blockchain-related gaps in the law, such as asset valuation, identification, and ownership, are just several ways in which practitioners can help both creditors and debtors transact with reassurance and efficiency. The question, then, is how?

First, if the debt contract or credit arrangement between the creditor and debtor involves a digital asset, the contract must have a rigid classification of whether the asset will be qualified as a “currency,” “security” or a “commodity.” This classification, moreover, should include the valuation and timing mechanics of U.S.C.A. § 550(a) to place a floor and limit on the amount at issue. If a dispute based on this contract or arrangement were to make it to court, the lawyers for the parties at interest have eliminated tasking the court with this responsibility, as a distorted classification or valuation of the resource at issue may leave a party with either an insufficient recovery or a potential windfall.

Second, during due diligence, the lawyers for both parties must emphasize access to a blockchain ledger for the parties at interest so they can: 1) validate transactions and ownership of assets simply by accessing the blockchain ledger; 2) track any manipulation or transfer of these assets; 3) create a qualifying bid schematic for any potential asset sales; and 4) structure an outline for claims administration prioritizing lenders in the order, and amount, which they lent. This structure would allow trustees and fiduciaries to track assets more efficiently than fiat money, as digital assets on a blockchain ledger are incorruptible. This structure would also be more cost efficient than it would be for tracing fiat money, as gaining access to bank documents in the event of a bankruptcy proceeding may significantly delay the process.

Lastly, to avoid the fear of fraud, Bankruptcy Rule 2004, Section 341 allows for a meeting of creditors and examinations where a trustee will examine a debtor’s assets, liabilities, and bank records—a meeting of this nature should be implemented into the debt contract and subject any potential fraudulent debtor to consequences, either civil or criminal, if a debtor materially omits a fact in the representations and warranties phase that is later uncovered in a bankruptcy proceeding. While debtors may be apprehensive to agree to this provision at first, it substantially deters the possibility of a debtor circumventing repayment based on fraudulent representations.

Although courts have yet to peg a uniform definition to blockchain-based digital assets, that does not mean that financing arrangements involving these assets must stall. In fact, practitioners should use this gap to their advantage since it creates an opportunity to provide creditors, debtors, bankruptcy courts, trustees, and fiduciaries with reassurance through a flexible, digital-asset based credit and lending agenda.


We would like to thank Armando E. Martinez for his contribution to this article.

Blockchain Automotive

Can Blockchain be the Driving Force for Autonomous Vehicles?

By: Jon Avidor

A key issue in today’s automotive industry is that many processes and data storage are manual and paper-based, leading to inaccuracies, disputes, and high transaction costs. Out of 1,314 automotive executives surveyed across 10 countries, 62% of these executives reported that blockchain would be a “disruptive force” in the automotive industry within three years. Equipment manufacturers and suppliers are looking to create privacy safeguards and change how they store information. The need for blockchain technology stems from the change in the once linear structure of the automotive industry, which was simply between suppliers, manufacturers, and dealers. Through globalization, regulation and technological advancements, the automotive industry has expanded so significantly that industry executives believe it calls for a shared ledger to centralize all of its intertwined processes.

While the automotive industry has not yet implemented blockchain technology, research and development of certain technologies are starting to take place. The University of Nevada, Reno’s Intelligent Mobility Initiative is working with the Nevada Center for Applied Research and Filament to develop blockchain internet of things (“IoT”) technology to create greater safety for autonomous vehicles, which market is expected to increase exponentially between 2019 and 2026.  IoT applications maintain a ledger of how devices interact. Testing is scheduled to begin soon, where Filament’s Blocklet Technology will be integrated into an autonomous vehicle, and the surrounding infrastructure will be placed with sensory functions. The sensory technology includes light detection and ranging (“LIDAR”) and dedicated short-range communications (“DSRC”). The testing phase aims to confirm this technology’s use in accurately documenting events and enabling data exchange through blockchain transactions.

This isn’t Filament’s only involvement in revolutionizing the automotive industry. The remanufactured automotive parts industry estimated by a U.S. International Trade Administration’s Industry Assessment to be approximately a $100 billion global industry. However, the business logistics of these operations make this subset of the automotive industry incredibly complicated and expensive. Filament’s Blocklet Technology is also helping manufacturers create new remanufacturing opportunities through reduced costs and increased efficiency. This technology aids in payment processing and implements smart contracts. The U.S. Department of Transportation (“DOT”) estimated that certain safety applications using vehicle-to-infrastructure (“V2X”) and vehicle-to-vehicle (“V2V”) communications could alleviate or eradicate up to 80% of non-impaired crashes. Since as early as 2014 the DOT has been exploring the use of V2X and V2V technology to allow vehicles to communicate with infrastructure and each other to prevent car accidents. The technology in cars today includes sensors that have a limited range and a delay in relaying data. V2V technology is a step-up because it shares information in real time. However, V2X uses blockchain technology to enable these communications.

Companies are taking note of the use of blockchain-based sensory functions in automated vehicles and are moving forward in filing patents. In April, IBM received a patent for a blockchain application that will manage data and interactions for autonomous vehicles. This V2X technology will intake sensory data from the vehicle and surrounding infrastructure and store the data into a private blockchain system. General Motors filed a similar patent in December. General Motors, BMW, Ford, Honda, and Renault are only a few members of the Mobility Open Blockchain Initiative (“MOBI”) – a non-profit organization created to support the creation and implementation of blockchain technology in the mobility industry.

Car manufacturers aren’t only utilizing blockchain for autonomous driving data and safety. Hyundai is developing a program that allows drivers to connect their Hyundai electric vehicles with their smartphones to customize certain vehicle functions. The application will allow drivers to adjust performance features of the vehicle from their phone. Blockchain technology and its variety of uses in the automotive industry is well on its way to becoming a reality.


We would like to thank Rachel Behar for her contribution to this article.

Is Ethereum a Security?

By: Steve Masur

SEC Chairman Jay Clayton recently confirmed in a letter that Ethereum and similar cryptocurrencies are not securities. This letter was in response to Representative Ted Budd’s letter asking the SEC to clarify the criteria used in determining whether a digital token offered or sold is an investment contract and thus is an offer or sale of a security. Ever since SEC Director William Hinman’s June 2018 speech, where he announced Ethereum and other similar cryptocurrencies are not securities, the crypto community has been wondering whether these remarks, in fact, reflect the beliefs and policies of the SEC – despite his disclaimer that his statements reflect his own opinions only. Generally, his speech concerns when a digital asset is offered as an investment contract and is thus a security.

There were several key takeaways from Director Hinman’s speech:
1. A token itself is not a security, but the transactions pursuant to which a token is distributed may be a securities transaction.
2. The Bitcoin and Ethereum networks are currently decentralized enough that the disclosure rules in federal securities laws would add little value. Further, other networks could become decentralized enough such that the tokens that are on these networks do not need to be regulated as securities.
3. Drawing on the well-known Howey Test, the form of a transaction is less important than the economic reality of it. The sale of tokens may qualify as a securities transaction where the tokens are sold in efforts to fund an enterprise, and where the token purchasers rely on the efforts of a third party to see a profit.
4. Lists of relevant factors in assessing whether a third party is driving the expectation of a return on a digital asset, and in determining when the sale of tokens may be a securities transaction.
5. The way that securities laws are applied to token distributions may impact the securities treatment of the token or sale in secondary transactions.

Chairman Clayton reiterated that whether a digital asset is an investment contract, and thus a security, depends on the application of the Howey Test and its progeny, including the Forman Test. While he didn’t specifically mention the consumption/consumer use test from Forman – finding that when a purchaser is motivated by a desire to use or consume the item purchased – it is assumed that this test applies. Chairman Clayton agreed with Director Hinman that the analysis of whether a digital asset is offered or sold as a security can change over time – that a digital asset may be initially offered or sold as a security, but that this designation as a security can change if the digital asset is offered or sold in a way that no longer meets the definition of an investment contract. He further agreed with Director Hinman that a digital asset transaction may no longer qualify as an investment contract if a purchaser no longer reasonably expects a third party to generate a return.

Chairman Clayton said that networks such as Ethereum and similar coins are sufficiently decentralized such that they are not investment contracts, and thus not securities. Although he didn’t specifically say it in his letter, he has mentioned in the past that Bitcoin is not a security. It is clear that a coin, alone, is not a security. It’s about the method in which the coin is offered or sold that makes it a security. If a coin is sold to fund an enterprise and the purchasers of the coin are relying on the efforts of a third party to make a profit, the coin is likely to be deemed a security. While this increased clarity is helpful in providing some general rules of thumb to consider in determining whether a digital asset could be considered a security by the SEC, it has also left open many questions that would need to be answered for this to achieve the level of real guidance.

What is the meaning of sufficiently decentralized, and at what point does a network become sufficiently decentralized? Networks will want to know more from the SEC on what this looks like, so they know what to expect. What does the SEC consider to be a similar coin, and what factors do they use to determine this? This is still an open question, and it may be wise to wait and see what coins the SEC deems to be similar to Ethereum, before assuming that a coin is not a security. The main takeaway from the letter is that the SEC is going to move slowly and carefully in providing guidance.  So for the time being, it is safest to presume a new digital asset might be considered to be a security in the US unless you are confident you can prove otherwise if tested in a court of law.

If you have further questions about a digital asset you plan to create, we can help you develop a good legal strategy for how to remain compliant when releasing it, both in the US and abroad.


We would like to thank Rachel Behar for her contribution to this article.

Wyoming blockchain MG+

Wyoming’s New Frontier for Blockchain and Digital Assets

By: Steve Masur

Wyoming, generally known for its great skiing and cowboy culture, is also quickly becoming an oasis for blockchain technology-based companies. The Wyoming legislature recently passed three blockchain-friendly laws—totaling 13 in the past two legislative sessions—that allow corporations structured under the Wyoming Business Corporations Act (“WBCA”) to facilitate transactions involving digital assets. By defining digital assets as both “virtual currency” and “utility tokens,” Wyoming is now the first state to place blockchain-based assets into their own distinct asset class, seemingly positioning itself as the go-to destination for blockchain-based commercial activity.

Wyoming’s blockchain-friendly ecosystem entices companies to incorporate in its state, such that competition with Delaware is imminent. Although Delaware still offers a tax and corporate-friendly environment for businesses, it has yet to establish a friendly legal framework for companies engineered around digital assets and virtual currencies. Other states have either labeled digital assets and virtual currencies as a “security” or a “commodity.” Since the Securities Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) have defined virtual currencies as “securities” and “virtual commodities”, respectively, businesses that are incorporated under Delaware law or transact with virtual currencies face the specter of answering to these agencies, potentially jeopardizing their operations.

The Wyoming legislature, by contrast, has taken the reins on defining digital assets as “virtual currencies” and “utility tokens”, placing these mediums of exchange into their own unique terminology buckets under Wyoming law. Since these benefits under Wyoming law only apply to businesses incorporated under the WBCA, blockchain-based companies have begun heavily considering Wyoming as their entities’ state of organization. Should Wyoming keep its current pace of enacting blockchain-friendly legislation, we can expect a paradigmatic shift in the number of companies, especially blockchain-based ones, spurning Delaware to incorporate in Wyoming.

Wyoming’s legal classification of digital assets as “virtual currencies” and “utility tokens” provides these assets with the same legal treatment as money under Article 9 of the Uniform Commercial Code (“the UCC”). Under UCC 9-332(a), “[a] transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Eliminating the security interest requirement allows blockchain-based companies to issue, lend, and borrow virtual currency without the need of a financial intermediary, such as a bank. In the context of issuing blockchain-based tokenized assets, cutting out the middle person may incentivize Wyoming-based companies to conduct more token offerings as a capital raising strategy.

The lack of clarity in defining these tokens at the federal level puts digital currency exchanges, such as Coinbase and Gemini, under vast scrutiny when conducting token-based offerings, since courts have interchangeably classified these currencies as both “securities” and “commodities.” This has impeded courts’ ability to clearly establish the rights of investors in these offerings, as many have received a fraction or nothing of what they were promised in the offering. By treating virtual currency and fiat currency as the same, legally speaking, Wyoming has legitimized token-based offerings bilaterally for issuers and consumers, as Wyoming-based exchanges may now conduct token-based offerings sans a financial intermediary and provide consumers with established rights under these offerings. Eliminating the hassle of dealing with a financial intermediary, while also providing greater security for prospective token offering investors, makes Wyoming an attractive destination for future digital currency exchange startups.

Wyoming’s legislative treatment of digital assets as money under the UCC has exempted owners of blockchain-based digital assets from paying property taxes on these assets. That is, Wyoming will treat these assets like fiat currency, but they will not have the same tax implications of United States currency, as the legislature does not recognize digital mediums of exchange as legal United States fiat currency. This is the icing on the cake for Wyoming-based blockchain companies, as their digital assets can be placed in a Wyoming bank as a store of value, free of any state property tax concerns.

Given Wyoming’s friendly treatment and definition of digital consumer assets, we will likely see a sharp increase in blockchain-related commercial activity in the state. In fact, Wyoming’s flurry of blockchain-friendly legislation indicates that the state is positioning itself to be the virtual currency hub of the United States. Should other states follow suit? If Wyoming’s economy creates a gold rush environment, we could see a legislative arms race among the different states to emulate Wyoming’s virtual currency legislation.


We would like to thank Armando E. Martinez for his contribution to this article.