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Introduction to Blockchain Technology and the Law

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Introduction to Blockchain Technology and the Law

Blockchain technology and cryptocurrencies present many complicated legal issues and attorneys need to be aware of these issues to provide competent legal representation. In addition, blockchain technology and cryptocurrencies are creating a new area of law that presents an excellent opportunity for attorneys looking to expand their practice or to be seen as a legal thought leader in their organization.

Transcript

- Welcome to Introduction to Blockchain Technology and the Law, a primer for attorneys. I am Eric Guthrie. I will be your presenter for this CLE. First, a few disclaimers. This training is for educational purposes only. None of what follows is legal or tax advice. Students are strongly advised to seek advice from a licensed attorney or a CPA. Unless otherwise communicated in writing by the trainer, being myself, GBA, which stands for Government Blockchain Association, or the trainer are not engaging in rendering legal, accounting, investment, or other professional services. And finally, neither the trainer nor GBA shall be liable for any loss of investment, profit, or any damages arising here from the content in this training. So, let's get into it now that disclaimers are done, and let's start with the trainer, by being myself. I am Eric Guthrie Esquire. I am the President of a consulting and training company called BetterMEBetterWE. And we do training on many different issues and subject matters globally. I am the author of the Amazon number one bestseller, Blockchain Or Die. It was the number one bestseller four times on Amazon. And as you can see on the bottom on the slide, has won three book awards, three business book awards, the Big Book Award, the Independent Press Award, and the Next Generation Indie Book Awards. I am a partner in The Cogent Law Group, a full service law firm in Washington, DC. And I'm the director of training programs for the Government Blockchain Association, which we'll talk about in a few slides. So as I said, BetterMEBetterWE is a global training and consulting company. We trained on blockchain technology, cryptocurrencies, diversity leadership, process improvements, many things from Bangkok to Brazil. We are the parent company for BetterMEBetterWE Publishing, which is the publishing company for Blockchain Or Die, and also our first book, Diversify Or Die. And also we're a certified Government Blockchain Association training provider. So we are licensed to provide all of the blockchain trainings that GBA has virtually or all over the world. The Cogent Law Group is a full service law firm in Washington, DC. I am proud to be a partner of that law firm. I'm not gonna read all this, but you can see the second bullet point, FinTech, blockchain and cryptocurrency practice. That's primarily where I practice, and that's where the firm has its most thriving practice. So if you're interested in getting in touch with us to learn more about the firm, then you can contact us at cogentlaw.co. So let's talk about the Government Blockchain Association. These are the courses that we provide. We're a 501 organization, but training is a really big part of our organization. We have a certified Government Blockchain Consultant Certification. And if you take the foundation, one the consulting series, and the executive consulting course, you become certified as a GBA consultant. Now the legal course, which is highlighted in red is the course that I teach. And it's highlighted because, A, I'm speaking to most likely a bunch of attorneys in this presentation. But secondly, because it is actually been accredited for 7.5 CLEs by the DC Bar Association. It's one of the few courses that have at DC MCLE credit, which is good in 45 states. So if you're interested in taking this course, we can get you registered for the next upcoming course, just contact me, and then we will get you registered. So when I do trainings, I like to be as interactive as possible. I think that's where some of the best training information lies. So unfortunately this is a recording where I can't interact with you in real time, but we can do some Q&A back and forth through the recording. So these are two starter questions I'm going to start with. One, do you think that our current laws, rules and systems are adequate to manage this transformational technology? And two, what impact will blockchain technology have on our legal, regulatory, and governance systems? Just gonna pause there and let you guys think about that. Think of some answers, and then we'll reconvene. Okay, welcome back. So let's start with the first one. Do you think that our current laws, rules and systems are adequate to manage this transformational technology? Well, the answer is, it depends, which is the typical attorney answer, but in this case, it happens to be very true. There are hundreds, if not thousands of laws that you know could be applied to bloodchain technology and cryptocurrencies, and there's some laws that may still need to be written to be able to adequately manage it. So if you ask the SEC, for example, the laws that governs SEC, they will argue are adequate. And there are other areas of cryptocurrencies and blockchains where there may be some new laws that need to be written. So that's why the answer is it depends. What impact will blockchain technology have on our legal, regulatory, and governance systems? It will have a huge impact. And the reason why I can say that is because, and we'll discuss this in a slide, blockchain technology is going to move important sections of what we do in our everyday life, from centralized to decentralized. And all of our regulatory systems, our whole legal system is based on centralized systems. Now we have to incorporate some decentralized systems, which would require us to really rethink how we manage our legal, regulatory, and governance systems, not just in the US, but globally, so we'll talk more about that later on. So now let's talk about how blockchains work. This slide is very important because if you don't have any knowledge of blockchain technology, you need at least a basic understanding to really grasp the material that's gonna be coming up in the rest of this presentation. This graphic is a real quick and easy way to understand the basics. It's by no means a in depth or involved explanation. So if you already have this knowledge, this will be very rudimentary to you. But if you do not, this will be helpful. In a blockchain transaction, in a decentralized blockchain transaction, there's a certain system that has to take place to make sure that the transaction takes place in an efficient and an effective way. These seven graphics will present that to you so you can understand it in a better manner. Let's say A wants to send money to B. I wanna send money to one of you. Well you can see there, there's a laptop involved, so this whole thing is virtual. And you can see in graphic number two, the transaction is broadcast on the network, on that particular blockchain network. So if you're on Bitcoin, it's on the Bitcoin network. If you're on Ethereum, it's on the Ethereum network. So on, so on, and so forth. So the miners, miners are the nodes that actually process the transaction. They take the transaction, and they add it to a block. Now it's called blockchain for a reason, the first part is creating the block. So the transaction's added to the block, and the block is broadcast to every party in the network. They're looking for someone to validate the transaction. Now, in this process, the fastest nude, the fastest environment to validate the transaction will actually win the reward. For example, in Bitcoin, you get paid in Bitcoin to complete the transaction. So the first one that complete it wins that reward. And you can see in number five, those in network approve the transaction is valid, that is proving the transaction has actually occurred. And the transaction is completed. Then the completed transaction is then added to the chain. And then, which is the record. This record is put in the chain, is locked away, it can't be changed, is totally immutable. And then only after all that occurs, does the money move from A to B. And that takes us, you know, back to the reason why money was being sent, because A wanted to send money to B, and one and seven, the actual, the money being the cryptocurrency moves from A to B. All that occurs between one and seven. This does not occur in a centralized transaction because the bank or the credit union or whatever organization is approving the transaction, they do it all internally. Here, it is done by all of the people and the miners on the network. That is in a quick and dirty explanation how blockchains work. So in that description, we have now five blockchain properties. Now again, this is for basic education, and it's important for you to understand not only these five properties, but the terms associated with them, because they're gonna come up quite a bit through your blockchain journey. First of all, blockchains are decentralized. Now, what does that mean? That means that as I showed you in the previous slide, the miners are the ones that are proving transactions, they're decentralized. Anyone can access it, anyone can access to the code, anyone can approve the transactions. So decentralization is extremely important because it's involving the community. It's involving anyone that wants to be involved. It's not centralized like a bank where you have to be an employee with certain level of clearance or access to be able to access the code of the systems. Anyone can access it. Any one of you right now can go to bitcoin.org and download the Bitcoin protocol. It's distributed ledger technology. What does that mean? That means that anyone can access to the ledger, right? All the transactions are stored on a ledger. The ledger is distributed to everybody, which means that anyone can view the transactions. So that's very important because that's extremely transparent. If anyone can view the transactions, then anyone can see if there's anything that's fraudulent or untoward happening, and they can report it. They can catch it and they can potentially stop it. Cryptographically safe and secure. Now, cryptography is extremely important in a decentralized distributed ledger technology because there has to be a means to protect the information, to protect the data, to protect the transactions. Now in a centralized world, the security, the firewalls, all the protections are all centralized, they're all internal, but in a decentralized world, it has to be a system that can protect it without restricting anyone from having it. So Bitcoin and a lot of the cryptocurrencies used what's called the SHA-256 Hash. I encourage you to look that up. And that is most commonly, the cryptographic security that's used to protect the transactions and the data on a blockchain. Number four, mining is used to validate blockchain transactions. So with all, with one to three in place, right, there has to be a way, there has to be a process to approve transactions, because if they're not gonna be approved, then the cryptocurrency is worthless. So there has to be a means to validate, to move money from A to B, like we saw in the prior PowerPoint slide. So miners are always used, and you saw miners on the prior slides. So those are the real important components of blockchain transactions that allow them to happen. And then five, transactions are immutable. So that means that they can't be changed. It would not be a viable decentralized finance system if transactions could be changed after the fact, and that can destroy the entire system. Once transactions are put in the block, and they're locked, they cannot be changed. For example, in Bitcoin, there are 10 transactions that go on each block. Once that block is locked, it is locked. It cannot be changed. And it's decentralized so people are always looking at it. So those are the five blockchain properties that make blockchain technologies so important and so transformational. Now let's go into the legal portion, legal systems overview. We're gonna discuss three components of legal systems in this slide. And then we're gonna kind of jump into it further on in this presentation. Now I said before that moving from centralized to decentralized, I'm saying that quite a bit because it's very true. Now, everything that we do in legal system is based on centralization. For example, our businesses are centralized. We have corporate structures, we have bylaws, we have taxes. Even our actual physical structure, one building, with one CEO, or one executive director, or one president. And then we have, you know, the president has a board of directors that's centralized, and then they have, reporting to them they have executive vice presidents, or vice presidents, or president or managers or directors. That's all centralized. It's a huge pyramid, it's all centralized. Everything that we do from a legal standpoint is based on a centralized business structure. Let's look at centralized regulations. All regulations are centralized to be able to accommodate and govern centralized businesses. So legislatures in local legislatures or state, or even, you know, national legislatures, they're passing regulations to regulate centralized businesses. And also there's centralized accountability. All of our structures, the laws, the regulations, the courts, are all based on identifying one person or one responsible actor in all of the transactions that we do, right? So the CEO is liable. The CFO is liable. You know, liability rests on either one person or one organization. And that has been the structure for the legal system for centuries. And now, you know, with decentralized systems, that may need to be changed. We're gonna talk about now what's called smart contracts. Now smart contracts are really important because in a blockchain organization, we are going to discuss what makes that tick. And one of the most important components of a blockchain organization are smart contracts. That's actually the method by which transactions and will be occurring, and approved, and finalized, which would account for the flow of the cryptocurrency, you know, to keep that the blockchain business going. So what's a smart contract? A smart contract is basically a software code, and it's deployed on the blockchain, and you know, smart contracts are basically when I said software code, they're basically if then statements. If something occurs, then something occurs next, okay? And that's what makes smart contracts, quote unquote, smart, because that's a very exact way to draft a smart contract or draft any contract language, okay? Because the if then statement is so precise, arguably it eliminates the needs for individuals to continue to process, to manage a transaction. It happens instantaneously on a blockchain. I'll give you a very rudimentary example. You go to a vending machine, you want to get a Twix candy bar, and you see Twix is on A7, and it costs 1.50. You put in $2, you plug in A7, the Twix hopefully drops out, goes to the bottom, and then you hopefully get your 50 cents change. And the transaction is done, right? Instantaneous, no need for anybody else, no need to go to a store clerk, or no need to, you know, tap your credit card onto a card reader. It all happens with the currency in that machine, and it's very instantaneous. Well, smart contracts, you know, I mean, that's a very, very simplistic example, but you know, the similarity is there. The vending machine is the blockchain, is all contained in one place. You know, the currency is the fiat currency, whatever you use, the dollar, the Euro, the Thai Baht, the Japanese Yen. And, you know, you want something, you put it in and it comes out. That's a smart, that's basically how smart contracts work on the blockchain. And if then statements make that possible. Now in case you're wondering about the history of smart contracts, it started in 1997. And Nick had a idea for smart contracts, which he made a paper, The Idea of Smart Contracts, very simply entitled. And this is where the vending machine example came from. So this is really where smart contracts came from. If you were interested in reading that paper, you should go look it up, you can Google it and find it, it's a very good read. Another good read by the way, is the Bitcoin white paper, which you can go on bitcoin.org and you can read it. It's actually in many different languages, so if you wanna share it with some of your friends or colleagues overseas, they speak different languages, the Bitcoin white paper has been translated into many different languages. So let's discuss if then. Now, smart contracts work on if then statements as I said before. If something happens, then something happens next. But how does that differ from legal contracts? Legal contracts do not work on if then statements. If you go back to your first year, your 1L years in law school, you know that smart contracts work on, I mean, the contracts work on offer and acceptance. There's an offer, then there's the acceptance. And that was what creates a binding contract. Well, how is that different from if then? Well, you know, if then is in the code, but offer acceptance is in the negotiation or the conversation. So, you know, you can have if then, but you still have to accept the offer of what's present in the if then to be a binding contract legally. So we're gonna talk about that in the coming slides with smart contracts. Now, so far we talked about coding mostly in terms of smart contracts, which is basically if then. But we need to talk about the other two bullet points more clearly to make sure that all of you understand the smart contract steps, the code, if then, done, we discussed that. Distributed ledgers, that's the blockchain, right? And that's the vending machine that we gave as an example. So whether it's a Ethereum blockchain, or a Solana blockchain, an Odo blockchain, these are all actual blockchains that smart contracts are on. This is where the smart contract is housed on that distributed ledger. Next is execution, right? So after you have the code, and the code is put on that particular distributed ledger, you need a buyer and a seller, okay? So the, let's say you're selling the use of a particular kind of code that you need. You see someone has the code, you wanna pay them, let's say one Ethereum for it, their Ethereum goes into the wallet of the seller. Once it's received, the code is automatically sent to the buyer, transaction done, and it's executed, right? Everything that happens on smart contracts follow these three bullet points, coding, distributed ledgers, and execution. But what does that mean in terms of the actual ability for it to be effective? You have to have good code. If you don't have good code, you're gonna have problems. Your distributed ledger has to be operational and also has to be, you know, instantaneous. If there's a problem with your ledger, you're gonna have problems. Execution. If there's a misunderstanding, or if there is some type of issue with what's being sent, the execution may be flawed, which may mean what? It may mean there's some legal action it may take afterwards, after the receipt of whatever it is you purchased, right? So these are the smart contract steps, but they are in a vacuum of issues that could be occurring that make this problematic, in which case the parties involved may need a lawyer to sort it out. So let's start with the quiz. Blockchain quiz, true or false? Smart contracts are smart, and they are legal documents. Take a minute and ponder that answer. Okay, so we're back. True or false, smart contracts are smart and they're legal documents. The answer is false. For all the attorneys that do contract law know that there are certain things that have to be in a contract for it to be actual legal document. And just computer code by itself, most likely does not meet that requirement. However, I will say this, there are smart contracts now that have lawyers that are helping, you know, with the coding and with the creation of the information in the contract. Those contracts may actually be legal documents because you know, the information that we're used to having and that's required to have, sometimes by law and by statute are actually being put into that smart contract, but smart contracts by itselves as a whole are not legal documents. Okay, let's go to liability. Blockchain liability issues. One thing in legal profession that we always have to think about is who's liable? What does liability lie? Now, here's the question for blockchain technology. Who can liable in a blockchain technology company? Here's the question. What is the term that changes the liability options from a non-blockchain company to a blockchain company? Take a second and think about that answer. Okay, we're back. What is the answer to that question? What is the difference? The difference is the key word that I was saying before, decentralization, right? We know where liability may lie in a centralized organization, but we may not know where it lies right now in a decentralized organization, i.e. blockchain liability. So, who could be liable? Let's look at the first five bullet points. Core developers of the blockchain software. If there's a problem with the code, like I was saying before in smart contracts, the coders could be liable. Miners that validate transactions, they could be liable as well. Developers of the smart contract applications, they could be the same as code developers, they could be different. They could be liable as well. The actual users of the smart contracts, if the users of the smart contracts are engaging in illegal activity, they could be liable as well. Are there any other possibilities? There are plenty other possibilities. This is an area of law that has barely been scratched. The questions are just being asked. So when it comes to blockchain liability issues, there's a whole lot to consider. And as attorneys that are interested in this area of law, you know, I encourage you to research some of these issues, and maybe even you could think of some of the answers or some of the questions to the answers, questions for answers to be presented, to be able to be a thought leader in this area. Let's look at a quote from the CFTC. One of the main issues, or the main way to resolve this issue is foreseeability. Again, back to first year law school, back to 1L, foreseeability could be huge. So the CFT, the former CFTC commissioner says, a strong could be missed for the co-developers to be liable if it is foreseeable if they were aiding and abetting CFTC regulations, right? Foreseeability is key. And that could be one of the ways we answer the question of blockchain liability issues. Back to smart contract liability, the code and the coder. If there's a problem with the code, is the coder liable? And the question is, it depends. There's a link there for you to do some more research on user liability, but the coder is definitely a important, important part of a blockchain organization. Why is that? Because blockchain organizations cannot exist without code. The code is everything for a blockchain organization. Which means the coder is at the core, the center, the heart of a blockchain organization. Which means the coder could be liable, or the coders could be liable. So, contract liability, coding is definitely, coders are definitely an important factor when considering smart contract liability. Okay, smart contract adoption. How many of you remember back in the 1990s when the internet came out, and all of a sudden simple wills and simple divorces were on the internet, and you can just download it and you can sign it, and you can say, hey, I don't need a lawyer. I just did my own will, or my own divorce. And a lot of buzz was around saying, is the internet gonna make attorneys obsolete? Do we still need attorneys anymore? Well, for those of you that are old enough to remember that, you know, remember that conversation, and guess what? We're still here. For those of you that, you know, aren't old enough to remember that, that was the conversation that we had back then, and guess what? That's the conversation that's rearing his head right now. Will smart contracts replace existing ways we deal with contracts? The answer is no, it's not. Smart contracts are not gonna replace natural law contracts. And there's a number of reasons why that's gonna, it's not gonna be replacing it. Number one, it'll take decades if not longer for smart contracts to really come into its own for use in the general legal systems, not just in the US but globally as well, that's number one. Number two, you know, if then is code, and you know, we could look at internet, internet is basically, you know, code that's distributed on a internet platform, and using the internet protocols. So, you know, our current legal system has adopted the use of internet for the use and made it better. The same principle's gonna apply here. We're just gonna adopt smart contracts and make our legal practice better, but it's not gonna take it over. It's gonna augment it, it's gonna change it, it's gonna provide more options, yes, but it's not gonna replace it. And it's important to realize that because if you wanna be an attorney that's gonna be practicing in the next 10, 20 years, you may need to have some good understanding on how smart contracts work, 'cause you may need to incorporate into your practice, okay? So, keep that in mind when you're dealing with smart contracts, because they're going to become, I think, a very major component of the contractual part of legal practice in decades to come. All right, let's talk jurisdiction. Now when we talk about liability, we talk about who is liable, and we talk jurisdiction is, well, where is that liability gonna start? Where is the plaintiff gonna file a claim? What IP address is, where the IP address may have a decision on where the smart contract is coded and where jurisdiction lies. You know, these are all some of the questions that are now just being asked. Where is jurisdiction? If you have a blockchain organization in a different part of the world that's doing business all over the world, and something happens, let's say in the US, and it's illegal or someone's aggrieved by it, where do you sue? Do you sue where the blockchain, if it's decentralized, do you sue where the IP address started? Because there's probably no actual physical location. Do you sue where the smart contract was completed? You know, there could be thousands of nodes where the smart contract was completed, you know, which one do you pick? Do you foreign shop? Do you choose a country? Do you choose a state where, you know, you have a better chance of winning as opposed to a country where you do not, right? These are all really important jurisdictional questions because you as attorneys need to know where to sue, where to file your suit on behalf of your client. So jurisdiction is huge. It's huge, and it can make all the difference in a case. Decentralized autonomous organizations. Now I've been saying blockchain organizations and blockchain businesses for quite some time now during this CLE. But there's actually a term for it. And if you look on this slide, on decentralized autonomous organization slide, which we call DAOs, or it's also can be called decentralized autonomous corporations, which is DACs, you can see the difference between the centralized, which is traditional top down, and decentralized. On the centralized, as I said before, CEO is looking vice president, senior vice president, vice president, director, manager, as you see in that pyramid, right? Everything goes up, goes up to the CEO. And a decentralized autonomous organization, everything is decentralized. Everybody is on the equal playing field. Everyone can commute with anybody, can communicate with anybody, and everybody makes their decisions independently as you can see by the circles, right? These are all people that are approving smart contracts. These are all people that are engaging in transactions, and they're doing it in a decentralized manner, not in the top down centralized manner. And what makes that possible? What makes that possible is the smart contracts, because the smart contracts contain the rules in the computer program and the code that are actually what runs the organization. And the decentralized ledger is where the records are kept. So you don't need to have the same type of traditional top down structure to manage your organization anymore, you can do it with a DAO. And all you need is the code and the ledger. So let's talk about some DAO legal issues. Now mind you, some of the issues we discussed before with smart contracts and jurisdiction, they still apply to this, right? But there are some additional legal issues that are considerations for DAOs. Who owns the DAO? Ownership is a key legal issue. And how is ownership defined? Now, we can pull some, we can pull some knowledge from the centralized application of corporations and apply it to the decentralized world and see if it actually helps understand the answer to this question. There are three rights that make up ownership in the centralized world. Unit, the use, the ability to use it, extracting economic value, and disposal, whether you can use it, sell it, rent it, et cetera. How do you, how can you dispose of it? Those are some rights that also can be considered for DAO. Who's using it, right? Who can get economic value out of it? If there's one person or a series of people that are actually pulling profit, pulling money out of the DAO, or making money out of it, they may be considered the owners or at least liable when it comes to a DAO legal issue. Who can sell it, who can rent it, who can do anything with it? That is also a way you can determine, you know, DAO ownership. Now, before we leave the DAO conversation, understand now there's two types of DAOs. There are DAOs that are owned by many people, which is basically a decentralized DAO that you have a number of people that can say they have ownership in it. And I have a number of clients that have DAOs that, that you know, a group owns. And then there's DAOs that no one owns, they're strictly 100% autonomous. Now I can tell you those are pretty rare, because having a DAO that absolutely no one owns is definitely more difficult to manage because you need to have a big enough community that's dedicated to spending their time to manage it, and reaping whatever mining rewards that there are for their transactional processing. That's what needs that to be in place for a owned by none, quote, "autonomous DAO". But many of them are owned by many. And those typically are kind of DAOs you're gonna see. Okay, let's talk about blockchain technology legislation, regulation, and case law. There's a lot of legislation out there when it comes to blockchain technology, and it is very much a very forming, you know, area of legislation and regulation. A lot of it has not been finalized yet, but I included some of these US federal legislation examples to show you some of the laws that are being passed to help try and regulate these issues. For example, the Stablecoin Tethering and Bank Licensing Enforcement Act, which is called the STABLE Act, which by the way, I think was an extremely clever acronym how they put that together, because stablecoins are actually types of cryptocurrencies, and you have the STABLE Act that's based on stablecoins, so kudos to whoever did that acronym. And a Stablecoin Classification and Regulation Act of 2020, and that act requires stablecoins to be become members of the Federal Reserve, and must seek prior approval from the Federal Reserve. Now, these two laws are very important because stablecoin that came out like Tether and USDT, they did not have to go through the whole regulatory process. They made their stablecoin, they, by the way, a stablecoin is backed against some asset. It could backed against, in this case, when I talk about the USDT or Tether, it's backed against the US dollar. So stablecoins are stable because they are far less volatile than other cryptocurrencies, right? If they had to go through the regulatory process, it would've been much more difficult, or you know, they may not even have gone through the process and been fully accredited. But back then, they didn't have that requirement. Now these laws are being passed that requires it. So it is a game changer because, you know, these stablecoins are being far more heavily regulated than it used to be when they started coming out in 2018-19 timeframe. The Cryptocurrency Act of 2020, which again, requires more regulation and licenses and certifications, the Blockchain Promotion Act of 2019. Now this one's interesting. This one directs the Department of Commerce to establish a blockchain working group, to help commerce understand the implications and the uses of blockchain technology. The one thing about this act that's really interesting is that Commerce has been given in five years to really do that analysis and figure out how to report this back to Congress. So the act isn't really by itself making any decisions, but it's enabling the Department of Commerce to give them advice to help them make decisions in the future. Again, all of the bills that I'm showing you here there's links to, for you to research them yourself. I encourage you to do so. It's very informational, it's very helpful to understanding the regulation of cryptocurrencies and blockchain technology. Banking for All Act requires Federal Reserve to, member banks to provide digital pass through accounts. This would actually make digital currency more available to anybody, because everyone uses the bank. So Banking for All is really a means to have digital money, and you know, digital transactions occur through all banks. Automatic Boost to Communities Act, again, this is a working group, establishing a working group to report to Congress, digital technology and blockchain technology. So you see in this bill, as well as with the bill for the Department of Commerce. Again, another bill for the Department of Commerce, they're really asking for help on how to analyze this and regulate it, which I think is really smart. Speaking of regulation, let's talk about the SEC. Now, I'm not gonna read all this because it's just a lot to read, but by and large, we're gonna do with the first bullet point, interpret and enforce federal security laws. This is what we do on the SEC website, dated June 10th, 2013. The link is right there. And we're gonna jump into the SEC because this is probably one of the more active areas of cryptocurrencies and blockchain technology when it comes to regulation and decisions by a US government agency. Now remember before I asked you earlier on about the laws, whether or not the laws are equipped to deal with it. And I mentioned the SEC is one area they say they are. Well, these are the two acts that are under the purview of the SEC. The Securities Act of 1933, and Securities Exchange Act of 1934. Now what's curious is neither one of these laws has the word "Bitcoin" or "cryptocurrencies" in it. But SEC has says that the language in those laws are so broad that they can cover most investments, including cryptocurrencies. And they're not planning on changing it. I mean, this is a quote from a prior SEC chairman, but the current SEC chairman is basically going on the same path. They are not gonna change it. They are going to keep their two laws, SEC, the Securities Act of 1933, and Securities Exchange Act of 1934 intact, and they're gonna use that for enforcement. And so far they've been doing that. The CFTC is another agency that's getting, that's been involved and is actually getting more involved in cryptocurrencies. So again, they're not changing the law, they're not changing anything when it comes to, and what they use to enforce commodities, and they consider Bitcoin and other cryptocurrencies a commodity. So if you're looking for another agency that's regulating cryptocurrencies and blockchain technology, look to the CFTC. Now, this is the definition. I'm not gonna read this whole thing, but the CFTC has a definition for commodity. And what's really interesting is, again, you don't see cryptocurrencies, you don't see Bitcoin in there, but you can see the future delivery of contracts, as well as, you know, the measure of value is where they're really, you know, placing the definition of commodity in with cryptocurrencies, especially Bitcoin. So just know that the CFTC is definitely regulating cryptocurrencies, especially Bitcoin. The IRS, another agency that has regulatory authority over cryptocurrencies. Now, back in 2015, '16, when cryptocurrencies were just coming out, especially Bitcoin, it was worth 0.003 cents, and, you know, people were making a lot of money on it. You know, it wasn't really on the IRS radar screen, but you know, when Bitcoin goes from 0.003 to 19,000, and people are making millions, tens of millions or more, the IRS is gonna pay attention to that increase in value and increase in profit. And that's what they did. They actually came out with an IRS notice in 2014, calling cryptocurrencies a property, and taxing, that was give them the ability to tax on cryptocurrencies. And they have actually partnered with US based exchanges like Coinbase, for example. And they have, you know, pulled their records, and people that did not feel that their cryptocurrency was under the purview of the IRS got a very nice letter from the IRS saying that they owed this money based on their assessment of the value they realized, the profit they've realized, and these cryptocurrency exchanges. So just know that the IRS is definitely looking to regulate cryptocurrencies by making it a taxable asset. As a matter of fact, last year, they actually put cryptocurrency on the form, on the 1040 form so they can track who owns it, who doesn't own it in terms of being a US taxpayer. That is the IRS Notice 214-21 that I mentioned before. So that gives you the ability to research it. And you can see the purpose is to describe how existing tax law principles apply to transactions using virtual currency. Now, they call it virtual currency, they don't call it cryptocurrency, but essentially it's the same thing. The notice provides guidance on in the form of answers to frequently asked questions. So that's the notice, IRS Notice 214-21. If you are a tax attorney, or you have clients that have questions about cryptocurrencies slash virtual currencies and taxes, that notice is very helpful. I recommended that you read it. Department of Treasury. So Department of Treasury also has regulatory authority over Bitcoin and cryptocurrencies. And the two areas that they have that authority are through the Know Your Customer Anti-Money Laundering, also known as KYC AML, and that's the FINCEN Department, Financial Crimes Enforcement Network, that's what FINCEN stands for. And, you know, so what does this all mean? You know, cryptocurrencies slash virtual currencies, and that they can be used to commit crimes. And, but any currency, any fiat currency can be used to commit crimes. So I don't want anyone to feel like there's a greater propensity for use of crimes using virtual currencies. It's all the same, you know, is basically, you know, a currency used to commit an illegal activity. Now, banks are the ones that are responsible for tracking the use of money, or bank accounts through systems. That's why KYC AML, if you know your customer, then you can be able to track the transactions, you can raise up red flags, you can stop the transactions. You can put a hold on money, things of that nature. So the same principle applies for cryptocurrencies. Instead of banks, it could be using cryptocurrency exchanges, and instead of bank accounts, it could be using wallets, right? So KYC AML is very important. And, you know, now a lot of the crypto exchanges are doing very similar things to what banks do, they ask for your driver's license, they ask for identification, they ask for a means to contact you, email or address, things of that nature. So just know that, you know, Department of Treasury is definitely enforcing KYC AML. Then there's OFAC, Office of Foreign Asset Controls. And that is, the division of OFAC is to administer and enforce economic and trade sanctions based on US foreign policy and national goals against targeted foreign countries, regimes, terrorists, and international narcotics. Now they also issued an FAQ in March, 2018, which also talks about virtual currencies. So I encourage you to read that as well, you know, because OFAC wants to make sure that cryptocurrencies aren't used for terrorism, international narcotics, and things of that nature. So by all means, if you are dealing with a foreign corporation, and they want to deal with digital currencies, you need to make sure you understand how OFAC comes into play, and their regulatory requirements so you can represent them adequately on a global scale. And I have international clients, and I've had to oftentimes go back and make sure that what I'm doing is in compliance with OAC with global clients. Okay, let's talk about case law. Now there are essentially two types of case law involving blockchain technology. There is case law that blockchain technology is part of the overall case that is not a blockchain based case, and there's case law that is specifically based on blockchain organizations, DAOs or DACs, things of that nature. For example, in the first instance, you know, blockchain issues in existing established case law. In fraud and intellectual property, and I guess in securities, you know, those are cases where cryptocurrencies and blockchains are part of a case, but it's not blockchain law. So for example, Oracle verse Crypto Oracle, I mean, Crypto Oracle tried to, you know, use the name, Oracle, just put crypto in front of it. Oracle claimed it was a trademark and infraction and they won, not surprisingly. So, when you are looking at case law, just know that the vast majority are gonna fall in this category. And actually these are the three most common categories you're gonna see, blockchain technology in US case law, and fraud, intellectual property, and unregistered securities, which involves the SEC. But there are some cases that blockchain technology is more of a growing area of case law, not just a part of existing areas. And in invisible.case is one of those cases where they tried to claim that blockchain technology by itself is protected. And the court said, no, it's not, you know, it's too much to be, too general to be a trade secret, so then that case allowed blockchain technology to continue be used in the public domain, by anybody, otherwise the plaintiff in this case would've been able to say, well, we own blockchain technology. Now this is an interesting case because in this case, Diamonds Training Inc tried to create a fraudulent regulatory body, the Blockchain Exchange Commission. They even used a very similar seal and logo. And the SEC basically said that that was extremely fraudulent, and they shut it down. So just know that the SEC, the CFTC, they're all looking very carefully at what these blockchain and cryptocurrency companies are doing, especially when it comes to fraud and unregistered securities. This case is really interesting, ZG Top Tech. It was interesting because it involves discovery. Now ZG Top lost 30,000 Tether and 100 Ethereum on a hack of this platform. Now they were able to figure out, you know, which wallet it went to, but they weren't able to get the identity of the people, the person that owned the wallet or the company that owned the wallet. So there was a discovery request that was filed, and actually expedited discovery request from the cryptocurrency platform, Bittrex, that housed the transaction. This was as far as we know, the first discovery request involving a cryptocurrencies and blockchains, especially when it came to a loss of that massive amount of money. So now we know, you know, through case law that we can do discovery requests on wallets and be successful. So let's talk about intellectual property. Blockchain technology has the capacity to change intellectual property processes and protections, okay? Yeah, so in conclusion, on the patent and trademark side, the USPTO could stand to benefit greatly from blockchain applications that would increase the ease of application and increase the power of enforcement. Okay, so let's move from the regulation and the government side to talk more about blockchain technology in the global legal industry. Blockchain technology is clearly a disruptor of the legal industry. I would argue a very positive disruptor of the legal industry. The first bullet point here, centralized verse decentralized. Talked about that a number of times so far. So current systems is centralized, blockchain technology is moving similar systems into a decentralized platform. But let's tell the story of legal systems versus technology. It's kind of a tortoise and the hare story. Technology always moves much faster than legal systems. A technology can be created in someone's basement overnight, new code, a new technology. It can be created by a new small, medium, large size company anywhere in the world, you know, within days or weeks. And it could be implemented especially using, you know, internet and social media, you know, just as fast as its created. But what happens is when that's new technology is created, and it started being used, the legal system does not come into play until, for example, laws are being debated to regulate it, or there's an grieved party that wants to sue, and now the courts have to decide, you know, a many times, a case of first impression on this new technology. So it requires someone to find an attorney, file a suit, has to work its way through the court system. In the meantime, I mean that can take, you know, years, in the meantime, this technology is just becoming much more prevalent in, you know, in global business systems. So the legal system always moves slower than technology because of the inherent way it's created and used. Legislation and regulation has to be debated, has to be voted up and down. There's, you know, gonna be protractors and detractors. There's gonna be, of course, folks that are gonna be lobbying for and against. So that also, you know, adds more components to the timeframe when it comes to, you know, laws, regulations, and how the legal system is dealing with new technology. Also, you know, if we have a new type of corporation that's being formed, like the DAO or DAC that I mentioned earlier on, some states had to create new corporate filings to be able to give that organization a legal entity in that state. And for example, Wyoming, already has the DAO LLC, where an organization as a DAO can file a LLC with Wyoming and be legally recognized as a DAO. There's many other ways that some of them would probably even haven't thought of yet that blockchain technology is disrupting the legal industry. And all of you that are listening to this, you know, you all could be thought leaders, and you can analyze, you can research, and you can find other ways, and you could write about it, publish it, podcast it, and you can, you know, get yourself recognized as a thought leader in this space. So, one of the questions I get most commonly from attorneys is how did you build a blockchain legal practice? Well the first thing you have to do to build legal practice is become an expert in the area you wanna build a legal practice. And you wanna become the expert in the area because you wanna show how your expertise can benefit the clients. Now, what do clients look for when it comes to any attorney, but in this particular case, a attorney in the blockchain cryptocurrency space? They're looking for attorney that has general knowledge, and maybe even specific knowledge of the technology or the legal issues, okay? If the attorney doesn't have that, then they're not hiring attorney that's best qualified to represent them. And, you know, having that knowledge of the technology, having a knowledge of legal issues, and also, in the third bullet point, having the knowledge of the applicable and proposed regulations, that's very important. You know, I have a lot of clients that ask me, well, what do you think about this bill or that bill, or the executive order that President Biden has proposed but has not finalized yet? And I don't read tea leaves, I don't have a crystal ball. The answer is, I don't know, but the best thing we can do is, you know, is position your company to be able to, not be as heavily impacted if it goes against us, you know, when it comes to the legalities of the issues. That's the best way to deal with it is to mitigate risk. And that's the term that I always use, want to mitigate the risk in case this does not work in our favor from a legal slash regulatory standpoint. That's the type of attorney that these companies are looking for. And that's the type of benefits that as an attorney in this space, you can provide to your clients. Now, so how does the firm benefit? Well, if you're a solo practitioner, or if you're a, a small, medium, or large sized firm, what you get is, especially in this space right now, you get to be recognized as an early provider of blockchain legal services. And that's huge because, you know, as an early provider now, 10 years from now, when it's really hitting mainstream, you've already got a decade under your belt. And that's gonna be very helpful for you 10 years from now. So while you may only have a client or two, you know, in the next year or so, as you build a name for yourself, as the firm builds a name for itself, then you will have a greater propensity to attract more clients because of your experience in history. Also, you know, just like internet law became an area of law, blockchain law will probably become a area of law as well. And again, as someone that's practiced in this space for a number of years, you will be able to, you know, show your history and your track record with your representation, and whether it's, you know, representing clients in a smart contract space, or a regulatory space, or a litigation space. I mean, there's plenty of spaces that represent clients in the blockchain space, so you don't have to limit yourself. You can hit one or more areas. And as I said before, you know, when you're dealing with a new area of law, there's new types of clients you can approach, you know, so you can find a whole bunch of new clients that can be added to your firm, or your own practice, and that can become a new source of capital for you, for yourself personally, and for the firm. And, you know, that could be built for many years, as you continue to increase your practice. And as I said many times, you can become a thought leader in the legal industry, so we definitely need to have more thought leaders in this area, and there's plenty space for plenty of thought leaders. So definitely, you know, do your research, learn technology, learn it well, and apply, you know, your own perspective, and your own understanding, and your own expertise to it, and become a thought leader. And that's something that will definitely get you a lot of attention in the legal industry. So I kind of covered this in the conversation I was just having, as we bring this CLE presentation to a close. But there are plenty of potential practice areas when you're providing blockchain legal services. There's legal or regulatory analysis, there's regulatory compliance on filings, there's corporate filings. You have companies that are forming, they need to have board of directors, they need to have bylaws, they need to have, you know, policies and ethics statements put in place. There's of course, blockchain litigation, we talked to some of those case laws that we read. There's smart contracting. If you are an attorney that has coding and legal experience, then kudos, you are there definitely a double threat when it comes to blockchain technology. You know, creating blockchain legal structures, intellectual property analysis and filings, you know, again, litigation, all of these are areas where you have blockchain legal services you can provide to your clients. The question is, can you think of any more? Can you think of any areas that are ripe for blockchain technology? For example, real estate. Real estate is not on that list, but, you know, there are blockchain companies that are filing block titles on their blockchain, and, you know, they are some that are accepting cryptocurrencies for payment to purchase property. You know, that may require a combination of blockchain technology expertise and real estate expertise. So there's many other areas out there. So I'm also often asked, where do I find my clients? Well there's a number of ways. I find my clients. Many of them, well, when I first started, I found them through organizations like GBA, or the Wall Street Blockchain Association, and a number of others. You know, when you got involved and they found that you're an attorney, they start talking to you, they start asking you questions. If you start making sense, they may start, you know, retaining you and paying you for your advice and expertise. So at first, you know, it's attending, it's creating networks, it's actual networking. Maybe there's some pro bono work here and there to get your name out there. But afterwards, you start to, you know, factor in your billable hours and how much you charge. I have attorneys now that have offered to volunteer work for on cases and clients I'm working with so they can get the expertise, and they're just volunteering, right? So, you know, there's many ways that you can find clients. Big picture, big question is, do you have the expertise to pull them in? If not, then you're gonna go back to that prior slide we talked about, you know, benefits to the client and how you can provide the benefits before you can really start hunting down blockchain clients. Also, blockchain conferences. I speak at a lot of conferences now, and I get off the stage and, you know, literally a line forms, and they start asking me a lot of questions. And I don't believe it's just because I'm that much of a brilliant speaker, even though I like to think so, it's because it's not that many blockchain attorneys in this space. And you know, when I talk to some of them, some of the attorneys are just giving bad advice because they don't have the expertise in that space. So going to conferences, definitely helpful. Even if you go to learn, even if you go to kind of get yourself involved in the blockchain and crypto space, that's a start. Start there on the blockchain conference tour, and then after you get more expertise, and more understanding, and more knowledge, then you can begin to, you know, approach it from a rainmaking standpoint, rather than the, I wanna learn more about the blockchain space standpoint. Online blockchain interest groups, Meetup, Facebook, LinkedIn, Reddit, Telegraph, all those, you know, online slash social media spaces. Actually, I kind of put two and three and four together. So online, you have Meetup and Facebook, on social media, you have Github, Reddit, Publish0x, Facebook, Twitter. Go on there, create a profile, engage with the social media blockchain and cryptocurrency community, and, you know, learn. Learn, engage, network, that's also very helpful. And finally, when you get to that place where you can, you know, say you're an expert, and you can really spend the time it takes to create your own platform, create your own. Do podcasts, do blogging, do what I did, write a book. These platforms will attract people to you, and they will attract people to your legal expertise. And then hopefully you can convert them to become paying clients for your firm. So that is the end of the presentation. I wanna thank you for attending. If you would like to reach out to me, you could find me at eguthrie, E-G-U-T-H-R-I-E @blockchainordie.org. Again, [email protected] And I look forward to engaging with all you, good luck with your blockchain legal career. I'm sure it'll be a fruitful one. And we look forward to seeing you at the next Quimbee CLE. Thank you.

Presenter(s)

Eric Guthrie
President, Better Me Better WE; Partner, The Cogent Law Group; Director of Training Programs, The Government Blockchain Association

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