Current and Future Perspectives on Cryptocurrency and Blockchain Law
Hackers and Founders’ Cryptocon Event
Hackers and Founders’ Cryptocon promised a conference about the regulatory aspects of the crypto space, but delivered more as we can read in this article. The occasion marked not only the launch of their tokenized liquid venture fund, but also announced their goal of establishing a not-for-profit to serve the interest of the crypto and blockchain industry worldwide. In this Medium-article we will look at how things can go terribly wrong, the current legal landscape, and future perspectives. At the end I sum up the most important findings, and make some recommendations of my own.
1. New Era
Law always runs after social and technological developments, because it simply takes time to implement rules. And like blockchain technology, legal knowledge also seems decentralized. Such discussions take place in Telegram groups. For me it doesn’t come as a surprise that entrepreneurs and developers sometimes educate lawyers on these legal issues. We know things are really changing.
The main reason why H/F started their fund was to work efficiently with their startup portfolio. Speaker and blockchain entrepreneur Diana Schrader, coming from a financial background, wasn’t always happy with the fee structure in the financial industry, particularly with hedge funds.
Crypto has a great future in disrupting many industries. Though the SEC has made some effort to offer clarity, we’ll read in this article there are still legal hurdles to overcome. The big question of today: How do we avoid facing more restrictions and, make way for crypto and blockchain innovations?
2. Problems in the Past
Taariq Lewis has been involved from early 2013 in two blockchain ventures. The first was a website that sold gold in custody on the blockchain. He continued to do so with medicine payments. From the outset, he wanted to run a legitimate business. In order to do so, he requested a ruling from FinCEN, and later registered as a Money Services Business (MSB), and the entity also started to file mandatory reports.
It was at this moment he and his company began to experience problems. Taariq felt even worse when a financial crimes attorney warned him that he could face imprisonment as a compliance officer. For the next six months Taariq endured harsh due diligence procedures instigated by federal officials. In the end, a warning was issued because of a minor issue.
Taariq’s main concern with the current rules is that these are particularly unfair for those who choose to comply. By attempting to run your business legitimately, you risk coming under the radar of the authorities. Blockchain entrepreneurs, who choose to dodge the rules, are then rewarded because they will not face due diligence procedures. According to Taariq, this issue must be addressed.
3. Present Legal Issues
Amilcar Chavarria’s (Fintechportfolio.com) and Bryan Myint’s (Republic.co) talk focused on the current legal landscape.
In his talk, Amilcar discussed governments’ perceptions of crypto. According to him, there is no consensus among governments on an international level on how to regulate, nor in the financial industry. This is demonstrated by this map that shows how countries are roughly divided between: countries that are crypto advocates, countries that restrict crypto and countries that sit on the fence.
The United States falls under the category of crypto restrictive countries. We know that unaccredited investors cannot buy most tokens. The DAO ruling in July of last year forced the SEC to define security tokens, and ruled that those are subject to security regulations. In determining this, they applied the 70 years old Howey test. Here a graph that allows you to decide for yourself whether a token constitutes as security.
Amilcar’s biggest piece of advice: Keep it clean. Currently the SEC has an assembly line for closing down illegal ICO’s. That’s what we saw recently with Arise Bank. For him, the protection of investors remains an important principle. Therefore, follow the rules. There are currently several options to do so. The Hack Fund uses the Reg D 506 C exemption for accredited investors, but the JOBS act has more options, as we will see with the next speaker. In any event the crypto space must develop standardized documents, like SAFE for early investments in startups. For crypto, there is SAFT(E) such as the one Republic.co developed for crowd sales.
Bryan Myint is Republic.co’s Director and its platform helps early startup raise money. This platform makes use of CF regulations from the JOBS Act, allowing to raise up to 1,070,000 USD per year. Some crowdsales are overbid and closed successfully within hours, proving that unaccredited investors in the US are eager to find ways to invest in crypto.
But Republic.co’s ambitions stretch further. They took a leading role in making industry standards. For that purpose they developed a document that goes by the name of Token DPA (Debt Payable by Assets). Under the CF regulations, non-accredited investors can invest in token crowd sales of up to 1,070,000. Currently, there is much demand for their services.
How does this work? In short, participants borrow the startup money, and as an investor he/she has the right to receive interest or the money is paid back in tokens triggered by a possible public token offering in the future.
It is clear that Republic.co created this document for all of crypto space in the hope it will serve as an industry standard in the future. For that purpose they make all these documents available.
4. Future Perspectives: advocacy
Charles Belle is currently starting up www.advocacy.hf.cx, a H/F initiative that aims at taking barriers away that hamper the growth and innovation of the blockchain industry.
He warns that more restrictive legislation can be put in place, which will hurt the industry as a whole. In our current situation, governments react by imposing restrictions and protecting consumers, he says. These push-backs come with disruptive technologies, and we can also expect push-backs from established interests.
Earlier, Jonathan Nelson recognized two practical problems on the legislative side. First, the government does not understand the topic. Currently there are three software engineers among the legislative staffers of the US Congress out of a few thousand. The second issue is that legislation and official publications often contain difficult wording, and as consequence these documents are not easily accessible.
Jonathan is, however, impressed by the SEC’s thoughtfulness in their approach to the blockchain industry. The question now is how to move forward? Preferably by developing industry standards rather than waiting for legislation to pass, Charles adds.
Both Jonathan and Charles agree that the industry needs better PR, and they conclude that a policy of openness and transparency is the best path towards getting things done on a legislative level. Even more so when you can identify issues and suggest solutions for the future.
But we are in a new industry, whereas finance for example, has been developing for over 70 years. The mechanisms to create industry standards are simply not there yet, Charles states. All we can do now as an industry is lobby, research, and build a community to promote a shared vision and moving the space forward.
5. Conclusion and Thoughts
At H/F’s first Cryptocon we heard speakers give testimonies about how things can take a wrong turn, and we heard interesting stories from people who are pioneers in the field. I would like to highlight three important points from the conference:
1. Building communities around entrepreneurs to create a healthy industry;
2. Starting an active lobby;
3. Having accessible and open source industry standards that will drive legislation.
For good reasons, much of the current discussion focuses on investor’s protection from a regulatory point of view. That’s public law. But we will also face challenges in the domain of private law. Token investors, like shareholders, also need protection from company and contract law.
As a means of moving forward, here are some important questions that we must ask. How is a token holder protected from the practice of fraudulent transfer of assets from the company? In that regard, what should (international) asset protection and asset recovery look like? These are just few of the many questions that we must continue to ask.