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From the Blockchain to the Icos Success: the Legal Challenges

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From the Blockchain to the Icos Success: the Legal Challenges 1 FROM THE BLOCKCHAIN TO THE ICOS SUCCESS: THE LEGAL CHALLENGES Dr. Olivier Hance, Ph.D, LLM, MBA, TEP, ESQ. Professor at the AMU & SHU Universities Managing Partner at Hance Law Avocats 2 1. THE TECHNOLOGIES: a) The Blockchain 3 1. The Technologies: b) DAOs 4 1. The Technologies: c) Smart Contracts (Example On Ethereum) 5 1. The Technologies: d) Cryptocurrencies 6 1. The Technologies: e) ICOs 2. CRYPTO VS. TOKENS 7 AND SOME CHARACTERISTICS 1. COINS (CRYPTOCURRENCIES) Its own platform (Blockchain) Function: Hold and transfer value Bitcoin & Altcoins Altcoins based on Bitcoins open-source protocol (but change of underlying code): Namecoin, Peercoin, Litecoin, Dogecoin, and Auroracoin Altcoins not based on BTC open course protocol (have created their protocols and blockchain): Ethereum, Ripple, Omni, Nxt, Waves, and Counterparty See https://coinmarketcap.com/ : list of coins with their platforms I584 crypto-currencies and Total Market Cap: $334 772 207 112 2. CRYPTO VS. TOKENS 8 AND SOME CHARACTERISTICS 2. (ICO) TOKENS Need another platform (e.g. Ethereum or Omni) to operate; Some tokens are issued to reward the servers running the Ethereum platform and a model to share computing resource and keeping some control on decentralised resources ICO Tokens can have different functions: A Currency, used as a payment system between participants; A digital asset (a digital right) A means for accounting (number of API-calls, volume of torrent uploads) A share (stake) in a specific start-up Payment for using a system 689 ICO Tokens and Total Market Cap: $49 327 209 314 2. CRYPTO VS. TOKENS 9 AND SOME CHARACTERISTICS 3. (ICO) TOKENS ISSUANCE: TECHNICAL ASPECTS Need another ICO platform to operate ⁼ A software platform through which the ICO can be conducted and token transactions validated Different Platforms Ethereum, Stellar, Omni, Waves, Counterparty, Bitshares, Ethereum Classic, and RSK Each platform has its key technical or other benefits. Ethereum = Smart contracts (with a specific standard largely widespread which allows smart contracts interoperability: ERC20) Stellar is more focussed on market making and efficient order matching 2. CRYPTO VS. TOKENS10 AND SOME CHARACTERISTICS 4. (ICO) SOFT AND HARD CAPS & TOKEN SALE MODELS HARD: Limit on the total contribution value that will be accepted; Once it reaches the hard cap, the organisation will refuse to accept additional contributions. SOFT: A soft cap is a total contribution amount which, once exceeded, will trigger a time limit on the remaining token offering period. Those caps can be PUBLIC or HIDDEN Various Sales Models including Fixed Exchange Rate, Dutch Auctions and Hybrid capped sales. 2. CRYPTO VS. TOKENS11 AND SOME CHARACTERISTICS 5. TOKEN CHARACTERISTICS AND ECONOMICS In Exchange of Bitcoin (BTC) or Ether (ETH) (the organisation then exchanges BTC/ETH against fiat); Generally, anyone can buy tokens – however: • Some prohibit US residents from contributing to avoid the US regulatory agencies • Some required the investor to be an accredited investor to avoid securities law issues Five Types of Tokens: • Usage tokens: access and use a product or a service (form of prepayment) • Equity tokens: provide equity-like benefits: profit sharing and/or voting rights • Work tokens: allow the holder to work for the organisation and perceives revenues • Community tokens: only allows a community to have its monetary policy • Asset backed tokens: allows for implementation of some securitisation schemes through an ICO 3. BLOCKCHAIN, DAOS & SMART12 CONTRACTS: 1. BLOCKCHAIN LEGAL ISSUES: LEGAL ISSUES BLOCKCHAIN TOKENS & DAOs: Licences and Authorisations, Financial Law, Consumer Protection, Liability Issues, Legal Status, etc. CRYPTOCURRENCIES: Civil Law, Tax Law, Money Laundering, etc. SMART LEGAL AGREEMENTS: Legal Layer: e.g. enforceability? BLOCKCHAIN & DATA PROTECTION: Data Protection, GDPR, etc. INTELLECTUAL PROPERTY ON THE BLOCKCHAIN: IPR Protection on the BC and the BC to secure IPR protection INTERNATIONAL PRIVATE LAW: Choice of Law and Choice of Jurisdiction 3. BLOCKCHAIN, DAOS & SMART 13 CONTRACTS: LEGAL ISSUES 2. DAOs LEGAL ISSUES: A. DAOs ARE NOT RECOGNISED AS LEGAL ENTITIES, BUT… Uncertainty on DAO’s Legal Rights Uncertainty on DAO’s Legal responsibilities and overall liability They have a lot of internal rules, but little help when interactive legal system (although commercial code could use them as the commercial good practices) SOME POTENTIAL QUALIFICATIONS Courts could qualify (absent constitutive docs) as JV or General Partnership The adoption of the legal status of Protected Cell Companies (PCC) has also been recommended JURISDICTION AND APPLICABLE LAW DAOs could be created by many international contributors, some known, some not… DAO’s tokens cannot be considered as shares if no entity Shall it nevertheless be treated as securities? How to assign the ownership in the product of contracts? 3. BLOCKCHAIN, DAOS & SMART 14 CONTRACTS: 2. DAOs LEGAL ISSUES: LEGAL ISSUES B. CONTRACTING, TOKENS & LIABILITIES CONTRACTING WITH DAO: As of the first DAP, it was necessary to offer the contractors a legal service structure to invoice. The first service company was incorporated in Switzerland. QUALIFICATION OF PARTICIPATORY TOKENS: Means of access and voting to technological experiment on the Ethereum ecosystem + But also investment and potentially monetary value. Therefore, risks of qualification as a security and their sale as the sale of investment contract LIABILITIES OF DAO & PARTICIPANTS: Liability Issues, but who is liable? This shall depend on the legal qualification of the DAP: if the partnership or JV, it would be the members who would be liable. An avenue might also be to consider the service company liable, but this is not obvious when the service company has a very limited role. 3. BLOCKCHAIN, DAOS & SMART 15 CONTRACTS: LEGAL ISSUES 3. SMART CONTRACT LEGAL ISSUES A. SMART CONTRACTS & CONTRACTUAL FREEDOM SMART CONTRACT? Execution of a contract by a computer when a consensus has been reached and when certain conditions are met. The technology allows therefore the programming of transaction implementing a business logic Therefore this implies and allows remote and complete performance of contractual obligations without interaction of a third party. CONTRACTUAL FREEDOM: The parties of a contract should be allowed to decide to use the blockchain enabled automation of obligation enforcement. From this angle, nothing new compared to EDI. Except that the EDI operations are based on real world contracts which specify the security measures, the applicable law, and the competent jurisdiction. 3. BLOCKCHAIN, DAOS & SMART CONTRACTS:16 LEGAL ISSUES 3. SMART CONTRACT LEGAL ISSUES B. SMART LEGAL CONTRACTS… I. For a smart contract to be qualified as a “legal” contract, it would need to respect the legal conditions of the contracts: mutual intent of the parties to be bound by the consequences of the contract. II. The smart contract could certainly be a tool for enforcement of a contract. This is already the case (spit of coins between different parties at an ICO and notably the ICO service provider agreed in contact and inserted in a smart contract). III. This could mean significant relief for enforcement and judiciary system. However, the smart can only play this role if the code is correct, i.e. shall execute the intent of the parties. IV. There are Industry Initiatives to allow those “smart legal contracts” e.g. OpenLaw with legal agreement templates which can be modified and then embedded in a smart contract. The project also works on the negotiation of those contracts via Ethereum and integration with payment processors. 4. CRYPTO-CURRENCIES: 17 REGULATORY ISSUES 1. Most of the authorities have emphasised technical and legal risks: • E.g. EBA (13/09/2013), EBA Opinion (04/07/2014), CSSF Position (14/02/2014) & CSSF (14/03/2018) 2. Legal status of Crypto-Currency • ECJ (22/10/2015): mean of payment (therefore no VAT of fiat/crypto exchange); • CSSF Position (14/02/2014): mean of payment + fiduciary money (scripturale) not cash money (fiduciaire); • ECB (12/10/2016) & CSSF (14/03/2018): mean of exchange • 5th Directive AML & CSSF (14/03/2018): no legal status as money 3. Lux: Crypto Issuers or Crypto/fiat Exchange platforms require a minima a payment service provider license & could be as e-money institutions • CSSF Position (14/02/2014) & CSSF (14/03/2018) • Pragmatic approach and the applicant must submit the business plan to CSSF 4. CRYPTO-CURRENCIES: 18 REGULATORY ISSUES 4. Success stories in Luxembourg SNAPSWAP: October 2015: E-money provider license Use, hold, and transact cryptos First licence in the EU wit passporting to all the EU countries BITSTAMP: April 2016 (Effect 01/07/2016): E-payment provider license Fiat/exchange platform Advantages for Bitstamp (channels with banks) and protection for consumers BITFLYER January 2018: E-payment provider license Fiat/Exchange Platform 4. CRYPTO-CURRENCIES: 19 REGULATORY ISSUES 5. Timing is Key! Bitstamp: 2 years to get the license “Your license in 6 months”? 40 entities in the pipeline? 6. & EU Institutions? In favour of the process However, largely pro new regulation, e.g. EU Parliament Resolution 26 May 2016 5. ICOS: 20 LEGAL & REGULATORY ISSUES 1. CONSUMER PROTECTION No requirement of Technological and Legal Due Diligence (vs. IPO); No pre-review and approval of the contractual documentations which can contain very dangerous provisions for the consumer; No protection against a glitch/flaw in the smart contracts (rare, but happened with DAO in 06/2006) Token Valuation is not reviewed or audited – no protection against risks of pure bubbles or even Ponzi Schemes. Risks for unexperimented consumer not to main or secure keys and to be stolen by a hacker. This is very severe, as when the security is compromised, it is forever and with no possibility of “password resetting” 5. ICOS: 21 LEGAL & REGULATORY ISSUES 2. Criminal Risks Hackers attack (see above: DAO of private key compromised) Phishing Scams: the criminal impersonates an organisation starting an ICO. Once the payment of the crypto has been made, it is irreversible.
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