May 6, 2021 Blockchain and Bankruptcy: Short term and long term observations of how blockchain technology can affect the law and practice of bankruptcy Presented by the Orange County Bankruptcy Forum SPEAKERS Jonathan Dunsmoor Securities Attorney | Investor | Blockchain Believer William J. Wall The Wall Law Office Bankruptcy Attorney MODERATOR Anerio V. Altman Lake Forest Bankruptcy Date/Time: Thursday, May 6, 2021 12:00 pm - 1:30 pm PT This activity has been approved for Minimum Continuing Legal Education by the State Bar of California in the amount of 1.5 hours of CLE. The Orange County Bankruptcy Forum certifies that this activity conforms to the standards for the approved education activities prescribed by the rules and regulations of the State Bar of California governing MCLE. OCBF ● 6789 Quail Hill Parkway #204 ● Irvine, CA 92603 Phone/Fax: 949-681-8676 ● [email protected] www.OCBF.org. OCBF 2021 SPONSORS PLATINUM GOLD SILVER BIOS Jonathan C. Dunsmoor, Esq. is a US corporate attorney who focuses his practice on securities law and regulatory matters including blockchain related offerings, asset management in DeFi, and governance tokens. Mr. Dunsmoor represents private companies, including those exploring blockchain/ cryptocurrency opportunities, as well as angel investors and investment funds. He has extensive experience in structuring, negotiating and consummating public and private securities offerings with a particular focus on technology driven finance including Crowdfunding, Regulation A+ and Security Token Offerings. He routinely advises large financial institutions and both private and public companies on blockchain technology and as well as best practices in structuring operational and corporate data. Jonathan is the founder and principal of Dunsmoor Law, P.C. and Senior Of Counsel for the New York-based Reid & Wise, LLC with offices in San Francisco and Shanghai. William (Bill) J. Wall has a long history and proven record of success in achieving consensual and often unique solutions for distressed entities and their stakeholders. Bill represents individuals and organizations, including debtors, creditors, trustees, and assignees for the benefit of creditors, in all phases of the insolvency process with an emphasis on insolvency related litigation. After two decades of bankruptcy practice, Bill has expanded his practice to encompass blockchain law, particularly the intersection between blockchain technology and bankruptcy. Bill also counsels entertainers, visual artists, writers, and other content creators through the process of protecting and monetizing their content, often in conjunction with the integration of emerging blockchain technologies. BLOCKCHAIN AND BANKRUPTCY BY: JONATHAN C. DUNSMOOR, ESQ.* AND WILLIAM “BILL” WALL, ESQ.** The Wall Law Office 26895 Aliso Creek Rd, #B-110, Aliso Viejo, CA 92656 949-387-4300 - [email protected] Dunsmoor Law, P.C. 3407 Delaware Ave Ste. 257, Tonawanda, NY 14217 (by appointment only) 716-371-1936 – [email protected] *Licensed in New York **Licensed in California All Rights Reserved 2021 INTRODUCTION William J. Wall (BW); Bankruptcy Attorney and Blockchain Enthusiast Jonathan Dunsmoor (JD); Securities Attorney and Blockchain Believer WHAT IS BLOCKCHAIN? • Blockchain is a technology that allows for an immutable transmission of data over a decentralized network. • Immutable because of advanced levels mathematics resulting in cryptography • Decentralized because no one central party has the entire “chain.”* *in most cases WHAT IS MONEY?: A VERY, VERY BRIEF HISTORY 1. Barter: Goods in exchange for service and other goods! 2. Gold, jewels, oh my! 3. Gold to paper receipts • Safety for travelers • Fungibility • Aided with Lending 4. Paper money! 5. The Gold Standard Act of the United States 1900 and established gold as the only standard for redeeming paper money. 6. The End of the Gold Standard 1933 7. Nixon Administration and the Smithsonian Agreement (birth of fiat currency) THE BIRTH OF ELECTRONIC MONEY • EGold - 1996 to 2009 ($2 billion transactions per year in 2008) • Liberty Reserve - 2006 to 2013 (“Liberty Dollars” and “Liberty Euros” $0.9 billion transactions per year) • Others, Goldmoney.com, e-Bullion.com, CrowneGold.com, Pecunix.com, and INTgold.com. • Most resulted in criminal prosecution for lack of money transmission licenses and/or related criminal activity associated with product CREATION OF BITCOIN • What is Bitcoin? Bitcoin is the first decentralized cryptocurrency • Created by Satoshi Nakamoto (and NOT Craig Wright) • But possibly the NSA. • Only 21 Million BTC available • Created via “Proof of Work” mining Condensed Timeline: • October 2008: White paper released Bitcoin: A Peer-to-Peer Electronic Cash System • January 2009: Bitcoin Genesis block “mined” • October 2009: $1 = ~ 1,309 BTC • 2014: Ethereum's ICO • September 2019: 1 BTC = $10,500 • May 2021: 1 BTC=$56,000 • Meaning a $1 investment in Bitcoin in October 2009 would be worth approximately $73 million dollars in May 2021. WHAT ARE ALTCOINS? WHY IS THIS IMPORTANT?!? • Peer to Peer • Decentralized • Private or Public blockchains but mostly anonymous transactions • Cryptographically secure • No double spend! • Immutable! (Possibly subject to a 51% attack) SOME BASIC TERMINOLOGY • Blockchain is the technology • Mining: Processing transactions using “hashing” power to solve “blocks” • Transactional Hash: Is a uniquely identifier of each particular transaction on a blockchain (it can be private, public or both) • Block: Small records of the entire blockchain • Fiat money: Inconvertible paper money made legal tender by a government decree. • Bitcoin is the first cryptocurrency system • Bitcoins are the units within the Bitcoin blockchain (1 bitcoin (BTC) equivalent to 1,000 millibitcoins (mBTC), 1,000,000 microbitcoins (μBTC), or 100,000,000 satoshis) • Altcoins are anything other than Bitcoin. “Alternative coins” • Coin is generally a specific unique blockchain protocol (ie. Bitcoin, Litecoin, Ethereum, etc.) • Token is a derivate of an existing blockchain that is built “on top” another blockchain protocol • ICO or Initial Coin Offering • STO or Security Token Offering sometimes called a DSO Fun fact: A “whale” is a • HODL: Hold On for Dear Life cryptocurrency holder with • FOMO: Fear Of Missing Out significant assets. • FUD: Fear, Uncertainty and Doubt • UTILITY TOKEN V. SECURITY TOKEN…. *WE WILL PROVIDE A GLOSSARY PRIVATE KEY V. PUBLIC KEY BLOCKCHAIN & THE LAW: WHY DOES THIS MATTER? • In the same way the Internet changed the world, Blockchain technology will change everything again. • Contract Disputes (Smart Contracts: are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code) • Payments made on chain (Stablecoin: A cryptocurrency with a stable asset price. Generally backed by a fiat currency) • Financial transactions, real estate transactions, HIPPA, and more • No one truly cared until ICO started to become popular… STATE VS. FEDERAL VS. INTERNATIONAL LAW • Each and every jurisdiction is different and changing rapidly • Canadian, Gibraltar, Malta, Estonia, Singapore and Switzerland all ahead of USA. • Why? Easy regulatory process. Canadian provinces govern. Gibraltar, Malta, Estonia, and Switzerland all small countries with quick response time. Singapore understands it is the key to Asia • Bahrain, a strong US ally with Fifth Fleet station there, dramatically ahead of most of MENA region • South America and Africa are significantly behind; mostly for fear of giving up centralized power • Australia is suffering a bit of an identity crisis • USA must step in several ways THE STATES • Just as in real estate, location matters most. • Some states are working diligently to combat fraud and build sandboxes • Do work with universities and private companies to create a thorough understanding of the technology • Don’t be New York and create a BitLicense • All cryptocurrencies are blockchain based but not all blockchains are cryptocurrencies! WTF: SEC, CFTC, IRS, FINCEN, ET. AL. •Who has jurisdiction? (It depends) •Why do they have jurisdiction? (No one is exactly sure) •But I want jurisdiction? •But I want a bigger budget! •WHAT IS A DOA?! BANKRUPTCY JURISDICTION AND COMMENCING CASES SEC V. W.J. HOWEY CO., 328 U.S. 293 (1946) The Howey Test: 1) Investment of money; 2) In a common enterprise; and 3) With the profits coming primarily from the efforts of others. If, all three conditions are met, it’s a security! - Howey SO WHAT IS RIPPLE (XRP?) THE DAO REPORT • July 25, 2017 • “Decentralized Autonomous Organization” • As of the time the offering closed, the total ETH raised by The DAO was valued in U.S. Dollars (“USD”) at approximately $150 million • Problems: • 1) DAO Token holder certain voting and ownership rights. • 2) The DAO would earn profits by funding projects • 3) DAO Token holders could sell their DAO Tokens in a variety of ways in the secondary market and thereby monetize their investment U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) THE SPEECH HEARD AROUND THE CRYPTO WORLD • 2) June 14, 2018 - Digital Asset Transactions: When Howey Met Gary (Plastic) - William Hinman Director, Division of Corporation Finance • In cases where the digital asset represents a set of rights that gives the holder a financial interest in an enterprise = Security • And putting aside the fundraising that accompanied the creation of Ether, based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure,