Blockchain Week in Review – June 9, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

SEC Obtains Judgment Against Bitcoin Mining Companies The SEC obtained final judgment this week against GAW Miners, LLC and ZenMiner, LLC. – two virtual currency mining companies who, along with their principal, Homero “Josh” Garza – have been the subject of ongoing investigation and litigation since the SEC filed a complaint against them in December 2015. The two mining companies were accused Continue Reading

Resources on Crypto-Tokens and Securities Law

Recently, there has been growing interest in whether, and in what circumstances, crypto-tokens may constitute “investment contracts” under the U.S. Supreme Court’s Howey test, rendering them securities subject to regulation in the United States.  The following resources take a deep dive into that issue, exploring the structural, marketing and other key considerations that may make crypto-tokens more or less likely to be securities under Howey.  As these resources demonstrate, the Howey test is highly fact-dependent, indicating that certain crypto-tokens may be securities under Howey whereas others – if properly designed – may not.

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Blockchain Week in Review – May 26, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Regulatory Updates

Vermont Law Recognizes Digital Currency as a Permissible Investment
Earlier this month, Vermont Governor Phil Scott signed Continue Reading

Guilt by Association: Bitcoin and the WannaCry Ransomware Attack

The recent so-called “WannaCry” ransomware cyber-extortion attack has thrust bitcoin as a means of payment back into the debate surrounding illegal online activity. Much in the way that the internet, in its early days, was seen as a tool useful only for crime, pornography, and other socially unacceptable activities, so too are bitcoin and other cryptocurrencies seen by some as only useful for bad actors. This of course ignores the substantial investment in bitcoin and other cryptocurrencies by legitimate and well-known businesses, financial institutions, and even governments all around the world. Still, in some corners the stereotype persists. But much in the way that the internet continued to grow and evolve, so too will the bitcoin and cryptocurrency ecosystem grow and evolve, and its use by bad actors will continue to diminish. Continue Reading

Two New White Papers Exploring Use Cases and Legal Issues of Distributed Ledger Technology-Based Smart Contracts and Self-Sovereign Identity Systems

We are pleased to release two in-depth white papers discussing cutting-edge legal and technology issues applicable to smart contracts and self-sovereign identity systems.

In the smart contracts white paper, Dax Hansen, Partner and Chair of the Blockchain and Digital Currency Industry Group, and Carla Reyes, Visiting Assistant Professor of Law at the Stetson University College of Law, define and demystify DLT-based smart contracts with a review of the current academic and industry literature, describe five actual use cases for smart contracts and analyze the novel legal issues surrounding smart contracts. This is the first comprehensive treatment of the full range of legal issues related to smart contract applications – going beyond the narrow discussion of contract law issues that predominate the existing literature.

Hansen and Reyes describe the state of the art of smart contracts in digital asset sales and capital markets, supply chain management, smart government records and smart cities, real estate land registries, and self-sovereign identity systems. The paper consists of four sections:

  • A brief introduction to DLT-based smart contracts;
  • A review of current academic and industry literature on smart contracts;
  • An exploration of the legal issues in emerging use cases of smart contracts; and
  • An initial risk mitigation checklist for businesses developing applications using smart contracts.

Following an overview of the legal risks involved in the use cases of this nascent and quickly-evolving technology, the authors conclude that companies in all industries should determine how this significant technology will impact them, that companies can benefit from the use of this significant technology, and that industry participants can address relevant legal issues with careful planning and collaboration.

In the self-sovereign identity white paper, Joe Cutler, Dax Hansen, and Charlyn Ho discuss the development of self-sovereign identity as a DLT-based technology, the various industry leaders offering DLT-based identity solutions, and the key legal issues self-sovereign identity solutions will face as the technology goes mainstream. The paper addresses:

  • The background and state of digital identity
  • Distributed ledger technology and self-sovereign identity
  • A sampling of companies or foundations working on DLT-based identity solutions
  • Self-sovereign identity and the law

While tracing the evolution of self-sovereign identity, the authors describe the many ways DLT can be leveraged to create applications that allow users to control their digital identity in a way that is both secure and portable across multiple platforms. Entities building out such solutions that are profiled in the white paper include Sovrin, Uport, Civic, R3, and Mooti.

Finally, Hansen, Cutler, and Ho discuss the most pressing legal considerations facing this promising technology, including:

  • Privacy Laws;
  • Anti-Money Laundering Laws;
  • Biometrics Laws;
  • Laws Governing Online Identities and Death;
  • Trust Frameworks and
  • Practical Considerations for Governments Using SSI.

As self-sovereign identity and other DLT-based technologies grow in popularity and adoption, they will have an ever increasing disruptive impact across all industries. The authors conclude that these advances will demand that legal practitioners, lawmakers, and technologists harmonize their approaches with applicable law.

Follow the links below to download the White Papers:

Perkins Coie LLP Legal Aspects of Smart Contracts Applications

Perkins Coie Self-Sovereign Identity and Distributed Ledger Technology_Framing the Legal Issues

Washington — B&O Taxation of Unredeemed Gift Cards

The Washington State Department of Revenue has just issued a draft Excise Tax Advisory (“ETA”) (will be hyperlinked to the attached document) in which it concludes that unredeemed gift card receipts (e.g., breakage) which are taken into income should be reported as subject to service B&O tax.  (As a reminder, in 2004, the Washington legislature excepted most gift cards from escheat, and now, after a period of non-redemption, companies may bring such receipts into income for book and federal tax purposes.  However, such companies are still liable should the card be redeemed.)   

We looked at this issue years ago, and the only authority on the issue was the administrative rule that said that gift cards are taxable upon redemption.  The Department’s conclusion is contrary to such administrative rule.  It is unclear whether this conclusion is being applied prospectively or retroactively, and there may be other associated issues.

The Department indicates it does not intend to hold stakeholder meetings on this ETA, and has set May 11 as the deadline to submit comments.  If you have any interest in this issue, we would be happy to assist you and coordinate whether there are multiple retailers with an interest. Please contact Gregg Barton or Bob Mahon.

 

Governor Signs Into Law Amendments to Washington’s Uniform Money Services Act

On April 18 the governor of Washington signed into law amendments proposed by the Washington Department of Financial Institutions (“DFI”) in December of last year, to the state’s Uniform Money Services Act, including provisions specific to digital currency.  The changes take effect on July 23, 2017.

Aligning with Washington’s Interim Regulatory Guidance on Virtual Currency Activities, published in December of 2014, the amendments do not broaden the scope of regulated activities relating to digital currency.  However, they provide clarity regarding the regulation of digital currency products that operate within a limited or closed universe.  For example, loyalty points programs and virtual currencies redeemable only on online gaming platforms are explicitly exempted from the licensing requirement, as are tokens issued in connection with a distributed ledger that do not operate as a medium of exchange.

In addition, digital currency exchanges and other companies offering digital currency products are permitted to include like-kind digital currency holdings as capital reserves to the extent obligated to consumers.

Blockchain Week in Review – April 17, 2017

Below is a summary of some of the significant legal and regulatory actions that occurred over the past week. This alert is not intended to be a comprehensive list of all such developments, but rather a selection of publicly-reported news that may be of particular interest.

U.S. Developments

Regulatory Updates

Washington State Legislators Prepare Bill To Regulate Virtual Currencies
In Washington, Senate Bill 5031 was introduced by Senators Jan Angel and Mark Mullet in January. Both legislative chambers have now approved the bill, which was delivered  Thursday to Governor Insleee for approval. The bill provides new rules for companies that deal in digital currency services.

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Dax Hansen and Josh Boehm Speak at Stanford Cyber Initiative About Blockchain Tokens

On March 29, 2017, Perkins Coie partner Dax Hansen and associate Josh Boehm were invited to the Cyber Initiative at Stanford Law School to deliver a presentation on several cutting-edge legal issues relating to blockchain technology.  Their presentation, which focused on blockchain token sales and treatment of bitcoin under property law, is available here.

Blockchain token sales have been a particularly high profile issue in recent months. As explained by Blockchain Capital’s Brock Pierce in an interview with American Banker last week, available here, token sales represent a potential new model for venture capital financing.  Perkins Coie attorneys are monitoring this trend and will provide updates on future developments.

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