Nearly 8 years after the release of Bitcoin as the first iteration of blockchain technology, regulators still have not issued clear compliance guidelines over the industry. Those with legal knowledge in the community are working together in an effort to self-police the industry, hoping that a good faith compliance effort will help regulators recognize that the technology is more often used for good than nefarious reasons.
On May 25, 2017, five of these legal experts gathered for a panel titled “Is Grey the New Normal in Legal and Compliance” at the Token Summit in New York City to discuss their varied understandings of emerging laws over the ecosystem. The common message throughout the panel was clear: while some guidance has emerged to help steer the industry, attorneys (perhaps unsurprisingly) still disagree on how to interpret or advise clients in this legal grey area—including whether to call it a “grey area” at all.
Some of the legal issues discussed included:
- Legitimate and Illegitimate ICO’s—Moderator Peter Van Valkenburgh of Coin Center opened the session by discussing how securities laws are in place specifically to protect investors from operations such as Ponzi schemes or other fraudulent activities. He mentioned the notorious Paycoin—which was revealed as Ponzi scheme in 2015 and whose founder is now facing trial for fraudulent sales of securities—as exemplifying times where regulatory intervention helps blockchain gain mainstream legitimacy and faith overall. He then outlined his vision for sensible ICO categories that could be regulated differently, pointing to the Ethereum Foundation’s open ICO as a non-profit entity that had already built its service and the ZCash (a for-profit company) ICO that was only offered to accredited investors in compliance with Regulation D private placement exemptions as two different legitimate ICO strategies that entrepreneurs can take depending on the nature of their project.
- It Is in Entrepreneurs’ Best Interest to Comply with US Securities and Exchange Rules Regardless of Where in the World They or Their Investors Are—Emma Channing—General Counsel for Argon Group, a blockchain-focused investment bank—recognized that the Securities and Exchange Commission (SEC) has no problem enforcing its decisions outside the US for any securities sale that involves either US-based investors or companies. She noted that the SEC is often the strongest regulatory body in the US, and cooperating with its staff and rules can make strategic sense as it will often use its broad authority to help companies that comply with its rules to avoid oversight by other administrations. She also noted that compliance is “really not as hard as it sounds,” pointing to the straightforward exemptions in Regulation D as means to accomplish this. She also recognized that every ICO should strive for global compliance given the risk of tokens possibly being sold in any jurisdiction, recommending that “if your adviser can’t talk to you about a global compliance strategy, you might want to find another adviser.” Marco Santori, a partner at Cooley LLP, offered the recently announced SAFT framework as one method to execute this compliance.
- These Issues Are Not Legal “Grey Areas” but “Developing Areas”—Sarah Hody, attorney at major law firm Perkins Coie, pointed to the Financial Crimes Enforcement Network’ (FinCEN) 2015 instructions that any issuer or exchange of a “convertible virtual currency” must register with the authority and comply with its other laws as an example of early guidelines that has brought the industry into compliance. However, she noted that the term “convertible virtual currency” as used in 2015 probably does not apply to “app tokens” as they are being used in 2017 because they represent the right to access and use a particular platform and not a currency like bitcoin. She suggested that this type of early rule issuance to help the industry comply and then periodic update to reflect new technology makes blockchain law more of a “developing area” than a “grey area” as far as legal issues go.
- FinCEN Regulations Do Represent a “Grey Area”—Channing disagreed with Hody’s analysis, pointing to FinCEN’s 2015 allegations against Ripple as an example of governmental authority overstepping that exact distinction of app tokens vs. cryptocurrencies. The panel questioned why this occurred since there was no evidence of any terrorism or other nefarious activity occurring through Ripple’s exchange, and such an investigation was beyond the agency’s charter. Nonetheless, the panel noted that, while the issue was settled out of court (and therefore does not represent binding law going forward), these types of occurrences do represent a grey area that can be harmful to innovative companies like Ripple.
The panel wound down with a discussion of whether Charlie Shrem was properly prosecuted under anti-money-laundering laws in 2015, though the panelists never reached any discernable agreement over the matter. The exploration of these issues gave lots of material for attorneys to consider in advising blockchain clients, though the clear disagreement among these experts over these lingering legal questions seems to indicate that perhaps “grey is [indeed] the new normal” for blockchain regulation.