Blockchain Series Part 1 of 4:

Transcription

1 Blockchain Series Part 1 of 4: Blockchain 101 It s Not Just Cryptocurrency #HASHTAG

2 SPEAKERS Glynna Christian Partner, Co-Head Global Tech Transactions Orrick Michaela Ross Tech & Telecom Reporter Bloomberg Law Teresa Walker COO Waller Lansden

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4 INTRODUCTION Why should we care about blockchain technology? New industry sector with many growing start-ups Legacy companies in a variety of sectors are researching and experimenting with blockchain technology Financial Services: JP Morgan, Goldman Sachs Energy & Infrastructure: BP, Shell Tech: Oracle, IBM, Amazon The technology is transformative enough to raise novel legal issues Regulators are starting to closely scrutinize blockchain projects and bring enforcement actions

5 NEXT GENERATION BLOCKCHAINS Thousands of projects are being designed that try to use blockchain technology for purposes in form distinct from crypto assets

6 INTRODUCTION (CONT D) Questions to be answered today What is blockchain technology, how does it work, and why is it innovative? What are some other uses for blockchain technology beyond bitcoin? What are some of the key legal issues facing clients relating to blockchain technology? What types of clients is the firm working with and what capabilities do we have to serve other clients?

7 WHAT IS BLOCKCHAIN? EITHER THE SECOND COMING OR THE APOCALYPSE. Decentralized, Immutable Digital Ledger Public, Private (or Hybrid) Network Multiple Software Platforms Variety of Products and Services

8 WHAT IS BLOCKCHAIN? DECENTRALIZED TECHNOLOGY. Decentralized No central location for information Network = thousands or millions of computers/users Uses the computing power of all computers to transmit (= speed) and store information (= volume) If any one computer goes down, the network does not Transparency = everyone in the network has access to information

9 WHAT IS BLOCKCHAIN? AN IMMUTABLE LEDGER. Immutable Information in a blockchain cannot be altered (except when it can) Serves as a permanent digital record of information Digital identity verification & authorization tool Transaction authenticity; trusted transaction record

10 WHAT IS BLOCKCHAIN? THERE IS NO ONE BLOCKCHAIN. Public or permissionless blockchain Completely open allowing anyone to join and participate (read, send transactions to and expect to see them if they are valid) Anyone can participate in the process for determining what blocks get added to the chain and the current state of the chain To sync data, each node in the network must solve a complex, resource-intensive cryptographic problem (proof of work) Little to no privacy for transactions Difficult to scale because verification requires significant computational cycles Completely decentralized. There is no central authority overseeing how it works

11 WHAT IS BLOCKCHAIN? THERE IS NO ONE BLOCKCHAIN (CONT D) Private/hybrids or permissioned blockchains Closed and monitored ecosystem / network (privacy) Restricts who is allowed to participate and in which transactions Participants must have an invitation (aka permission) to join Access control may vary: existing participants can decide future; regulatory authority can issue licenses to participate or a consortium can make decisions (scalable, with central authority) Once an entity has joined the network, it will play a role in maintaining the blockchain Many of the blockchain consortiums that build private blockchains follow this model

12 WHAT IS BLOCKCHAIN? THERE IS NO ONE BLOCKCHAIN (CONT D) Multiple Software Platforms Open source software Ethereum Hyperledger Fabric Proprietary software

13 BLOCKCHAIN VISUALIZED

14 DIFFERENCES BETWEEN BLOCKCHAINS Type of data that is shared can vary widely Medical records Voting Real estate records IP licenses Supply chain information Proof of insurance For any set of shared data that would benefit from a time-stamp system, it is virtually certain that there is a team working on a blockchain solution

15 TRADEOFFS BETWEEN BLOCKCHAINS Privacy Open/permissionless blockchains generally require transaction information to be public Some new encryption techniques provide more privacy Permissioned blockchains confine transaction information to trusted nodes but sacrifice inclusivity Scalability Open blockchains proving difficult to implement at scale Bitcoin and Ethereum require large amounts of computing power to secure blockchain Centralization Centralization can help with efficiency but may lead to rent seeking or censorship

16 KEY LEGAL ISSUES Anti-Money Laundering and Sanctions State Money Transmitter Regulations Securities, Commodities and Derivative Regulations Advertising / Consumer Protection Others

17 KEY LEGAL ISSUES ANTI-MONEY LAUNDERING AND OFAC The Financial Crime Enforcement Network (FinCEN), the enforcement arm of the Department of Treasury, was one of the first regulators to claim jurisdiction over cryptocurrency transactions Issued guidance in 2013 and has since brought cases and issued administrative rulings Companies engaged in the business of buying and selling convertible virtual currencies in the U.S. must comply with the federal Bank Secrecy Act, which requires development of an AML program and registration with FinCEN Applies most directly to exchanges and other intermediaries but FinCEN has suggested that the guidance may apply more broadly Also leads to consideration of whether money transmitter licenses need to be acquired in each state OFAC has indicated that it will add specific blockchain wallet addresses to SDN list

18 KEY LEGAL ISSUES SEC AND CFTC REGULATIONS Ongoing debate about where the line between commodities and securities should be drawn SEC has jurisdiction to regulate securities If the offer / sale of a digital token constitutes a security or an investment contract under Howey, then offering must be registered with the SEC or satisfy an existing exemption CFTC has jurisdiction to regulate derivatives and police the commodities spot market for fraud and manipulation CFTC has stated that crypto assets are commodities (to the extent they are not securities) Bitcoin futures began trading in December 2017 on the CME and CBOE futures exchanges

19 KEY LEGAL ISSUES SEC AND CFTC REGULATIONS The CFTC is generally viewed as friendlier to the blockchain industry than the SEC In September 2017, the SEC announced the creation of a Cyber Unit, which has brought enforcement actions against bad actors using crypto assets to conduct fraudulent securities schemes In May 2017, the CFTC approved the creation of LabCFTC, an initiative aimed at promoting FinTech innovation and fair competition

20 KEY LEGAL ISSUES Advertising / Consumer Protection The Federal Trade Commission (FTC) has jurisdiction under existing regulations relating to consumer protection / false advertising associated with the distribution of digital tokens In March 2018, at the request of the FTC, a federal court halted the activities of four individuals who allegedly promoted deceptive money-making schemes involving cryptocurrencies Taxation where is the tax location of a blockchain transaction? Intellectual property does anyone own the blockchain network? Usage data? Antitrust Are competitors colluding if they share information on a blockchain network? Smart contracts can smart contracts anticipate everything & be completely autonomous? Evidence is data stored on a blockchain admissible?

21 KEY LEGAL ISSUES DATA PRIVACY LAWS Data Privacy Can data protection and blockchain co-exist? The EU General Data Protection Regulation (GDPR) is due to come into effect on May 25, 2018 It is currently unclear how numerous requirements of the GDPR would be compatible with a blockchain-based service Issues Processor vs Controller The user of a blockchain system may at the same time be a controller for the data that uploaded to the blockchain, and a processor by virtue of acting as a node i.e. storing the full copy of the blockchain on their system Who is responsible for complying? Which party should comply with and/or enforce obligations under a processing agreement?

22 KEY LEGAL ISSUES DATA PRIVACY LAWS (CONT D) International transfer Public blockchain could result in a number of nodes distributed across the world Since each node would effectively have a full copy of the underlying information, this could mean a number of transfers of personal data outside the EEA Minimization Information transiting through the blockchain is processed by every node and cannot be removed from the blockchain This level of processing could be considered to be excessive, and conflicts with the principle that personal data should not be processed for any longer than necessary for the purposes for which they were collected Data subject rights The nature of blockchain is that the underlying data cannot be erased or amended, which may conflict with the exercise of data subject rights Consider an off-chain private permissioned blockchain as a solution

23 KEY LEGAL ISSUES DATA PRIVACY LAWS (CONT D) On-chain vs. Off-chain On-chain is a traditional blockchain transaction Off-chain Simply store hashes instead of data Split in data architecture that allows personal data (or other data) to be referenced in a blockchain but not seen or accessed without access to the off-chain database The blockchain is a tool to enable trust between parties and deliver proof for transactions. The actual data is not required for that

24 KEY LEGAL ISSUES DATA SECURITY Decentralized technology could mean more robust data security than centralized systems can be less vulnerable (e.g., Target, Equifax) All blockchain security not created equally Software and implementation Public vs private blockchains Access Controls (nodes) Consensus protocols Network architecture Transaction Reversibility

25 KEY LEGAL ISSUES DATA SECURITY (CONT D) Weak technology can jeopardize the security of the blockchain Outside technologies integrated badly, poorly thought-out data architectures Safety of data is key to a trusted blockchain An infrastructure with integrated security that can: Restrict access to data. Validate data quality before it enters the blockchain.

26 KEY TAKEAWAYS *Blockchain technology will be implemented across organizations, to perform large and small tasks *Data privacy must be handled very carefully, especially ex-us *Public and private networks are very different. Private networks give more control but risk more security issues. *Data security is dependent upon software architecture and implementation

27 GLOSSARY Blockchain: A structure for storing data in which groups of valid transactions, called blocks, form a chronological chain, with each block cryptographically linked to the previous one. Consensus Protocol: A process, encoded in software, by which computers in a network, called nodes, reach an agreement about a set of data. Cryptocurrency (or crypto-token): A scarce digital asset defined by a blockchain protocol and exchanged via that blockchain system. Decentralization: A hard-to-quantify measure of a network s resistance to attack, a function of how broadly control is distributed among different actors. Distributed ledger technology (DLT): A system, most commonly a blockchain, for creating a shared, cryptographically secured database. Initial coin offering (ICO): A blockchain-based fund-raising mechanism in which entrepreneurs mint new crypto-tokens and sell them to investors. Mining: The process by which nodes in Bit-coin, Ethereum, and many other blockchain systems (those that use the consensus protocol known as proof of work) add new blocks to their respective chains and generate new crypto-tokens.

28 GLOSSARY (CONT D) Permissioned blockchain: A shared database with a blockchain structure that requires participants to obtain permission before reading or writing to the chain. Contrast this with permissionless blockchains, which anyone can join. Proof of stake: A novel consensus protocol in which, instead of mining, nodes can validate and make changes to the blockchain on the basis of their existing economic stake. Proof of work: The consensus protocol of choice for Bitcoin and many other cryptocurrencies To add a new block, miners must calculate a hash for it that meets certain narrow criteria. Doing so requires an enormous number of random guesses, making it a costly process that deters attempts to commit fraud. Smart contract: A computer program stored in a blockchain that automatically moves digital assets between accounts if conditions encoded in the program are met. It serves as a way to create a mathematically guaranteed promise between two parties. Source: MIT Tech Review April 2018

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30 USE CASES IN LEGAL REALM Smart Contracts Financial Services Identity Management Voting Data/Asset Registries Supply Chain Management

31 EARLY USES IN LEGAL Internal Contract Automation Contract and Deal Negotiation and Auto-Updating Calendaring Document Authentication Client Identity Management Transaction Recordkeeping Automated Billing Service of Process Verification

32 EXAMPLES OF PLATFORMS

33 LEGAL WORKING GROUP EXAMPLES

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35 GROWING GOVERNMENT USE

36 CHALLENGES Interoperability Energy Regulations Security Risks Scalability Investment Decisions

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38 LEGAL INDUSTRY IMPACT Delaware Blockchain Initiative law allows creation/maintenance of corporate records West Virginia pilot tested election voting Vermont law approves blockchain data as court admissible Illinois Blockchain Initiative medical credentialing process project blockchain in government tracker birth registration pilot project

39 System/Process/Functions Entities Involved, Blockchain Document Management System Document Assembly NetDocs, Integra Ledger Thomson Reuters Contract Express, Integra Ledger LEGAL INDUSTRY IMPACT Document Templates for Smart Contracts Contract Management using Smart Contracts Document Execution, Existence Notary Services OpenLaw, Ethereum Monax s Agreements Network Basno, Blocksign SilentNotary, Ethereum Service of Process ServeManager

40 GROUPS WORKING ON LEGAL INDUSTRY OPPORTUNITIES Global Legal Blockchain Consortium Association of Legal Administrators OpenLaw Accord Project

41 IMPACTED INDUSTRIES Banking Healthcare Government Real Estate Legal Security Politics Rentals and Ride Sharing Charities and Aid Organizations Education

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43 IMPACT ON INDIVIDUALS FOR IDENTITY

44 QUESTIONS?