Legal Quick Hit 2016 SUTHERLAND ASBILL & BRENNAN LLP / SUTHERLAND (EUROPE) LLP

Transcription

1 Legal Quick Hit All Rights Reserved. This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decisions of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Sutherland and the recipient.

2 Blockchain Defined Blockchain is a form of Distributed Ledger Technology ( DLT ) - a decentralized database - on a peer-to-peer network that maintains a ledger of records arranged in data batches called blocks, and in which each server (or node ) must validate transactions in order to reach consensus It may be easier to comprehend Blockchain and DLT by seeing what they do and how they work 2

3 Blockchain Transactions - An operation that cannot be further divided and that works or fails as a complete unit, but never partially - Ex: purchase and sale with delivery vs. payment Hashes Bruce Arena will lead the US MNT to a World Cup victory! Algorithm Fg300fki789 90llk88s29g 3

4 Blockchain Merkle Tree Top Hash Hash 0 Hash 1 Hash 0-0 Hash 0-1 Hash 1-0 Hash 1-1 Trxn 1 Trxn 2 Trxn 3 Trxn 4 4

5 Blockchain A Public Key is an address on the blockchain (a long, randomly-generated string of numbers) A Block Top hash is incorporated into the next block 5

6 Before DLT Intermediary New Hurdles and Risks Related to Intermediary Trust is placed in intermediaries to facilitate trade execution and settlement. Roles Shifted to Intermediaries Onboarding Negotiation Execution Confirmation Collateral Exchange Reconciliation Trade Reporting Recordkeeping Amendments Testing Transportation Storage Settlement Payment Fraud Mistakes Theft / Conversion Insolvency Disasters Lesser Degree of Care (in practice) 6

7 DLT Idealized A Peer-to-Peer Network A Node = Individual Server Each node has an entire copy of the database (with records of all of the transactions) which the node continually updates and reconciles with each other node in the network. The result is a distributed ledger. 7

8 Bitcoin Bitcoin is a digital currency or cryptocurrency that uses a public blockchain as its underlying technology - No intermediation - No central bank - Created and held electronically Bitcoin is currently the best known use of blockchain CFTC deemed Bitcoin a commodity 8

9 Smart Contracts A smart contract is: - A digitally signed, computable agreement using blockchain technology Key attributes of a smart contract: - Self-executing - Real-time self-valuations - Self-reporting - Automatic margin calculations and payments - Automatic termination on counterparty default 9

10 Blockchain: Recent Developments Overstock subsidiary t0.com - Settlement platform with a goal of settling securities transactions instantly - Recently approved by the SEC to issue public bonds via blockchain Australian Stock Exchange - Working with Digital Asset Holdings to completely replace its clearing system with a blockchain alternative DTCC - Exploring new technology to improve securities settlement and other projects Digital Asset Holdings - Created a Smart Contract Alternative with privacy optionality 10

11 Potential Uses of Blockchain In both physical and financial trading, DLT has the potential to perform principally five functions: - Fraud Protection - Disintermediation - Record Retention - Smart Contracts - Regulatory Monitoring 11

12 Derivatives Trading Blockchain technology may disrupt but not wholly replace the role of central counterparties ( CCPs ) The following CCP roles may be performed by DLT: - Contract valuation - Variation margin payment settlement - Initial margin calculation and custody - Novation / netting - Close-out on default DLT may transform and revive the OTC derivatives market by providing a transparent alternative to CCP trading 12

13 Potential Regulatory Implications Positive regulatory implications: - Simplification of data records Single golden record to which the regulator can be granted access - Transparency / immutability All network participants (including regulators) have access to data in real-time Data cannot be altered or deleted Recordkeeping and reporting are automatic and will not require separate processes Efficient AML / KYC compliance Negative regulatory implications: - Uncertain regulatory landscape - Need to make rules technology-neutral to accommodate blockchain 13

14 Blockchain: What the Future Holds The next big thing? - SEC FinTech Panel: Adoption on a grand scale coming soon; DLT compared to other major market disruptions - World Economic Forum: DLT will fundamentally alter the way financial institutions do business and will become the beating heart of the finance industry Potential concerns: - Security concerns (hacking, bugs) - Transaction anonymity and privacy - Cost savings and efficiency? - Industry and cross-industry collaboration and standardization needed - Regulatory contradictions or ambiguity 14

15 Thank You! David T. McIndoe Partner Cheryl I. Aaron Associate

16 SUTHERLAND S ENERGY AND ENVIRONMENTAL PRACTICE Sutherland s Energy and Environmental Group has more than 60 lawyers representing every major sector of the energy industry. Our 40-year history of excellence in serving the regulatory, compliance and policy needs of our clients is matched by the commercial and operational experience we bring to increasingly complex transactions. Complemented with our team of wellregarded, high-profile litigators, Sutherland s energy practice is well positioned to provide the full range of legal services to our energy clients. Our clients include crude oil and natural gas refiners and producers, domestic and multinational traders, energy lenders and marketers, hedge funds and financial institutions, independent power producers and electric cooperatives, international oilfield service providers, and renewable energy developers. 16