Cryptocurrency,ICO’s and the Global Legal Framework Cedric K. Wachira - Blockchain Association Of Kenya 30 May 2018
The decentralized legal world ● The global nature of Crypto and ICO’s changes the nature of regulation ● Old model - You live in one nation, you follow that nations rules, because you have no choice ● What you end up doing is to learn the rules of that one nation really, really well ● Crypto and ICO’s break this model because you are now dealing with the rules of 200 different jurisdictions ● It’s *impossible* for any one person to comprehend all of this ● And each jurisdiction’s rules interact with other jurisdictions
Making order out of chaos ● Don’t look at the law like a lawyer - Example: Suppose I rip off my clothes and start hitting people in the face. Is something bad going to happen to me? ● Fishes and dolphins - Fishes and dolphins are fundamentally different animals. But they have very much in common because they have to address the same sorts of problems ● Different food cuisines - Different places have different types of food, and the different types of foods reflect different climates - But different food has the same goals, and there are similar problems and similar solutions - If you want to understand food and health law, you start with food and politics rather than law
Big companies and small companies ● Big companies have to care about the entire world. Small companies don’t ● Big companies can survive by doing nothing. Small companies will go insolvent if they do nothing ● Big companies have existing relationships with regulators. Small companies can be much more aggressive ● Big companies are terrified of regulations. Small companies don’t have to be
General principles ● Do something that makes business sense. The regulations may influence what you do, but start with the business case ● Don’t do anything *bad* - There are things that you know will get you in trouble ● Pay your taxes ● Why this works….. ○ Laws are different from place to place, but they have the same purpose. ○ You are dealing with other business people who are all trying to make money and do deals ○ The place that you care about are the places that you can find people with local knowledge
How to think about regulation ● Figure out what jurisdictions you care about (and which ones you don’t) ○ Where you live ○ Where your customers live ○ Places that are nice to crypto and ICO’s (Switzerland, BVI/Caymans, Hong Kong) ○ United States of America - It is special ● Pretend you are doing this with paper - What is the law? ● Understand what the regulators want and the local legal culture and local language ● Avoid boundary conditions , if possible ○ Example: Public offering versus private placement ● Avoid doing anything legally new, if possible ● Copy what other people have done - there is safety in numbers
How not to end up in jail ● Good news - It’s really, really hard to end up in jail accidentally ○ You aren’t smuggling cocaine ○ The big banks destroyed the world economy but no one ended up in jail ● Don’t do anything *bad* (like smuggling cocaine) ● Take warnings from regulators seriously ● Pay your taxes
Regulatory approaches that didn’t work ● We don’t need a stinking legal system (everything is a smart contract)!!!! ○ Fails the moment you leave cyberspace and hit the real world ● Let’s create new laws and new licenses!!!! ○ Bitlicense disaster - Thank you Benjamin Lawsky for showing how not to do regulation ● Let’s try to undermine existing legal framework!!!! ○ NO!!!!! The empire has struck back!!!!
Regulation by existing regulation ● Ignore the fact that you are using new tech. What is the thing that you are trying to do ● Regulate the Crypto/ICO under existing legal framework ● Provide exemptions where necessary
The major classifications ● Things that look like money ● Things that look like securities (stock bonds) ● Things that don’t look like anything else (tokens)
Things that look like money ● It looks like money but it’s not money - It’s postage stamps and a commodity ● But just because it’s not money, it could fall under money transmission laws ○ I convert USD to postage stamps and then mail the postage stamps to someone else, and they convert it back to USD, Is this regulated? ● Yes in the United States. No in Hong Kong ● Easiest way of making sense of the regulations is to find out what the governments *really* care about ○ US cares about taxes. Reporting and control of money going out. Very loose regs on reported income and money coming in ○ Mainland China cares about capital controls ○ Hong Kong has very liberal rules because it is a money center, and cares about reputation
Things that look like securities ● What is a security? ○ Narrow definitions - Switzerland and Hong Kong ○ Middle definitions - United States ○ Broad (i.e. part of financial product) - Singapore and the UK ● Who is regulated? ○ Usually a exception for rich people ○ Usually no extra-territorial regulation (except for the US) ● How is it regulated? ○ English, United States, Hong Kong - marketing and purchase ○ Germany, China - issuance ○ Is there a a registration requirement? ● What are the exemptions
Things that don’t look like anything ● Black list - Here are the things that you can’t do ○ United States, Switzerland, Hong Kong ● White list - Here are the things that you can do ○ United Kingdom, Singapore ○ Regulatory sandbox ● Grey list - We want to keep you guessing as to what you can and cannot do ○ Mainland China and Russia ● No list - None of our business what you do (as long as you don’t to it here) ○ BVI, Caymans
Strategies ● White list - Negotiate with regulators to get a sandbox ● Black list - Try to avoid restricted activities and use regulatory arbitrage ● No list - Use as flag of convenience ● Gray list - Just do it!!! And be prepared to stop doing it!!!
Thoughts on the future ● Law will develop by evolution rather than by explicit planning ● Fundamental issue is that governments no longer have a monopoly on force or information ● “Hostes gentium” - Coordinated action against “enemies of humanity” ○ To see a list of things that will make you an enemy of humanity - see definition of “specified criminal activity” in 18 USC 1958 and subtract some stupid things ● Seals of approval for everything else ○ Seals of approval ○ Flags of convenience
Where to go next ● Google is your friend. You just need to know the right search terms ● Meet people. Reddit and Quora ● Marketing material from legal firms ● Q/A
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