[PPT] - FROM THE BLOCKCHAIN TO THE ICOS SUCCESS: THE LEGAL CHALLENGES Dr. PowerPoint Presentation

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FROM THE BLOCKCHAIN TO THE ICOS SUCCESS: THE LEGAL CHALLENGES

Dr. Olivier Hance, Ph.D, LLM, MBA, TEP, ESQ.

Professor at the AMU & SHU Universities Managing Partner at Hance Law Avocats 1

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1. THE TECHNOLOGIES:

a) The Blockchain

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1. The Technologies:

b) DAOs

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1. The Technologies:

c) Smart Contracts (Example On Ethereum)

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1. The Technologies:

d) Cryptocurrencies

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1. The Technologies:

e) ICOs

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2. CRYPTO VS. TOKENS

AND SOME CHARACTERISTICS

1. COINS (CRYPTOCURRENCIES)

Its own platform (Blockchain)
Function: Hold and transfer value
Bitcoin & Altcoins
Altcoins based on Bitcoins open-source protocol (but change of underlying

code): Namecoin, Peercoin, Litecoin, Dogecoin, and Auroracoin

Altcoins not based on BTC open course protocol (have created their protocols and

blockchain):

Ethereum, Ripple, Omni, Nxt, Waves, and Counterparty
See https://coinmarketcap.com/ : list of coins with their platforms
I584 crypto-currencies and Total Market Cap: $334 772 207 112

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2. CRYPTO VS. TOKENS

AND SOME CHARACTERISTICS

2. (ICO) TOKENS

Need another platform (e.g. Ethereum or Omni) to operate;
Some tokens are issued to reward the servers running the Ethereum platform and

a model to share computing resource and keeping some control on decentralised resources

ICO Tokens can have different functions:

 A Currency, used as a payment system between participants;  A digital asset (a digital right)  A means for accounting (number of API-calls, volume of torrent uploads) A share (stake) in a specific start-up  Payment for using a system

689 ICO Tokens and Total Market Cap: $49 327 209 314

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2. CRYPTO VS. TOKENS

AND SOME CHARACTERISTICS

3. (ICO) TOKENS ISSUANCE: TECHNICAL ASPECTS

Need another ICO platform to operate

⁼ A software platform through which the ICO can be conducted and token transactions validated

Different Platforms
Ethereum, Stellar, Omni, Waves, Counterparty, Bitshares, Ethereum Classic, and RSK
Each platform has its key technical or other benefits.

 Ethereum = Smart contracts (with a specific standard largely widespread which allows smart contracts interoperability: ERC20)  Stellar is more focussed on market making and efficient order matching

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2. CRYPTO VS. TOKENS

AND SOME CHARACTERISTICS

4. (ICO) SOFT AND HARD CAPS & TOKEN SALE MODELS

HARD:
Limit on the total contribution value that will be accepted; Once it reaches

the hard cap, the organisation will refuse to accept additional contributions.

SOFT:
A soft cap is a total contribution amount which, once exceeded, will trigger a

time limit on the remaining token offering period.

Those caps can be PUBLIC or HIDDEN
Various Sales Models including Fixed Exchange Rate, Dutch Auctions and Hybrid

capped sales.

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2. CRYPTO VS. TOKENS

AND SOME CHARACTERISTICS

5. TOKEN CHARACTERISTICS AND ECONOMICS

In Exchange of Bitcoin (BTC) or Ether (ETH) (the organisation then exchanges BTC/ETH

against fiat);

Generally, anyone can buy tokens – however:
Some prohibit US residents from contributing to avoid the US regulatory agencies
Some required the investor to be an accredited investor to avoid securities law issues
Five Types of Tokens:
Usage tokens: access and use a product or a service (form of prepayment)
Equity tokens: provide equity-like benefits: profit sharing and/or voting rights
Work tokens: allow the holder to work for the organisation and perceives revenues
Community tokens: only allows a community to have its monetary policy
Asset backed tokens: allows for implementation of some securitisation schemes

through an ICO

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3. BLOCKCHAIN, DAOS & SMART

CONTRACTS: LEGAL ISSUES

BLOCKCHAIN TOKENS & DAOs: Licences and Authorisations,

Financial Law, Consumer Protection, Liability Issues, Legal Status, etc.

CRYPTOCURRENCIES: Civil Law, Tax Law, Money Laundering, etc.
SMART LEGAL AGREEMENTS: Legal Layer: e.g. enforceability?
BLOCKCHAIN & DATA PROTECTION: Data Protection, GDPR, etc.
INTELLECTUAL PROPERTY ON THE BLOCKCHAIN: IPR Protection on the

BC and the BC to secure IPR protection

INTERNATIONAL PRIVATE LAW: Choice of Law and Choice of

Jurisdiction

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1. BLOCKCHAIN LEGAL ISSUES:

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3. BLOCKCHAIN, DAOS & SMART

CONTRACTS: LEGAL ISSUES

A. DAOs ARE NOT RECOGNISED AS LEGAL ENTITIES, BUT…
Uncertainty on DAO’s Legal Rights
Uncertainty on DAO’s Legal responsibilities and overall liability
They have a lot of internal rules, but little help when interactive legal system

(although commercial code could use them as the commercial good practices)

SOME POTENTIAL QUALIFICATIONS

Courts could qualify (absent constitutive docs) as JV or General Partnership
The adoption of the legal status of Protected Cell Companies (PCC) has also

been recommended

JURISDICTION AND APPLICABLE LAW

DAOs could be created by many international contributors, some known, some

not…

DAO’s tokens cannot be considered as shares if no entity
Shall it nevertheless be treated as securities? How to assign the ownership in the

product of contracts?

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2. DAOs LEGAL ISSUES:

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3. BLOCKCHAIN, DAOS & SMART

CONTRACTS: LEGAL ISSUES

B. CONTRACTING, TOKENS & LIABILITIES

CONTRACTING WITH DAO:

As of the first DAP, it was necessary to offer the contractors a legal service

structure to invoice. The first service company was incorporated in Switzerland.

QUALIFICATION OF PARTICIPATORY TOKENS:

Means of access and voting to technological experiment on the Ethereum

ecosystem + But also investment and potentially monetary value. Therefore, risks of qualification as a security and their sale as the sale of investment contract

LIABILITIES OF DAO & PARTICIPANTS: Liability Issues, but who is liable?

This shall depend on the legal qualification of the DAP: if the partnership or JV,

it would be the members who would be liable.

An avenue might also be to consider the service company liable, but this is

not obvious when the service company has a very limited role.

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2. DAOs LEGAL ISSUES:

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3. BLOCKCHAIN, DAOS & SMART

CONTRACTS: LEGAL ISSUES

A. SMART CONTRACTS & CONTRACTUAL FREEDOM

SMART CONTRACT? Execution of a contract by a computer when a

consensus has been reached and when certain conditions are met. The technology allows therefore the programming of transaction implementing a business logic Therefore this implies and allows remote and complete performance of contractual obligations without interaction

f a third party.
CONTRACTUAL FREEDOM: The parties of a contract should be allowed to

decide to use the blockchain enabled automation of obligation

enforcement. From this angle, nothing new compared to EDI. Except that

the EDI operations are based on real world contracts which specify the security measures, the applicable law, and the competent jurisdiction.

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3. SMART CONTRACT LEGAL ISSUES

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3. BLOCKCHAIN, DAOS & SMART CONTRACTS:

LEGAL ISSUES

B. SMART LEGAL CONTRACTS…

I. For a smart contract to be qualified as a “legal” contract, it would need to respect the legal conditions of the contracts: mutual intent of the parties to be bound by the consequences of the contract. II. The smart contract could certainly be a tool for enforcement of a

contract. This is already the case (spit of coins between different parties

at an ICO and notably the ICO service provider agreed in contact and inserted in a smart contract). III. This could mean significant relief for enforcement and judiciary system. However, the smart can only play this role if the code is correct, i.e. shall execute the intent of the parties. IV. There are Industry Initiatives to allow those “smart legal contracts” e.g. OpenLaw with legal agreement templates which can be modified and then embedded in a smart contract. The project also works on the negotiation of those contracts via Ethereum and integration with payment processors.

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3. SMART CONTRACT LEGAL ISSUES

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4. CRYPTO-CURRENCIES:

REGULATORY ISSUES

E.g. EBA (13/09/2013), EBA Opinion (04/07/2014), CSSF Position (14/02/2014) & CSSF

(14/03/2018)

1. Most of the authorities have emphasised technical and legal risks:
ECJ (22/10/2015): mean of payment (therefore no VAT of fiat/crypto exchange);
CSSF Position (14/02/2014): mean of payment + fiduciary money (scripturale) not cash

money (fiduciaire);

ECB (12/10/2016) & CSSF (14/03/2018): mean of exchange
5th Directive AML & CSSF (14/03/2018): no legal status as money
2. Legal status of Crypto-Currency
CSSF Position (14/02/2014) & CSSF (14/03/2018)
Pragmatic approach and the applicant must submit the business plan to CSSF
3. Lux: Crypto Issuers or Crypto/fiat Exchange platforms require a minima a payment

service provider license & could be as e-money institutions

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4. CRYPTO-CURRENCIES:

REGULATORY ISSUES

4. Success stories in Luxembourg

SNAPSWAP:
October 2015: E-money provider license
Use, hold, and transact cryptos
First licence in the EU wit passporting to all the EU countries
BITSTAMP:
April 2016 (Effect 01/07/2016): E-payment provider license
Fiat/exchange platform
Advantages for Bitstamp (channels with banks) and protection for consumers
BITFLYER
January 2018: E-payment provider license
Fiat/Exchange Platform

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4. CRYPTO-CURRENCIES:

REGULATORY ISSUES

5. Timing is Key!

Bitstamp: 2 years to get the license
“Your license in 6 months”?
40 entities in the pipeline?

6. & EU Institutions?

In favour of the process
However, largely pro new regulation, e.g. EU Parliament Resolution 26 May

2016

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5. ICOS:

LEGAL & REGULATORY ISSUES

1. CONSUMER PROTECTION

No requirement of Technological and Legal Due Diligence (vs. IPO);
No pre-review and approval of the contractual documentations which can

contain very dangerous provisions for the consumer;

No protection against a glitch/flaw in the smart contracts (rare, but

happened with DAO in 06/2006)

Token Valuation is not reviewed or audited – no protection against risks of

pure bubbles or even Ponzi Schemes.

Risks for unexperimented consumer not to main or secure keys and to be

stolen by a hacker. This is very severe, as when the security is compromised, it is forever and with no possibility of “password resetting”

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5. ICOS:

LEGAL & REGULATORY ISSUES

2. Criminal Risks

Hackers attack (see above: DAO of private key compromised)
Phishing Scams: the criminal impersonates an organisation starting an ICO.

Once the payment of the crypto has been made, it is irreversible. They usually register domain names close to the ones of the real organisation or hack a real organisation and change the address of payment

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5. ICOS:

LEGAL & REGULATORY ISSUES

A. USE OF LOCK UP AGREEMENTS

In IPO, there are Lock-Up Agreements & Provisions: the founders or key

executives cannot sell rapidly their shares and run away with benefits.

Protection against founders selling an overvalued company
Those cash-outs in BTC or ETH can create market price distortions, especially as

they go along with other massive exchanges post ICO to pay bills and finance projects

They could be fixed by best practices

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3. MARKET REGULATIONS

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5. ICOS:

LEGAL & REGULATORY ISSUES

B. Market regulations against market manipulation
Small Community: Very few powerful players, less than 50, a lot of them in Russia

and China;

Manipulation in the first days of the ICOs: the promoter borrows for one week BTC,

for instance, to buy the token and simulate success of the ICO. This pushes the price up and launches the IPO. Those tokens are then sold with substantial benefits after the tokens appreciation.

Insider information: temptation to conclude deals with platforms or between

large platers on the basis of inside information. Criminal law not adapted.

Pure manipulation and fraud to investors: some association of players can decide

jointly to sell massively tokens to decrease the value. When the investors buy massively (with loans in BTC) and when the price sky-rockets again, they sell… Pumping and Dumping. Criminal Law not adapted.

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3. MARKET REGULATIONS

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5. ICOS:

LEGAL & REGULATORY ISSUES

B. Market regulations against market manipulation (Continued)

Release and communication of false or misleading information: to influence

the pricing of a listed instrument. Pumping and Dumping. Criminal law not adapted.

Spoofing through non bona fide orders: a trader submits a buy or sell order

and cancels the order before execution. Objective = manipulate the market price by pushing the other investors to follow the move.

Spoofing tough Scare walls: the trader buys a very large buy order at a certain
price. This pushes others to offer at a higher price, otherwise their orders shall

not be executed.

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3. MARKET REGULATIONS

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5. ICOS:

LEGAL & REGULATORY ISSUES

AML Regulations vs. Anonymity of the buyers & Tax Evasion
Tokens are sent from and to crypto-addresses, but the buyer is not necessarily
identified. Technically the buyer could be identified, but some blockchains

are organised to protect this anonymity (e.g. Montenegro);

There is also a serious risk that the investment in the cryptos might itself be a

means to achieve money laundering or to use so laundered money;

The operation of the ICO itself may constitute a tax evasion (e.g. no

declaration of realised capital gains)

Regulatory Treatment of the ICO and Financial Law:

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4. REGULATORY ISSUES

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5. ICOS:

LEGAL & REGULATORY ISSUES

China (04/09/2017) ICOs are banned and completed ICOs have to refund their

token buyers;

Singapore: AML & Financial law if securities are issued (registration of prospectus

with MAS) and registration of the intermediaries (Statement MAS, 01/08/2017). For the others, no direction and no guidance.

US: AML & Financial law if securities are issued (25/07/2017, SEC: Security

qualification depends on the economics of the transaction, e.g. profit sharing) + registration of many players (e.g. brokers). If not security: not clear.

Russia: AML, Focus on Taxation (Capital gains) & Financial Law?
UK: Sandbox to Blockchain companies to test innovative products without respect
f all regulations.
EU: AML.

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5. REGULATORY TREATMENT OF ICOs & FINANCIAL

LAW: INTERATIONAL – CLASSICAL TOUR

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5. ICOS:

LEGAL & REGULATORY ISSUES

A. SWITZERLAND

FINMA Guidelines (16/02/2018): Crypto-friendly, Zug canton, but AML & Financial

Law if securities issued. If not, seems to be unregulated + plan to introduce a crypto friendly license (comp. Gibraltar).

Positions taken are very clear in terms of securities
Payment tokens: are NOT treated as a Security
Utility tokens: if they are not for investment purposes: then NOT treated as a security
Asset tokens: treated as A SECURITY (this covers rights of interests sold as the occasion of

an ICO)

Position completed by the qualification as deposits or Collective Investments: in

principle no but depends on explicated criteria

Very practical approach with a table of solutions provided + a questionnaire for

interested parties + a fintech special e-mail to send the request for qualification of the projects

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5. REGULATORY TREATMENT OF ICOs & FINANCIAL

LAW: INTERATIONAL – INNOVATION TOUR

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5. ICOS:

LEGAL & REGULATORY ISSUES

B. Malta

New Consultation (finished end of March) on creation of the Malta Digital

Innovation Authority, Framework for providers & new Virtual Currency Act: a new authority + a certification by auditors and legal status for decentralised platforms and smart contracts + the IT auditors shall also certify the ICO from a technology standpoint;

Adoption of a clear “Financial Instrument Test” criterion to determine if

securities law is applicable.

For the ICOs which do not offer securities, there shall be disclosing
bligations, regulation of white paper and licensing requirements for some

providers.

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5. REGULATORY TREATMENT OF ICOs & FINANCIAL

LAW: INTERATIONAL – INNOVATION TOUR

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5. ICOS:

LEGAL & REGULATORY ISSUES

C. Gibraltar
GFSC February 2018:
AML & Financial law if securities are issued (registration of prospectus)
Need to adapt a clear legislation for all ICOs recognised
Regulation needed for the ICO and for all the main intermediaries
with the key points covered: AML, financial crimes, regulated sponsors,

codes of practice, public register & new criminal offence + regulation of intermediaries and providers of ancillary services.

Objective: the three regulations should be adopted by the end of

October 2018.

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5. REGULATORY TREATMENT OF ICOs & FINANCIAL

LAW: INTERATIONAL – INNOVATION TOUR

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5. ICOS:

LEGAL & REGULATORY ISSUES

D. Lichtenstein

Fact Sheet on ICOs, 10/9/2017;
Emphasized clearly all the ICOs’ risks
The design and the function of the tokens are decisive to implement a regulatory
framework. Even the AML depends on this.
In principle: the tokens which have characteristics of equity securities or other investments

require the publication of a prospectus

It does dot seem that the rest of the ICOs are regulated or that there is an intention to

regulate;

In fact, it is only recommended to submit the white paper and a business plan to the FMA

for be confirmed that a prospectus registration is not required.

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5. REGULATORY TREATMENT OF ICOs & FINANCIAL

LAW: INTERATIONAL – INNOVATION TOUR

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5. ICOS:

LEGAL & REGULATORY ISSUES

E. Luxembourg

CSSF Warning, 14/3/2018
No specific regulation, no guarantee, no regulatory protection & high risks!
For all the ICOs: AML Procedures;
CSSF’s threat to consider that the ICOs could be regulated by applicable

financial law and ICO could be an attempt to circumvent this regulation…

no clear definition, no precise criterion. Still very vague and not instrumental

for the clients.

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5. REGULATORY TREATMENT OF ICOs & FINANCIAL

LAW: INTERATIONAL – INNOVATION TOUR

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5. ICO RELATED AGREEMENTS
This a misconception. This is not the practice anymore.
Even small ICOs have a more elaborated set of contractual documents.
But this misconception is largely spread: Lawyers, National Regulatory

Authorities, Providers

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1.“Misconception/ There is only a White Paper”

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5. ICO RELATED AGREEMENTS
TEASER;
PRIMER;
OTHER MARKETING DOCS PUBLICLY CIRCULATED.

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2. MARKETING DOCUMENTS WHICH NEED LEGAL REVIEW
3. LEGAL AND CONTRACTUAL DOCUMENTS
WHITE PAPER: can be very detailed and very complete.
TERMS & CONDITIONS: crucial document which can contain very

crucial provisions. Those T&Cs regulate the ICO or the pre-ICO if there is one;

PRE-ICO PURCHASE AGREEMENT;
TOKEN PURCHASE AGREEMENT ( e.g. SAFT).

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MANY THANKS!

livier.hance@hance-law.com

www.hance-law.com +352 274 404

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