Originally published on The Legal Executive Institute.
By Joseph Raczynski
NEW YORK — The fifth annual Consensus — the preeminent cryptocurrency and blockchain conference powered by CoinDesk — wrapped a rousing three-day event in mid-May that produced several legal-leaning themes in the ever-mingling world of technology and the law.
On the anti-money laundering (AML) front, Sigal P. Mandelker, Under-Secretary for the US Treasury Department’s Terrorism and Financial Intelligence unit, cited several salient points around cryptocurrency. First, he said, there is a need for more guidance from regulatory agencies.
Since 2013, the Financial Crimes Enforcement Network (FinCEN) has received more than 47,000 suspicious activity reports (SARs) that mention bitcoin or virtual currency with half of these filed by virtual currency exchangers or administrators themselves. If your institution forgoes more robust Know Your Customer (KYC) rules for anti-money laundering efforts, you could be significantly impacted. The positive, Mandelker noted, was that forthcoming Financial Action Task Force (FATF) guidance could arrive as early as June which will help crystalize how to handle cryptocurrency in the AML quagmire.
Around cryptocurrency, there is a need for more guidance from regulatory agencies.
The Consensus conference also demonstrated that avid interest in understanding the blockchain space persists. While I have spent the better part of the last three years discussing blockchain and cryptocurrency with law firms of all sizes in the US, the UK, the UAE, and Australia, the thirst for learning is not quenched.
Steve Quirk, TD Ameritrade’s executive vice president for trading and education, spoke candidly that the interest in this area spans across all generations. He noted that attendance has been “off the charts” at the bitcoin education events facilitated by TD Ameritrade, which is exactly what I have found when presenting to law firms and corporate counsel. Within the legal ecosphere, lawyers seek to know more about the technology around blockchain, and what impact it will have on their clients and their business.
The SEC Weighs In on IEO
Another theme emerging at Consensus was the eager discussion concerning Initial Exchange Offerings (IEOs) which is similar to Initial Coin Offerings (ICOs), but in this instance the cryptocurrency exchange is the one responsible for running the financials.
The US Securities and Exchange Commission (SEC) weighed in on this frothy topic, as Valerie Szczepanik, the SEC’s Senior Advisor for Digital Assets and Innovation, made it abundantly clear that these IEOs fall under the oversight of the SEC. These crypto-exchanges which facilitate token sales likely meet the legal definition of securities dealers if the issuer or any of the buyers are based in the US, she explained.
So again, we could see a flood of business move outside of the US — however, some exchanges balk at this threat, noting that it’s very similar to the run up of the ICO market. To comply in the US, the exchanges need to follow the same procedures for registration and licensing requirements as do broker-dealers, alternative trading systems (ATS), or national securities exchanges. Forgoing those steps, any IEO who promotes or sells such tokens will find themselves in the SEC’s direct line of fire.
There were several other themes likely to impact the legal industry in the coming years that were brought up at Consensus. For example, so-called “stable coins” were discussed in detail at multiple sessions. Stable coins are cryptocurrencies designed to minimize volatility, usually by pegging them to another asset, like US dollars or other cryptocurrencies. It is feasible that real estate transactions — or indeed, transactions for any financial agreement — could be executed using these more stable digital assets.
Internet 3.0 is here, and that rests on the Internet of Value, which is built on a distributed ledger.
Another concept being talked about was “staking”, or the evolution of cryptocurrency mining and the confirmation that transactions are legit on a blockchain. This confirmation is changing from the energy-intensive Proof of Work to Proof of Stake, in which those who wish to confirm transactions stake a large sum of tokens or money on a blockchain. Then, if they try to cheat the system or confirm erroneous transactions, they face the prospect of losing their stake. This will be a bourgeoning area for lawyers to aid users and companies because we will see many tokenized systems placed into custody for management, with these details baked into smart contracts.
As the conference came to close, ConsenSys founder Joe Lubin discussed the evolution through which we currently are being catapulted. Internet 3.0 is here, he said, and that rests on the Internet of Value, which is built on a distributed ledger.
This new trustless state, is a far cry from our current Internet, he added, which was built “in naive times” which has left us “running our economy on a network that was built by academics to trade research papers.”
Today’s new trustless environment is going to require skilled lawyers to navigate a concept where distribution of information is decentralized and increasingly self-executing.