CryptoLaw Newsletter #20
China’s Great Crypto Wall – the sequel; radical right uses crypto funding; BIS on multi-CBDC prototype; who holds private key to El Salvador's BTC stash?
It is never a boring week in the land of law & crypto. I’ve summarized the top stories of the week below. I’m also thinking about how to give you more systematic overviews of legal frameworks on crypto around the world, or short interview series on a specific law & crypto theme. Suggestions welcome!
China – China’s (latest) crypto crackdown dominated much of the crypto news this week – and also left its mark on sliding crypto prices, wiping US$150 billion off the market. Some dryly remarked you can only ban crypt once – and if you have to keep repeating the same ban, it simply means you cannot really ban it. Others noted that this latest crackdown was different: not only because 10 different authorities jointly issued the statement, but also because its broad scope. It warns any individual and entity that any crypto-related transactions are unlawful – and that includes China-based employees of overseas crypto exchanges. The news immediately left is footprint on crypto prices. Some of the largest Ethereum miners ceased operations and some of the major crypto exchanges (such as Huobi and Binance) also reacted by ceasing on-boarding of new mainlaind users and gradually phasing out services for existing users in mainlaind China. Crypto-exchange FTX moved its headquarters from Hong Kong to the Bahamas. Alibaba said it would stop selling crypto-mining related products. Meanwhile, some US politicians see China’s Great Crypto-Wall as geopolitical advantage. Sen. Toomey, for example, tweeted China’s crackdown is a “big opportunity” for the US. (Reuters, Decrypt, Forbes)
US - Ethereum develop Virgil Griffith pleads guilty to breach of sanctions law for his presentation at a crypto conference in North Korea. (Decrypt)
Canada – Financial regulators jointly warned crypto trading platforms that their advertisements may be covered by securities laws. The regulators took aim at certain crypto advertisement practices, including misleading ads, FOMO marketing and gambling-style contests. (Decrypt and IIROC press release)
El Salvador – Who holds the private keys to El Salvador’s stash of bitcoin? No one knows… and that’s a problem, says BlockBanck executive. (Decrypt)
Global – Right-wing extremists are using crypto such as bitcoin or privacy-oriented Monero to raise money, an AP report concludes. The news organization found that “radical right provocateurs are raising significant amounts of money from around the world through cryptocurrencies. Banned by traditional financial institutions, they have taken refuge in digital currencies, which they are using in ever more secretive ways to avoid the oversight of banks, regulators and courts, finds an AP analysis of legal documents, Telegram channels and blockchain data from Chainalysis, a cryptocurrency analytics firm.” (AP)
BIS – How do you make central bank digital currencies of several countries compatible? The Bank for International Settlements (BIS) teamed up with 4 central banks/monetary authorities to build a ‘multi CBDC’ platform for international payments. In its latest report, the BIS said its mCBDC prototype was able to complete international transfers and foreign exchange operations in seconds and reduce the cost for users by up to half. The Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China; and the Central Bank of the United Arab Emirates participated in the prototype.
UK – The House of Lords is inviting submissions from the public on CBDCs. The Economic Affairs Committee of the upper chamber of parliament published its consultation document, asking for comments on questions such as privacy concerns, impacts on the financial sector, fintech competition and monetary policy. It also wants to know how CBDCs might affect economic sanctions and geopolitics. Responses should be submitted by 15 Oct.
US – Federal Reserve Chairman Jay Powell said it would be “ideal” for the Fed to work with Congress on a digital dollar. (The Block)
Peru - A stablecoin pegged to Peru’s national currency the sol has been launched on the Stellar blockchain, claiming it is 100% backed by fiat. The stablecoin issuer hopes that stablecoins can reduce the cost of and time-lag for cross-border payments in Latin America. (Coindesk)
Why is it so hard to regulate DeFi and crypto? Laura Shin’s Medium post looks at the difficulty of regulating crypto . Collins Belton told her the SEC is “unwilling to articulate a position is in part because they’re trying to resolve this tension [between laws assuming intermediaries and DeFi removing intermediaries], and if they do it the wrong way, is they’ll essentially give everyone a road map to not being regulated by the SEC.”
DeFi could become a trillion $ industry, according to BlockData, but 'regulatory concerns are too great' for traditional financial investors to jump in.
Fireblocks wants to remedy that, at least for DeFi’s Aave transactions: it submitted a governance proposal to become a ‘whitelister’ for Aave Arc. Aave is one of the largest DeFi protocols, but Aave Arc offers a ‘permissioned’ protocol version, accessible only to whitelisted parties. Fireblocks now wants to become the whitelisting partner. The company says it wants to extend “access to even our most compliance-conscious customers, who would otherwise avoid DeFi over compliance or regulatory concerns”. Is the concept of ‘permissioned DeFi’ a contradiction in terms or the road for institutional adoption of DeFi?
Block reorganization: user-miner collusion? There has been much talk about miners’ ability to prioritize certain transactions submitted on Ethereum over others. Ethereum miners can pick & choose unconfirmed Ethereum transactions to include in the next proposed block that will give them the highest overall profit. They don’t need to follow any particular order to process unconfirmed transactions. When Art Blocks minted NFTs, some of its users thought they bought some, only to find out … they hadn’t. It turned out the Ethereum block containing the transactions had been re-organized. The Block commented: “This kind of thing may have been just due to how blockchains work (small reorgs happen all the time) or it could have been a user collaborating with a miner to put the transactions in their favor.”
Blockchain and trade secret metadata: Putting metadata of trade secrets on a blockchain can help trade secret holders make their case in a lawsuit, according to a Reuters attorney analysis. Attorney author R. Mark Halligan says China recently amended its laws, “accepting blockchain evidence to prove the existence and misappropriation of trade secrets.” The holder of trade secrets “can preserve trade secret evidence on the blockchain of the required elements of proof: existence, ownership, notice and access.” (Reuters – Attorney analysis)
How can lawyers ‘translate’ derivatives contracts into code? Ciarán McGonagle looks at this question in the short article Translations: creating legally effective smart derivatives contracts. McGonagle is Assistant General Counsel at the International Swaps and Derivatives Association (ISDA) and has done much work on automation of ISDA standardized documentation. He contrasts a legal agreement (a “high-level framework for responding to future events, allowing the parties to exercise discretion and make commercially reasonable determinations in order to give effect to the parties’ (presumed) intentions”) with code (which is deterministic and must be precise and predictable at the point of execution). Parts of a contract may have operational language that can be automated using code/smart contracts (e.g., ‘if A pays B, then B delivers asset X to A on date Y’). Other parts of the contract are non-operational and cannot adequately be translated into code. But the operational and non-operational parts often work together: you can automate payment clauses using smart contracts, but how can the code take into account a potential occurrence of force majeure that affected the obligation to pay in the first place. McGonagle calls this the ‘separability problem’. In addition, even clauses that seem easy to automate are subject to unanticipated changes in law, which may need to override the code. The article was published in Butterworths Journal of International Banking and Financial Law, Sept. 2021 (pp. 540-543).
Are DAOs the companies of the future? They have some growing up to do, writes Decrypt. “If this is the future of companies, they'd be very erratic companies.”
Some Decentralized Autonomous Organisations (DAOs) have amassed very large treasuries: Uniswap’s treasury is now worth more than US$ 10.2 trillion, Compound has $1.13 trillion and Aave $615 million, according to Open-Orgs.info. The site only shows the total, not how it has been calculated or how it evolved. The Defiant added that DAOs are now looking to diversify their treasury holdings, swapping their native tokens for other tokens to manage treasury risk.
NFTs are hot, but what about IP protection of those that mint (create) the NFT? Law firm SheppardMullin published a breakdown of common terms & conditions on various types of NFT platforms. One key lesson for content creators: make sure that the IP license accepted by the initial buyer also binds subsequent buyers. One obvious first step is to ensure that the secondary marketplace says in its terms that subsequent buyers remain bound by the IP license protecting the content creator. But that may not be enough: the subsequent buyer will likely object they should have received notice or should have actively accepted those terms. Putting the terms next to the NFT for sale is one option. But what about a wallet-to-wallet transfer? In that case, the original IP license could impose limits on transferability: for example, by stipulating the NFT can only be transferred if the seller informed the purchaser of the IP license. With smart contracts, we can even envisage smart contracts automatically enforcing parts of such an obligation. Or the IP license can be embedded in the NFT: that makes it harder for a subsequent user to argue they didn’t know about the IP restrictions.
US - The CFTC’s Dan Berkovitz is joining the SEC team. Berkovitz will become the SEC’s general counsel in November, the SEC announced. Berkovitz previously warned that certain DeFi products may be derivatives and may be in breach of federal laws.
Thanks for reading! Suggestions and comments always welcome. Contact me at a s c c 2 [at] c a m [dot] a c [dot] u k.