As science and industry become evermore intertwined, new technologies continue to emerge that fundamentally change the manner in which business is conducted. Remember business before the advent of the personal computer, copy machines, or the internet? Each of those technologies fundamentally altered (or disrupted) the very nature of how business is conducted. And, with each such change came new legal issues and challenges for businesses – everything from new regulations requiring compliance to new avenues of potential liability.
Along comes blockchain technology, which, like all other disrupting technologies before it, is already fundamentally altering the nature of business and the legal landscape facing clients across a broad spectrum of industries.
While many have heard of blockchain, or a particular application of the technology like Bitcoin (itself a cryptocurrency), many lack a basic understanding of what blockchain is or how it works. In simplest terms, blockchain technology allows a series of interconnected computers to reach agreement on shared data in a manner that:
- Removes the need for trusted advisers to confirm the transfer of information and/or assets (think banks, escrow agent, closing companies), i.e., “disintermediation.”
- Reduces the possibility of hacking, theft or corruption of the data by creating immutable copies of files at uncentralized locations throughout the respective blockchain’s cryptograhic “distributed ledger.”
In other words, blockchain is a functional technology focusing on how data or value is shared in our modern online society – not on what is being shared.
McDonald Hopkins brings big law experience and talent to bear on the emerging issues that blockchain technology has brought to the legal forefront. Our firm regularly works with companies in the various industries that have been (and likely will be) impacted by blockchain technology, including health care, real estate, manufacturing, finance, technology, and personal services. Moreover, McDonald Hopkins is a full service law firm that has capability in assisting with the numerous other cutting-edge issues that arise out of blockchain technology, including complex intellectual property issues, taxes, litigation, securities and initial coin offerings, and everyday corporate and commercial smart contract issues.
The purchase and sale of cryptocurrencies has numerous legal ramifications. While legal regimes continue to evolve to address this issue, clients interested in the buying and selling of cryptocurrencies must comply with regulation and guidance coming out of various governing bodies, including FinCEN, the SEC, the CFTC and state governments regulating “money transmitting business.” McDonald Hopkins has lawyers experienced with navigating this complex web of intervening regulations and advising clients on licensing and forming cryptocurrency brokerages and the legal pitfalls to be avoided.
In connection with that experience, we have former federal prosecutors and decades of experience of compliance with relevant anti-money laundering laws (AML) and know-your-client laws (KYC), including prosecuting dozens of such matters on behalf of various federal agencies to assist client in ongoing compliance with FinCEN regulations.
Likewise, McDonald Hopkins has a strong team of litigation specialists with deep expertise in complex commercial litigation and defending clients in various actions brought by federal agencies for alleged violations of federal regulations.
INITIAL COIN OFFERINGS/TOKEN GENERATION EVENTS
ICOs, or initial coin offerings, are capital raising methods recently adopted by blockchain based startups. Not unlike a Kickstarter campaign, an ICO usually sets a minimum goal for a fundraiser and a period of time to reach that goal. If the requirements are met, the developers takes payment from the interested participants and then the tokens are distributed and can be used for the purchase and use of certain products developed by the startup. Those same tokens, though, can also be held or sold by offering participants looking to profit off the change in value of the coin or token over time. As such, the Securities Exchange Commission (the SEC) has taken the position that many ICOs and Token Generation Event (TGEs) are, as a legal matter, “securities” transactions under the long-standing Howey test – finding that a transaction is an investment contract (i.e., security) if there is an investment of money in a common enterprise with an expectation of profit which is derived from the efforts of others.
Accordingly, when deciding to embark on a capital raise through an ICO or TGE, it is important to make sure that the offerings are compliant with existing SEC regulations and applicable exemptions governing the solicitation, offer and sale of securities. McDonald Hopkins has a strong bench of lawyers with expertise in assisting clients with their capital raising efforts.
DATA PRIVACY AND CYBERSECURITY
As blockchain technology requires distribution and storing of data on a corresponding distributed ledger (often with multiple pseudonymous – and potentially nefarious – participants), data privacy and security issues abound. The nature of the blockchain makes cryptocurrency transactions irreversible, providing no recourse in the event a fraudulent transaction is induced. Additionally, cryptocurrencies are a tangible asset frequently compared to bearer bonds. If access to specific cryptocurrency is lost, it is most likely lost forever. Cryptocurrency wallets and passwords can be susceptible to the same cybersecurity threats facing other online data, such as phishing, ransomware and other hacking methods, any of which may give rise to potentially total loss. To that end, McDonald Hopkins has a nationally recognized data privacy practice that can provide guidance and ongoing consultation on best practices to secure cryptocurrency, and assist clients in the case of online breach, theft and ransom-related data incidents.
Intellectual property rights are at the core of blockchain technology. Businesses and individuals must take appropriate steps to insure that they are protecting their rights in their valuable intellectual property, across all areas of intellectual property, including patents, copyrights and trade secrets, as well as avoiding infringement of third party blockchain intellectual property rights. McDonald Hopkins’s team of intellectual property lawyers provide powerful, cutting-edge legal and business expertise across all facets of intellectual property law and are ready to assist you in the application of intellectual property issues arising in connection with the use of blockchain technology in your business.
 (See SEC v. W.J. Howey Co., 328 U.S. 293 (1946); see also USA v. Zaslavsky, Case No. 17 CR 647 (RJD) (E.D.N.Y), Memorandum and Order, dated September 11, 2018 (finding that SEC has jurisdiction to pursue fraud claim arising from two allegedly fraudulent ICOs).)