Blockchain Legal Resource

On January 8, 2024, the CFTC’s Technology Advisory Committee issued a detailed report on decentralized finance, or DeFi. The report, which was authored by the Subcommittee on Digital Assets and Blockchain Technology, notes that DeFi offers both promising opportunities and complex, significant risks to the US financial system, consumers and national security.

As we begin the new year and reflect on what we learned last year, the Hunton Andrews Kurth Blockchain team would like to provide you with a recap of the top posts we shared throughout 2023. Please visit the links below for these highlights.

On October 16, 2023, the SEC’s Division of Examinations released a reporting detailing its 2024 examination priorities. The document lays out the key risks, topics and priorities that the Division plans to focus on during its upcoming cycle of inspections and examinations of broker-dealers, investment advisers and other regulated securities intermediaries. Among the various areas of focus, once again risks related to crypto assets and blockchain will be an examination priority.

On June 8, 2023, Judge William H. Orrick of the U.S. District Court for the Northern District of California granted a default judgment in favor of the CFTC against Ooki DAO, a cryptocurrency decentralized autonomous exchange. The court also permanently enjoined Ooki DAO from operating its website and awarded the CTFC $643,542 in monetary damages. The court found that Ooki DAO’s lack of participation in the litigation and refusal to appear in court contributed to the default judgment. This decision brings to a close the closely-watched case that establishes new precedents for the legal liability of decentralized autonomous exchanges.

As we begin the new year and reflect on what we learned last year, the Hunton Andrews Kurth Blockchain team would like to provide you with a recap of the top posts we shared throughout 2022. Please visit the links below for these highlights.

Our goal is to continue to provide our readers with relevant, real-time information on legal and regulatory developments in the blockchain space. If you would like to receive email alerts when new posts are published to this blog, please enter your email address in the 'Subscribe' field. Thank you for your readership!

On November 22, 2022, New York Governor Kathy Hochul signed into law a two-year moratorium against granting permits to crypto mining operations that “are operated through electric generating facilities that use a carbon-based fuel.” Renewable sources of energy are not impacted.

On October 18, 2022, the European Commission published a report, titled Information Frictions and Public Policies: Approaching the Regulation and Supervision of Decentralized Finance (“DeFi”) (the “Report”). The Report discusses the need to adapt existing policy frameworks to account for the change brought about by DeFi to the underlying information structure upon which financial services are provided. Unlike traditional finance, DeFi applications provide financial services based on blockchain technology, i.e., without requiring any intermediary agent and instead relying on automated protocols that are encoded in public digital contracts universally accessible and maintained by an open pool of pseudonymous miners.

Non-fungible tokens (NFTs) are creating new economic opportunities in old, familiar spaces. To capitalize on the current popularity of NFTs, some retailers are turning to the timeless art of nostalgia: reworking old media or products into an NFT collection to advertise a brand in an online space or bring new attention (and customers) to a vintage product.

LCX AG, a cryptocurrency exchange based in Liechtenstein, recently lost nearly $8 million in digital assets from a cyberattack. The perpetrator’s identity was unknown. Through the public ledger, LCX found the blockchain address that received the stolen assets, and quickly filed a complaint in New York to freeze certain of those assets.[1] Without any other way to contact the perpetrator, the court permitted LCX to serve the wallet address with an NFT containing a hyperlink to the required legal notice documents.[2] This may be the first example of service-by-NFT.

In a June 9, 2022 letter to the Directors of the US Patent and Trademark Office (USPTO) and US Copyright Office, Senators Thom Tillis (R-NC) and Patrick Leahy (D-VT) requested that the agencies jointly undertake a study of intellectual property (IP) rights considerations with respect to non-fungible tokens (NFT or NFTs).

On 25 October 2021, the Dubai Financial Services Authority (DFSA), the regulatory body of the Dubai International Financial Centre (DIFC), announced that it implemented a regulatory framework for investment tokens issued or traded within the DIFC (Regulatory Framework for Investment Tokens), which follows from the Consultation Paper No. 138 (Regulation of Security Tokens) it issued earlier in March this year. Consequently, the UAE advances its status as a hub for technological innovation (and entrepreneurs); it fully embraces the global adoption of cryptocurrencies and blockchain technologies, as well as the demand for Investment Tokens, and the number of companies within the DIFC that are eager to issue, and trade in them, is steadily on the rise.

As a show of continued interest in the development of cryptoasset solutions, Senator Mike Crapo (R-ID), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, recently sent a letter to Acting Comptroller of the Currency Brian Brooks. Chairman Crapo’s letter requested an update on findings of the Office of the Comptroller of the Currency (OCC) and information regarding next steps the OCC intends to take with respect to blockchain and distributed ledger technology.

Referencing the OCC’s June 4 advanced notice of proposed rulemaking on digital activities in ...

The World Bank Group recently published a “FinTech Note” on Smart Contract Technology and Financial Inclusion in its “Finance, Competitiveness and Innovation” series. The note explores the potential of smart contracts to spur economic development and financial inclusion around the globe. The note explains the key technical and legal characteristics of smart contracts, delves into potential uses of the technology and, ultimately, raises important considerations for policymakers to weigh when implementing smart contract legislation. Below, we highlight a few of the key takeaways on the potential benefits of smart contracts and discuss how policy and legal decisions will impact the use of this technology.

Recently, staff of the US Senate’s Permanent Subcommittee on Investigations prepared a memorandum for subcommittee members in advance of its April 30, 2020 “Roundtable on Continuity of Senate Operations and Remote Voting in Times of Crisis.” The memo provides a description of Senate proposals to allow senators to participate and vote remotely during crises such as the ongoing COVID-19 pandemic, with an emphasis on potential technological solutions such as blockchain.

In the fall of 2018 we posted a state-by-state summary of smart contract legislation which included an overview of legislation passed in Arizona, Tennessee and Vermont, as well as an update on legislation pending in other states at the time. Over the past few years, a multitude of states have tackled smart contract legislation with varying degrees of detail and success. Most state smart contract legislation has fallen into three broad categories: formation of exploratory committees, recognition of basic smart contract concepts and comprehensive treatment of smart contracts and related technologies.

On January 7, 2019, the United States Patent and Trademark Office (USPTO) issued further guidance on patent subject matter eligibility, which should ease some of the burden placed on patent applicants seeking to obtain U.S. patents on certain technology, including blockchain technology.

On November 8, 2018, the SEC announced settled charges against an unlicensed digital token exchange (the “Platform”). It represents the SEC's first enforcement action based on findings that such a platform operated as an unregistered national securities exchange. This action follows first-of-their kind enforcement actions that the SEC brought in September against an unregistered broker-dealer and an unregistered investment company that each transacted in digital securities.

The SEC’s Division of Enforcement (Division) released its latest Annual Report (Report) on November 2, 2018. The fiscal year that ended September 30, 2018, was a busy one for the SEC in the crypto and distributed ledger technology space, and the Report includes a discussion of the SEC’s initiatives on this front.

On Monday, October 22, 2018, Judge J. Paul Oetken of the Southern District of New York granted Alibaba Group Holding Limited’s (“Alibaba”) motion for preliminary injunction in a trademark action against several foreign-based promoters and developers of a new cryptocurrency called “AlibabaCoin.” In doing so, the court considered several novel issues around personal jurisdiction and blockchain.

Hunton Andrews Kurth partner Scott Kimpel, chair of the Firm’s blockchain working group, recently participated in a panel discussion hosted by the Washington Legal Foundation regarding the latest legal issues associated with ICOs and security token offerings. Co-panelists included Alan Cohn, formerly of the Department of Homeland Security and Daniel Alter, former general counsel of the New York Department of Financial Services.

As reported on the Hunton Insurance Recovery Blog, in what appears to be a case of first impression, an Ohio trial court ruled in Kimmelman v. Wayne Insurance Group that the crypto-currency, Bitcoin, constitutes personal property in the context of a first-party homeowners’ insurance policy and, therefore, its theft would not be subject to the policy’s $200 sublimit for loss of “money.”

On October 11, 2018, the Senate Banking Committee held a wide-ranging hearing entitled “Exploring the Cryptocurrency and Blockchain Ecosystem.” The hearing featured testimony from Dr. Nouriel Roubini, an NYU professor who famously predicted the 2007-2008 financial crisis, as well as a counterpoint from Mr. Peter Van Valkenburgh, the Director of Research from Coin Center.

Recently, California Governor Jerry Brown signed into law Assembly Bill No. 2658 for the purpose of further studying blockchain’s application to Californians. In doing so, California joins a growing list of states officially exploring distributed ledger technology.

On October 2, 2018, Venezuelan President Nicolas Maduro appeared on national television and announced the official launch of the Venezuelan Petro cryptocurrency. First announced in December 2017, and purportedly backed by the country’s oil and mineral reserves, the Petro is intended to supplement Venezuela’s national currency, the bolívar, which has depreciated at an exorbitant rate in the past year. The International Monetary Fund has predicted that inflation in the country will reach 1 million percent.

For many public companies, the annual meeting voting process is littered with intermediaries and inefficiencies that can result in a lack of shareholder engagement. Proposals are often voted on by proxies instead of by shareholders, oftentimes weeks in advance of the meeting. Few shareholders attend annual meetings in person. Large institutional shareholders may be granted engagement opportunities with management of the company that are not afforded to individual shareholders. These factors can result in a lack of transparency in the voting process and asymmetrical voting power amongst shareholders. Blockchain technology has several potential applications that can remedy these inefficiencies and restore shareholder trust and engagement.

Interest in the crypto economy continues to grow in Congress. On September 25, 2018, Representative Warren Davidson (R-OH) hosted a roundtable, “Legislating Certainty for Cryptocurrencies,” with more than 50 financial institutions and crypto start-ups invited to attend. Additionally, the House Financial Services Committee has scheduled a hearing on financial innovation on September 28, 2018, entitled Examining Opportunities for Financial Markets in the Digital Era.

Recently, in a wide-ranging speech, the SEC’s Chief Accountant, Wes Bricker, provided his thoughts on how the SEC accounting staff analyzes accounting issues surrounding digital assets and distributed ledger technology. Bricker emphasized that companies must continue to maintain appropriate books and records, irrespective of whether distributed ledger technology, smart contracts or other technology-driven applications are (or are not) used. Likewise, when accounting for digital assets, companies should act appropriately within the parameters of the existing requirements of the federal securities laws. Accordingly, they should consider traditional regulations and accounting standards such as those relating to books and records, internal accounting controls, internal control over financial reporting, and custody. Bricker emphasized that “[d]istributed ledger technology and digital assets, despite their exciting possibilities, do not alter this fundamental responsibility.”

Blockchain, or distributed ledger technology (“DLT”), is already proving to be a game-changer for businesses globally and across sectors. But is it secure? And can insurance help protect against risks and, thus, help advance the development of this technology?

Recently, several states have passed legislation allowing the use of smart contracts and blockchain technology in various commercial contexts. A “smart contract” is commonly defined in such legislation as an event-driven program or computerized transaction protocol that runs on a distributed, decentralized, shared and replicated ledger that executes a contract or any provision(s) of a contract by taking custody over and instructing transfer of assets on the ledger. 

Recently, the International Law Section of the New York State Bar Association published its annual International Law Practicum issue featuring an extensive collection of articles discussing cryptocurrency regulation in various jurisdictions around the world. Hunton Andrews Kurth partner Torsten Kracht served as editor of the issue, and associate Mayme Donohue contributed an article called “Blockchain and Cryptocurrency: An Introduction and Primer.”

Articles are reprinted with permission by the New York State Bar Association, One Elk Street, Albany, NY 12207.

On August 9, 2018, the World Bank issued a press release highlighting what it described as the “World’s First Blockchain Bond.” It will be issued in Australia and, according to news reports, will be called a BONDI—both in honor of the famous Australian beach and also a clever acronym for “Blockchain Offered New Debt Instrument.” The issue size is approximately AUD $100 million (about USD $74 million).

Current regulations in the United States limit the ability of securities to trade exclusively over a blockchain, but over time we believe they will become more commonplace ...

On August 6, 2018, the Federal Trade Commission ("FTC") published a notice seeking public comment as to whether broad-based changes in the economy, evolving business practices, new technologies or international developments might require adjustments to competition and consumer protection law, enforcement priorities and policy. The notice, published in the Federal Register, does not specifically mention blockchain or distributed ledger technology specifically, but the broad list of topics that the FTC lists as areas in which it seeks comments could easily accommodate market developments due to the emergence of blockchain technology and related applications. 

In a lengthy order issued on July 26, 2018, by a 3-1 vote the U.S. Securities and Exchange Commission (“SEC”) denied an application by the CBOE Bats BZX Exchange, Inc., (“BZX”) seeking to list and trade shares of the Winklevoss Bitcoin Trust. The denial marks the culmination of a two-year effort by the Winklevoss brothers to launch the first bitcoin-based exchange-traded fund, or ETF, in the United States. In denying the application, the SEC cited various concerns about the lack of oversight in the underlying bitcoin market, and ruled that BZX did not demonstrate that bitcoin and bitcoin markets are uniquely resistant to manipulation, or that alternative means of detecting and deterring fraud and manipulation are sufficient in the absence of a surveillance-sharing agreement with a significant, regulated market related to bitcoin.

In the race to develop blockchain technology, companies are increasingly devoting capital to creating proprietary blockchain solutions. A search of the U.S. Patent & Trademark Office (“USPTO”) as of today returns 343 patent applications that contain either “blockchain” or “distributed ledger” in the abstract. Patents are being filed related to a wide variety of industries and applications, including supply chain management, autonomous deliveries, energy networks, electronic health records, 3D printing, travel itinerary management, data security and securing rights to digital media.

Enterprises around the world are actively implementing a wide variety of blockchain solutions to improve efficiencies, enhance user experiences and lower transaction costs.  But the private sector’s development of distributed ledger technology is often outpacing the legal and regulatory regimes that impact it.  In the United States, numerous regulators have asserted jurisdiction over blockchain applications, frequently in redundant or even contradictory ways.  With the Blockchain Legal Resource blog, we at Hunton Andrews Kurth plan to keep track of the most notable legal ...

Blockchain’s impact is often misunderstood as narrowly affecting the financial sector. We discuss with Law360 why “retail and consumer products companies can no longer afford to ignore blockchain as a passing trend.”