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Presenting a live 90-minute webinar with interactive Q&A

Emergence of Blockchain: New Applications

and Issues for Corporate Counsel Navigating Choice of Law, Electronic Signatures, Enforceability of Smart

Contracts, Money Transfer Licensing, Privacy, AML and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, JULY 12, 2017

Josias N. (Joe) Dewey, Partner, Holland & Knight, Miami

Adam Bridgers, Fisher & Phillips, Charlotte, N.C.

Deb Dobson, Marketing Technology Manager, Fisher & Phillips, Atlanta

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Characteristics of Distributed Ledger Technology (DLT) and

Blockchain

Presented by: Deb Dobson, Marketing Technology Manager

Fisher & Phillips, LLP Phone: (404) 240-4299

Email: ddobson@fisherphillips.com Twitter: @debdobson

What is it?

• Decentralized database

• Peer-to-Peer network

• Shared, distributed ledger

• No intermediary required

• Authenticated transactions

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How Does It Work?

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Example:

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Unpermissioned vs Permissioned • Unpermissioned (permissionless)

• Anyone can join and participate

• Mining models: • Proof of Work (PoW)

• Proof of Stake (PoS)

• Permissioned • Only preapproved entities can join and participate

• Many financial institutions, among others, use this model

• Mining models • Does not need to use computing power based mining for

consensus since actors are known

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Enterprise Blockchains

Most of the piloted blockchains are permissioned for these reasons

• Privacy: allows only actors who have rights to view the transactions e.g., a bank consortium with competitors

• Scalability: can build a simplified Proof of Stake model to establish consensus. (BigChainDB)

• Fine Grained Access Control: allows restricted access to the data within the ledger (R3CEV’s Corda)

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Security

• Signed immutable records/blocks –PKI signed (cryptographic hash)

• Robust security, PKI encryption

• Built in auditing

• Nonrepudiation

• Distributed Database

• Transparent

• No single point of failure

• Trust layer for the internet

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Difference Between Blockchain & DLT • Distributed ledger technology: a consensus

of replicated, shared, and synchronized digital data spread across multiple sites, countries, and/or institutions. • Better scaling options potentially

• Does not necessarily employ blocks or chain transactions

• Blockchain: a type of distributed ledger, comprised of unchangeable, digitally recorded data in packages called blocks.

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Smart Contracts & Use Cases

Presented by: Josias Dewey, Partner Holland & Knight LLP

Phone: (305) 789-7746 Email: joe.dewey@hklaw.com

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SMART CONTRACTS

• Today, blockchains have evolved in terms of the complexity of the data that can be maintained by the ledger. Blockchain protocols, such as Ethereum, allow users to actually execute computer code (generally known as a smart contract) on the blockchain.

• The term ‘smart contract’ is often misused. It can be used to refer to the execution of snippets of code on the blockchain, but is sometimes confused with the concept of a legal contract that is implemented on the blockchain. While such a legal contract can be effectuated across a blockchain, not all smart contracts are contracts in the traditional sense.

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SMART CONTRACTS • Parties draft traditional contracts in a manner that reduces risk for themselves, but ultimately, an element of risk is almost inevitable in the traditional contract.

• Smart contracts reduce these risks as a result of the following characteristics: (i) smart contracts are coded and computer code ultimately boils down to 1’s and 0’s — there are no gray areas or ambiguities, (ii) the current state of things (whether this thing is a home or your bitcoin wallet) digitally tied to the blockchain is verifiable (hence, no need to meticulously explain what is you think you are getting), and (iii) smart contracts are self-executing, which means that the contract cannot be reneged, no one can decide not to perform a certain task (at least one that is linked to the blockchain), and there are less human hands (and hence human corruption) that influence performance throughout the contract’s term.

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Possibilities Endless • The ability to model financial

instruments of any level of complexity has drawn the attention of most industry participations involved in the World’s capital markets.

• The DTCC is exactly the type of intermediary that blockchain can eliminate. That has led them to lead, not fight, the effort for adoption. Getting in front of the technology before others could was very wise strategy.

• There are still numerous obstacles and challenges that must be overcome before the technology is widely adopted.

• One such challenge is describing the future lawyers role in draft contracts.

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Digital Signatures • At the core of ESIGN is the

principle that signatures and contracts may not be denied legal effect, validity, or enforceability because they exist only in electronic form. This principle equally applies to notary acknowledgments and affidavits made under oath.

• The vast majority of states have adopted the Uniform Electronic Transaction Act (“UETA”). At least 47 states and the U.S. Virgin Islands have all adopted the UETA. Only Illinois, New York, and Washington have not adopted the UETA. Each of these non-adopting states has, however, adopted a statute that deals with electronic records.

• Wills, testamentary trusts and negotiable documents require closer scrutiny.

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Automated Execution and Enforcement • Smart contracts permit value

exchanges and other rights transfers that can be set in motion, and unless the smart contract provides otherwise, can’t be stopped from executing if the conditions in the code are satisfied.

• There is no precedent directly addressing the enforcement of such arrangements, but no policy justification for denying enforcement either. No more so than an electronic slot machine after the button is pressed and before outcome known.

• Much has been written about the relationship of human prose and computer code in the context of enforceable contracts.

• May not want to walk into court with lines of code as contract.

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Delaware Corporate Changes • Delaware sees DLT as a way to improve

corporate records. Eighty-five percent (85%) of public companies organized in Delaware.

• Dole Food case prime example of what blockchain prevents.

• Delaware State Bar Association's Corporation Law Section recently proposed a piece of legislation to its General Corporation Law that would re-define the term “stock ledger” to include those administered electronic networks such as blockchain.

• Specifically, it would also permit a corporation to maintain stock ledgers by using “distributed electronic networks and databases.””

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Banking & Finance • Now that we have a basic

understanding of the blockchain and smart contracts, let’s focus on how it can be used in banking and finance.

• How does blockchain technology benefit banks and finance companies?

• Transparency • Cost reduction • Instant trade execution • Automated KYC / AML through digital

identity technology • Security • Enable automated machine-to-machine

trading • All the benefits of a central clearing

house without the need to actually have one

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Real Estate • DLT’s transparency and the

tamper proof, immutable nature make it a near perfect solution for tracking interests in real property. While the transition will take some time in developed nations with large amounts of existing real estate records, other nations have already begun the process of transferring to blockchain records. The implication are significant:

• Substantial reduction in transaction costs and government expenditures.

• Implications for title companies, mortgage lenders, lawyers and brokers.

• Capital raising, including crowdfunding, will change with new opportunities.

• Vast improvement in contract and asset management.

• Smart building technology can leverage blockchain, IoT and data analytics.

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Supply Chain and Trade Finance • Supply chain and trade finance one of the fastest developing areas of blockchain.

• A number of large companies, including Walmart among others, have already instituted beta deployments of the technology.

• Letters of credit and bills of lading on the blockchain.

• This is a use that takes advantage of not only blockchain, but also IoT and artificial intelligence-–which in the case of IBM, has involved the application of Watson to blockchain logic.

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Government

• Entirely new government consultancy have begun to spring up as more and more people recognize the enormity of potential cost savings. Some of the potentially significant gains might be seen in:

• DLT asset registries will replace their central database counterparts.

• DLT based anti-fraud and systems to improve integrity in the distribution system for legal drugs will reduce social harm and improve communities.

• Dubai moving all government records to distributed ledger before 2020.

• Congressional blockchain caucus.

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Insurance • Internet of Things (IoT) can

be levered because DLT provides secure data sharing and the ability to pre-load DLT with self-implementing policy logic if sensors in field send back data to DLT confirming loss occurrence.

• May be best to for fighting insurance fraud in history of industry. All results from ability of DLTs to share information from numerous sources—all of which data is immutable and not subject to tampering. In addition, the entire area of provenance improvement with respect to valuable art work, wines and other insurable items is making measurable progress.

• Machine learning and natural language processing becoming more efficient at understanding policy terms. 24

Blockchain in the Workplace and Legal Questions Generated by the Technology

Presented by: Adam M. Bridgers, CIPP/US

Fisher & Phillips, LLP Phone: (704) 334-4565

Email: abridgers@fisherphillips.com

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Blockchain in the Workplace

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Blockchain in the Workplace

• Blockchain in HR • Create, manage, and securely store employment

documents, e.g. applications, background checks, credentials, performance reviews

• Reference checks eliminated • Authentication of resume information

• “Smart” employment contracts

• Blockchain-enabled collective representation

• Gig Employment • Technology allows workers in the gig, or sharing,

economy to operate without a trusted third-party intermediary

• No need for intermediary to connect workers and consumers

• Paying employees with virtual currency

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Legal Issues

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Legal Status & Jurisdiction

• Public v. Private Blockchain

• Decentralized Autonomous Organizations • What is the legal

status? • DAOs run

automatically, who is held responsible?

• Liability to DAOs and creators

• Who pays?

• Jurisdictional concerns

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Criminal Liability

• Are bitcoins “money” for purposes of criminal liability? • “Whoever knowingly conducts, controls, manages,

supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both.” United States v. Petix, No. 15-CR-227A, 2016 WL 7017919, at *3 (W.D.N.Y. Dec. 1, 2016) (citing 18 U.S.C. § 1960(a)) (emphasis added).

• Answer = No • “Money,” in its common use, is some kind of financial

instrument or medium of exchange that is assessed value, made uniform, regulated, and protected by sovereign power. Petix at *4 (citations omitted).

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Silk Road Case • Online Black Market operated on

Tor

• 2013 FBI shut down website and arrested founder Ross William Ulbricht aka “Dread Pirate Roberts”

• Convicted of 8 charges and sentenced to life in prison without the possibility of parole

• May 31, 2017 the U.S. Court of Appeals for the Second Circuit denied Ulbricht’s appeal. United States v. Ulbricht, 858 F.3d 71 (2nd Cir. 2017).

• Government used records created by Bitcoin’s Blockchain to link Ulbricht to Dread Pirate Roberts

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Blockchain Data as Evidence • Vermont Court Procedure, Blockchain enabling. Vt.

Stat. Ann. tit. 12, § 1913.

• (a) As used in this section, ‘blockchain technology’ means a mathematically secured, chronological, and decentralized consensus ledger or database, whether maintained via Internet interaction, peer-to-peer network, or otherwise. (b) Authentication, admissibility, and presumptions. • (1) A digital record electronically registered in a blockchain

shall be self-authenticating pursuant to Vermont Rule of Evidence 902, if it is accompanied by a written declaration of a qualified person, made under oath, stating the qualification of the person to make the certification and:

• (A) the date and time the record entered the blockchain; • (B) the date and time the record was received from the

blockchain; • (C) that the record was maintained in the blockchain as a regular

conducted activity; and • (D) that the record was made by the regularly conducted activity

as a regular practice.

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Legal Issues in Financial Sector

• SEC’s denial of Bitcoin ETF • Ethereum ETF application

• Digital currency investments subject to federal securities laws. See SEC v. Shavers, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013)

• FINRA, Distributed Ledger Technology: Implications of Blockchain for the Securities Industry (Jan. 2017)

• Department of the Treasury Financial Crimes Enforcement Network, FIN-2013-G001, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (2013)

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Privacy Concerns • Once data is stored it cannot

be easily altered or erased (GDPR, FCRA)

• HIPPA concerns related to re-identification of previously de-identified PHI

• Transparency of transactions on Blockchain not easily compatible with privacy laws in financial sector (GLBA and BSA)

• Potential Solutions - privacy focused Blockchains; private or permissioned blockchains • E.g. Digital Asset and R3

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Legal Issues • Contractual Concerns

• Warranty disclaimers • Enforceability of Smart Contracts with self-

enforcing provisions

• Liability Issues • Public Blockchain = inability to control and

stop functioning • If Blockchain fails or breaks, who is held

responsible?

• Intellectual Property • Is Blockchain Data “property”? • Ownership of IP on Blockchain

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Legal Issues

•State and local efforts e.g. Delaware and Chicago’s Cook County

• “Distributed ledger technology offers a potential technological solution by maintaining multiple, current copies of a single and comprehensive stock ownership ledger.” In re Dole Food Co., Inc., No. CV 8703-VCL, 2017 WL 624843, at *4 (Del. Ch. Feb. 15, 2017)

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Thank You

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