Securities Attorney Joshua Klayman Joins Linklaters as US Head of Fintech plus Blockchain & Digital Assets

Global law firm Linklaters has announced the appointment of Joshua Ashley Klayman as US Head of Fintech and Head of Blockchain and Digital Assets. Klayman will be operating out of the New York office of the 175-year-old, UK based law firm.

Klayman is well known in the blockchain and digital asset sector. She has been at the forefront of the shift from analog to blockchain-based offerings since the beginning. Klayman possesses deep expertise in Fintech and the issuance of securities having worked with both big corporates and early-stage firms. Her practice will focus on token sales, initial coin offerings, and related transactions.

Klayman said that Linklaters is one of the world’s premier law firms and has a truly global reach and perspective.

“I am excited to join a firm that financial institutions and disruptive companies alike trust with their most complex Fintech matters.”

Scott Sonnenblick, Partner in the firm’s U.S. corporate practice commented on Klayman’s appointment:

“Joshua’s cutting-edge practice will be of great value to our tech and finance clients. Her legal acumen and experience will resonate with a broad spectrum of the industry and her leadership will provide valuable support to our rapidly growing Fintech sector.”

Prior to joining Linklaters, Klayman was founder and CEO of Klayman LLC, a boutique blockchain-focused law firm, and Inflection Point Blockchain Advisors, LLC, a blockchain strategy consulting and advisory firm.

Linklaters has 30 offices scattered around the world. The law firm has been very active in the Fintech sector for years.

The Wall Street Blockchain Alliance Responds to SECs Digital Asset Guidance. Applauds Commission’s Effort While Stating the Guidance Raises New Questions

The Wall Street Blockchain Alliance (WSBA) has published a response to the recent guidance on digital assets from the Securities and Exchange Commission (SEC).

In early April, the SEC, Division of Corporate Finance, issued its first No-Action letter (NAL) to Turnkey Jet pertaining to the issuance of a token that is considered not to be a regulated security. The SEC also published a “Framework for ‘Investment Contract’ Analysis of Digital Assets,” thus providing guidance on the issuance of tokenized securities.

Since these two proclamations by the SEC there has been much analysis and postulation on the merits of the SEC’s position.

The WSBA is a highly regarded, non-profit trade association created for financial market professionals. Their mission is to guide and promote comprehensive adoption of blockchain technology and digital assets across global financial markets.

Commenting on the WSBA response, Ron Quaranta, Chairman and CEO of the WSBA, stated:

“On behalf of the Wall Street Blockchain Alliance and our Legal Working Group, I am very proud of the work that our legal members have done to develop and publish a substantive response to the SEC Staff “Statement on Framework for ‘Investment Contract’ Analysis of Digital Assets” of April 2019. The WSBA Legal Working Group is composed of over 100 attorneys representing more than 50 firms from around the world. Their collective experience, knowledge and thought leadership makes their work and this publication invaluable to the development of the digital asset ecosystem. I and our entire global membership look forward to feedback about this document, as well as our ongoing collaboration with regulators, members and participants in the digital asset ecosystem.”

Joshua Klayman, the Chair of the WSBA’s Legal Working Group, said she was proud of the work the Group has completed and she is honored to work alongside so many brilliant, thoughtful legal leaders in the blockchain and digital asset space.

“I hope that legal practitioners and those in the market find this response useful and relevant.”

So what did the WSBA have to say? In the response, the WSBA stated:

“While the SEC’s release of the Guidance marks a welcome attempt on the part of the Staff to provide greater clarity as to the applicability of U.S. federal securities regulation to digital assets, in the view of those Wall Street Blockchain Alliance Legal Working Group members named at the end of this Paper, the Guidance represents more of a consolidation of previously enunciated positions, rather than an expansion of prior guidance expressed by the SEC and many key members of its Staff.”

The WSBA points to the fact that the Framework “makes it clear that it is is not the last word” representing the view of FinHub, the SEC’s innovation division. This means it is not an SEC rule nor regulation thus leaving a fair amount of ambiguity.

The WSBA says the SEC guidance also appears to expand on the “active participant” (AP) concept that:

“adds to the Howey analysis a new and, arguably, subjective test requiring a determination as to (i) whether one or more parties are acting as APs in connection with the “enterprise” associated with the digital asset, (ii) whether the efforts of such AP or APs are “essential” to the success of that enterprise and, if so, (iii) whether, but for such essential efforts, the enterprise would not be successful. As a result of adding this expansive concept, we believe that there is a much higher likelihood of finding that the “reliance on the efforts of others” prong of the Howey test has been satisfied in the digital asset sale context.”

In regards to the possibility that a digital asset may start life as a security and then “morph” into something else, the WSBA believes the water is still murky:

“… it is our view that the concept of “morphing” is likely intended to be a narrow exception and that market participants, through their lawyers, absent seeking no-action relief, in most cases should engage in discussions with FinHub to seek guidance, rather than assuming that any digital asset sale has “morphed” and thus become the sale of a non-security.”

While laudatory of the efforts provided by the SEC, and FinHub specifically, the WSBA said the Framework adds to the analysis additional complexity, by never explicitly stating that a digital asset that was security at the time of its initial sale actually could cease to be a security.

Regarding the 12g issue, and the potential for an issuer of a digital asset being compelled to become a reporting company as an issuer of an equity security, it is the WSBA’s view that not every digital asset that is a security should be deemed an equity security while simultaneously noting that Airfox, Paragon, and Gladius Network enforcement actions, required each issuer to register its issued digital assets as a class of securities under Section 12(g).

The WSBA states that the SEC’s acknowledgment of virtual currencies appears to reinforce the idea that the Staff recognizes that not all digital asset sales constitutes a sale of securities, leaving an important door opening.

But in the end, it seems issuers are better off safe than sorry.

Start from the point that all digital assets are securities while engaging directly with SEC staff for a “facts and circumstances” discussion that may, or may not, determine something other than utilizing a securities exemption.

The WSBA remains concerned that the “characterizing digital asset sales as sales of securities would be harmful to, and materially stifle, the development and adoption of digital assets, as well as existing projects.”

The WSBA believes the SEC Guidance is “unlikely to materially change the legal guidance that responsible legal practitioners provide to a client seeking to launch a digital asset transaction in the absence of the Guidance.”

In all likelihood, it will take an act of Congress to create bright-line rules. The SEC has been challenged by the emergence of the digital asset concept but has ramped up quickly to better understand, and manage, the tokenization of various services as well as securities.

One cannot fault the SEC for its go-slow approach as the concepts are complex and, at times, profoundly nuanced – especially in light of existing securities law. But one may challenge current opinions at the SEC which are still clearly developing regarding the digital asset sector.

The WSBA Response is embedded below and may be downloaded here.

[pdf-embedder url=”” title=”WSBA Digital Asset Framework Guidance – FINAL 5-16-19″]

Chambers Ranks Top US Blockchain/Crypto Lawyers

London based Chambers, one of the legal industries most prestigious ranking entities, has just published their list of top ranking attorneys in the cryptocurrency and blockchain sector. Chambers seeks to identify the “best law firms globally, whether they are multi-national or boutique.”

Law firms and individual lawyers are ranked by qualities such as professional conduct, technical ability, diligence, client service, commercial astuteness and more.

Blockchain is a relatively new sector falling in the Fintech industry. The fast-moving space has seen participants from both big law and boutique startups that strive to leverage an expertise that may not be available from other firms.

CI caught up with Joshua Klayman during Blockland Cleveland. She is an attorney ranked at the top of the list, who is a frequent legal source for our publication. In recognizing Klayman Chambers called her a “leading light in the blockchain space, particularly with regards to advising clients on regulatory issues.”

Klayman said she was truly honored to be included on this list of leaders all of whom she “deeply respects and admires.”

“I’m happy to see that the list includes several members of the Wall Street Blockchain Alliance legal working group and Wharton Reg@Tech, whom I consider dear friends,” said Klayman.

Klayman noted that not all of the lawyers recognized by Chambers were from big law firms. In fact, two of the top three lawyers were former big law firm attorneys who launched boutique firms specifically to cater to the emerging industry:

“I have long believed that there is a need in the market for specialized legal practices. Traditional law firms do a lot of things really well, and, in this space, it is critical also to have firms with the skill sets and knowledge to help guide the blockchain industry.  There is a place and a need for both types of legal practices, and we all benefit from collaboration across them.”

As the industry is so new and changing quite rapidly, Klayman added that “you [really] have to love it, to be passionate about it – to follow the twists and turns and perhaps shape the legal paths.”

The Top Ranked US lawyers for crypto/blockchain are as follows:

Band 1

  • Lewis Cohen – DLx Law LLP
  • Dax Hansen – Perkins Coie LLP
  • Joshua Klayman –  Inflection Point Blockchain/ Klayman LLC

Band 2

  • Alan Cohn – Steptoe & Johnson LLP
  • Brian Klein – Baker Marquart, LLP
  • Lowell D Ness – Perkins Coie LLP
  • Joel Telpner – Sullivan & Worcester LLP

Band 3

  • Grant P Fondo – Goodwin
  • Richard B Levin – Polsinelli PC
  • Patrick Murck – Cooley LLP

“The Case Will Proceed to Trial”:  Taking the RECoin / Diamond & Other ICO Actions One Step at a Time

As has been reported widely, digital token sales (sometimes referred to as initial coin offerings or ICOs) arguably are becoming increasingly important as a new form of capital raising.  To date, certain regulators (including the U.S. Securities and Exchange Commission (the “SEC”)) have provided ongoing guidance (including through enforcement actions, speeches and market educational materials) warning that sales of digital tokens to U.S. persons in ICOs are exceedingly likely to be sales of investment contracts and, hence, sales of securities.

While many predict coming waves of ICO-related litigation, thus far, relatively few U.S. courts have weighed-in about some of the most fundamental questions relating to digital token sales.

Perhaps for that reason, among others, when courts do address certain token-related questions, headlines are made.  Many in the crypto and legal communities, understandably, are eager for answers.  It is critical, though, that when analyzing judicial guidance, we, collectively, remember the procedural posture, or “stage,” of a given action and listen closely to what is said – and what is not (yet) said – by the court.

The Zaslavskiy Order:  Denial of a Pre-Trial Motion to Dismiss

Earlier this week, on September 11, 2018, the United States District Court for the Eastern District of New York (the “Court”) issued a Memorandum and Order (the “Zaslavskiy Order”) concerning The United States of America vs. Maksim Zaslavskiy, one of the more prominent ICO-related actions.  While the Zaslavskiy Order arguably provides important guidance to token sellers, other market participants and their lawyers, it is critical to recognize that the Court did not determine that Maksim Zaslavskiy’s (“Zaslavskiy”) token sales were sales of securities.  Rather, the Zaslavskiy Order denied Zaslavskiy’s pre-trial motion to dismiss a criminal indictment and determined that “[t]he case will proceed to trial.”

Basic Background

In 2017, the SEC and, later, the United States Department of Justice (the “DOJ”) each filed an action against Zaslavskiy, alleging securities fraud in connection with two ICOs, one relating to diamonds and one relating to real estate.  In early 2018, Zaslavskiy filed a motion to dismiss both the criminal indictment, and the SEC’s enforcement action, where he is represented by Jason Nagi of Polsinelli, PC.  The motions asked the Court to consider:  “(i) whether the securities laws are appropriately applied to cryptocurrencies; (ii) whether Zaslavskiy’s token sales constitute “investment contracts” under the test articulated in SEC v. W.J. Howey Co., 328 U.S. 293 (1946); and (iii) whether the securities laws are void for vagueness as applied to cryptocurrencies and token sales.”

In the Zaslavskiy Order, the Court denied Zaslavskiy’s pre-trial motion to dismiss, stating, “Because the Indictment is sufficient under the Constitution and the Federal Rules of Criminal Procedure, and because the law under which Zaslavskiy was charged is not unconstitutionally vague as applied, Zaslavskiy’s motion is denied.”

Whether an Investment Contract Exists Is a Question of Fact

While some have reported, and others may believe, that the Court determined that Zaslavskiy’s token sales were sales of securities, the Court did not do so.  In fact, to the contrary, in the Zaslavskiy Order, Judge Dearie provided a reminder that the question of whether the token sales were sales of securities are factual ones to be determined based on evidence presented at trial, as well as that the so-called Howey test – an over 70 year old test used to determine whether something is an investment contract (and, hence, a security) – is a facts-and-circumstances test.  As stated in the Zaslavskiy Order:

“The subsidiary question of whether the conspirators in fact offered a security, currency, or another financial instrument altogether, is best left to the finder of fact—unless the Court is able to answer it as a matter of law after the close of evidence at trial. Nevertheless, the parties engage in a spirited debate that is undoubtedly premature. The Court has been treated to a volley of cases decided in the civil arena, which may well be instructive at the appropriate time but do not inform us as to whether the Indictment itself is fatally flawed. The parties also encourage the Court to evaluate documents and evidence outside of the four comers of the Indictment, which we decline to do[….] Despite the parties’ attempt to cast, this issue as one related to the Indictment’s facial sufficiency, they have instead asked us to resolve what can only fairly be a question of proof at trial, based on all of the evidence presented to a jury.  Zaslavskiy’s primary contention—that the investment scheme at issue did not constitute a security, as that term is defined under Howey, is undoubtedly a factual one. [….]  In any event, we briefly examine the parties’ exchange and confirm our conclusion that the Indictment calls for a trial on the merits.”

The Indictment Was Facially Valid

In the Zaslavskiy Order, the Court determined that the Indictment was facially valid, in other words, that it “satisfies the demands of due process and gives the defendant clear notice of the charges against him.”  The Court also found that, if the allegations set forth in the Indictment were proven at trial, a reasonable jury could conclude that the token sales satisfied the Howey test and, therefore, were sales of investment contracts.  Judge Dearie clarified further, “However, the ultimate fact-finder will be required to conduct an independent Howey analysis based on the evidence presented at trial.”

The Law under which Zaslavskiy Was Charged Is Not Void for Vagueness As Applied

The Court also concluded that the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 thereunder are not unconstitutionally vague (“void for vagueness”) as applied.

Noting that Zaslavskiy contended that U.S. securities laws are void for vagueness as applied to cryptocurrencies, the Court stated, “Whether or not the investments promoted in the REcoin and Diamond are cryptocurrencies is beside the point at this stage. The question is whether the law under which Zaslavskiy is charged is unconstitutionally vague as applied to his conduct, as it is described in the Indictment. It is not.”

Among other things, the Court determined that Zaslavskiy had failed “to demonstrate that a person of ordinary intelligence would not have sufficient notice that the charged conduct was proscribed.”

Notably, in support of the Court’s statement that “[T]he abundance of caselaw interpreting and applying Howey at all levels of the judiciary, as well as related guidance issued by the SEC as to the scope of its regulatory authority and enforcement power, provide all the notice that is constitutionally required,” the Court’s citations included the SEC’s 21a Report concerning The DAO, as well as recent guidance by SEC Chairman Jay Clayton and CFTC Chair J. Christopher Giancarlo published in The Wall Street Journal.

This is a potentially critical take-away for token sellers and other crypto market participants.

Market Participants and Their Lawyers Arguably Have Notice that U.S. Securities Laws Apply to Token Sales to U.S. Persons

To-date, the SEC and other regulators have made numerous public statements concerning digital tokens.  It is incredibly important that those in the crypto space, and their lawyers, be aware of and heed the warnings and continued guidance provided by the SEC.  As was the case in the Zaslavskiy Order, courts may conclude that the public has been provided constitutionally sufficient notice about the applicability of certain U.S. laws (including U.S. federal securities laws) to digital token sales.  In other words, ignorance of such laws (or their applicability to ICOs) will not excuse failure to comply with them.

While the Court determined that, given the factual nature of the inquiries, the “spirited debate” about whether token sales were sales of securities was “premature,” some may find it heartening to know that such debates are taking place.  Indeed, many believe that, in these early crypto cases, it is particularly important that parties be represented by litigators who truly understand both the digital token space and the relevant regulatory guidance.  The ultimate verdict in the Zaslavskiy case has not yet been determined, and, as the Court noted, “[T]he case will proceed to trial.”

Joshua Ashley Klayman is one of the best known blockchain and crypto currency lawyers in the world. Ms. Klayman is the Founder and Managing Member of Klayman LLC, a boutique blockchain-focused law firm, and the Founder and CEO of Inflection Point Blockchain Advisors, LLC, a boutique strategy consulting firm.  Active in the blockchain community, Ms. Klayman chairs the Wall Street Blockchain Alliance’s Legal Working Group and frequently speaks and publishes about blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics.  Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. A mother of five, she is a passionate advocate for the promotion of women and other underrepresented groups and is a founding member of Diversity in Blockchain, Inc. and Collective Future.

¹This article is not intended to be, and should not be relied upon as, legal advice or investment advice.  The views expressed are the author’s own and may not necessarily represent the views of her employer or any other natural person or entity.  In addition, the author is not a litigator.
²“Shortly after the launch of the Diamond “IMO,” on September 29, 2017, the SEC filed a complaint against Zaslavskiy alleging (i) that both the REcoin ICO and the Diamond IMO were unregistered offerings of securities; and (ii) that Zaslavskiy made a series of false and misleading statements in connection with both token sales.  On November 21, 2017, Zaslavskiy was indicted for substantially the same conduct as alleged in the SEC Complaint.  On January 31, 2018, the SEC action was stayed pending resolution of the DOJ’s action.” Goodwin, U.S. v. Zaslavskiy: DOJ and SEC Coordination in Enforcing the Securities Laws over Token Sales, Blog, Digital Currency Perspectives (April 26, 2018), available at
 4 “[….] see also, e.g., SEC Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO. SEC Release No. 81207, 2017 WL 7184670, at *9 (“automation of certain functions through [distributed ledger, blockchain, smart contracts, or computer code] technology…does not remove conduct from the purview of the U.S. federal securities laws”); Jay Clayton and J. Christopher Giancarlo, Regulators are Looking at Cryptocurrency, Wall St. J., Jan. 24, 2018, available at https://www.wsi.coni/articles/regtilators-are-looking-at-cryptocurrency-1516836363 (“some products that are labeled virtual currencies have characteristics that make them securities”); Public Statement of SEC Chairman Jay Clayton on Cryptocurrencies and Initial Coin Offerings, Dec. 11. 2017, available at 1 (“simply calling something a ‘currency’ or a currency-based product does not mean that it is not a security.”).”  The Order at 20, available at

FinCEN Director Kenneth Blanco Addresses Tough Topic of Cryptocurrency, Attorney Joshua Klayman Adds Insight to Topics Discussed

This week, at an event in Chicago that focused on legal questions swirling around the emerging cryptocurrency industry, FinCEN Director Kenneth Blanco delivered a much anticipated speech regarding his agency’s thoughts on digital assets and virtual currencies.

FinCEN is part of the US Department of Treasury and plays an important enforcement role both domestically and abroad. FinCEN is tasked with collecting data on financial transactions in order to address illicit activity such as criminal acts or terrorist financing. Recently, there has been much discussion, both inside the beltway and beyond, regarding digital currency and the perceived utilization on the dark web and other nefarious activities. So FinCEN’s opinion counts a lot.

In a speech to participants of the 2018 Chicago-Kent Block (Legal) Tech Conference, Blanco shared how FINCEN is approaching virtual currency and financial innovation (Fintech) in general. Blanco said that innovation can be a great thing, providing consumers with better services but, as we all know, “financial crime evolves right along with it.”

“Virtual currency is an example of both aspects,” stated Blanco. ” Major money services businesses are looking at how to incorporate blockchain payments to expedite remittances to locations around the world.  But like any payment system or medium of exchange, virtual currency has the potential to be exploited for money laundering and other illicit finance.  Nobody here today wants to see innovative products and services misused to support terrorism, facilitate child exploitation, or become another vehicle for criminals to carry out fraud, identity theft, corruption, or extortion.  There are already too many victims out there who may never be made whole again, and harm can be done with devastatingly increasing speed, breadth, and obscurity in the digital world.”

Blanco said their role is to protect and secure the financial system against those who seek to misuse it.

Regarding the utilization of virtual currency, Blanco outlined the current regulatory environment;

“In short, individuals and entities engaged in the business of accepting and transmitting physical currency or convertible virtual currency from one person to another or to another location are money transmitters subject to the AML/CFT requirements of the BSA [Bank Secrecy Act] and its implementing regulations.  To comply with these obligations, virtual currency money transmitters are required to (1) register with FinCEN as a money services business, (2) develop, implement, and maintain an AML program designed “to prevent the [MSB] from being used to facilitate money laundering and terrorist finance,” and (3) establish recordkeeping, and reporting measures, including filing Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs). It is important to understand that these requirements apply equally to domestic and foreign-located convertible virtual currency money transmitters, even if the foreign located entity has no physical presence in the United States, as long as it does business in whole or substantial part within the United States.”

[clickToTweet tweet=”FinCEN has noticed some compliance shortcomings when it comes to virtual currencies #Crypto #Cryptocurrencies” quote=”FinCEN has noticed some compliance shortcomings when it comes to virtual currencies #Crypto #Cryptocurrencies”]

Avoiding questions out of fear of the answer is not a good strategy, said Blanco.  Financial services adopting Fintech must be aware of their existing responsibilities and guard against vulnerabilities.

Regarding examinations, Blanco said they have “noticed some compliance shortcomings.”

” … our examinations have included a wide array of virtual currency businesses:  virtual currency trading platforms, administrators, virtual currency kiosk (or ATM) companies, crypto-precious metals dealers, and individual peer-to-peer exchangers.  We have focused on both registered and unregistered exchanges. This variety is important because, whether a business is operating as an individual peer-to-peer exchanger of one virtual currency, or a large, multi-national trading platform offering numerous virtual currencies, we expect you to comply with your AML/CFT regulatory obligations.”

Blanco shared that FinCEN now receives over 1500 SARs [suspicious activity reports] each month involving virtual currency. These originate from both industry participants and traditional finance. FinCEN sees the industry developing new techniques to help uncover unscrupulous acts and they are keenly interested in these innovations.

[clickToTweet tweet=”FinCEN now receives over 1500 SARs each month involving virtual currency #Cryptocurrency” quote=”FinCEN now receives over 1500 SARs each month involving virtual currency #Cryptocurrency”]

CI had the opportunity to speak with Joshua Klayman, a prominent attorney engaged in the cryptocurrency / blockchain industry. Klayman was invited to speak at the event and she had the opportunity to listen to Blanco’s speech and fireside chat that followed. Klayman told CI;

“I, and in my view, many others in attendance at Chicago-Kent Law School’s all day #BlockLegalTech event yesterday greatly appreciated FinCEN Director Blanco’s willingness to address the audience with prepared remarks and a fireside chat format. My understanding is that Director Blanco, and others from FinCEN, were in the audience for other “Ted-style” talks and panels. In my view, that is significant. Director Blanco expressed an interest and willingness of FinCEN staff to engage in conversations with those in the crypto space and indicated that those interactions help regulators to learn, and, in my view, he demonstrated that receptivity yesterday. For instance, at one point during the fireside chat,  Director Blanco appeared to really listen and acknowledge a point that an audience member raised.”

Klayman came away from the presentation with a positive view towards FinCEN’s regulatory approach. It is not easy to balance rapid Fintech innovation and existing compliance mandates.

“A take-away for me is that, while Director Blanco did not seem presently to contemplate new regulations, FinCEN staff seeks to provide guidance and outreach for those in the crypto space,” said Klayman.  “In his remarks, among other things, Director Blanco specifically mentioned having brought into his front office “a Chief of Strategic Advancement and Tactical Development, Michael Mosier,  to spearhead a forward-looking, cross-functional approach.””

Klayman shared her thoughts on some of the high level take aways from Blanco’s discussion;

  • that size is no excuse for non-compliance;
  • that companies need to grow their compliance programs as they grow their businesses – compliance shouldn’t be an afterthought, and compliance shouldn’t begin only after a regulatory inquiry;
  • that you can delegate tasks but you can’t delegate your compliance obligations and responsibilities – if you don’t understand your obligations, you need to find someone who does;
  • that crypto to crypto exchanges will be treated the same as those that are fiat to crypto or crypto to fiat;
  • that there is communication among regulators and that there may be overlapping jurisdiction of multiple regulators;
  • that it is fact-specific as to whether you need to register with FinCEN if you already are registered as a broker-dealer, for instance, and will depend on individual use cases and activities, as well as whether specific statutory exemptions may be available;
  • that increased efficiency of technology is not an excuse for non-compliance with legal obligations – in other words, that increased efficiency should not be a trade-off for making us less safe;
  • that SARs reporting is of critical importance, including to aid regulators that are waging battle against the opioid crisis;
  • that presence in a non-U.S. jurisdiction does not mean that one is not subject to U.S. law obligations that otherwise apply;
  • and that, importantly, as noted in the remarks, “FinCEN will aggressively pursue individuals and companies who do not take their obligations under U.S. law seriously, whether by targeting victims or enabling those who do.””

[clickToTweet tweet=”.@Josh_Blockchain shares perspective on FinCEN Director Blanco’s presentation on #cryptocurrency” quote=”.@Josh_Blockchain shares perspective on FinCEN Director Blanco’s presentation on #cryptocurrency”]

Blanco closed his prepared remarks stating their intent to support responsible innovation but noted they will pursue those who break the rules. Klayman said she, for one, looked forward to an ongoing discussion with FinCEN leadership;

“I am appreciative of the thoughtful, reasoned tone of Director Blanco’s remarks and look forward to continued dialogue and education between the crypto community and FinCEN”

Prominent Blockchain Attorney Joshua Ashley Klayman Launches Blockchain- and Digital Token-Focused Law Firm & Blockchain Strategy Consulting and Advisory Firm

Joshua Ashley Klayman, a well known name in the digital token sale / blockchain industry, has departed Morrison & Foerster LLP to launch her own boutique law firm targeting the industry she has been intimately engaged with for the past few years. Announced today, Klayman LLC has a published mission of integrity and trust, working in a dynamic, emerging industry that continues to undergo dramatic change. While so-called unregulated ICOs were the norm in 2016 and much of 2017, in more recent months, market participants and their lawyers have begun to accept and embrace securities and other regulation. The blockchain legal landscape continues to evolve worldwide.

Klayman expects to provide her clients with a unique legal perspective while collaborating with other lawyers when matters demand additional insight. Klayman has a goal of providing clients with the services that they need, wherever it may be found.

Klayman also announced that she is a consultant to the global law firm, Shearman & Sterling LLP, which has approximately 900 lawyers in 22 offices around the world and advises corporations, major financial institutions, emerging growth companies, fintech companies, governments and state-owned enterprises.

Andrea Tinianow, Esq., who is founding Director of the Delaware Blockchain Initiative and Chief Innovation Officer at Global Kompass, said that Klayman is “a smart, natural leader”;

“She zeros in on key issues quickly, creating effective, novel solutions, particularly for clients looking to innovate using blockchain technology. She works collaboratively to ensure that clients obtain the very best result. She is willing to speak up on unpopular or difficult issues, even when those around her are willing to stay silent,” stated Tinianow.

Caitlin Long, the person who almost single handedly turned Wyoming into a crypto friendly jurisdiction, added;

“Josh is one of the most curious corporate attorneys working in the blockchain space. She was early to the sector and is a gifted teacher on the topic as well.”

Klayman will continue to represent a range of clients, from well-established “household names” to emerging companies (including token sellers), both domestic and internationally, to help these companies navigate the dynamic world of blockchain, smart contracts and digital tokens. Klayman will leverage her expertise with, and market knowledge of, a wide range of more traditional debt and equity financing structures and other commercial transactions, which helps inform Klayman’s work in the blockchain space. Klayman says that for more than a decade, she has represented some of the world’s largest and most prominent borrowers, issuers, investors and lenders, including in many headline-grabbing transactions.

Greg Murphy, Founder of Elara, describes Klayman as “one of the top lawyers in the world in the blockchain space.”

“Utilizing these skills, coupled with her participation and leadership in various legal groups and her relationships with other top lawyers globally, she is able to bring a unique and valued perspective in her advice to clients,” Murphy stated.

Along with her new legal practice, Klayman will launch in parallel a blockchain consulting firm. Sister company, Inflection Point Blockchain Advisors, LLC, will provide blockchain strategy consulting and advisory services. Klayman says she will provide valued perspective for both startups and established firms.

Kathleen Breitman, Co-Founder and CEO of Tezos, calls Klayman “one of the strongest legal minds in the blockchain space”;

“What’s more, her passion for entrepreneurs is palpable and lends itself to constructive advice.”

Josh Stein, President of Harbor, puts in perspective when he says,

“The best counselors listen as much as they speak, and Josh is one of those. She combines deep experience in the crypto space with the ability to truly listen to the client.”

Klayman has long emphasized the importance of legal collaboration in the blockchain and digital token space.  In addition to chairing the Wall Street Blockchain Alliance Legal Working Group, Klayman works closely with lawyers from around the world through the Wharton Reg@Tech thinktank, grappling together to understand and address regulatory uncertainties. 

Ryan Singer, Co-Founder and President of Chia, says of Klayman,

“Josh is, in my opinion, one of the top attorneys and legal strategists in the digital asset space.  She’s at her best while helping regulators and her clients craft policy that blends regulatory background with emerging market phenomena in this incredibly fast changing sector.”

In an industry frequently described as a boy’s club, Klayman will be a female founder and finally a partner. She believes that blockchain represents an inflection point, a fundamental shift in how individuals, businesses and nations relate to one another, and that this “creates a meaningful on-ramp” for those who traditionally may have been underrepresented in business and technology.

“I am so thankful for the blockchain and crypto community, not only for igniting in me an intellectual passion and for the many deep, true friendships that I have made, but also for the tremendous opportunity to venture out on my own,” said Klayman. “In the blockchain space, we have a wide open opportunity.This is an exciting time and, for me, an exciting day.”

Klayman says she intends on maintaining a spirit of collaboration across the market and with all of the people she has worked with in the legal industry and the broader blockchain industry.

“I am so appreciative of the many, many people – including other lawyers – who have helped, challenged and inspired me over these past few years. I would not be where I am today without them. My goal is to do the same for them and others.”

CFTC Chair Giancarlo Applauds Operation Cryptosweep. Says “Virtual Currencies and Other Exponential Digital Technologies are Taking Us into a New Era”

On the same day the North American Securities Administrators Assocation (NASAA) announced “Operation Cryptosweep” – a coordinated enforcement action targeting fraudulent initial coin offerings (ICOs), Commodity Futures Trading Commission (CFTC) Chair J. Christopher Giancarlo delivered a speech to NASAA members. Within his prepared remarks, Giancarlo stated;

“We applaud NASAA on a new program [Operation Cryptosweep] being announced today. It complements the CFTC’s on-going virtual currency investigations with NASAA members.”

NASAA members from over 40 jurisdictions have participated in Operation Cryptosweep. To date,  approximately 70 inquiries and investigations and 35 pending or completed enforcement actions have been taken since the beginning of May. Additional enforcement actions  may be forthcoming – not to mention the many that took place prior to this month. In their defense, NASAA says that not every ICO is fraudulent but the group urges the public to remain vigilant regarding possible acts of fraud.

Giancarlo has become a favored regulator within the cryptospace. Following his testimony before the Senate Banking Committee this past February, cryptocurrency advocates rushed to compliment his balanced approach and respect for entrepreneurial innovation in the financial services industry. Unlike some other policy makers, Giancarlo has been hesitant to over-regulate and crush innovation in its infancy. This is not to say that the CFTC is not vigilant in its mission of rooting out fraud and monitoring the ICO marketplace. Quite the contrary. Vigilance against potential acts of fraud is vital to fostering a robust ICO ecosystem. The CFTC has consistently dealt with bogus ICOs but that is different from enabling change – even when change veers from established financial and regulatory norms.

The “Inexplicable Power of the Word”

In Chair Giancarlo’s speech, the regulator stated;

“As you may know, US futures exchanges and clearinghouses are self-regulatory organizations for the markets they operate.  As front-line regulators, they should be proactive, flexible and engage in heightened review of new virtual currency contracts and their oversight to ensure proper surveillance of the trading and clearing of these contracts given the risks. I believe that this advisory should help exchanges and clearinghouses effectively and efficiently discharge their statutory responsibilities as SROs, while keeping pace with the unique challenges of emerging virtual currency derivatives.”

But Chair Giancarlo added;

“One thing is certain: ignoring these changes in the market would be a profound mistake. They will not go away. We must be proactive in making a regulatory and statutory framework that is ahead of the curve, prevents and punishes fraud and criminality, gives clarity and coherence to these emerging technologies, and anticipates the evolution of new instruments such as virtual currencies. The same technology can give us advantages in market regulation. Our task, as market regulators, is to set and enforce rules that foster innovation while promoting market integrity and confidence.” (emphasis added)

[clickToTweet tweet=”‘One thing is certain: ignoring these changes in the market would be a profound mistake. They will not go away.’ #Blockchain #Cryptocurrency” quote=”‘One thing is certain: ignoring these changes in the market would be a profound mistake. They will not go away.’ #Blockchain #Cryptocurrency”]

Giancarlo said we are at a juncture of changing times thus indicating his belief that Bitcoin, ICOs, and other digital assets are here to stay. Unlike some other pundits or commentators, such as Nouriel Roubini (AKA Dr. Doom)  that believe cryptocurrencies are for “suckers” and “bullshit” or the legendary Warren Buffet who recently called Bitcoin “rat poison” – Giancarlo is ready to defend change and speak his mind.

“The world is indeed changing, moving into a virtual universe.  Language and ideas are being transformed,” stated Giancarlo. “Distributed ledgers, virtual currencies and other exponential digital technologies are taking us into a new era.”

While the news of the day may have been about the buzzy phrase Operation Cryptosweep, Giancarlo is looking to what happens after the scammers are flushed out, and an established digital assets marketplace gains its footing.

Joshua Klayman, Chair of the Wall Street Blockchain Alliance Legal Working Group and co-Chair of Morrisson Foerster global blockchain group, said that Chairman Giancarlo’s speech was important and timely.

“While he spoke about developing a framework of cooperation among regulators at the U.S. federal and state levels to better identify patterns of wrongdoing as well as aggressive prosecution of fraudsters and manipulators, his message arguably conveyed much more than just that,” said Klayman. “In his speech, Chairman Giancarlo described the CFTC as having “been at the regulatory horizon on virtual assets, especially with our criteria for heightened review of new virtual currency products” and mentioned a forthcoming CFTC staff advisory that would provide “guidance to exchanges and clearinghouses on certain enhancements when listing a derivative contract based on virtual currency.”

Klayman pointed to the fact that Giancarlo told listeners that many in the world look to the United States for leadership and guidance and that the American public expects a coordinated approach to regulatory oversight.  He spoke about the value of “best practices” that are “ahead of the curve, sensible and effective.”

“As I have said often, I believe that we are at a societal inflection point. In my personal view, Chairman Giancarlo’s acknowledgment that the world is changing and moving into a virtual universe, a new era ushered in by “blockchain, virtual currencies and other digital technologies,” seemed to strike a thoughtful tone that many in the blockchain and crypto space may welcome,” Klayman stated.

Yes, the world is watching as the U.S. is the leading market economy in the world. And it is “looking to the United States for leadership and guidance.” The U.S. cannot turn its back on innovation due to the intrinsic risk of the new to the detriment of an alternative finance future that may be beneficial.

That Chair Giancarlo understands this is clear, similar to SEC Commissioner Peirce’s call for thoughtful regulation of digital assets. Peirce recently stated regulators should “not let our lack of familiarity with the technology breed anxiety and therefore bad regulation.”  But, unfortunately, it is not certain his peers are as willing to embrace the crypto marketplace, competition, and the possible benefits of decentralization and digital assets that challenge the long established regulatory convention.

[clickToTweet tweet=”the world is watching. And it is looking to the United States for leadership and guidance #Cryptocurrency #Blockchain” quote=”the world is watching. And it is looking to the United States for leadership and guidance #Cryptocurrency #Blockchain”]

Prominent Cryptocurrency Attorneys Lewis Cohen and Angela Angelovska-Wilson Launch New Law Firm DLx Law

In a report today, it was announced that Lewis Cohen, formerly of white shoe law firm Hogen Lovells, and Angela Angelovska-Wilson, recently the GC of Digital Asset, have formed their own law firm targeting the blockchain industry. The new firm, DLx Law, is designed to “align better with the culture of the blockchain space.”

Speaking to CoinDesk, Cohen stated;

“Inherently, it was very clear to us the challenges in providing clients the kind of services that they need within a very large law firm. A week in blockchain time is like a month anywhere else … I’m aware of some of the arguments that can be made. But there are a variety of good legal reasons why ETH should not be considered a security at this time, not least of which is the hard fork that occurred following the DAO debacle.”

The initial coin offering (ICO) market is in a period of transition. Following the many enforcement actions launched the Securities and Exchange Commission, the ICO market in the US has slowed. Issuers now either attempt to avoid US investors or they must file for an appropriate securities exemption such as Regulation D.  As the market begins to stabilize, which is widely expected, a bespoke law firm targeting security tokens may make sense as the industry regains its sea legs.

Cohen recently published a blog post explaining his position on ICOs;

“… although there needs to be a push for greater regulation of capital raising through token sales — particularly when “Main Street” purchasers are involved, market participants need to thoughtfully distinguish between digital tokens which are functional elements of a blockchain-based network or ecosystem (and are not themselves “securities” that should be regulated as such) and “investment schemes” developed by sponsors, which are appropriately subject to traditional standards, such as the “Howey test,” to determine whether the scheme should be subject to regulation.”

Joshua Klayman, Chair of the Wall Street Blockchain Alliance Legal Working Group and co-Chair of Morrisson Foerster global blockchain group, complimented Cohen on his decision.

“As I have long stated, it has always been my view this is where the industry is going.  There is a need in the market for specialized legal practices. Traditional law firms do a lot of things really well but in this industry it is critical to have firms with the skill set and knowledge to help guide the ICO and blockchain industry. I have long known Lewis and Angela and I respect their knowledge and support of the crypto sector.  I commend them both and I look forward to collaborating with them.”

The new law firm is expected to partner with big law on blockchain based projects, while hiring up to 5 additional lawyers.

Securities and Exchange Commission Issues Statement Regarding “Unlawful” Cryptocurrency Exchanges

The Securities and Exchange Commission (SEC),  Divisions of Enforcement and Trading and Markets, has published a statement on “online trading platforms,” or cryptocurrency exchanges, that trade in tokens minted by initial coin offerings (ICOs) and digital assets in general. The SEC stated:

“The platforms often claim to give investors the ability to quickly buy and sell digital assets.  Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data. A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  If a platform offers trading of digital assets that are securities and operates as an “exchange,” as defined by the federal securities laws, then the platform must register with the SEC as a national securities exchange or be exempt from registration.  The federal regulatory framework governing registered national securities exchanges and exempt markets is designed to protect investors and prevent against fraudulent and manipulative trading practices.”

The statement should come as no surprise as the Commission has been in the process of clamping down on the ICO industry in recent months. Dozens, perhaps hundreds of subpoenas, have been sent out to issuers of ICOs and to “gatekeepers.” The SEC has been messaging for some time that unregulated exchanges were part of the process and thus on their list for potential enforcement actions. The SEC said that investors should only trade in digital assets that are securities that use regulated exchanges, alternative trading systems, or a broker deals.

The SEC staff said it has concerns that many online trading platforms appear to investors as SEC-registered and regulated marketplaces when they are not. Simply referencing the term “exchange” can provide a misrepresentation to investors that a platform meets regulatory approval.

“Although some of these platforms claim to use strict standards to pick only high-quality digital assets to trade, the SEC does not review these standards or the digital assets that the platforms select, and the so-called standards should not be equated to the listing standards of national securities exchanges.  Likewise, the SEC does not review the trading protocols used by these platforms, which determine how orders interact and execute, and access to a platform’s trading services may not be the same for all users.”

The SEC stated there is no reason to believe that information provided by an unregulated crypto exchange has the same integrity as that provided by national securities exchanges.

The Statement said that a platform that trades securities and operates as an “exchange,” must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for ATSs under SEC Regulation ATS.  A national securities exchange must itself comply with the federal securities laws and must file its rules with the Commission.

An entity seeking to operate as an ATS must register as a Broker Dealer, become a member of an SRO (IE FINRA) and submit itself to ATS regulatory requirements. Many online crypto exchanges do not currently meet this definition under federal securities laws and may be deemed as trading digital assets that are securities. The SEC cited an example that some platforms offer digital wallet services (to hold or store digital assets) or transact in digital assets that are securities. These services may transgress existing rules and may, in fact, be trading in unregistered securities.

“In advancing the SEC’s mission to protect investors, the SEC staff will continue to focus on platforms that offer trading of digital assets and their compliance with the federal securities laws.”

Georgia Quinn, General Counsel for CoinList and a CI Senior Contributor, commented on the SEC statement;

“I am waiting for the news here. If these assets are securities, which the SEC has been saying they are, then obviously these marketplaces must abide by the exchange rules. I have been wondering what guidance these exchanges have been relying on to operate. Now the race is on for a compliant and functional exchange. “

Joshua Klayman, a securities attorney active in the cyrpto / Blockchain space and legal lead for the Wall Street Blockchain Alliance, commented;

“In my view, this is generally consistent with the prior guidance provided by the SEC, including in The DAO enforcement action.”

The SEC encouraged market participants to consult with both legal counsel as well as to reach out with SEC staff.

Recently, it came to light that Poloniex, a crypto exchange that was acquired by Goldman Sachs backed Circle, had reviewed their intent to become a Broker Dealer and then in due course a regulated ATS with the SEC. A leaked image indicated the SEC had given its tacit approval of this approach thus paving the way for other cryptocurrency exchanges. Yesterday, the Canadian Securities Exchange, reviewed their intent to commence trading in security tokens later in 2018. Several other platforms have tipped their hat as to their intent to become regulated ATS’s – most prominently tZero, a company that is in the midst of completing their ICO that is a security.

Please note that any of the above should not be taken as legal advice and any individual or entity should consult their legal counsel regarding any and all issues addressed above.

Understanding the CFTC’s Proposed Interpretation of “Actual Delivery” for Cryptocurrency Retail Commodity Transactions

The recent and rapid proliferation of cryptocurrency¹ transactions involving retail or “Main Street” customers has left some — including many cryptocurrency platforms serving retail customers — grappling conceptually with the answer to a fundamental question: what constitutes “actual delivery” of cryptocurrency in the eyes of the U.S. Commodity Futures Trading Commission (CFTC) for purposes of the “actual delivery exemption” from registration with the CFTC?

In December 2017, in response to requests for guidance, the CFTC issued a proposed interpretation of “actual delivery” in the cryptocurrency retail commodity transaction context.  The public has until March 20, 2018 to provide comments to the CFTC’s Proposed Interpretation. This article discusses; (a) the CFTC’s current Proposed Interpretation; (b) why the Proposed Interpretation matters to the cryptocurrency industry, and (c) some practical related questions that arguably remain to be explored.


Retail Commodity Transactions

Under section 2(c)(2)(D) of the Commodity Exchange Act (CEA), it is unlawful for a person (including an entity) to enter into, or to offer to enter into, a transaction in any commodity with a retail customer (i.e., someone who is not an eligible contract participant or eligible commercial entity as defined in the CEA), if such transaction is entered into with the retail customer on a leveraged, margined, or financed basis, with certain exceptions, unless the person transacting with the retail customer is registered with the CFTC in an appropriate capacity. This type of transaction is sometimes referred to as a “retail commodity transaction.”

Cryptocurrency Retail Commodity Transactions

The CFTC has repeatedly established that virtual currency is a commodity within the meaning of section 1a(9) of the CEA².  In general, a cryptocurrency platform that offers cryptocurrencies (i.e., commodities) to retail investors on a leveraged, margined, or financed basis (a “cryptocurrency retail commodity transaction”) falls within the jurisdiction of the CEA and would be required, among other things, to register with the CFTC as a licensed domestic futures exchange or a foreign board of trade, unless such platform qualified for an exemption from registration.

Although many cryptocurrency platforms³ currently serve retail customers4, many such platforms have not registered with the CFTC. Instead, a number of such platforms rely on a statutory exemption from such CEA registration requirements that sometimes is referred to as the “actual delivery exemption.” To qualify for the “actual delivery exemption,” a contract of sale for cryptocurrency needs to result in “actual delivery” of the purchased cryptocurrency to the retail customer within 28 days after the consummation of the transaction5.

Proposed Interpretation

Consistent with past CFTC guidance interpreting the meaning of the term “actual delivery” in section 2(c)(2)(D) of the CEA, the CFTC’s Proposed Interpretation of “actual delivery” in the context of cryptocurrency retail commodity transactions distinguishes between the transfer of title and possession of the cryptocurrency — which would satisfy the requirements of “actual delivery” — from mere book entry transfers with respect to the ownership of such cryptocurrency, which would not satisfy “actual delivery” requirements.

Meaning of “Actual Delivery”

But what does “actual delivery” really mean in the cryptocurrency context, and how does one know with certainty that — and when — “actual delivery” has been achieved?

Traditional Economy Definition

With respect to the traditional economy, the CFTC defined the meaning of “actual delivery” in 2013, when the CFTC issued a final interpretation (the “2013 Final Interpretation”)6. The 2013 Final Interpretation provided that “actual delivery” is the transfer of title and possession of the commodity to the purchaser as distinguished from mere book-entry of a transfer (which is not “actual delivery”)7.

In the 2014 case CFTC v. Hunter Wise Commodities, LLC,8 the U.S. Court of Appeals for the Eleventh Circuit reinforced the 2013 Final Interpretation and held that “actual delivery” of a commodity is the transfer of possession and control of such commodity whereby the buyer has real and immediate possession thereof, as opposed to merely constructive delivery.  In that case, the Court of Appeals noted further that Congress used the modifier “actual,” which must be given meaning as other than simply “delivery” without such modifier.

Prior Cryptocurrency Guidance

Similarly, in its 2016 enforcement action against Bitfinex,9 the CFTC was not satisfied that Bitfinex met the requirements of providing “actual delivery” of Bitcoin to retail purchasers, because Bitfinex did not actually deliver the purchased Bitcoins to retail customers. Instead, Bitfinex held the Bitcoins in deposit wallets that Bitfinex (not the retail customers) owned and controlled.

Proposed Clarifications

The CFTC’s December 2017 Proposed Interpretation specifies that “actual delivery” in the cryptocurrency context requires the applicable retail customer to have the ability to (a) take possession and control of the entire quantity of purchased cryptocurrency and (b) use such purchased cryptocurrency freely in commerce. In addition, the cryptocurrency platform must not retain any interest or control over the cryptocurrency purchased by the retail customer. Sham delivery or cash settlement of cryptocurrency, and other offset mechanisms that may be exercised by the cryptocurrency platform with respect to purchased cryptocurrency, will not qualify as “actual delivery” of purchased cryptocurrency to the applicable retail customers.

On the other hand, the Proposed Interpretation also states that the “actual delivery” requirement is satisfied where the transfer of cryptocurrency is recorded on the applicable cryptocurrency blockchain. The Proposed Interpretation includes a number of non-exclusive examples illustrating the meaning of “actual delivery” in this context.

[clickToTweet tweet=”In the eyes of the CFTC, what does “actual delivery” really mean in the #cryptocurrency context?” quote=”In the eyes of the CFTC, what does “actual delivery” really mean in the #cryptocurrency context?”]


In general, the requirements of the Proposed Interpretation are not consistent with the current operations of many cryptocurrency platforms serving retail customers, and it remains to be seen what impact the Proposed Interpretation, if adopted as proposed, will have. Some initial observations and areas for further analysis and exploration include:

Private Keys. From a practical perspective, it is unclear what the ideal way is for a cryptocurrency platform to satisfy the “actual delivery” exemption’s possession and control requirements. The Proposed Interpretation raises the question of whether this should be satisfied by way of possession of a private key.10 Currently, many retail cryptocurrency platforms do not provide customers with private keys, and, in certain cases, there arguably may be some good reasons for that. For instance, from a custody perspective, it may not always be secure for retail customers to store their own private keys, and they may not know how to do so.

Multi-signature Authentication. The Proposed Interpretation leaves open the issue of whether multi-signature authentication (i.e., requiring more than one signature to authorize a cryptocurrency transaction) would satisfy the “actual delivery” exemption’s possession and control requirements.11

“Actual Delivery” Period. The CFTC seeks public comments as to whether a shorter “actual delivery” period under the CEA would be appropriate in the cryptocurrency context, in particular, whether such period should be shortened to a two-day period from the current 28-day period. While the CFTC has the authority under the CEA to lengthen the “actual delivery” period beyond 28 days, it does not have the authority to shorten the “actual delivery” period (absent Congressional action). If the “actual delivery” period is reduced to a two-day period, some cryptocurrency platforms may have technical difficulties satisfying the “actual delivery” requirements within the shortened time frame.

Leverage, Margin, and Financing. If they find it too challenging to comply with the requirements of the “actual delivery” exemption, cryptocurrency platforms potentially may avoid the requirements of the CEA by not providing leverage, margin, or other financing to their retail customers. Query whether as a policy matter that is a result that the CFTC and retail customers would prefer.

Public Comments

The CFTC is requesting comments from the public until March 20, 2018. This is a potentially important opportunity for the cryptocurrency industry to engage actively with the CFTC and to provide valuable perspectives regarding what “actual delivery” means for cryptocurrency retail commodity transactions.

[clickToTweet tweet=”This is a potentially important opportunity for the #cryptocurrency industry to engage actively with the #CFTC and to provide valuable perspectives” quote=”This is a potentially important opportunity for the #cryptocurrency industry to engage actively with the #CFTC and to provide valuable perspectives”]


Joshua Ashley Klayman Chairs the Wall Street Blockchain Alliance’s Legal Working Group and frequently speaks and publishes about Blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics.  Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters.

Julian Hammar – focuses on futures, derivatives and commodities, energy regulatory, corporate and securities matters. Hammar is a leading expert on the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Hammar previously served as special counsel at an Am Law 50 firm and as the assistant general counsel at the Commodity Futures Trading Commission (CFTC), Office of the General Counsel. His most recent work at the CFTC included drafting regulations to further define key terms including “swap,” “security-based swap” and “security-based swap agreement,” under the Dodd-Frank Act.

Shiukay Hung practices in tax law and Blockchain + Smart Contracts. He has a broad-based transaction-oriented practice focused on U.S. federal and international income tax matters. Hung advises on the tax aspects of sophisticated capital markets transactions (including ICOs), financial instruments (including structured products and derivatives), cryptocurrencies, REITs, real estate finance and equity transactions, credit facilities, mergers and acquisitions, representations and warranty insurance, and private equity transactions (including sovereign wealth funds).

Anna Pinedo has concentrated her practice on securities and derivatives. She represents issuers, investment banks / financial intermediaries, and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products. Pinedo works closely with financial institutions to create and structure innovative financing techniques, including new securities distribution methodologies and financial products. Pinedo has particular financing expertise in certain industries, including working with technology-based companies, telecommunications companies, healthcare companies, financial institutions, REITs and consumer finance companies.

1 This article uses the more common street name “cryptocurrency” instead of the CFTC terms “virtual currency” or “digital currency.” The CFTC defines “virtual currency” or “digital currency” as: any digital representation of value (a “digital asset”) that functions as a medium of exchange, and any other digital unit of account that is used as a form of a currency (i.e., transferred from one party to another as a medium of exchange); may be manifested through units, tokens, or coins, among other things; and may be distributed by way of digital “smart contracts,” among other structures. The CFTC views cryptocurrency as one type of virtual currency. 
 2 See, e.g., In re Coinflip, Inc., d/b/a Derivabit, and Franciso Riordan, CFTC Docket No. 15-29, 2015 WL 5535736.
 3 In this article, we use the term “cryptocurrency platform” rather than the street term “cryptocurrency exchange” since most of these platforms are not exchanges registered with the CFTC within the traditional meaning of the word.
4 See Retail Commodity Transactions Involving Virtual Currency, 82 Fed. Reg. 60,335 (Dec. 20, 2017), available at:
5 See section 2(c)(2)(D)(ii)(III)(aa) of the CEA, which provides an exemption to its requirements for transactions that result in “actual delivery” within 28 days, or such longer period as the CFTC may determine by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved.
6 See Retail Commodity Transactions Under Commodity Exchange Act, 78 Fed. Reg. 52,426 (Aug. 23, 2013), available at:
7 The 2013 Final Interpretations provide that the CFTC will consider relevant factors, such as ownership, possession, title, and physical location of the commodity purchased or sold, both before and after execution of the agreement, contract, or transaction, including all related documentation; the nature of the relationship between the buyer, seller, and possessor of the commodity purchased or sold; and the manner in which the purchase or sale is recorded and completed. Id. at 52,428.
8 749 F.3d 967 (11th Cir. 2014).
9 BFXNA, Inc. d/b/a/ Bitfinex.
10 A private key is a unique key or other credentials that allow a person full access and ability to transfer the cryptocurrency. A private key needs to be kept secret because any person possessing the private key can gain full access and ability to transfer the cryptocurrency. 
11 Multisignature authentication is a common security protocol. Rather than having one private key grant full access and control of the cryptocurrency, the permission is split up between multiple parties such that all parties need to provide authorization for a transaction.
 12  Pursuant to section 2(c)(2)(C) of the CEA, retail foreign currency transactions are subject to a two-day “actual delivery” period.
13 See section 2(c)(2)(D)(ii)(III)(aa) of the CEA providing that the CFTC may provide for a longer period than 28 days by rule or regulation based upon the typical commercial practice in cash or spot markets for the commodity involved.
Please note that any of the above should not be taken as legal advice and any individual or entity should consult their legal counsel regarding any and all issues addressed above.

Pump & Dump Digital Currency: Commodity Futures Trading Commission Warns Investors to Watch Out for These Scams

The Commodity Futures Trading Commission (CFTC) has issued a warning to consumers to beware of pump and dump scams that have become somewhat prevalent in initial coin offerings and digital currencies in general.

The CFTC says it has received complaints from customers who have lost money to pump-and-dump schemes, and the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.

Pump and Dump scams typically take place when a group of people or organizations conspire to pump the price higher of a cryptocurrency by various means. FOMO may take place and the unwitting investor jumps aboard the ride up only to fall prey to the dump side of the equation as they are left holding devalued cryptocurrency. There are numerous chats were plotters work in concert to manipulate the market in the largely unregulated cash market for virtual currencies and digital tokens.

CFTC Director of Public Affairs Erica Elliott Richardson commented on the CFTC announcement saying the scam, like many others, is not really new. The Pump & Dump has been around since the emergence of securities markets but public interest in digital assets has reinvigorated the ploy;

“Pump-and-dump schemes long pre-date the invention of virtual currencies, and typically conjure the image of penny stock boiler rooms, but customers should know that these frauds have evolved and are prevalent online. Even experienced investors can become targets of professional fraudsters who are experts at deploying seemingly credible information in an attempt to deceive. The CFTC encourages all customers to thoroughly research potential investments, stay informed about tactics commonly used in investment fraud, and avoid investment opportunities they don’t fully understand.”

Pump-and-dump schemes are mostly anonymous. The bogus demand, followed by a quick sale, creates a profit opportunity for nefarious actors by taking advantage of traders who are unaware of the plan. The CFTC says customers should obviously avoid purchasing virtual currency or tokens based on tips shared over social media.

Joshua Klayman, a leading attorney in the cryptocurrency space and Chair of the Wall Street Blockchain Alliance’s Legal Working Group, said schemers need to take heed;

“While many focus on the SEC’s actions and guidance regarding digital tokens, the CFTC also plays an important regulatory role in the space.  As noted in the Advisory released today, “the CFTC maintains general anti-fraud and manipulation enforcement authority over virtual currency cash markets as a commodity in interstate commerce.”  The CFTC’s guidance today warned the public to beware of pump and dump schemes that may exist in the digital token context and cautioned potential purchasers against purchasing tokens based on social media-based rumors and tips.  Beyond just sending a cautionary and educational message, the CFTC also encouraged those who are aware of pump-and-dump schemes to “blow the whistle” and submit tips, reminding potential whistleblowers of the possible monetary awards that whistleblowers may, in certain cases, be eligible for in the event of a successful enforcement action that leads to monetary sanctions. In my view, those in the crypto space should be mindful that the CFTC is actively focused on digital tokens and protecting potential customers.”

The CFTC added that customers can best protect themselves by purchasing only alternative virtual currencies, digital coins, or tokens that have been thoroughly researched. So don’t fall prey to the Pump and Dump trap.

[Editors Note: the above statement by Joshua Klayman does not represent legal advice in any form and any views expressed are hers alone]

The Taxman Cometh: Tax Reform May Impact Cryptocurrency Trading

It is that time of year again. Tax time.

The dreaded annual routine where you compile all of your state and federal tax forms into an envelope and shuffle it off to your accountant. Alternatively, you may use a tax software and do it yourself – something many people do these days if their filings are fairly simple.

At the end of 2017, the Trump Administration signed into law a massive tax overhaul in an attempt to simplify the tax filing process. This law lowered the tax bill for many and raised it for some. Perhaps the most impactful portion of the Tax Reform law was the fact that corporate taxes have become far more competitive in a global economy. This is important and the actual results will not be fully revealed for some time but the initial response has been positive.

But one item buried within the law may impact cryptocurrency traders. Whether you trade BTC, ETH or XRP – this is something you should discuss with your accountant to determine whether it impacts you.  Now I am no accountant nor tax attorney, but Joshua Ashley Klayman, a Blockchain attorney with Morrison Foerster who is co-chair of the firm’s Blockchain + Smart Contracts Group, has shared some commentary on possible implications for traders in cryptocurrency. Klayman points out she is not an accountant nor a tax attorney so be certain you check with your own tax professional first.

While crypto may be new and cool you still cannot dodge the taxman;

“Whether or not U.S. token purchasers are aware of it, some aspects of the new U.S. Tax Reform Bill may have a very real effect on them individually,” says Klayman. “The new tax laws clarify that, when a token purchaser buys a digital token using another digital token, it could be a taxable event.”

Why is that important?

Because it is a change as to how some individuals that trade in crypto have been reporting their taxes (if they have been reporting the gains or losses at all). This change revolves around the definition of real property.

Jeannette Spaulding recently wrote about this change, explaining the real property enigma;

“Firstly, the bill limits the exception to real property only. Real property can be defined as a tangible asset that has value due to its physical substance. Intangible assets such as cryptocurrency coins clearly do not fall into this category. Secondly, the bill limits the exception to property that is not held primarily for sale. It’s safe to say that the premise of cryptocurrency trading is to buy coins in order to sell them. Therefore, traded coins also fail to meet this second requirements for the tax exception.”

Klayman clarifies this further;

“To put it into perspective, purchasers using Bitcoin or Ether to purchase alt-coins in initial token offerings may have taxable events, not just when they sell those alt-coins, but also at the moment of purchase of the alt-coins.”

Previously, some people had taken the position that exchanging one digital token for another token may qualify as a like-kind exchange (also known as a 1031 exchange frequently used in Real Estate transactions). Klayman says that in this case, taxes may have been deferred when digital tokens were exchanged for other tokens and there may have been no “taxable event” until the tokens were ultimately traded for fiat currency such as U.S. dollars, Euros, Pounds etc..

“The new tax laws limit like-kind exchanges to real property not held for primarily for sale, which may take the wind out of the sails for token purchasers hoping to rely upon that exemption,” adds Klayman.

This is an important policy shift. Remember, the Feds have been stepping up their game when it comes to cryptocurrency trading, ICOs and digital currencies in general. Towards the end of last year, Coinbase was compelled by the courts to hand over account Info to IRS for users that transacted $20,000 or more in crypto during the years 2013 to 2015. What do you think the IRS is going to do with this info? Just stare at it? Not.

Reliance on tax deferral when digital tokens were exchanged for other digital tokens was cautioned against by many lawyers, explains Klayman. Lawyers had pointed out instances where other exchanges were not considered like-kind exchanges—for instance, when trading other commodities such as cattle or gold coins.

“Token purchasers should carefully track their token purchases and sales, as they may be responsible for paying taxes that they could owe,” says Klayman.

Since many people use multiple exchanges to trade in Crypto – the process of tracking transactions can be pretty laborious. Some crypto platforms will provide gain / loss reports which can make tax reporting far easier so you may want to check with your exchanges to see if they offer this type of service. Alternatively, there are platforms like Zenledger that enables users to import data from many exchanges to create a single document to assist with tax filing.

“The changes arguably add complexity to some token purchasers’ tax calculations and may create a significant need in the market. While I cannot vouch for any particular company or service, start-ups like ZenLedger and others appear to be focused on this issue,” adds Klayman.

Cryptocurrency values have been on a roller coaster ride when it comes to valuations. Towards the end of 2017, Bitcoin surpassed $20,000 at one point. Today, Bitcoin is trading near $8000 representing a significant hair cut for anyone that bought at or near the high. But if you made money last year, your probably on the hook. And as more and more individual investors enter the cryptocurrency space, tax questions become more pressing for both the investors and tax authorities.

And it is not just the IRS that has become keen to learn more about Crypto. The SEC and CFTC have plunged into the digital currency world with vigor. The SEC has recently taken action against multiple initial coin offerings (ICOs) with their new Enforcement Cyber Unit that targets misconduct in areas including the Blockchain and ICO realm.

 “New year, new rules,” states Klayman.

So word to the wise. Regardless of the country where you report your taxes – be certain to speak to an accountant who is knowledgable on crypto.  When it comes to the taxman – it is always best to be prepared.

[Editors Note: Joshua Klayman is not a tax lawyer nor accountant and this should not be construed as legal advice. Any investor in cryptocurrencies should seek out professional legal and/or accounting advice to assess their own situation]

The Empire Strikes Back: Traditional Debt and Equity Capital Providers Get Smart(er) About Token Sales

With thanks to Greg Murphy of Outlier Ventures for his contribution to this article.

Now that 2018 is well underway, traditional debt and equity capital providers would be wise to re-examine many of their familiar forms of contracts to identify new risks – and realize new rewards – that token sales (also called initial coin offerings or ICOs) may create.

New Potential Rewards, New Potential Risks

As has been reported widely, more and more early stage companies, and, increasingly, more established businesses, are taking advantage of a new form of capital raising; namely, developing and selling digital tokens.

Token sales enable entities to raise money without having to sell equity (which often requires founders to cede aspects of control and economic rights) or incur debt (which typically would restrict the company’s activities and require repayment).

[clickToTweet tweet=”Token sales enable entities to raise money without having to sell equity #ICO” quote=”Token sales enable entities to raise money without having to sell equity #ICO”]

The very nature of digital tokens provides token sellers with tremendous flexibility in terms of structuring the bundle of rights that holders of a particular token may or may not have.  For instance, token sellers may create tokens that have attributes typically associated with debt or equity, some that look more like software licenses, as well as many other token types.

Given their frequently international nature, many token sales are likely to implicate a broad (and sometimes nearly global) scope of regulatory frameworks, including, among others, securities, tax, financial services and money transmitter, sanctions, investment company and investment advisor and broker-dealer laws and regulations. 

Token sales also generally are subject to anti-fraud, good faith and fair dealing requirements. While many of these legal and regulatory considerations exist in the context of traditional debt or equity issuances, token sales typically do not correspond one-to-one with those familiar capital raising structures and may raise unique questions for which the answers are unclear.

While token sales may provide certain companies with an innovative avenue by which to distribute their products and services, as well as raise capital, they also may raise token sellers’ risk profiles in ways that some debt and equity investors may not have anticipated or priced-in.

In 2018, many existing and would-be token sellers, as well as their investors and other capital providers, would be wise to take a close look at the terms of their equity and debt agreements in light of the token sale market.  Hopefully, before any disputes or potential liabilities have arisen.

[clickToTweet tweet=”many existing & would-be token sellers would be wise to take a look at the terms of their equity & debt agreements” quote=”many existing & would-be token sellers would be wise to take a look at the terms of their equity & debt agreements”]

Equity Investors Think It Through

Some shareholders and venture investors, who historically may have relied upon more typical pre-emptive rights and other anti-dilution provisions or covenants to restrict or limit a company’s ability to issue additional equity, may have been dismayed to discover that they did not have specific consent or veto rights that would restrict, police or otherwise govern the company’s ability to launch a token sale.  Similarly, many negotiated restrictions on the company’s ability to incur debt or undergo fundamental changes may not have contemplated or prevented the company from consummating a token sale. 

Why might an equity investor care? 

In addition to the much-discussed risk that a given token sale may be a sale of securities, a given token could be structured to provide the token holders with rights commonly associated with equity or debt, including certain voting and economic rights. 

In addition, the post-token sale company may be subject to unforeseen risks and liabilities as a result of the token sale itself.  For example, a token seller may fail to carry out proper know-your-customer and anti-money laundering checks during the token sale; may fail to comply with sanctions and terrorist financing laws; or may fail to register as a money transmitter if required by law to do so.  In addition, certain token sales may cause a heightened litigation risk or may result in unexpected adverse tax consequences.    

Just as importantly, some investors that may have entered into SAFEs (Simple Agreements for Future Equity) or received warrants may have been surprised to discover that certain token sales may not have constituted liquidation or liquidity events or investments under certain of those SAFEs or warrants.  Complications also may arise in the context of convertible debt issuances.

Now that investors with bargaining power know better, token sale-specific provisions are likely to be front-of-mind and are beginning to appear in term sheets.

Customary Debt Provisions Are Re-Examined

Much debate has occurred over whether a given digital token is a security, but implications go beyond securities law analyses.  The nature of the tokens and the sales are relevant under many credit facilities, as well.

For instance, many traditional secured lenders typically restrict or limit, through covenants, representations and events of default, the ability of a borrower to incur additional debt, issue equity or undergo fundamental changes (such as changes of control, mergers, sale of all or substantially all of the company’s assets, etc.). Many of those same debt documents also require mandatory prepayments in the event that the borrower receives proceeds, for example, of equity or debt issuances or certain asset sales.

Is the sale of a given token (which is software) like a sale of inventory under the relevant debt documents, or is it more like a pre-sale of services or goods? Alternatively, is it more like a sale of equity, or a debt incurrence? Lenders and noteholders are likely this year to re-examine their forms of debt agreements, to make sure that proceeds of token sales, and, perhaps more importantly, permission for token sales, are addressed in a manner that protects the credit providers.

Similarly, token sellers that also may be borrowers under credit facilities or issuers of notes need to be mindful of the restrictions under their debt documents.  For example, does a token seller need to prepay its outstanding loan with the proceeds of its token sale?  Does the token seller need to request consent in order to launch a token sale?  For a company that may have an outstanding loan secured by all assets of the company, does that mean the secured lender will have a security interest in any tokens developed or sold by the company? Could a token seller unwittingly breach its ’40 Act (i.e., Investment Company Act of 1940, as amended) representation by selling tokens that are securities?

Some Traditional Players Look to Expand Their Horizons

In addition to identifying risks, however, many traditional debt and equity capital providers are likely to recognize and welcome the potential new benefits that token sales can create.  For example, beyond merely raising money, the sale and distribution of a given company’s digital tokens may lead to faster and more widespread adoption of that company’s products or services.  Token sellers may be motivated to develop certain projects more quickly in order to launch token sales and benefit from those potential blockchain network effects.

[clickToTweet tweet=”many traditional debt & equity capital providers are likely to recognize the potential token sales can create #ICO” quote=”many traditional debt & equity capital providers are likely to recognize the potential token sales can create #ICO”]

Indeed, debt and equity providers appear to be discovering new opportunities for themselves in the token sale space.  For instance, we are starting to see some of the more traditional capital markets players (such as underwriters and bookrunners), many of which were somewhat or entirely disintermediated from last year’s token sale process, begin to contemplate providing marketing and sales services in connection with certain token sales, particularly in the case of self-described security tokens.

This year, we are likely to see the development of new contractual provisions that contemplate the ability (and negotiated rights) of certain capital markets actors to play lead arranger and other similar roles not just in debt, equity and hybrid (debt/equity) financings, but also in token sales.   Many familiar concepts are likely to be reimagined.  For instance,  some “alternative transaction fee,” “right of first refusal” and exclusivity provisions may be expanded to refer also to digital token sales, and certain “change of control” definitions also may be modified.  Perhaps one day “flex” language, common in leveraged financing fee letters, will begin to include the ability to flex all or a portion of a given facility to a sale of tokens.

While no one knows for sure what 2018 will bring, wise market participants and their lawyers will be re-examining their contracts.

This article is not legal advice or investment advice and should not be relied on as such.  In addition, the views expressed in this article are the author’s own and may not necessarily reflect the views of her employer.


Joshua Ashley Klayman, chairs the Wall Street Blockchain Alliance’s Legal Working Groupand frequently speaks and publishes about blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics.  Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters.

Blockchain Leaders Schedule 2018 Digital Assets Investment Forum

FinTech4Good, Alternative Assets, Asia Finance Association, and the Wall Street Blockchain Alliance, have joined together to create the 2018 Digital Assets Investment Forum (DAIF) scheduled for January 16th, 2018 in New York.

This is a one day seminar covering all things blockchain including the fast evolving initial coin offering market. The organizers have told CI that several hundred industry stakeholders will participate in the event – coming from ten different countries. Participants include several CI contributors including Joshua Klayman and George S. Georgiades.

Startups like NewPay, GateHub, IOTA, Celsius Network, SunExchange and EnLedger, as well as well-known blockchain investment funds such as LDJ Capital, Dencentra Fund, ConsenSys Capital, FuturePerfect Capital and DoubleRock Fund.

There are also scholars from universities and research institutions such as Cornell University, Columbia University, Johns Hopkins University, Cheung Kong Graduate School of Business, as well as blockchain influencers from the United Nations, the World Bank, ID2020, Blockchain Committee and Crypto Working Group.

The forum will also involve cryptocurrency experts from BlockchainA3, ExpertDOJO, Manatt Law Firm, Hogan Lovells Law Firm and EG&S LLP Law Firm.

“We hope this forum will connect digital asset gurus, technology pioneers and blockchain investors, to share the most disruptive solutions and shape the future of digital assets.” said by Xiaochen Zhang, President of FinTech4Good, “Many executives are traveling thousands of miles from Asia, Europe, South America and Oceania to the Digital Asset Investment Forum.  They know this is one of the most exciting opportunities to learn about the market trend, identify the best talents, build the most powerful networks and access to the top investors in digital asset.”

Several new initiatives will be announced at the forum, including the Digital Assets Leadership Committee, Blockchain for Impact Leadership Committee and Blockchain 30 Under 30 Committee.

So if you are in New York City next week – you should definitely check this event out.

A 21st Century “Kodak Moment”: the Kodak and WENN Digital Security Token Sale

Photography is more than a medium for factual communication of ideas. It is a creative art.” – Ansel Adams

The past year has witnessed a flurry of remarkable “initial coin offerings,” or ICOs.  The pending KODAKCoin digital token sale jointly announced by Kodak and WENN Digital today appears to represent a true watershed moment. 

As a threshold matter, Kodak’s story arc is dramatic:  a former Dow Jones Industrial Average component, once driven into bankruptcy by technological change, announcing a blockchain-based image rights management platform to regain a place on tech’s bleeding edge.  The market reaction to this announcement was equally dramatic, as the price per share of Kodak stock more than doubled in the wake of the announcement.

Scheduled to open on January 31, 2018, the KODAKCoin token sale is distinct from predecessor ICOs in several notable respects and may portend legitimization of the ICO as a bona fide fundraising technique for “traditional” corporate America, at least in select instances. 

Unlike most ICO issuers, Kodak is not a startup or private company known (if at all) only to cognoscenti, but an NYSE-listed and SEC-reporting company, and still a household name.

The proposed KODAKCoin token sale also is distinct from many other token sales launched to date in that it is an offering of self-described “security tokens,” which will be sold only to “accredited investors from the U.S., UK, Canada and other select countries.”  While numerous token sales have been similarly limited to accredited investors as a prophylactic measure in the event that such sales were found to involve the offering of securities, token issuers generally have not professed to be offering securities, even when the tokens in question have had security-like features (such as profit-sharing rights).

While some observers may be surprised by the public announcement, the token sale is described as being launched under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended, which, subject to compliance with certain restrictions, permits the token seller to engage in general advertising and general solicitation. 

As a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Kodak is unlikely to be concerned about Exchange Act Rule 12(g) reporting thresholds on ownership of securities, which may be a concern to token sellers that are startup companies, as triggering the applicable thresholds requires the filing of periodic reports with the SEC.

Following the SEC’s The DAO 21A Report last summer, many unregulated cryptocurrency exchanges subject to U.S. securities laws have tried to prevent security tokens from trading on their platforms, in an effort to avoid having to register as national securities exchanges or as alternative trading systems. 

KODAKCoin’s status as a security likely will preclude the token from being tradable on unregulated cryptocurrency exchanges that are subject to U.S. securities laws—likely affecting the token’s liquidity—and KODAKCoins would be resalable by purchasers only either in a registered securities offering or a transaction exempt from securities registration (such as under the Rule 144 safe harbor for sales by non-affiliates after a holding period is met).

The torrid market sentiment for cryptocurrency and blockchain technology is demonstrated by the ecstatic market reaction to the Kodak/Wenn announcement, despite the press release providing *no* detail about (1) the amount of capital that Kodak is seeking to raise, (2) the rights that tokens would impart to holders, and how those rights might affect common stockholders, or (3) whether the KODAKCoins and the associated blockchain platform will be “functional” in any sense when issued (or in the near term).

It remains to be seen whether the KODAKCoin token sale ultimately will be remembered primarily as a strategic initiative, rather than a marketing initiative (à la “Long Blockchain Corporation”), or if it signals the nascent opening of a legitimate capital raising path for mature companies. 

Triple digit share price appreciation is sure to be noticed by other “traditional” companies, causing some to examine their capital raising strategies and explore potential token sales. 

Although digital provenance for photographs may be a valid use case in the blockchain context, other organizations may struggle to identify bona fide needs for distributed ledger technology and tokenization, and may lack the technological resources (whether internal or external) to implement any identified strategy.  While some companies may be eager to raise funds without necessarily having to incur debt or cede control or economic rights in the manner of a traditional security, many companies, whether well-established or emerging, would be wise to resist the ICO siren call and exercise caution before trying to contrive blockchain use cases, as some critics already posit that the technology represents a solution in search of a problem. 

The KODAKCoin token sale will open in less than a month.  It will be fascinating to observe the details—and knock-on market effects—as the full picture comes into focus. 

This article is written by the authors solely in their personal capacities, and the views expressed are the authors’ own and do not necessarily reflect the views of their employers or any other person.  This article does not constitute, and should not be relied upon by anyone, as legal or investment advice.


David M. Adlerstein is counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz. His practice focuses on mergers and acquisitions, corporate, securities law and regulatory matters, with a focus on financial institutions. Mr. Adlerstein has worked on a broad array of public and private company acquisitions, divestitures, proxy contests, securities offerings and corporate governance matters. He also provides counsel to several nonprofit organizations on a pro bono basis.  Mr. Adlerstein is a member of The Economic Club of New York and The Wall Street Blockchain Alliance.



Joshua Ashley Klayman, chairs the Wall Street Blockchain Alliance’s Legal Working Group and frequently speaks and publishes about blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics.  Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters.

KNO-MO?   The Seemingly Small (Yet Actually Chasmic) Gap Between Crypto Knowledge & Crypto Capability

Oh the excitement!  Oh the frustration!

Each day, more and more people are becoming aware of digital tokens generally, and an ever increasing number of them have begun the journey into purchasing some of those tokens.  But a lack of mechanical technological know-how may leave many on the outside, looking in.

Creating one’s initial account, whether on Coinbase or another similar platform, may be a thrill – Yes!  I finally can purchase some cryptocurrency! I am part of the cool crowd!

But when the initial newness wears away, as it inevitably does, some of those same users may find themselves frustrated.

While tokens like Bitcoin, Ether, Litecoin and Bitcoin Cash are easily accessible on multiple platforms, other exciting tokens in the market are substantially more difficult to purchase – or even to get to.

For those whose conceptual understanding exceeds their technical ability, the gap between knowing which tokens you want to purchase and knowing how to purchase those tokens may sound tiny, but, practically speaking, may be as challenging to cross as the Grand Canyon.

[clickToTweet tweet=”While tokens like #Bitcoin are easily accessible on multiple platforms, other tokens are more difficult to purchase” quote=”While tokens like #Bitcoin are easily accessible on multiple platforms, other tokens are more difficult to purchase”]

While this barrier to entry arguably may be good, or at least protective, for those unsophisticated retail buyers with little technological ability or interest who wish to purchase digital tokens purely for speculative purposes, others who may be very deeply engaged in the crypto community may find themselves excluded, as well.

For those who may have immersed themselves in researching and understanding different digital token types, completed considerable due diligence and developed views about which tokens they want to buy – and have money to spend – it may be immensely frustrating to realize that they just don’t know how.

That is a FOMO (fear of missing out) of a whole different type – those people know that they are missing out.  (Does that suffering have a name? Perhaps KNO-MO?).   All jokes aside, it is a real problem.

For non-technologists among us, common questions may include:

  • Where can I buy [insert exciting token name here]?
  • Why isn’t my account at [insert applicable exchange name here] approved yet? – It has been weeks!
  • Can I purchase the token that I want with fiat currency, or do I have to use purchase it using another digital token type?  If the latter, how do I safely move my existing cryptocurrency from one exchange to another?  (And, don’t forget, under the new U.S. tax laws, it is clear that the token-for-token exchanges are not like-kind exchanges and will be taxable events that need to be tracked.)
  • Knowing that it is unwise to store tokens on an exchange, how do I know which wallets/programs/platforms may been trusted?  In theory, cold storage sounds easy and makes sense, but how do I do it?

Where does an informed purchaser turn for step-by-step help – and which, if any, of the online how-to-purchase instructions can be relied upon?  How does one (whether purchasing tokens for consumptive or speculative use) avoid missing out on opportunities, not because of a failure of knowledge or imagination, but due to a failure of technical ability?

This is not just a hypothetical scenario – it is something that is playing out every day.  As the price of XRP and other, lesser known tokens have climbed recently, how many interested and (conceptually) educated people have been left watching from the sidelines, wanting desperately to participate but not knowing how?

There is a tremendous need in the market for practical instruction (or, at the least, better user interfaces), and businesses that are able to help potential token purchasers to bridge the execution gap are likely to find many eager customers, including potentially me.


Joshua Ashley Klayman, chairs the Wall Street Blockchain Alliance’s Legal Working Groupand frequently speaks and publishes about blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics.  Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters.

The Token Sale Sky is Not Falling. Unless We Cause It To.

You Can’t Generally Stop Someone From Suing You.

In the years before the blockchain buzz, I often would sit in my mentor’s office for conference calls. Even on calls where there was not much for me to add, I always learned from listening to him counsel his clients. I continue to learn from him.

As finance and corporate deal lawyers, we help our clients to structure, negotiate and close their important transactions.  We help them to identify and find ways to minimize risks.  Some risks cannot be obviated.

In the deal context, when negotiating contracts, clients often are very concerned with finding ways to be certain that they will not be sued, that no claim or cause of action will be brought against them. In response to the inevitable, “Could we get sued?,” my mentor would remind clients that, yes, they could get sued.

Even with the perfect deal, the most compliant performance, the best intentions, it generally is very, very difficult to prevent someone who wants to bring a claim against you from bringing an initial claim.  In some cases, of course, you may be successful in having an action dismissed for any one of a number of reasons – or you ultimately may win a case that is brought against you. But, at least in the United States, someone who wants to bring a civil case against you generally will not be prevented from doing so.

Litigation is to be expected.  It is a risk of doing business, a risk that is unlikely to be reduced to zero.  And, in our legal system, litigation often is necessary and critical to solve disputes, protect rights, hold potential wrongdoers accountable and interpret and clarify the law.

However, it is just as important to remember that bringing suit doesn’t mean that a given plaintiff will win or is right.

Just because a suit is brought by a private party against a token seller certainly does not automatically mean that a death knell is sounded for the entire “utility token” sale space.  It does not automatically mean that the token seller did anything wrong.  It does not necessarily mean anything except that the plaintiff brought a cause of action claiming that something occurred and has requested some type of relief.  (My litigator friends may use different terminology to describe this.  I am not a litigator, and this is not legal advice.)

Those of us who are active in the blockchain and cryptocurrency space generally, and who would like for this sector to continue to flower and thrive, would be wise to avoid sensationalizing every lawsuit or dispute.  Those less knowledgeable or experienced in the space already may be wary of new developments, as may be those persons, entities and industries that fear being disrupted or disintermediated.  Why add even more fuel to the fire?  Why stir up more fear and potentially provoke responses from regulators, judges and other fact-finders that could result in a much more conservative approach and landscape than is needed?  A catchy sound bite may grab attention and result in increased views for a moment, but let’s try to consider the potential longer term effects.

In The U.S., There Currently Is No Bright Line Test About Which Tokens Are Securities.

Thanks to the United States Securities and Exchange Commission’s guidance this summer, we now know, among other things, that certain digital tokens may be securities under U.S. law, as well as that the determination as to whether a given token is a security will be based on a consideration of the various facts and circumstances involved.  The U.S. Supreme Court case, SEC v. WJ Howey Co., provides the relevant framework for such analysis. (This particular topic has been covered a great deal lately.  You can read more about it here, here, here, here and here, among other places.)

The bottom line is that currently there is no bright line test that tells us which tokens are not securities under U.S. law.  Each token, and each token sale, needs to be examined individually.  There is no shortcut for any of us, whether we are token sellers, token purchasers, exchanges, other market participants, lawyers and even judges.  The analytical struggle is real.

But the determination and commitment to establishing a compliant and efficient token sale market is just as real.  It may not always be highlighted in headlines, but there is no shortage of effort and activity being expended by lawyers and others to try to create and promote a more credible token sale landscape.

In fact, as has been publicly announced, some of the most experienced lawyers in the space are working together to provide practical, reasoned private sector guidance regarding certain real-life questions regularly encountered in the token sale context.  Later this month, the Wall Street Blockchain Alliance expects to release its initial thought leadership in the form of a Q&A addressing certain common concerns in the U.S. relating to tokens that may be securities and those that may not be.

It may be hard work to try to tease out which token and token sale characteristics may make something look more like, or less like, a security under U.S. law.  But it is important work, and it is work that actively is being done.

Market Realities Are Relevant and Should Not Be Ignored.

As we analyze the legal frameworks applicable to token sales and resolve the inevitable disputes that have arisen and will continue to arise, we also must remain aware of the market realities playing out today.  It is critically important in the context of legal disputes that we consciously and deliberately distinguish between legal analysis of claims, facts and the actions of issuers and other market participants, on the one hand, and the emotional responses of those whose bets just have not panned out.

For context, as I write this, the price of bitcoin has soared to over $7,370, as reported by Coinbase’s price chart, compared to roughly $4,300 just one month ago.  Despite pricing volatility, according to those price charts, the price of bitcoin has increased nearly 950% since this time last year.

Many of those familiar with the token sale space likely are aware that the values of various other digital tokens have risen or fallen, sometimes repeatedly, sometimes often and sometimes significantly.  Sometimes token purchasers have purchased digital tokens – let’s call them “Token A” – using other digital tokens (such as bitcoin or ether – i.e., “Token B” for this purpose).  And, in some cases, the post-sale price of Token A may have fallen, while the price of Token B may have risen.  This naturally may cause a purchaser to regret having purchased Token A and to want to be able to return Token A for the now more valuable Token B.

Just like the famous Bitcoin Pizza Day pizza purchaser would likely prefer to be holding his 10,000 bitcoins right now.

Without question, truly bad actors in the token sale space should be held accountable for bad acts.  But disappointment and regret about making a particular purchase decision based on price fluctuations – while entirely understandable at a human level – should not become, in and of itself, a silent cause of action.

More Calm and Less Frenzy.

As a wise person once told me, the number one thing that a nervous client needs is a calm lawyer.

That may not be an exact quote, and, of course, it is not intended to minimize the importance of knowledge of the law or zealous client representation. It also doesn’t mean that the lawyer, inside, isn’t still trying vigorously to “figure it out.”

In new and uncertain circumstances, the general public often naturally looks to those in the legal profession for guidance, for a steady hand to hold.

The blockchain and cryptocurrency space is an emerging and evolving one.  In many ways, the public is looking to those knowledgeable and experienced in the space for similar guidance.

If we want to maintain flexibility in the token sale space, while encouraging a legally compliant token ecosystem, let’s be clear-headed.  Let’s be the adults in the room.  We will figure it out.  In the frenzy, let’s be the calm.

The token sale sky is not falling.  Unless we cause it to.

Note:  The following article is not legal advice or investment advice and should not be relied upon for any purpose.  The thoughts expressed in this article are the views and opinions of the author in her personal capacity and do not necessarily represent the views of her employer or any other natural person or entity whatsoever.


Joshua Ashley Klayman, chairs the Wall Street Blockchain Alliance’s Legal Working Groupand frequently speaks and publishes about blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics.  Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters. All opinions expressed in this article are hers alone and do not represent the opinion or intent of her employer or any other natural person or entity.

Gibraltar: Does Statement on Initial Coin Offerings Include New Regulatory Framework?


On September 22, 2017, the Gibraltar Financial Services Commission (GFSC) issued a Statement on Initial Coin Offerings (ICO).   With the GFSC Statement, Gibraltar joined a growing number of jurisdictions that have provided token sale guidance, including, among others, the United States, Canada,  Singapore,  Hong Kong and China.

A Statement, Not a Warning

While token sale guidance from certain other jurisdictions has highlighted the (very real) risk of fraud from bad actors in the space, and some jurisdictions have issued statements in conjunction with local police forces or have issued outright token sale bans, Gibraltar appeared to be signaling, by virtue of a careful choice of words –which has not gone unnoticed – its interest in becoming a token launch centre of excellence.  Notably, the GFSC Statement was published as a “statement,” and not as a “warning” or “alert,” and mentioned that Gibraltar is considering implementing a token sale regulatory framework, stating specifically that “Gibraltar is committed to being a sound and safe place to do business with and is considering a complementary regulatory framework covering the promotion and sale of tokens, aligned with the DLT framework.”

Distributed Ledger Technology (DLT ) Friendly Framework

For those who may be unaware, in May of this year, the Gibraltar Government released a consultation paper proposing a new regulatory framework applicable to firms that use DLT (ie Blockchain) to ‘store or transmit value belonging to others’ (the DLT Framework).  This new regulatory regime will become effective on January 1, 2018 and is principles-based.  The DLT Framework’s purpose is to provide a licensing regime that will provide regulatory certainty for operators in the DLT space, while also enabling firms to grow and adapt. The DLT Framework’s ultimate goal is to protect both consumers and the reputation of Gibraltar.  As Gibraltar’s Minister for Commerce, the Hon Albert Isola, MP, said last month, during his participation on the regulatory panel at the World Blockchain Forum in London;

“The idea of an innovative framework guiding businesses along the lines of best practice would be a good thing. This is evolving and you can’t box this in, but efforts have to continue towards protecting investors too.”

While no public statements had previously been made by Gibraltar regarding any new regulatory framework that would be specifically applicable to the promotion and sale of tokens (the Token Framework), the GFSC Statement announced that Gibraltar is considering the adoption of such a Token Framework, one that would be ‘aligned’ with the DLT framework. As such, some Gibraltarian experts are of the view that it is entirely reasonable to expect that the current ‘DLT Principles’ may be extended and applied to token promotion and sales activities.

The existing ‘DLT Principles’ can be summarized as follows:

1. A DLT firm must conduct its business with honesty and integrity;

2. A DLT firm must pay due regard to the interests and needs of each and all of its customers and must communicate with its customers in a way which is fair, clear and not misleading;

3. A DLT firm must maintain adequate financial and non-financial resources;

4. A DLT firm must manage and control its business effectively, and conduct its business with due skill, care and diligence, including having proper regard to risks to its business and customers;

5. A DLT firm must have effective arrangements in place for the protection of client assets and money when it is responsible for them;

6. A DLT firm must have effective corporate governance arrangements (mind and management must be in Gibraltar and four eyes (two minds) must be applied both to the formulation and the implementation of the policy of the DLT firm);

7. A DLT firm must ensure that all systems and security access protocols are maintained to appropriate high standards;

8. A DLT firm must have systems in place to prevent, detect and disclose financial crime risks such as anti-money laundering and countering terrorist financing (AML/CFT); and

9. A DLT firm must be resilient and must develop contingency plans for the orderly and solvent wind-down of its business.

While acknowledging that there are many issues to consider when expanding the application of the DLT Principles to the token promotion and sale space, many in Gibraltar would consider such extension to be a positive and natural evolution. While some Gibraltarian legal experts believe that the promotion of self-regulatory regimes and best practice frameworks should be encouraged and should continue to develop, many of them acknowledge that such informal frameworks are largely unenforceable and voluntary. One limitation of self-regulation is that it does not automatically capture the bad actors in the token promotion and sale space, nor does it require said bad actors to operate on the same playing field as the more responsible operators who will seek to comply with “best practice” statements and principles. For that reason, the development of a specific Token Framework may make Gibraltar a more attractive jurisdiction for those potential token issuers that genuinely wish to comply with applicable legal requirements.

Concerns Identified by the GFSC Statement and Other Jurisdictions’ Guidance

The GFSC Statement was, in some ways, consistent with the guidance that other jurisdictions have issue, and it included certain substantively similar, high-level considerations.  Below is a simplified summary of such points, as described in the GFSC Statement:

1. Is the Token a Security?

• Token sales involve the issuance of digital tokens. Depending on the functionality, properties and rights that attach to a given token, it may or may not be caught within existing financial services legal and regulatory frameworks. In the most simple terms, taking the units of a fund or a company and essentially securitising these rights within a digital token does not ‘avoid’ the legacy frameworks that capture this kind of activity.

• Regulatory authorities from various jurisdictions that have spoken formally about token sales have emphasized that, when assessing token sales, ‘form should be disregarded for substance.’  In reality, the question of what constitutes a ‘security’ in the U.S., or the closest equivalent to this investment contract concept in a European (and arguably global) context, a unit in a collective investment scheme, a collective investment scheme arrangement, a private placement or an option arrangement, is far more nuanced. In fact, although similar in some respects, there are some fundamental differences between and among various jurisdictions’ legal and regulatory frameworks.

• Notwithstanding this, to date formal regulatory notices regarding tokens generally have confirmed, directly or indirectly, that a given token may be, but will not always be a ‘security.’

• There are numerous implications of a digital token being classified as a security, implications which extend and apply beyond the immediate realm of the token issuer. Such implications also apply to the exchanges, dealers, promoters, advisors and other relevant counter-parties relating to such tokens. In practice, a distinction is often made between a token that is caught within the scope of existing securities regulation and a token that is a generally not deemed to be a security, i.e., a ‘utility token’.  In reality, given that there is no single type of ‘security token’ or ‘utility token’, there are likely many more categorisations of digital tokens – and implications that accompany such classifications – including those from a regulatory, commercial and tax perspective. Such variations have, understandably, (given the relative nascence of this type of activity) not yet received the kind of specific and focused attention as might otherwise be expected in other, more traditional, areas of regulated business, in the various official jurisdictional statements issued to date.

2. Buyer beware

• Regulatory authorities from those jurisdictions that have issued a notice, warning or statement regarding token sales have generally cautioned readers regarding risks that may exist with respect to digital token investments.

• Some have highlighted risks relating to highly speculative investments, the promise of ‘high returns’, inadequate documentation, lack of investor protection, disclosure, or potential for fraud, as well as the early stage development risk involved with certain tokens and token issuers.

• Most regulatory statements to-date have summarised certain steps that a consumer should take before making an investment decision and have offered some general guidance. However, very few have included any – or any significant – guidance or direction regarding steps that token issuers themselves should or could be taking to reduce such risks to consumers.

Other Perspectives regarding the GFSC Statement

Some may not necessarily agree with the GFSC Statement in its entirety. In particular, certain legal experts in Gibraltar and elsewhere may disagree with its statement that investment into this space should be undertaken by ‘experienced investors’ who are familiar with assessing the nature of the project and its business plan. While there may be broad agreement that a good argument may exist regarding suitability and appropriateness in respect of certain investments, some may not agree that a person who has accumulated a significant degree of wealth will always be in a better position to assess an investment into certain blockchain-based businesses or startups. It may be that only those with substantial technical expertise will be in a position to really understand the business (and ultimately the code) that they are investing in.

A Reasonable and Proportional Response

In summary, many relevant legal experts believe that the GFSC Statement is both reasonable and proportionate. They also welcome the prospect of extending the DLT Principles to develop a Token Framework that will be useful to consumers, token sale issuers and other related parties.



Joey GarciaISOLAS LLP, has built up a strong Financial Services practice advising on a variety of structures and solutions to an international client base which includes funds, investment managers, e-money institutions, banks as well as family offices and larger private clients. He has also been at the forefront of developments in the various aspects of business in the fintech space, including digital currency, blockchain and distributed ledger technology in Gibraltar. He co-chairs the Gibraltar Government working group/think tank on digital currencies. He has been involved in advising a number of blockchain start ups and businesses crossing over from the blockchain into the financial services space and is one of the thought leaders involved with the Fintech think tank established by the firm, Joey also sits on the Financial Services Commission (the Gibraltar Regulator) MiFID II working group and previously on the AIFMD working group. He was also the author of the Corporate Governance Code for Gibraltar Collective Investment Schemes and worked on a secondment within the Financial Services Commission during the latter part of 2013 in relation to AIFMD related technical issues. He is licensed by the Financial Services Commission to act as an Experienced Investor Fund Director and Company Manager. Email:


Joshua Ashley KlaymanMorrison & Foerster LLP,  is Of Counsel in the Financial Transactions Group and is a founding member and co-head of MoFo’s Blockchain + Smart Contracts Group. Ms. Klayman’s practice focuses on finance and corporate matters, as well as blockchain-based transactions (including token sales). In her finance practice, Ms. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Ms. Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters. Ms. Klayman chairs the Wall Street Blockchain Alliance’s Legal Working Group and frequently speaks and publishes about blockchain technology, smart contracts and cryptocurrency, among other things.  Ms. Klayman’s clients have included, without limitation, investment banks and other financial institutions; private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Email:


The recent European Commission report on the assessment of money laundering and terrorist financing risks for virtual currencies and crowdfunding platforms highlighted features such as the cost, high level of technical expertise and the nascent technology as less attractive than other forms of funding.

Joshua Klayman Shares Her Perspective on Marco Santori’s White Paper on SAFTs

Marco Santori, Fintech Team Leader at the law firm of Cooley LLP, has published a white paper tackling the issue of “Simple Agreement for Future Tokens” or SAFTs – the widely used structure for Initial Coin Offerings (ICOs).

Santori proposes a path toward a compliant framework using SAFTs while launching the SAFT Project—a forum for discussion and development of the SAFT framework. Santori’s white paper includes the imprint of Protocol Labs, the platform that has partnered with Angellist to create the Coinlist platform. Protocol raised over $200 million in their own ICO for their Filecoin offering – one of the largest ICOs yet.

While the white paper states that a SAFT is a security, the document adds that public purchasers may still be profit-motivated when they buy a post-SAFT utility token.

Joshua Ashley Klayman, an attorney with Morrison Foerster who is part of the Wall Street Blockchain Alliance, has shared her perspective on Santori’s paper.

Klayman congratulated Santori on the SAFT white paper calling it a “real step forward” that provides a point of discussion for the entire ICO industry.

Klayman, who makes a point to neither advocate on behalf of, nor criticize, the white paper, shared her preliminary thoughts;

1. The SAFT is based on U.S. laws and necessarily is U.S.-centric.  The Howey test is a test under U.S. law. Certain non-U.S. lawyers have shared that utility may not be relevant to their jurisdictions’ token assessments.  Some non-U.S. practitioners advocate tests under their respective laws that may relate more to contractual privity or similar concepts.

2. Embracing SAFT theory isn’t enough. Careful drafting is required. Certain existing SAFTs have been drafted poorly or without the input of relevant non-U.S. counsel. For example, I understand from certain Swiss lawyers that some SAFTs have obligated Swiss foundations to do things that Swiss foundations cannot do, and there may be related enforceability concerns. Some SAFTs may be problematic due to failure to properly or fully describe the token.

3. Some uncertainty may necessarily remain, even with a SAFT. While the idea of “day one utility” as a dividing line may be attractive, as it sounds like it offers a degree of certainty re: whether a token is a security, grey areas remain. Tokens are software /technology and pinpointing exactly when utility exists (and how much utility is required to satisfy that hurdle) requires judgment.

This discussion is only getting started.

[scribd id=360509927 key=key-onIu56UzkwdaVYEYAXmN mode=scroll]

Comment on Recent Regulatory Moves by South Korea & Switzerland Regarding ICOs

Just about every week we have been hearing about regulators in one country or another curtailing Initial Coin Offerings or simply banning them outright. China, perhaps taking the most extreme action, simply banned cryptocurrency exchanges and ICOs effectively crushing the nascent market domestically.

Last week we heard from South Korea, Switzerland and Australia. South Korea banned tokenized offerings following the lead of China. Switzerland was more cautious and softened the announcement  by saying they were supportive of Fintech in general. Australia, a country that wants to be the leading Fintech hub in the region (and perhaps the world) took an even more diplomatic approach that was widely supported by the Fintech industry.

Joshua Ashley Klayman, an attorney with Morrison & Foerster, and head of the firm’s Blockchain + Smart Contracts group as well as part of the WSBA, shared her insight with Crowdfund Insider. Klayman stated;

“The announcement from Switzerland’s Financial Market Supervisory Authority potentially is significant, not because it is different from what other jurisdictions have been saying, but because its message is relatively consistent with other jurisdictions’ guidance. It is significant, among other things, because Switzerland now has stated that certain tokens may be securities. Prior to this guidance, many in the space previously had assumed that Switzerland’s view was that tokens were not securities, in reliance on a court decision that focused specifically on Ethereum.”

Klayman explained that some people active in the space including her team at MoFo and Emma Channing of the Argon Group have been cautioning about the risk of relying on that decision, particularly in the case of tokens that bore very little resemblance to Ether.

“It will be interesting to see whether this guidance will affect Switzerland’s relatively overwhelming popularity to date as a token sale launch jurisdiction, now that it has been clarified that certain tokens may be securities.”

These announcements, in general, have been viewed positively by industry supporters and legitimate companies launching ICOs. Everyone agrees, regulation is needed to encourage a robust, efficient and transparency capital raising ecosystem.

Klayman said;

“On the whole, though, I see the greater clarity and relative consistency of messages from various jurisdictions, such as the U.S., Canada, Singapore, Hong Kong, Switzerland and others, as a net benefit to those navigating the token sale space. Of course, China and South Korea appear to have taken different approaches by announcing bans, but even they noted similar concerns in their guidance.”