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A thorough dispute resolution model can help market participants navigate inevitable disputes in the blockchain network and minimize costly litigation.  

By Jenny Cieplak

Some of the biggest challenges in scaling blockchain solutions revolve around setting up an effective governance framework, particularly a component to manage the processes by which disputes among parties are properly settled. A new paper from the World Economic Forum (WEF) and Latham & Watkins explores forward-looking practical options for different dispute resolution mechanisms distilled from case studies, various existing solutions, and blockchain-based dispute resolution protocols.

The paper outlines the following five key insights to help market participants — blockchain professionals, businesspeople, and lawyers — not only plan for disputes related to on-chain transactions, but anticipate disputes that may arise in new and unexpected ways.

US Department of Justice’s sprawling report reveals regulatory enforcement priorities for cryptocurrencies and highlights multi-agency cooperation.

By Susan Engel, Miles Jennings, Benjamin Naftalis, Yvette Valdez, Eric Volkman, Stephen Wink, Douglas K. Yatter, and Deric Behar

On October 8, 2020, the US Attorney General’s Cyber-Digital Task Force of the Department of Justice (DOJ) published an extensive white paper, titled Cryptocurrency: An Enforcement Framework (the Report). The Report gives a detailed overview of legitimate uses of cryptocurrencies, the risks of illicit cryptocurrency activity, and related federal enforcement challenges and response strategies.

A collaborative project led by the Global Blockchain Business Council represents an unprecedented effort to analyze the technical and regulatory blockchain landscape.

By Stuart Davis, Axel Schiemann, Farhana Sharmeen, Simon Hawkins, Max von Cube, Kenneth Y.F. Hui, and Gen Huong Tan

On October 14, 2020, the Global Blockchain Business Council (GBBC) and the World Economic Forum released the 2020 Global Standards Mapping Initiative (GSMI), the first comprehensive effort to assess and map global blockchain standards. The GSMI synthesizes key blockchain data and trends, and provides action-oriented guidance for public- and private-sector stakeholders. Latham & Watkins provided legal and regulatory review for the project.

The GSMI comprises two component reports (Technical Overview and Legal & Regulatory Overview) and an interactive world map of blockchain and digital asset legislation, regulation, and guidance. The survey encompasses data aggregated from 185 jurisdictions, 379 industry groups, and more than 30 technical standard-setting entities. The blockchain and digital asset landscape is mapped across three distinct areas: (i) technical standards; (ii) legislation and guidance by sovereign and international bodies; and (iii) industry best practices and standards.

SEC relief streamlines noncustodial settlement of digital asset trades, but broker-dealer custody is still off-limits.

By Stephen P. Wink, Naim Culhaci, and Deric Behar

On September 25, 2020, the US Securities and Exchange Commission (SEC) issued a no-action letter (the Letter) granting more leeway to registered alternative trading systems (ATSs) that settle trades involving digital asset securities. The no-action relief is intended to reduce operational and settlement risks that ATSs face as they seek ways to provide noncustodial digital asset services, including settlement of trades involving virtual currencies, coins, and tokens.

Latham fintech partners explore tokenization and distributed business models with guest speakers from Energy Web Foundation, ConsenSys, and The LAO.

Tokenization of assets, as well as the innovation of blockchain-based distributed business models, have the potential to unlock asset liquidity, create more efficient, trustless and transparent processes, and reshape systems and entire industries by minimizing or removing the role of intermediaries. What is the current state of projects leveraging these technologies, and what relevant legal issues are arising and should be top-of-mind?

Latham Fintech partner Jenny Cieplak discussed consortium governance on a panel hosted by WEF at the Consensus: Distributed Conference.

Jenny Cieplak, a member of Latham & Watkins’ Fintech Industry Group, recently discussed blockchain consortia governance issues as part of a panel hosted by the World Economic Forum (WEF) at the Consensus: Distributed conference. A replay of the panel discussion is available on the Consensus: Distributed website, and the segment focused on consortia governance starts at minute 59.

The resource aims to help businesses create more resilient supply chains and trusted data by responsibly deploying blockchain technology.

By Stuart Davis, Fiona Maclean, Andrew Moyle, Jenny Cieplak, Mitch Rabinowitz and Masha Smith

The World Economic Forum has launched a new, first-of-its-kind resource — Redesigning Trust: Blockchain Deployment Toolkit (Toolkit) — to help organizations responsibly develop and deploy blockchain technology based on their business needs. The resource aims to address the need for more resilience, trust, and efficiency in global supply chains.

The Toolkit reflects the ongoing efforts of numerous experts at the intersection of law and technology to document blockchain deployment best practices. It contains 14 modules addressing key topics, considerations, and challenges implicated in blockchain deployments. Latham lawyers both drafted and contributed to sections on Consortium Governance, Data Protection, Personal Data Handling, and Legal and Regulatory Compliance.

SEC’s motion for a preliminary injunction is granted, prohibiting delivery of Telegram tokens to purchasers.

By Stephen P. Wink, Shaun Musuka, Carolina Bernal and Deric Behar

On March 24, the Court in the Southern District of New York sided with the SEC and granted an injunction prohibiting Telegram Group Inc. and TON Issuer Inc. (together, Telegram) from delivering Telegram’s digital token, “Grams,” to 175 entities and high-net-worth individuals (Initial Purchasers).

As we previously discussed after the SEC filed its complaint, Telegram entered into agreements with the Initial Purchasers (Gram Interest Agreements), where, in exchange for US$1.7 billion from the Initial Purchasers, Telegram provided a promise to deliver Grams to the Initial Purchasers upon the launch of its blockchain (TON Blockchain).

SEC Commissioner Peirce has proposed a three-year safe harbor for qualifying token projects, but regulatory clarity remains elusive.

By Stephen P. Wink, Carolina Bernal, Shaun Musuka, and Deric Behar

SEC Commissioner Hester Peirce has been a perennial advocate of innovation in the financial services and digital asset space. Continuing that tradition, she unveiled a Token Safe Harbor Proposal in a speech at the International Blockchain Congress on February 6, 2020. The proposal would allow for a time-limited exemption for token-based projects that seek to raise capital to develop decentralized networks. The exemption would permit fledgling networks to operate unburdened by the onerous registration provisions of the US federal securities laws.

Provided that certain standards and disclosure requirements were met, the three-year grace period would ostensibly allow token developers to pursue “sufficient” decentralization of their network from the time of first token sale, such that purchasers of the token would no longer reasonably expect that that token value was being driven by a person or group via managerial or entrepreneurial efforts. Sufficient decentralization has become the holy grail of initial coin offerings (ICOs) ever since the SEC’s Strategic Hub for Innovation and Financial Technology released a framework for assessing whether a blockchain-issued token or digital asset constitutes an investment contract (i.e., security) under the Howey test. (See New SEC Token Guidance: This Is Howey Do It and Crypto — The Pursuit of Sufficient Decentralization.)

It was a year filled with tantalizing tidbits and many loose ends.

By Stephen P. Wink, Cameron R. Kates, Shaun Musuka, and Deric Behar

2019 marked the 10th year since blockchain technology was released into the wild by its still unknown inventor, Satoshi Nakamoto, who mined the first bitcoin block in January 2009. In the intervening decade, blockchain technology has catalysed widespread innovation, some of which has garnered the attention (and consternation) of US regulators. One topic in particular has spawned spirited debate: How should token-based economic activity, especially within the sphere of capital raising and value exchange, be treated under existing US regulatory infrastructure?

While US regulators did not provide any specific answers in 2019, the year was notable for providing the crypto space with additional pieces of the burgeoning regulatory puzzle in the form of agency guidance, enforcement actions, no-action letters, and highly publicized governmental concerns regarding private global stablecoins.