Exploring the tech and legal side of Blockchain. A peek behind the curtain of how it works. Presented by Susan Goldsmith and Ash Yadav at whartonclubnj event.

1. We thank our annual sponsors
for their support!

2. Blockchain Bootcamp
Susan Okin Goldsmith
sgoldsmith@mccarter.com @Susan_Goldsmith
Ash Yadav
ashyadav@gmail.com @ashyadav

3. Introduction
• Internet 1.0 – where we were
• Internet 2.0 (2.5?) – where we are
• Internet 3.0 – where we are going, driven by
AI, IoT and BLOCKCHAIN
• The technology
• Some applications
• The legal framework

4. A system
“[Blockchain] is to Bitcoin, what the internet is
to email. A big electronic system, on top of
which you can build applications. Currency is
just one.”
Sally Davies, FT Technology Reporter

5. How does it work?
“Any sufficiently advanced technology is
indistinguishable from magic.”
Arthur C. Clarke

6. Blockchain Basics
• An append-only database - data in a block cannot be altered
retroactively, as the chain breaks.
• A continuously growing list of records, called blocks, which are
linked to one another and secured using cryptography.
• Each block contains a unique link to a previous block (a
“hash”), a timestamp and transaction data.
• “Miners” are in a peer-to-peer network, using an agreed
protocol to validate transactions and generate new blocks in
the chain.

7. Software History
• Internet protocols
– HTTP / HTTPS
• Security measures and encryption
– Transaction is secure
– Data is not secure
• Ownership of digital assets

8. Hashcash – c. 1992 -1997
• Hashcash is a proof-of-work
algorithm, which has been used
as a denial-of-service counter
measure technique in a
number of systems.
• Hashcash was originally
proposed as a mechanism to
throttle systematic abuse of un-
metered internet resources
such as email, and anonymous
remailers in May 1997.
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9. b-money – c. 1998
A scheme for a group of untraceable digital pseudonyms to
pay each other with money and to enforce contracts
amongst themselves without outside help
“I am fascinated by Tim May's crypto-anarchy. Unlike the
communities traditionally associated with the word
"anarchy", in a crypto-anarchy the government is not
temporarily destroyed but permanently forbidden and
permanently unnecessary. It's a community where the
threat of violence is impotent because violence is
impossible, and violence is impossible because its
participants cannot be linked to their true names or
physical locations.” - Wei Dai
http://www.weidai.com/bmoney.txt

10. SHA-256 – c. 2011
• Cryptographic hashing
• Digital Signatures

11. Merkle Tree c. 1979
Hash trees allow efficient and secure
verification of the contents of large data
structures. Hash trees are a generalization of
hash lists and hash chains.
Hash trees can be used to verify any kind of
data stored, handled and transferred in and
between computers. They can help ensure
that data blocks received from other peers in
a peer-to-peer network are received
undamaged and unaltered, and even to
check that the other peers do not lie and
send fake blocks.
https://en.wikipedia.org/wiki/Merkle_tree

12. Bitcoin
A purely peer-to-peer version of
electronic cash would allow online
payments to be sent directly from
one party to another without going
through a financial institution.
Requiring a proof of work to provide the
signature for the blockchain was Satoshi
Nakamoto's key innovation.
White paper 2009:
https://bitcoin.org/bitcoin.pdf

13. Blockchain
Demo

27. Genesis Block

28. 1st Transaction Block
Satoshi Nakamoto -> Hal Finney
On Jan 12, 2009
https://bitcointalk.org/index.php?topic=15
5054.0
On 22 May 2010, Laszlo Hanyecz made the
first real-world transaction by buying two
pizzas in Jacksonville, Florida for 10,000
BTC.

29. Bitcoin – BTC or
• Non-governmental currency
• No bank laws protect you, no government controls it
• Stored value but recently used mostly for speculation
• About 20% of all Bitcoin (4M coins) is lost as cyber
key/security codes have been forgotten, lost or
abandoned

30. Coinbase – Bitcoin price 4/17/2018

31. Coinbase – Ethereum price 4/17/18

32. Ethereum: Smart Contracts, Tokens
• Open software platform based on blockchain
technology that enables developers to build and
deploy decentralized applications (DAPPS).
• Uses a crypocurrency (ether) which is also used for
smart contracts.
• Enables creation of utility tokens [ERC20 standard]
• Ether is also used by developers to pay for
transaction fees and services on the platform.

33. Internet 3.0
• Cryptonetworks
– Open and public (but decentralized)
– Closed and private (but centralized)
• Tokens
– Cryptocurrency / Cryptoassets
• Usage
– Utility token provides digital service
– Investment in service provider

34. Few Applications Actually Available
• Email: Earn.com (purchased by Coinbase)
• Browser: Brave.com
• Insurance: Fizzy.AXA – flight insurance (beta)
• Diamonds – Everledger.com (being replaced
by DeBeers initiative)
• Yahoo! Google ?
• MySpace Facebook ?

35. Many Applications Being Developed
www.icotracker.net

36. Cambrian Explosion?
• It will solve all your problems!
• Not yet: high fees, long confirmation times,
impractical exchanges, fraud, stolen wallets,
government interference.
• Over 1,000 cryptocurrencies exist (“altcoins"); 600+
have market capitalizations of over $100K.
• There’s something happening here, what it is ain’t
exactly clear.
• Cambrian Explosion ended with extinction event.

37. Smart Contracts
• Can be used for self-executing agreements,
e.g., payment distributions among musicians,
compensation to artist in ticket resales.
• Retailers can use smart contracts for issuing
loyalty points / rewards.
• Streaming money while something happens.
• Third party can see something happened but
not know who was involved.

38. Supply Chain Management
• Software programs automate performance through
connectivity (IoT) – IBM working hard on this
• Example: Seller ships product? Funds automatically
transferred from buyer
• How will current contracts law be applied?
• Example: Error in the code? Unilateral mistake;
mutual mistake; or no mistake at all if the actions
taken were consistent with the code

39. More Implementation Worries
• More features and complexity more potential vulnerabilities
• What is the strategic goal? What functionality do you really need?
• Blockchain vendors disclaim as much risk and liability as possible, robust
testing environment must validate and debug before launch.
• What happens when something goes wrong? Need real-time monitoring
and auditing? Plan B: unwind transactions or manually correct entries?
• In customer and vendor agreements, allocate risks and liabilities under
dispute and failure scenarios, attention to termination provisions.
• Consider cross-border transactions, different laws and regulatory
schemes; move to permission-based structure, compliance with GDPR.
• Regulatory Compliance: what processes are being supplanted?
• Transaction Due Diligence – need to include tech specialists / coders.

40. Legal Issues
OMG

41. Short Portion of a Very Long List
• Taxes
• Money laundering / Patriot Act
• Data privacy including GDPR, HIPPA
• Property records (real and IP)
• Inheritance and wealth transfer
• Theft by trusted people (or hackers)
• Effect on Uniform Commercial Code
• International trade

42. Some IP Issues
• Algorithms, ledgers and contracts are not patentable.
• Business methods as such are not patentable.
• Many patent applications in the pipeline, next front
in litigation, many from large banks and insurers.
• Role of whitepapers and prior disclosures.
• Open source code is often used for the platforms,
each has its own terms.
• Who gets sued?

43. Cryptocurrency for Capital Raising
• Initial Coin Offering – ICO
• Lure of raising money non-dilutively, perhaps
without constraints imposed by securities laws and
other regulatory requirements
• Democratization of access to these investments
empowered by crowdfunding
• $1.7 billion raised by selling cryptocurrencies in Q4
2017 alone/more than the dollars invested in
venture capital financings
• Lots of scams, many fraudulent deals
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44. Cryptocurrency Capital Raising (cont’d)
• Utility v. security tokens
o Utility tokens: narrowly defined to permit coin holder to
buy issuer’s goods or services, usually at a discount or with
rewards or other benefits (analogize to prepaid gift cards)
o Security tokens: broader and more generalized in usage,
often include revenue share, profit share, distributions or
interest
• SEC issuing warnings about crypto, applying “facts and
circumstances” test based on the characteristics of the coin to
determine if a coin is a security or a token
• March 2018: SEC says register or seek exemption
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45. Securities Laws Plus Other Agencies
o Utility tokens – sell like a gift card, possibly exempt
o Security tokens – compliance required
− Reg. D – private placements, usually SAFTS (Simple Agreement for
Future Tokens), but narrow distribution/limited numbers of non-
accredited investors, not freely tradeable
− Reg A+ - mini IPO, elegant solution for capital raises of around $8 to
$10M, up to $50M
− Registered Public Offering
o Commodities Futures Trading Commission – requiring compliance for
utility tokens as futures contracts?
o Money transmission license required for “most” ICO issuers (recent letter
of Treasury Dept. Financial Crimes Enforcement Network (FinCEN))
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46. State Law Compliance
• NY – June 2015 Department of Financial Services (DFS)
enacted BitLicense framework, licensing regime covers
substantially all "virtual currency business activity" that
touches New York or its residents
• Massachusetts taking aim at ICOs
• BUT: Utility tokens exempt in Wyoming
https://www.coindesk.com/wyoming-house-approves-utility-token-securities-exemptions-bill/
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47. Markets Start to Mature
• Emerging - professionalized, financially disciplined entities:
o Crypto hedge funds
o Venture capital funds are entering the market
o Will crypto be legitimate asset class for investors’
diversified portfolio?
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48. Warning Signals
• https://icotracker.net/
• Markets can go offshore

49. National Sovereignty Issues
• Japan, Singapore, Switzerland, Malta, Liechtenstein, some
others emerging as nation states strongly embracing crypto
• China, South Korea, India take hard negative stance (but are
furiously submitting patent applications)
• Facebook may issue its own currency, but won’t accept ads for
others. Does Amazon issue crypto?
• Existential threat to state sovereignty?
oTax enforcement
oMonetary policy
oPrimacy of the US $ subject to threat?

50. Security
• Protect your keys!
• Hardware wallets, hard copies
• Authentication
• Recovery keys
• Possession is 100% of the law?

51. Confused? Exhilarated?
Questions and Answers
(Questions? Yes. Answers? Some.)
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