Potential legal implications of Proof-of -stake based networks

Transcript

huh okay hello a story for not being able to join you I had very good intention do you feel me well studio is it okay now okay cool anyway I wanted to be with all of you in Paris

but due to whole hype of Corona my kid was not allowed to travel with me so then I decided that we will stay in souk even though we heard the dose so we have some virus here but I hope this is not the main topic of the conference and that you're all enjoying your time and exchanging what is new and water our plans for this year so I have prepared the topic which is definitely a new trend and being a lawyer I feel somehow that I want to share with all of you what is my opinion and what informations

I have collected about potential legal implications of proof of stake based networks so I work as a legal counsel for every foundation for almost a year now and it's been very dynamic and crazy especially since I'm in the industry for almost five years and working only with startups so I have some overview of the industry and opinion and I would like to say that for sure we can somehow think that there are certain trends every year and from ICO bubble which brought us from some kind of FOMO to failure this

year everything is about proof of stake why is it interesting because we are talking about passive income and I think it's a it's very a nice topic to to dive more deeply from the legal perspective we have here is just a short overview water we'll be talking about so here is just a short overview of from the stores taking reverse calm I have prepared presentation maybe a few weeks ago so maybe the data is not correct anymore you can check yourself

because it's really growing on daily basis of course everybody wants to utilize take him to earn crypto rewards and the total market cap of all the coins that are being staked is approximately 111 or maybe maybe even more 12 billion of which eight billion tokens is being locked top five networks they have a majority of their tokens locked and you can see in percentages if you visit the page you can see you can calculate all your potential earnings

and we have dozens of networks already available and of course this year to follow up our polka dot is among them as well that everybody's waiting as well and as we all know that theorem 2.0 is also conic so today everything is about group of states and I hope there is something beyond staking in all this and the people are trying to understand that if all token holders are stickers that not only that that the token will be

diluted but the network will have no long-term success because it to not be able to attract neither businesses or developers this is my modest opinion but I think that we should definitely look beyond staking because this is some kind of life blood of wide adoption so maybe to think about of course yes we like idea of passive income but this is very limited so we can see maybe just to compare it next year this time how many networks is still up and running and how did they develop so to understand the

basic concepts in legal sense of proof of stake we have to narrow it to be able to understand proof of work it is definitely one of the biggest technical debates proof of work versus proof of stake but I'm just a lawyer and I'm not this is out of my scope I advise everyone to do their homework and to do the analysis what are the features of each and what are the benefits of proof of the stake one of the first coins that had proof of stake was already in 2011 I

think that it was proposed peercoin I don't know if it still exists today and what is happening but let's talk a little bit about group of work so one of the most the main feature mechanism is validation of trance and of transaction blocks by volunteer army of miners in proof of state we are eliminating mining so we have to understand what is it being replaced with and to be more abstract here there are like different legal theories behind it and analysis the problem is that we have so many

jurisdictions and global legal prisons that it's it's definitely not easy assignment so that if you expect me to be straightforward here and and to tell you like things are like this and this and this is how you have to do it in order to have some little certainty this definitely doesn't exist my da is to zoom out and to to somehow lead you to do some abstract concepts that weekend one of the potential understanding is I even found a term in one article they call it unchain fetishism it's more like we have a lot

of community members that think that blockchain is absolute and that everything starts and ends up with blockchain it's quite a radical and as a legal practitioner I put I think this would be a topic of separate talk and we could definitely dive in what does it mean and can blockchain be jurisdiction what are the issues and some kind of own chain versus off chain and I mean how we humans operate and work so definitely we cannot transcend ourselves and be completely unchain this

we all have to understand but still we can look at the public blockchain so any network in some more abstract way that it's on some kind of research and voluntary basis and that it doesn't have any legal personality and it can exist as such completely and especially in all of our projects which have a big tendency to show this decentralization in its full power how much is this achievable it's of course up to up to us and up to all the participants in certain metric we can also load

blockchain is a property and then we have some more like down-to-earth correlations with with a real legal system and property law if we would look that the miners as some kind of owners of computer farms which are lending the computing power and in return they get some fee but I would say that this is not some simple and in such interpretations of blockchain we actually have certain flaws that then it brings me to my next

slide where I have a few drawings and diagrams to be more specific so the definition that I just said has its flaw because it's showing us that we have like centralized entity and then that the fee goes out from from blockchain as it goes to miners and between all participants but that would mean that if there is some relationship between the blockchain and and reverse that there should be some kind of contract but if Tyrion definitely doesn't have little personality so that

means that there cannot be any contract so we can cross this down and whoever thinks that you can have a contract with the public network I would like to hear some arguments in favor why would we go that this is some contractual base so it's the same for proof of stakes or any kind of relations because if the network is decentralized if no one is having power over it or can control any activities happening that means that we cannot create any contractual relations and I mean this is good news I would say so we have to make distinction as you can see that Tyrion is not the same as a

Tyrion foundation of course there are legal implications on different topics like who owns github repository are there any intellectual property rights trademarks etc but this is definitely not something that belongs to the public blockchain itself so in short we can definitely not have contracts with networks and this is why I put this little image of ghost as we can say the deuterium or any other network is a little ghost and I actually plan to write some article about it in more detail saying that more precise so you will be able then to read more once

published talking about all these things I didn't mention any other existing jurisdictions because somehow I think its first important to understand the theory that I just explained and as many blockchain participants they already operating across many jurisdictions and trying to find some ways where regulations and legal frameworks are more open to the industry and of course we have more favorable ones or more pushing like us for instance but this

just means that it's up to each person to decide where do you want to operate and why are you choosing certain jurisdiction to establish your entity because somehow everybody is trying to have some legal certainty so therefore all projects have some entity somewhere and many of us is here in Contin doog crypto belly and people wondering why did we choose it and what situations it's one we definitely can say one of the reasons not just political system and of sweets run in general but the country is so small that the dialogue

exists between the industry and its of course they don't have to comply with the EU or other countries so they can bring their own framework of course this this has also some disadvantages because they have come quite far this new world on world level F ATF regulations especially travel rule I don't know if you're familiar with it but it means in short without going into some kind of legal definitions that where the printer goes we follow it so each service provider who operates which crypto has to provide

the data of the person so meaning they are trying even out to create some standards and we already see a few participants like finance working on it to provide solution for this protocol that is supposed to be some kind of proof of ownership of the wallet I know that definitely one side of the industry doesn't like the idea because that means that how how far did we actually move from banks and open systems that we now have crypto which is supposed to have a direct identity behind it but if ATF is here its 2020 a lot of things happened

in the last few years and they will be more restrictive all countries are obligated to implement this in very short period and 15-time on your laundry directive entered into force this year so we definitely have more troubles swimming in between all these regulations especially if you are running exchange businesses or wallet or whatever can be categorized that you're dealing with financial instruments I mean we have from the other day that Germany and confirmed that bitcoin is financial instruments so each jurisdiction is a story for itself so my

advice is what could be like to conclude on this topic is to find as many as possible arguments in favor and against when choosing your own jurisdiction for operations because you have to have some long term view how you see your project developing or where is majority of participants that you work with what are the potential like liabilities for all of them tax implications Switzerland is very expensive definitely so people go to Offshore's as well we're trying to invite but also in malta you can see

that political situation influence the change of prime minister and new one is not so open for blockchain projects so maybe the good days of malta have also ended but this is why you have legal advisors and to help you navigate to follow up with the news and what is happening in each jurisdiction and definitely you can move from each all the time there is no law that is preventing you that you have to stay where you initiate it and you can establish as many entities as you want with any kind of relationship so actually options are unlimited at least in my view and my personal experience but to understand the bottom line is

that blockchain for now we will never have a legal certainty and there will always be some kind of overlapping gray area this is why I choose this picture so that my answer is like great there is no clear view definitely but one of the jurisdictions that I want to say a little bit more because they are already discussing proof of stake there is a proof of stake Alliance who is in some close dialogue with SCC and they are trying to determine what are the requirements to be able to safely

operate the network or staking actually not network but staking as a service under security regulations so we have a situation in staking that we can hold our own asset so we don't have to involve third party as custodian we can have option that we delegate our validation rights or we can choose that we will delegates our validation rights and also our assets for to the third party who will be then providing staking as a service and then we can share the

reward this is the most important case for us regulators now because practically someone is doing stating on your behalf and we have already few institutions interested in that and offering and I think more and more exchanges will be involved in this I mean as a new trend of course especially this year when the rewards are still on the very interesting percentage so somehow it brings us to basic definitions of what is security I mean

I'm sure you have discussed it and it was a hot topic of 2017 during I see a high utility where's the security and who we test and how this all works we test I don't know if you ever read about it or any historical informations that you research it's from 1964 1846 yeah it's almost seventy years old and it was a case of some Florida based businesses which bought some land and then they resell it and lease it back

and it was something about growing oranges butts today with no more oranges we have tokens and we have to understand this that tokens are definitely a novelty for all these security or market and why these regulations are so restrictive has also some historical view and it brings us back to early 1930s after the crash of stock market and when US regulators created this framework which is still valid today but it's very simple and straightforward

it's not so complex it's more like that every investor has to have basic information about what is investing engine and this is how some how things are looked at what who it has the has to determine is what is actually the substance of the some agreement that exists so it is not about how we will what kind of language and wording people use a special encrypted we like to do things in different frames and calling it everything but not investment but unfortunately I can see our hands now and how many people would raise their hands for I really am NOT interested in earning something from staking my tokens

and is it like investment or not of course there is incentive to run the network but I wouldn't vote that it's like 99% of people just interested in that so the definition is of securities here's it enumerates a lot of different but the red one it's investment contract and this one is used whenever it doesn't fit to anywhere else and SEC has very simple rule if it walks like a duck and quacks like a duck it's a duck so as I said earlier we cannot hide it because they will the court when it comes to

that level it will look into the economic background of the agreement in staking we have interesting perspective because in situation when I'm only delegated my validation rights then practically I'm not risking and facing any financial loss the only thing that can happen is that I don't earn reward if my validator is slashed but my main points are still with me so that means that I will not lose anything and this is one of the reasons why we can argue

and the defense that it is not investment contract but if you are in situations with more bonded networks like cosmos where you actually are you have to put your tokens then you if you can lose them then it's a completely different situation because one of the definitions how use regulators to you on the investment agreement that it there has to be a possibility of financial loss so here we are coming a bit closer to the definition of investment agreement of course everything is open

and it will be definitely case-by-case there is no rules each network has different features and it will offer different solutions but I think there is plenty of information available online that each of us can dive into and explore the projects who is behind it how does it work stability etc and this is how it is the one that will bring you a reward that you satisfied if you can even support it like on some kind of philosophical level even better if you believe in success but people definitely see

the story continues this year or even next one there is also more more legal topic about licensing of service taking as the service operators but I think they will also try to fight it because it will be very complex and long-lasting procedures if they will have to get licensed and especially in u.s. with the banking secrecy act that that you have to get licensed as a money service business in integers in each state it will be definitely more expensive that

will induce that the fee is higher so probably be as a potential clients users participants will be less interested to choose that someone does the staking on our behalf at least this is a some kind of a logic that I have behind it so just this is to ensure everything what I managed to find there is really not many resources at least not from a legal world coming on this yet I think we will see how it develops that's it enjoy your time still at ECC and if you

have any legal trouble shootings you can always contact me yeah and thanks I don't know if there is like questions or something they didn't tell me in technical team whether you have this part included but maybe someone comes closer and tells me okay