Stable coins, the rise of custodial solutions and the recent announcement of Fidelity launching an institutional platform for Bitcoin and Ethereum are all designed to make it easier for institutional investors to partake in the cryptocurrency market.
Yet a number of questions arise as the cryptocurrency ecosystem continues to expand its reach to traditional financial markets. Trust must be built among new market participants, countries leading innovation need to respond to legal concerns and actions should to be taken to pave the way for both accredited and non-accredited investors to step foot into the cryptocurrency market.
As a result, lawyers specializing in cryptocurrency related matters have become key players for ensuring the success of the global adoption of digital assets. Three women lawyers in particular are taking action to help define legal uncertainties currently facing the evolving crypto ecosystem.
Establishing Trust Among Market Participants: Sydney Schaub
First and foremost, trust is required as new market participants enter the crypto market. The licensed digital asset exchange and custodian founded by the Winklevoss brothers, Gemini Trust Company, LLC (Gemini), recently announced that Sydney Schaub has joined as General Counsel. Ms. Schaub will focus on tackling new jurisdiction expansion, product initiatives and building Gemini’s in-house legal team, reporting directly to Gemini’s President, Cameron Winklevoss.
At this important moment for the global adoption of digital assets, establishing trust among market participants will be critical for success. Gemini’s leading market surveillance technology and digital asset insurance, coupled with its thoughtful approach to growth and regulation, are essential for creating this trust. I am looking forward to working with my new colleagues at Gemini to build the future of money, Schaub told me.
Schaub joins at a time of incredible growth for Gemini, which recently received approval for the Gemini Dollar, the world’s first licensed and regulated stablecoin. Gemini also recently became the first licensed exchange in the world to offer ZCash upon obtaining approval from the New York State Department of Financial Services (NYDFS).
Ms. Schaub brings tremendous experience working with industry-disrupting, high-growth start-ups to her role as General Counsel for Gemini, said Tyler Winklevoss, Chief Executive Officer of Gemini. Sydney’s reputation as a trusted advisor to business, product and engineering teams precedes her, and that, along with her proven ability of successfully navigating complex deals and strategic partnerships, will prove invaluable to Gemini as our organization continues to expand.
Bringing More Investors To The Crypto Market: Joshua Ashley Klayman
According to Joshua Ashley Klayman, Founder and Managing Member of Klayman LLC, a boutique blockchain-focused law firm based in New York City, certain steps should be taken from a legal standpoint to get more investors involved in the crypto market. While a key focus has been on bringing institutional investors in, Klayman believes that an increasing number of investors from around the world will soon enter the crypto market.
As regulators, the media and the general public become more familiar with digital tokens, my view is that increasing numbers of investors from around the world will enter the crypto market. A few steps that could be taken to promote the involvement of additional investors in the crypto market may include enhanced disclosure in connection with token sales, including use of proceeds, lock-ups, percentage of tokens held by founders, discounts, etc, Klayman told me.
Additionally, Klayman mentioned that clarity concerning how the existing securities laws apply to digital tokens is needed.
We now know that the SEC’s view is that present day sales of Ether are not deemed to be sales of securities, due, among other things, to sufficient decentralization. But, we do not yet know at what point sufficient decentralization is achieved or how, as a practical matter, a token seller would be able to remove itself from reporting and other securities law requirements when its tokens originally were sold as securities. We also need greater clarity, in the form of no-action letters and other guidance, regarding legally permissible approaches where compliance requirements may be less clear.
Navigating Malta’s Cryptocurrency Ecosystem: Veronique Dalli
Finally, countries innovating in the cryptocurrency space also need lawyers to help navigate the evolving ecosystem. Malta in particular has become one of the most innovative countries for cryptocurrency and blockchain related projects. Yet while Malta’s recently passed cryptocurrency, blockchain and distributed ledger technology (DLT) laws have created a sense of legal certainty, grey areas still remain.
Veronique Dalli is a cryptocurrency lawyer based in Malta. Dalli started studying crypto law at the end of 2015, when her law firm, Dalli Advocates, began to receive inquires about cryptocurrency and blockchain applications. According to Dalli, the questions she typically receives deals with licensing requirements in Malta.
It is required to bring all crypto projects to jurisdiction in Malta. It must be understood that the Maltese Government is a sound legal system that doesn’t come up with any surprises once an initial coin offering (ICO) is launched. It has been made very clear in Malta as to what jurisdictions will be at the receiving end of the token generating events issued here. For example, there are jurisdictions where by residents are not allowed to participate in crowd funding. As for investors, I would say that one needs to be careful in the sense of looking at the way ICOs are being advertised – if it sounds too good to be true, then it probably is. When someone comes to Malta to launch an ICO, we look at the white paper very carefully. We see what is proposed in the white paper and then determine if that is being seen in their ICO, Dalli told me.
Other Legal Questions To Consider: Utility Vs. Security Tokens
Security tokens are another area crypto lawyers are finding of interest. In a recent article, it is stated that 2017 was the year of the utility token and that 2018 was the year of realizing the mistake of the utility token. As a result, 2019 will be the year for tokenized securities and the rise of Security Token offerings (STOs).
Yet according to Klayman, there are still many grey areas to consider when it comes to security tokens.
Even if you launch a token sale to U.S. persons and presume that such token sale is a sale of securities, unanswered questions remain. This is because applying the existing U.S. federal securities laws to digital tokens is an imperfect fit. Among other things, security token sales raise important issues relating to flowback of tokens into the United States from regulated and unregulated exchanges worldwide – even if initially tokens were sold only to non-U.S. persons; requirements to file periodic reports with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); risks of inadvertently becoming an investment company under the Investment Company Act of 1940, as amended (the “40 Act”); and compliance with transfer agent and broker-dealer registration requirements.
While security tokens seem to be a growing trend in the U.S., countries like Mata, where regulations are in place, are still seeing a great deal of ICOs. However, according to Dalli, there are still legal uncertainties.
“The concept of utility tokens is still in its initial stages. There could be situations, which are left without a solution. I think it is easier to regulate security tokens than utility tokens. If the asset is introduced as an access to a company’s product, financial authorities are unlikely to investigate it,” Dalli said.