cryptocurrency We recently received an inquiry about whether we had expertise in cryptocurrency law.  It was the first such inquiry we ever received.  We did some research and here are some notes on a subject untouched in our 10 years of writing this newsletter.

We’ve all heard about cryptocurrencies such as bitcoin and others, but what is a cryptocurrency? Wikipedia says a cryptocurrency is:

a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.

The “strong cryptography” referred to is “blockchain” technology. You can’t really talk about cryptocurrency technology without a discussion of blockchains. Now, we won’t even attempt to describe the intricacies of blockchains in the limited space we have here but suffice to say that a blockchain, also referred to as distributed ledger, is a dynamic list of records, called blocks, which are cryptographically linked.

Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data …. By design, a blockchain is resistant to modification of the data. It is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way”.

If you want to learn more checkout this link.  Blockchains have many applications but one of the most prevalent is for cryptocurrencies. Creation, validation, ownership, transfer, and distribution of bitcoin are performed through application of blockchain technology without intervention by third parties such as banks. Theoretically, blockchain technology is resistant to fraud, identity theft and tampering.  Therein lies its appeal to the “financial services, healthcare, retail and public sector.”

One can only imagine the number of legal issues that might arise over using an alternative currency to that authorized by the federal government.  In February 2018, The Harvard Law School Forum On Corporate Governance and Financial Regulation published a review of the important legal issues surrounding cryptocurrencies. The single prevalent issue is whether the Securities and Exchange Commission has jurisdiction over regulation of cryptocurrency coins and tokens. The typical question is whether an offering of a cryptocurrency constitutes an offering of securities, which, in the United States, must be offered and sold consistent with US securities laws. Just to take one example, the SEC investigated a coin offering by Decentralize Anonymous Organization (DAO) over the question of whether tokens issued by DAO should be considered “investment contracts.”  Although the SEC concluded that DAO tokens constituted unregistered offerings of securities, it chose to issue an advisory opinion rather than an enforcement action. According to the Harvard Review article, the opinion served as a “warning to new and existing coin offers and paves the way for private litigation.”

There have also been several class action lawsuits against promoters of cryptocurrencies for conducting unregistered securities offerings and for engaging in fraud. Given that individuals and businesses are investing billions of dollars in cryptocurrencies, litigation is definitely a growth industry in this area of the law.

In the intellectual property field, The World Intellectual Property Organization (WIPO) has championed the use of block chain technology for the management of IP rights.  According to WIPO, use of block chains could provide immutable evidence of IP ownership rights, provide anti-counterfeiting and enforcement rights, and help brand owners enforce their contractual arrangements.

One case drew our attention, Founder Starcoin, Inc. v. Launch Labs Inc.,  was filed in the US District Court for the Southern District of California. The plaintiff, Founder Starcoin, focused its business on the “crypto collectibles” market.  It developed “a method for celebrities to “commoditize themselves, fund their projects, and create a new type of asset via the first security compliant token platform for entertainers.”  In other words, a type of cryptocurrency tied to the identify of celebrities.

Launch Labs, the defendant, developed a game, CryptoKitties, built with blockchain technology “that allows users to securely buy, sell, trade, and breed genetically unique virtual cats.” Founder Starcoin accused Launch Labs of trade secret misappropriation related to the licensing of digital collectibles. The court denied the motion for preliminary injunction on various grounds, including the plaintiff’s failure to provide supporting evidence that “licensing digital collectible based on athletes, entertainers, and celebrities” could be characterized as a trade secret. The case reflects some of the innovative applications created with blockchain technologies.

As we learn more about this interesting area of the law, we will keep you informed.

— Adam G. Garson, Esq.