Not Legal Advice, 9/9/19

This is Not Legal Advice.

Not Legal Advice is a new, weekly newsletter-thing I will be publishing every Monday where I discuss three (3) items of interest from the prior week in crypto or crypto-adjacent technology law.

This “newsletter” will be in public, on the blog. I will not do one by e-mail. You get enough e-mail, and I don’t want your e-mail address. So check back here manually every Monday. Or see the RSS link at the bottom of my homepage. Or don’t. Do whatever makes you happy. It’s your life.

I accidentally stabbed myself over the weekend whilst trying to pry apart frozen cheeseburgers with a very sharp knife. This led to a quick ER trip, a tetanus shot, and a Scooby-Doo themed band-aid. As a result, my left hand does not work, so this post will be short.

Down to business. This week:

  1. Binance Gets Serious
  2. The Marshall Islands: All Aboard the Lulz Boat
  3. ConsenSys Rediscovers LLCs

1. Binance Gets Serious

This early profile of Binance’s CEO in Bloomberg caught my eye when it was first published:

Zhao keeps the locations of Binance’s offices and servers secret — making it tough to determine which country has jurisdiction over the company — and he instructs employees to keep quiet about their affiliation with the exchange on social media. He said he never stays in one place for too long, living out of short-term rentals and hotels in Singapore, Taiwan and Hong Kong (where he prefers the Mandarin Oriental or the Ritz-Carlton).

Yikes. This is no way to run a business. Not that it’s slowed Binance down: despite a regulatory rebuke from Japan and being forced to withdraw from the U.S. markets in June, the overseas exchange has still grown into one of the largest exchanges on the planet, if not the largest, and last week announced the creation of a dollar-backed stablecoin in association with Paxos that obtained the blessing of NYDFS. Binance is also planning to return to U.S. markets with its own exchange in due course. 

If the Paxos scheme works, it solves a potentially very big problem for Binance. Overseas exchanges with checkered regulatory histories can have trouble getting solid access to U.S. and European banks. (Even exchanges with relatively good reputations for KYC and the like, such as Coinbase, have recently lost major banking relationships.)

Exchanges that can’t get access to USD or are relegated to the margins of the financial system have attempted numerous workarounds. These include the so-called “stablecoins.” The most prominent of these is Tether, which a number of overseas exchanges, including Binance, use to provide dollar liquidity to their markets.

I query how long Tether can last in this role, seeing as it is under investigation by the Attorney General of New York, and allegedly implicated in shadowy banking (not “shadow banking”) arrangements such as those allegedly conducted by Crypto Capital Corp in relation to which several federal indictments have come down. 

Stablecoins are, legally speaking, a nightmare. The crypto-collateralized or “algorithmic” versions of these products, when not outright Ponzi schemes, are usually structurally very flawed and doomed to fail for one reason or another. Among those that are redeemable at par for a unit of currency held in an insolvency-remote account, such as Paxos and Gemini’s (and now, apparently, Binance’s) offerings, there are some hairy aspects with current implementations around the travel rule and money transmission – particularly if the system is open and, e.g., runs on an ERC-20 that anyone can use, whether they’re KYC’d with you or not. If you want one that runs like a cryptocurrency, you’re going to create liability.

Nor is this a a problem unique to the stablecoins; it’s a regulatory failing common to the entire industry in multiple different contexts (it’s currently possible to withdraw from a Coinbase wallet direct-to-exchange, for example, without Coinbase or the exchange communicating with each other.) I can’t imagine FinCEN hasn’t noticed this, although the U.S. regulatory apparatus has been slow to make any major moves in this area. It’s still early in the stablecoin space.

Whether Binance’s new coin does what Binance needs it to do in terms of granting it access to U.S. dollar markets remains to be seen. This is a development to watch in any case.

2. The Marshall Islands: All Aboard the Lulz Boat

The “Minister In-Assistance to the President and Environment Minister” of the Marshall Islands, population 53,127, writes in CoinDesk:

Blockchain has given us the opportunity to finally acquire monetary independence in a way that reflects Marshallese values. We intend to grasp that opportunity, innovatively and responsibly.

First, the word “blockchain” when used in the singular always requires an article. “The blockchain crossed the street.” “A blockchain went to the mall.” Definite or indefinite, I don’t care.

Second, “Grasping that opportunity” means, at least in terms of what has already been made public about this scheme, launching a $30 million ICO. Flashing back to 2018, when this plan was first announced:

The government reportedly intends to use its ICO proceeds to bolster its coffers ahead of the termination of U.S. reparations payments, which amount to $30 million a year, meant to compensate islanders for the United States using site as a nuclear weapons testing ground in the 1940s and 1950s.

According to CTech, 70 percent of the funds raised will be used to offset gaps in the budget expected post-reparations. Ten percent will be devoted to sustainability projects related to climate change and green energy, and the remainder of the proceeds will be distributed to Marshallese citizens.

And who is orchestrating this scheme?

The bold plan is being spearheaded by Israeli fintech company Neema. It is the brainchild of CEO Barak Ben-Ezer who sought out sovereign nations that do not have their own currency to adopt the idea. The Marshall Islands, despite being a republic since 1982, uses the US dollar as its legal tender.

And what does Neema get from the arrangement, pray tell? Per The Conversation:

The Israeli company Neema will provide the technology and support to launch an initial coin offering (ICO) that is expected to raise $30 million, half of which Neema will keep.

Unless something major has changed from the last time this scheme crossed our desk, that means:

  • The Marshall Islands is launching its own cryptocurrency, the “SOV.”
  • The “SOV” will raise $30 million for government coffers.
  • $15 million of that will be paid to Neema, at least based on third party reviews of the scheme’s terms.
  • Note: charging $15 million for a glorified Dogecoin clone is outrageous.
  • The $15 million left-over after paying Neema will be put at the disposal of the Republic of the Marshall Islands.
  • 70% of that $15 million, or $10.5 million, will go directly into Marshallese government coffers.
  • 10%, or $1.5 million, will be allocated to sustainable energy projects.
  • 20%, or $3 million, will be distributed as a one-time welfare payment to the Marshallese people. That’s $56.46 per person.
  • The SOVs in circulation will be backed by $0 in a country that uses the U.S. dollar as legal tender.

Seems legit! I wonder what SOVs will be worth when they hit the exchanges?

Unsurprisingly, the IMF has threatened to cut the islands off if they proceed with the plan. Which the Marshall Islands shouldn’t. This plan should be abandoned and the Marshallese government should go back to the drawing board.

Marshall Islanders: if you’re reading this, you can do better.

3. ConsenSys Rediscovers LLCs

ConsenSys: everyone’s favorite inadvertently hilarious blockchain tech company. Admit it, behind the scenes, we’ve all had a giggle now and then at the stuff it puts out:

This would all be terribly funny if not for the fact that n00bs who haven’t been through the wars lack the experience to parse marketing from reality, the latter of which is that Ethereum breaks anytime anyone uses it in anything resembling production numbers for even a small app using traditional infrastructure. Ethereum is not going to scale to millions or billions of users or, if it does, it will be wholly centralized on AWS through offerings like Infura rather than being a standalone coin.

Unfortunately, unless and until Ethereum dies it’s likely that we will have to continue hearing from ConsenSys as the company has a rumored war chest in the hundreds of millions of dollars (of pre-mined Ether) which it can spend on disseminating pro-Ethereum propaganda from offices around the planet… and beyond:

Ethereum! In space!
Ethereum! In space!

Comedy gold. Nobody lives in space, and Planetary Resources doesn’t have a spaceship, but in “the months ahead” the Consensys Space Agency’s “deep space capabilities” at their secret orbital launch complex in Williamsburg will “help humanity craft new societal rule systems through automated trust.” Because when I’m on the surface of the fucking Moon, my first concern should be how my Cryptokitty- and Augur-backed multi-collateral Dai is doing on a decentralized exchange used by a few dozen bots.

Anyway. On the less-of-a-space-cadet side of CSys’ operations is a company called OpenLaw. OpenLaw is a so-called “spoke” of the “ConsenSys Mesh,” or what normal people would refer to as a “subsidiary” in the “ConsenSys AG Group” (the structure of the group is fairly opaque, so this is my best guess as to which entity is the parent).

OpenLaw is one of a handful of serious early entrants in the merger of blockchain tech and Legal Tech. Blockchains and legal make sense because verifying that things happened at certain times and in a certain order among adverse parties is more important to law practice than it is to most other disciplines.

Law practice is, however, ripe for disruption and there is a burgeoning industry aiming to do it. Early standouts in traditional-law-land include A16Z-funded Atrium and the mobile app DoNotPayLaw (which claims to be a “robot lawyer” while being owned by non-lawyers and not actually being a law firm… yikes). From blockchain-land, we have CSys’ OpenLaw, Peter Hunn’s Clause, which appears to be more or less a direct competitor to OpenLaw, and Monax, which I used to work for, which was initially an enterprise blockchain firm (indeed, it was the first) but now seems aimed more at on legal process management SaaS.

OpenLaw recently announced an offering called the “LAO.” “LAO” is shorthand for “Limited Liability Autonomous Organization. This is a play on the term “Decentralized Autonomous Organization” or “DAO.”

What’s a DAO, I hear you ask? Well, neo-cypherpunks have long wanted to rid themselves of corporations. They think one can achieve this with code and write software to this end. Because decentralization-uber-alles types are, most of the time, unfamiliar with the desirability and consequences of selecting a legally recognized form of incorporation, “DAOs” that do not follow a well-worn organizational form run the risk of having their legal classification chosen for them by a court or a regulator in the event of a dispute, such as an unincorporated association or a partnership.

It makes sense to organize as a corporation and use software to manage that corporation, as many corporations currently do. Letting the software or “decentralization principles” rather than legal reality dictate the corporate form, as many decentralization evangelists would prefer, is to put the cart before the horse.

A “LAO,” we are told, solves this. The issue is that the “LAO” launch announcement is in fact a proposal to incorporate and provide services for a LLC. They are one and the same, as I explain at length in this blog post.

Strangely, however, the LAO announcement did not contain the term “LLC.” I believe the reason for this is that the use of the name “LAO” makes what would otherwise be a fairly ho-hum Delaware LLC incorporation and corporate services business, like LegalZoom or Wolters Kluwer, seem more cutting-edge than it actually is.

tl;dr: the term “LAO” is branding woo-woo. It has no legal meaning. It’s just an “LLC that buys stuff from ConsenSys.” I pray to the One True Roman Catholic God that we are not forced to endure months or years of panel talks and crypto news articles about this fatuous acronym. Indeed, I hope to never hear or see it again as long as I live.

Not a ferret

Until next week!