Not Legal Advice, 9/22/19 – self-proclaimed architect of the “Zug Defence” arrested, ICOBox sued, Section 230 limited by the 9th Circuit

Welcome back to this week’s edition of Not Legal Advice!

Between delivering the keynote at blockchain day of Stamford Innovation Week and getting ready for Crypto Springs, I’ve been pretty busy, so this week’s newsletter is going to be on the short side (a mere 1,800 words). This week:

  1. Self-proclaimed architect of the “Zug Defence” (or “Defense” for Americans) arrested
  2. ICOBox sued for selling unregistered securities, fraud, and operating as an unregistered broker-dealer; Paragoncoin resurfacts
  3.  Enigma v. Malwarebytes: 9th Circuit says Section 230 doesn’t apply to deliberately anticompetitive conduct

1. Self-proclaimed architect of the “Zug Defence” arrested

Last week brought us the news that Steven Nerayoff – early Ethereum advisor, sometimes Ethereum co-founder, and current one-of-those-guys-who-is-on-twelve-different-token-boards, was arrested and charged in the Eastern District of New York with extortion.

Although of course Nerayoff and his alleged co-conspirator, a fellow named Michael Hlady who previously was convicted of defrauding a group of nuns in Worcester, Mass (no, really), are innocent until proven guilty, it suffices to say that the allegations contained in the indictment do not portray either defendant in an especially flattering light.

Of wider significance here from the observer’s viewpoint is the fact that someone with intimate knowledge of the Ethereum Foundation’s early legal strategy and, in particular, the contents of a legal opinion which, according to CoinDesk, is said to have cost $200,000, payment of which Nerayoff reportedly guaranteed with his own money, is now in federal custody.

The issuance of this legal opinion is worth re-examination, at the very least for historical purposes if nothing else. Apart from the obvious fact that $200,000 is rather a lot of money to pay for a legal opinion, the issuance of that opinion – which I presume authorized the sale, otherwise why pay $200k for it – arguably set off the ICO boom as we know it. The fact that Ethereum proceeded with legal air cover and was such a wild, runaway success encouraged other law firms, large and small, to then take a view on subsequent offerings in order to gain market share and marquee clients.

Ethereum was the first of many coin issuers to set up shop in Zug, Switzerland, known now as “crypto valley,” presumably under the theory that Swiss residence and legal structures would immunize them from U.S. law. This tactic, referred to in jest by cryptolawyer OGs as the “Zug Defence,” is rumored to involve establishing a Swiss Stiftung, or foundation, obtaining tax opinions from a Swiss law firm that the token-product is to be treated as a software product for tax purposes, and, in Ethereum’s case, obtaining a second, supplemental opinion which presumably set out the U.S. legal position (if the rumors are true). Although I have not read it, to the extent that opinion authorized the Ethereum pre-sale to occur in the U.S. without requiring the Ethereum Foundation to register the tokens or avail itself of an exemption, it would have been, in my professional opinion, legally incorrect. This conclusion is based on the SEC’s 2018 Paragon and AirFox settlements, which we may presume form the template for all enforcement actions which will follow, and in relation to which the Ethereum pre-sale, in hindsight, does not appear to have been materially different.

Generally speaking, a practitioner who possesses even one whit of conservatism in their bones will tell you that the so-called “Zug Defence” is not much of a defence at all, to the extent that the transaction or scheme touches the U.S.  or captures the U.S.’ attention. Although the statute of limitations for the Ethereum Foundation qua token issuer under the Securities Act of 1933 has run, their operations continue. When a supposed non-profit in Switzerland magically creates $20+ billion out of thin air, you can be sure this does not go unnoticed.

This is accordingly a story to watch.

This marmot is on Mt. Rainier, not in Switzerland. This marmot follows U.S. securities laws.

2. SEC sues ICOBox for selling unregistered securities, fraud, and operating as an unregistered broker-dealer; Paragoncoin resurfaces

In other federal-agencies-on-the-warpath news, the U.S. Securities and Exchange Commission sued ICOBox and its founder last week for allegedly conducting an unregistered coin offering, engaging in fraud in relation to that coin offering, and operating as an unregistered broker-dealer in relation to other coin offerings launched using its platform.

Attorneys can spot plausibly deniable sarcasm from 1,000 yards, and the complaint does not disappoint:

ICOBox proclaims to be a “Blockchain Growth Promoter and Business Facilitator for companies seeking to sell their products via ICO crowdsales” —in other words, an incubator for digital asset startups. A self-described blockchain expert, Evdokimov, has acted as the company’s co-founder, CEO, and “vision director,” among other titles.

The facts of the coin offering and the alleged fraud do not bear repeating here. More interesting from my perspective is how the SEC has built up its claim that ICOBox was acting as an unregistered broker-dealer:

The token sale conducted by at least one of these clients, Paragon Coin, Inc. (“Paragon”), constituted a securities offering under Howey… By actively soliciting and attracting investors to ICOBox’s clients’securities offerings in exchange for transaction-based compensation without registering as or associating with a registered broker-dealer, Defendants engaged in unregistered broker activities that violated the federal securities laws.

SEC v. Paragon Coin, we may remember, was the first major settlement announced between the SEC and an ICO issuer, back in November 2018. Around the same time, the SEC announced settlements with AirFox (unregistered securities offering) and the founder of EtherDelta (for operating an unregistered securities exchange). About 30 days prior to that, the SEC announced its settlement with ICO Superstore, a similar business to ICOBox, for operating as an unregistered broker-dealer.

So we should not be surprised that the SEC is going after ICOBox, nor should we be surprised if the SEC decides to go after other token mills in the future. Interestingly, the SEC appears to have used the cooperation and disclosure obtained in the Paragon exercise to build the case against ICOBox:

ICOBox’s team members highlighted on social media during the offering that ICOBOX had started to work with certain clients including Paragon (referring to it as ICOBox’s “child”), but did not disclose that no ICOBox clients had yet completed any ICOs using its services.

Tl;dr? The SEC is good at a lot of things, but they’re particularly good at playing follow-the-money, and their inquiries will not end with token issuers. They will use what they learn at issuer level to move up the chain to promoters and service providers. It will be interesting to learn what is revealed as they undergo that process.

3. Enigma v. Malwarebytes: 9th Circuit says Section 230 doesn’t apply to deliberately anticompetitive conduct

If you don’t know what Section 230 of the Communications Decency Act is, start here. If you do, recall that Section 230 has two main operative provisions:

  • Section 230(c)(1), which says that publishing platforms and users of publishing platforms are not liable for content created by someone else; and
  • Section 230(c)(2), which basically says that companies can’t be sued for good-faith moderation calls, so if e.g. you’re Milo Yiannopoulos and one of your posts is moderated off of Facebook, if you sue Facebook for it, you will lose.

With regard to each of those provisions, however, these above shorthand definitions are just that, shorthand, and what they gain in comprehension for the layman they lose in terms of the stripping away of the actual, technical language they use. Section 230(c)(2) reads as follows:

No provider or user of an interactive computer service shall be held liable on account of (A) any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected; or (B) any action taken to enable or make available to information content providers or others the technical means to restrict access to material described in [sub-]paragraph ([A]).

The facts of Enigma v Malwarebytes are as follows.

Enigma Software Group USA, LLC, and Malwarebytes, Inc., were providers of software that helped internet users to filter unwanted content from their computers. Enigma alleged that Malwarebytes configured its software to block users from accessing Enigma’s software in order to divert Enigma’s customers.

Malwarebytes and Enigma have been direct competitors since 2008, the year of Malwarebytes’s inception. In their first eight years as competitors, neither Enigma nor Malwarebytes flagged the other’s software as threatening or unwanted. In late 2016, however, Malwarebytes revised its PUP-detection criteria to include any program that, according to Malwarebytes, users did not seem to like.

After the revision, Malwarebytes’s software immediately began flagging Enigma’s most popular programs— RegHunter and SpyHunter— as PUPs. Thereafter, anytime a user with Malwarebytes’s software tried to download those Enigma programs, the user was alerted of a security risk and, according to Enigma’s complaint, the download was prohibited[.]

As a former startup guy, don’t I know that startup competition in the software industry is a fight to the death.

Fortunately, commerce is not a free for all and there are rules and certain standards of fair dealing that companies are expected to follow as they compete. Enigma brought a number of claims under state and federal law, ranging from unfair and deceptive trade practices to a Lanham Act violation of making a “false or misleading representation of fact” regarding another person’s goods. Malwarebytes argued it was immune from the action due to the effect of Section 230(c)(2).

Malwarebytes won at first instance. The 9th Circuit reversed:

The legal question before us is whether § 230(c)(2) immunizes blocking and filtering decisions that are driven by anticompetitive animus.

In relation to which the court found:

Enigma points to Judge Fisher’s concurrence in Zango warning against an overly expansive interpretation of the provision that could lead to anticompetitive results. We heed that warning and reverse the district court’s decision that read Zango to require such an interpretation. We hold that the phrase “otherwise objectionable” does not include software that the provider finds objectionable for anticompetitive reasons…
…if a provider’s basis for objecting to and seeking to block materials is because those materials benefit a competitor, the objection would not fall within any category listed in the statute and the immunity would not apply.

Pretty clear cut ratio there.

Eric Goldman’s treatment of the subject is much more detailed than my own. I recommend it to anyone looking to read further in this case; suffice it to say that I agree with the 9th Circuit, and disagree with Goldman, in that anti-competitive conduct by large tech companies is a growing problem, it cannot have been the intention of Congress to enable unlawful anticompetitive conduct with Section 230 and, at least as far as I am concerned, the natural meaning of “otherwise objectionable,” while extremely broad, does have limits, and, much as one would have a difficult time finding a motorcycle or a plant objectionable, it is conceivable that anti-malware software that is not itself malware might fall outside of those limits.

The opening that is created here is narrow and appears to be strictly limited to anti-competitive conduct, although there is a risk this ruling could be distinguished by new categories of litigants whose user-generated content is excluded without apparent justification from online platforms. I struggle to think whence these claims might arise, given that users of online platforms customarily contract away most of their rights and acquiesce to the platform’s discretion to filter content as it pleases in accordance with their policies (as opposed to the situation in Enigma, where Enigma’s rights vis-a-vis Malwarebytes originated in statute which Enigma did not waive). This of course naturally invites the question of whether states themselves will also try to create new statutory protections for constitutionally protected opinions which, of course, is exactly the thing that Section 230 of the the Communications Decency Act was enacted to prevent. Between Enigma and the EFF’s First Amendment challenge to FOSTA/SESTA, Section 230 jurisprudence over the next few years looks to be anything but boring.

See you next week!

A brief note on the Block’s article “Addressing Preston Byrne’s MakerDAO criticisms”

I was made aware earlier today of a post in The Block, which has been paywalled, by Teo Leibowitz titled “Addressing Preston Byrne’s MakerDAO criticisms.” This piece focused on a number of points I made about MakerDAO during a podcast recording.

I was a little surprised to learn the piece was being published, as I was in The Block’s offices yesterday afternoon recording the Block’s inaugural crypto-legal podcast with my good friend Stephen Palley. I was not aware that I was being interviewed by anyone other than Stephen Palley. Neither was Palley. I certainly was not being interviewed by Leibowitz, who was present in the room, and with whom I exchanged a handshake and perhaps five words over the course of two hours.

To wit, Mr. Liebowitz critiqued remarks of mine that were not yet on the record and in so doing, was front-running the podcast.

This is not Palley’s fault; he is one of my closest and most trusted professional friends and learned about Leibowitz’s article only after it was published, as I did.

To say that I am annoyed with Leibowitz and The Block is an overstatement. It takes a lot to do that. I am, however, disappointed.

Leibowitz was sat about twelve feet away from me at about 7 O’Clock. He was listening intently to our conversation, and as will be evident from the podcast when it is released, he was even invited to join that conversation. He did not do so. Instead, he published a piece in the Block, behind a paywall, in which the perhaps 23-year-old Leibowitz “takes exception to [Preston Byrne’s] empirical misunderstandings of the MakerDAO mechanics,” primarily by reference to two two-year-old, and therefore a little dated, blog posts of mine written at the end of 2017 and in January 2018, tracing the key points I alluded to during the podcast.

For context, I live about 100 miles from New York City, in the countryside. I drove myself to New Haven, took a two hour train ride into the city, schlepped downtown in a cab, did the podcast free of charge, and then repeated the journey back home to assist with making content for an early-stage startup I like and to support my friend who produces it for them.

Adding insult to injury, Leibowitz’s rebuttal is fairly facile as well, and looks like it has been taken from the talking points of the stablecoin set, with whom I am advised he is closely acquainted, even friendly.

I think the majority of stablecoin people are dilettantes with barely enough brainpower among them to ignite a 20-watt bulb, so I don’t particularly care to repeat Leibowitz’s analysis in full or rehash my own, save to say that it is my belief, and the belief of every professional person I know and respect, that MakerDAO is a shitcoin and Dai is a trash fire. The language scheme promoters use to describe it is confusing (e.g. “stability fee” instead of “withdrawal penalty”), the promises they make are overblown, the representations they have made for the scheme have changed multiple times over the past 20-odd months to match the observed behavior of the scheme, and the behavior of the USD peg was and remains highly unnatural, with little evidence of an organic market and considerable evidence of artificial trading activity.

The second-layer solutions being built on top of it are amateurish, even reckless, and the investors funding these solutions and companies seeking to rely on them are as foolish as anyone who believes that repackaged Ether is safer than AAA-rated debt. Which is what these people actually believe.

Addressing the argument that Dai’s stability is supported by legitimate market making activity, Leibowitz’s rebuttal conveniently leaves out the fact that it is difficult to believe, based on the available data, that early “market making” bots were doing anything but wash trading. He writes:

Preston seems to take issue with market makers, who provide liquidity while capturing spreads. Market makers operate at volume in the Dai market. That this is the case is a) a positive for the MakerDAO ecosystem b) a signal of faith in the MakerDAO mechanisms.

In my 35 years of life the practice of market making has not escaped my notice. I do not take issue with market makers or market making. I take issue with the fact, as I explained on the podcast, that in January 2018, on Dai’s largest market, with daily volumes of $2.6 million, the loss of one bot eliminated all but $300 of volume, being 99.9998846% of the volume on that market. I especially take issue with the fact that Rune Christensen explained this away as “a bot going down” and gullible and inexperienced young grasshoppers such as Leibowitz accepted the explanation on faith without bothering to actually do any follow up. 20 months later, I’m still waiting for someone, anyone, to do the follow up.


I am advised by well-placed sources that the Block is willing to offer an apology in long-form. I do not require an apology. Nor do I want one. I am Catholic, and we prefer to exact penance with forgiveness.

In any case. The podcast will be coming out. Palley is a solid dude and my very close friend, and I will be going back on his podcast in the future, as will other interesting people in the crypto-legal space. So definitely give his content a listen. And keep reading the Block, too. Their content is good, their people, including this chap Leibowitz, are talented if unorthodox and they take a more critical view of the space than most. They raise the bar in that respect.

But without getting into too much detail about recent things they’ve said and done, they need to start behaving a little more professionally. I look forward to continuing to contribute on occasion to Palley and Nelson’s Crypto Caselaw Weekly and provide the Block with hard hitting and dynamic, yet tender and somehow ineffably heartwarming comment of a legal nature.

But to be clear, and to conclude, the article in the Block that has my name in the title is the other half of a conversation in which the author was an eavesdropper, had an opportunity to participate, and did not.

Coda – 18 hours later

Let’s be clear about what happened here. I gave an interview and most of my day over to the Block so I could help my friend, Palley, who writes a weekly legal column with them, generate some interesting legal content for his new podcast.

One of the Block’s reporters, who has 90% of his crypto portfolio in Ethereum, with the knowledge and consent of his editor, eavesdropped on that interview and then surreptitiously wrote a hit piece – on the Block’s own podcast guest – seeking to discredit my critique of a thing called “MakerDAO,” which is the closest thing Ethereum has to a killer app. It was released immediately, with my name in the headline, behind a paywall, ahead of the release of that podcast. In the podcast, which will no longer be released, I am highly critical of that “killer app.”

I forgave them for this.

Leibowitz now claims I’m making it all up.

Screen Shot 2019-09-13 at 3.03.15 PM.png


Sometimes you give people the benefit of the doubt and they disappoint you. In this instance, it didn’t take long: after receiving written apologies from the Block’s two editors Mike Dudas and Larry Cermak, and an (entirely unnecessary) apology from my friend Palley who was also deceived, the staffer went right back on Twitter and started firing pot shots to defend himself, rather than doing what he should have done, which is apologize.

It wasn’t Leibowitz’s interview, it was Palley’s. If Leibowitz wanted to discuss anything I was saying, one would hope he’d have enough self-confidence to discuss it face to face, as indeed he was invited to do. One should also hope that he would have the decency and courage to apologize directly instead of leaning on his two editors, one of whom is based in the Czech Republic and was asleep at all relevant times, to do so for him via Twitter DM.

Pity he didn’t.

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!


XRP: the more things change, the more they stay the same

This week, I’ve written a guest post over at The Block in the Crypto Caselaw Weekly column:

Entrepreneurs in the crypto space, or in any space for that matter, are risk-takers and sometimes can be quite cavalier risk-takers. The importance for the legal practitioner advising entrepreneurs on the cutting edge is to be sufficiently confident with one’s handle on the technology or the marketplace that one can ensure that whatever folie à plusieurs has seized the imagination of the market does not also have a firm hold on you.

Read the whole thing.

Also read my blog post from last year, For the last time, Ripple Labs created XRP while you’re at it.

Thoughts on Facebook’s Libra Coin

Permissioned blockchains: where it all began

Facebook’s Libra coin is to be built on a thing called a “permissioned blockchain.”

Permissioned blockchains – i.e., blockchains that are designed not to be decentralized cryptocurrencies but rather are designed to be databases with approved validators, administrators and granular write permissions  – have long been some of the more misunderstood critters in blockchain-land. They have been derided as slow databases, cheap knock-offs of Bitcoin or easy innovation wins for lazy bank tech people with budgets to spend.

The first permissioned chain prototype, however, had nothing to do with money. I should know; my team built it.** It was designed to be a distributed decision-making platform, with a UI like Reddit’s. We called this product Eris. And at the time we described it as follows:

Current free-to-use internet services, from search to e-mail to social networking, are dependent on advertising revenue to fund their operations. As a result, companies offering these services must – to paraphrase Satoshi Nakamoto – ‘hassle their users for considerably more information than they would otherwise need.’ This necessity has skewed the internet toward a more centralized infrastructure and usability system than it was intended….

Where Bitcoin was designed to solve this problem in relation to point-of-sale and banking transactions, [we are] working on solving this issue for internet-based communications, social networking and community governance — bearing in mind that for free internet services such as e-mail, social networking, search and “open data,” intrusion into users’ private lives and the accumulation and centralisation of vast quantities of personal information in centralised silos is not some minor and ancillary nuisance — this is a design imperative for everything that [we are] engaged in. As such, Eris is not another web service; Eris is significantly different because it has been designed and implemented specifically to not use servers.

The Prototype

Put another way, back in 2014, the “permissioned blockchain” was conceived as a tool of liberation from centralized architecture that would allow disparate groups of people in different parts of the world to spin up distributed cryptosystems for discrete processes, arrive at consensus as to the outcome of those processes, and have a cryptographically verifiable record of the means though which those outcomes were reached.

Andreas Olofsson’s People’s Republic of Doug, another early prototype of blockchain permissioning in a non-monetary usecase

Building a big, clunky, global, one-chain-to-rule-them-all permissioned blockchain system is dumb. Such a system will be unscalable and doesn’t accommodate the kind of granular read permissions that you need to implement when you’re trying to maintain even a semblance of user privacy. Private chains obviate the need to use third party services like AWS to run a program for users in different locations. With a chain, a group of users can run a program simultaneously and easily, and can verify proper execution, on their own consumer-grade hardware even if they’re far apart. But in exchange for not using AWS, the people running the program among themselves have to be comfortable showing each other all of their cards.

Put another way, in exchange for getting privacy vis a vis the outside world, you’re required to have radical transparency among your counterparties. If that trade off doesn’t make sense, chances are it wasn’t (and isn’t) a good use case for a permissioned blockchain.

After we released the code for the first permissioned blockchain client in late 2014, I spent the better part of Q4 2014/Q12015 (the pre-Blythe Masters era) pounding pavement in London – literally traipsing around on foot from one bank to the next  – to explain what, exactly, this newfangled blockchain thing was and why it was going to be relevant for financial services business going forward. We managed to pick up one design and build contract here, another one there, but at the time scalable business models in enterprise chains were hard to come by and, to a certain extent, they still are.

Enter Libra

That was a long time and another career ago. Now I practice law in the countryside and occupy my free time shooing marmots away from my plants.

When I heard Facebook was going to launch its own blockchain product, I was initially really excited. It had the potential to be good validation for the permissioned chain thesis. The use of a permissioned chain would permit, for example, seamless value transfer between accounts on Facebook’s various social media properties, such as Instagram and WhatsApp, which would settle out to USD or local currency. Privacy wouldn’t be an issue as Facebook would run all the nodes. Other companies would presumably follow suit and use similar systems to pass data between their own different consumer-facing applications.

But this is not what Facebook built.

I know blockchains well, and there is no reason whatsoever to use a blockchain for Libra. Furthermore, the promises Facebook has made in relation to Libra make no sense if a blockchain is used.

For example, Facebook promises that it will “allow users to hold one or more addresses not linked to their real-world identity” but will also be regulatory compliant. Facebook also tells us Libra will be “a single data structure” that allows validators to “read any data from any time and verify the integrity of that data using a unified framework” but also, in public statements, that the company cares about privacy and that features to “enhance privacy” will be considered over time.

This is nonsense. Design choices have consequences, and when a specification gives, it also takes away. If you permit anonymous transactions you will fail KYC/AML/CFT requirements. If you hold all data forever and allow validator nodes to read it, user privacy simply does not exist.

Keeping in mind the need for global regulatory compliance, an immutable public ledger and data privacy of any sort are incompatible. On the blockchain, every validator has read permissions, ipso facto. Libra is proposing to have 100 corporate validators. With distribution that broad, it might as well publish the transactions in the New York Times.

Not even the most silver-tongued Frenchman can smooth over a pile of bullshit this large.

So here’s what I think

If Facebook had built an app that just allowed in-app, user friendly payments in USD, I could have gotten behind that.

What has been proposed instead is a combination of a licensed version of Liberty Reserve with an ETF, which furthermore proposes to share transactional data with a veritable rogues’ gallery of privacy-abusing tech companies and the VC firms that funded their rise. The marketing plan uses the word “blockchain” to frighten away legislative scrutiny, under circumstances where the scheme clearly has as its aim the destruction of government money and enrichment of Facebook. It is clear enough from David Marcus’ comments today what Facebook wants to do: the company wants to own payments, from the moment someone is paid, to the payments for the advertisements that person is served, to tracking where the payments go and how effective the advertising was, and right back through where the merchant pays its employees and the process begins anew.

Facebook has assembled a stunning array of partners, from Andreessen Horowitz to Uber, whose mantra for the last two decades has been venture-funded loss-leading expansion to establish a monopoly, followed by network effect-reinforced rent extraction once the monopoly position has been secured.

The Circle of Trust

Facebook’s problem, of course, is that it cannot grow any larger – its products are used by more than 1/3rd of all sentient life – so it must grow deeper. See, for example,, a scheme whereby Facebook seeks to become the only means of access to telecommunications available to the global lumpenproletariat. Among those societies which can afford telecommunications, the growth plan is Libra: turn Facebook into the only means of access to commerce.

Just as Uber eviscerated municipal taxi guilds with little regard for regulations and livelihoods, so Facebook will eviscerate small countries, community banks, credit card issuers and small payment processors, in collaboration with industry giants, until it – through its Libra cabal – has the power to determine the terms on which ordinary Americans, and indeed anyone on Earth, can buy goods and services, if our governments let Facebook get away with it.

This will be no ordinary monopoly; it will be neo-feudalism. Presumably the plan is for goods and services sold by the hundred-odd eventual Libra members to be heavily discounted to incentivize people to toss their Amex cards and close their bank accounts. Libra will be hooked  into Stripe, Uber, PayPal, and other companies run by the same bunch of Allbirds-wearing hipsters in a 50-square-mile area of California, with the acquiescence of card giants like Mastercard and Visa, all with the aim of making Libra more attractive than money.

Once money is dead, then the trap will snap shut. Look up the term “Embrace, extend, and extinguish.” This is an old West Coast tech tactic. They’re doing it here just as they have before.

And it won’t stop with dominating commerce. The Valley has long shown a willingness to deplatform businesses, people and ideas of whom or which they disapprove. See Milo Yiannopoulos (banned by Facebook, Twitter, and Coinbase – the latter of which is also a Libra consortium member), Laura Loomer (banned by Facebook and Uber), Alex Jones (banned by everyone), or Linsday Shepherd (banned by Twitter).

The cherry on top – an insult to our intelligence – is that Facebook and its for-profit commercial partners claim that this is a non-commercial public good to bank the unbanked. They point us to the “Libra Association,” notionally a non-profit in Switzerland despite the fact that operating an income-generative money transmission system is by any reasonable measure a for-profit enterprise.

If Facebook raised an army, this would be only slightly more hostile to the people of the United States than what is currently proposed. Big Tech doesn’t share American values and doesn’t care about American users. It doesn’t care about the unbanked. It cares about money. It cares about building defensive moats, i.e., monopolies. And Libra – the tech industry monopolization of global finance – is a phenomenal way to get both free money (the token represents, after all, an interest-free loan from Libra’s users) and a very deep, wide moat, not just for Facebook, but also for every other major category leader/tech monopolist on the planet.

I would have a hard time arguing with anyone who suggested that the Libra scheme, if operational, could possibly meet all of the criteria for a cartel. As proposed, it should not be permitted to exist. Of course it will be, just as all manner of funky commercial activity becomes passable long as the word “blockchain” is included.

In closing

There is no need for a permissioned blockchain here. Facebook should back off the cypherpunk act and just use PostgreSQL. Permissioned blockchains, like all distributed systems, crypto or otherwise, are best used to circumvent Big Tech.

I am hopeful for the future. Today we see seeds of rebellion across the Internet. New payment processors. New social networks. Bitcoin. Facebook is infuriating the people who would otherwise be power users in the name of profits. Their arrogance inspires competitors. I hope they keep doing it. And I predict Libra – the mother of all corporate overreaches – will be the company’s Stalingrad.

I grow increasingly tired of hearing what Big Tech thinks the world should look like. I trust millions of others are starting to get sick of them too. I embrace any decentralized solutions being built immediately, as soon as they cross my desk.

So should you.




A little-known fact is that, just as Satoshi Nakamoto is the mystery-shrouded father of Bitcoin, the father of permissioned blockchains is a quasi-mythical character known only as “Marmotoshi Nakaburrow.” After extensive investigation I have narrowed down his identity to two possibilities:

  • The first possibility is that he is a groundhog named “Doug the Smart Contract Marmot” who lives in Preston Byrne’s back yard.
  • The second is that he is not one man but a group of people. The title “father of the permissioned blockchain” (sorry ladies) can probably be divided up evenly between Monax’s Dr. Tyler Jackson and Casey Kuhlman, Cosmos’ Ethan Buchman and Sweden’s Andreas Olofsson. Preston wrote the copy and signed the checks, so I suppose he played a role too.

Marmotoshi’s identity must remain secret, so the question of whether this blog post is written by Preston Byrne or Doug the Smart Contract Marmot will go unanswered.

All you need to know is that this post was written by Marmotoshi himself.