For all the excitement and promise of blockchain-based technology, it’s vital to remember that the very “newness” of a technology can lead to issues of basic legal compatibility. Few if any technologies magically create their own regulatory framework whole cloth, after all. For this reason, technology providers wishing to use the blockchain—or related distributed ledger technology (DLT)—in their own offerings necessarily must pay careful attention to how their particular blockchain-based technology will interact with the established (and evolving) contracts, laws and customer expectations encountered in the marketplace. Here are three of the biggest issues that await providers:
Back in January, news of reversed transactions on the Ethereum Classic (ETC) blockchain (little brother to the main Ethereum blockchain) made headlines and raised concerns about blockchain security. The product of a “51% attack,” these transaction reversals allowed some ETC tokens to be spent twice, a cardinal sin in cryptocurrency called a “double spend,” and the exact problem blockchains were invented to solve.
The use of blockchain and cryptocurrency platforms continues to evolve and expand into new markets. We recently highlighted the new patent issued to tZERO covering blockchain-based methods and systems to trade “digital transactional items,” so it should be no surprise that another company—UK-based VAKT—has developed a blockchain platform for energy commodity trading.
With bitcoin prices rising from the dead over the last few weeks (up nearly 25% from a December 14 low), there’s a degree of renewed excitement regarding blockchain and cryptocurrency. But as general public interest rises and falls, the steady process of creating useful applications and systems for distributed ledger technology continues. The issuing of new patents is one observable part of this process, and as such, it’s worth noting that trading platform tZERO, a portfolio company of the e-commerce giant Overstock, was recently awarded a patent outlining how it may merge legacy trading systems with cryptocurrencies and digital asset technology.
With the World Series upon us, here in Los Angeles, all eyes are on the Dodgers, who are in the hunt for their first championship trophy since 1988, a year best remembered for its epic mustaches and Kirk Gibson’s cinematic, two-out, walk-off home run. What may have gotten lost in the excitement, though, is a unique Dodgers fan giveaway that might also be remembered years from now.
The journey by which the blockchain and its underlying distributed ledger technology (DLT) becomes an everyday aspect of doing business is one of a thousand small steps, many of them legislative and regulatory. In “California’s New Law on Corporate Blockchain Use,” colleagues Sara J. O’Connell and Riaz A. Karamali examine California’s recently signed SB-838, which amends Cal. Corp. Code § 204 (General Corporation Law) and Cal. Corp. Code § 2603 (Social Purpose Corporation Act) to allow certain corporations to use blockchain technology for certain corporate records. (Legislation triggering the formation of a “blockchain working group” that will evaluate the risks and legal implications associated with the use of the technology by state government and California-based businesses was also signed into law.)
As we approach 2020, distributed ledger technologies (DLT) appear likely to have a far-reaching, comprehensive impact on our global economy. But core components of that economy—intellectual property rights in particular—sit in tension with DLT. Copyright owners learned this lesson with the advent of BitTorrent. Patent owners will face similar threats from DLT-based computing platforms executing programs referred to as “smart contracts.” To date, less than 500 U.S. patents have issued with the term “blockchain” in a claim, and none appear to have been litigated. As such, many nuances of DLT patent enforcement have not yet manifested. Nonetheless, even a cursory review of current case law reveals the road to a decentralized utopia is laden with patent-law potholes.
As the blockchain avalanche continues, and ever-increasing numbers of blockchain-based patent applications seek issuance, savvy inventors and practitioners continue probing for patent-eligible space. Blockchain apps ultimately will face the same barriers as other software applications—key among them being new rules on subject matter eligibility. For those hoping to make it past such obstacles, performance-related refinements to blockchain technology may provide a safe harbor.
A recent order by the SEC relating to an initial coin offering (ICO) by Munchee Inc. dealt a blow to the common practice of making a distinction between “utility tokens” and “security tokens.” In doing so, the SEC seems to also reject what our colleagues Daniel N. Budofsky and Robert B. Robbins refer to as the “magic frog” approach, the belief that a token can begin life as a security token (i.e., a magic frog) but at the point that the application and ecosystem go “live,” the token will be transformed into a utility token (i.e., the magic frog becomes a prince) and any securities law restrictions will no longer apply. In their recent client alert, “The SEC’s Shutdown of the Munchee ICO,” they examine this issue in greater detail and explore ways in which it is still possible to carry out an ICO that’s in compliance with the Securities Act.