Decentralized Law Template
Decentralized Law #0 | [Date]
BanklessDAO Monthly Legal Newsletter
[Opening]
Authors: Bankless DAO Legal Guild (authors)
This is the official Legal newsletter of the Bankless DAO. If you were a Premium Member of the Bankless Newsletter as of May 1st 2021 you have been subscribed to this newsletter at launch. To unsubscribe edit your settings here.
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UMA: Making financial markets universally accessible
Interview
Content
Regulation
Content
Developments
Content
Taxation
Content
News and Selected Articles
Content
Action Items
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🏃♀️ Catch up:
🙏Thanks to our sponsor
UMA
UMA can help DAOs achieve their goals by incentivizing their community.
UMA’s KPI options align incentives and build loyalty through airdropping options tokens, which pay out a variable amount of the protocol’s token depending on the KPI metric being tracked, giving the community a powerful motivator and focussing their efforts to collaboratively achieve the protocol's aims. If the metric is not fully achieved, the residual amount is returned to the DAO treasury. The BanklessDAO Legal Guild has used KPI options to crowdsource international legal opinion on the regulatory space that surrounds DeFi.
Some people start directly to operate on-chain and eventually they also have success and generate significant profits. Once people feel satisfied, things become more shadowy, and questions begin to arise: is all this lawful? How can I convert cryptocurrency to fiat currency? Am I ok with taxation? They then contact a lawyer and discover that the activity should have been organized in a completely different way and that many legal steps would have been needed to avoid the difficulties that the project faces now.
Other people try to follow a more virtuous path and decide to get legal advice before the launch of the project, but …
Obtaining proper advice can be incredibly expensive. Also in the early days, crypto projects are often run by international groups and required framing global corporate strategies, with the intervention of many professionals. Not everyone can afford such costs. It is even thought that normally people do not even get the possibility of having knowledge of how a proper legal framework could look like.
This situation is constituting a severe obstacle for the growth of our industry and for the achievement of original and enduring results.
The LexPunK movement, funded by leading DeFi protocols, tackles these issues in preparing open-source legal materials and guidelines, which could directly be used by entrepreneurs and developers willing to launch an activity in the crypto-space. It further advocates for clear and fair rules to help communities to organize themselves and assess legal risks.
Decentralized Law intends to stress the importance of such community driven initiatives in hosting SydLauren for an interview concerning LexPunK and her role within the organization. The present issue will further […]
Although this newsletter may help to familiarize readers with the legal implications arising out of blockchain technology, the contents of Decentralized Law are not legal advice. This newsletter is intended only as general information. Writers’ opinions are their own; therefore, nothing in this newsletter constitutes or should be considered legal advice. Contact a legal expert in your jurisdiction for legal advice.
Contributors: BanklessDAO Legal Guild (BanklessDAO Legal Guild (eaglelex, lion917, hirokennelly.eth, COYSrUS.eth, Trewkat, MDLawyer, ARTICLE AUTHORS)
This is the official legal newsletter of BanklessDAO. You are subscribed to this newsletter because you were a Premium Member of the Bankless Newsletter as of May 1, 2021. To unsubscribe, edit your settings.
🎙 Interview
SydLauren Deploys the Lex_Punk Army to Fight for Builders
CB Image and Syd Banner
Please tell us something about your background and how you started to engage with crypto-legal issues
As a Brooklyn Law 1L, I joined a student incubator for coding and innovation, an offshoot of the NY Legal Hackers Organization. I was quickly immersed in legal tech and saw a potential for a career in creative lawyering.
I wasn’t shy in finding my niche – networking is in my nature – but I had to carve it out for myself. It’s very encouraging to see law schools offering courses at the nexus of the crypto-economy and the law, but my tenure in law school was just a bit too early to enjoy the benefits of the current environment where there are actual opportunities to call yourself a #cryptolawstudent.
In 2018, during the height of the ICO-boom, I attended a fireside chat with former SEC Chairman Jay Clayton (funny enough, I met him on the train at Times Square after the event heading back to Brooklyn and pitched him my law Note). At the time, he claimed that cryptosystems needed to adapt to current securities regimes as opposed to the securities markets adapting to the emerging tech. It was a seminal moment for me – it was obvious that work needed to be done; more participation and education was needed between regulators and industry leaders. It was then that I decided that finding a way to help address the intersection of cryptosystems and law as part of my career was imperative.
For the rest of law school, I spent as much of my time as possible outside of the classroom attending crypto-related events, studying, and writing on crypto and blockchain applications. I helped form the official Brooklyn Law chapter of Legal Hackers – which was also Legal Hackers’ first official student chapter – and interned at Coinbase’s Legal Department and the Legal Working Group of the Wall Street Blockchain Association. These opportunities have resulted in some truly incredible relationships and the ability to forge amazing connections in cryptolaw quite early in my career.
What is the LeXpunK movement?
LeXpunK was developed to bring builders, lawyers, advocates, and users together under the shared ethos that regulatory and policy initiatives that affect DeFi should value openness, transparency, and decentralization; more specifically, we are a builder and community-first group that works in the interest of spontaneous crypto-native communities.
As part of that mission, a major focus in our first six months has been finding decentralized funding models that can encourage lawyers and developers to come together, build in public, open-source the work product, and still get paid for this effort. “Open-source-lawyering” is a concept very foreign to most lawyers – and, aside from our recent efforts, there is no funding for it. Through our bounty program – generously funded by the Yearn, Curve, and Lido communities – we have been able to encourage lawyers and developers to work together in new ways while still getting paid for their time. We use Coordinape to help score each others’ contributions and we encourage participants to work on Github so that anyone can use and improve the resulting work product.
What is your role within LeXpunK?
My title is L3X Ops Commander, a full-time position that I started in October 2021. I moderate our channels and Working Groups, recruit Army members, ideate new work products, and keep current work moving and “on mission”. My role requires me to be very “member-facing”– so, although I spend a good amount of time working on our deliverables myself, I also stay active on Telegram all day working with the Army.
Where do the most hopeful and challenging parts of your work intersect and do you find that tension to catalyze change?
That is a really great question. It is our responsibility to stay plugged into the builder ecosystem and anticipate the need for legal thought/reasoning. At LeXpunK, we focus on delivering legal work product – such as contract templates, standard policies and disclaimers, and model governance charters – that will be useful in practice to the communities we interface with. Legal guilds and organizations typically produce content meant to be read and used by other lawyers. *IANAL* sentiments set in quickly for non-JDs and the thought-leadership remains siloed in the legal field. Bridging the language gap between devs, lawyers, advocates, and users – stewarding our mission – through our work products and conversations, is not an easy feat.
Change is not accomplished alone. We have a fantastic group in the Army who frequently ping me with new ideas and directions, which makes my job a lot easier, however, once we start building – we are focusing on the harder questions. When calls for our various Working Groups go for more than an hour, and I remind our members that all the work that we are doing is funded work, it’s truly inspiring to hear that some of our contributors are not “in it” for the funds, they’re motivated by our mission and how they’re expanding their own knowledge base from the work we’re producing.
How is LeXpunK different from other DAOs that bring together crypto-lawyers and innovative legal technology?
We are closely integrated in the builder-ecosystem; as noted before, Curve, Lido, and Yearn supported and funded our initial slate of proposals. Representatives from their communities remain active in our channels and are instrumental in our decisions for rapid-response initiatives. The LeXpunK Army includes some of the most technically proficient practitioners in the space, many who contribute to other grass-roots, crypto-advocacy/cryptolaw driven groups, which allows for collaboration from all ends of the ecosystem.
Many well-known, but traditional, crypto advocacy groups publish guidance papers, reports, and commentary, calling for regulatory clarity or share policy recommendations. We feel we are uniquely positioned by embracing autonomous lawyering: law is a public good and should be available in an open source environment. We are developing new legal standards and protocols for DeFi developers to utilize in building projects. In some ways, we’re building a new lexicon that incorporates technical functioning of a cryptosystem to best fit existing regulatory regimes. We are building composable governance pieces to form industry standards. To my knowledge, we’re the only group that functions with an autonomous lawyering ethos.
Can you describe the scope of LeXpunK’s current projects?
Right now, we have five active working groups, noting many have BanklessDAO member contributors! Since launching our funded proposals in October, we’re focusing on DAO Structure & Risk Mitigation (specifically in our DAO Defense WG, DAO Model Foundation Structure WG, and DAO Coop WG), Policy/Legal Position Papers (MiCA Commission’s Proposal) and Model Legislation/Regulation (SEC Disclosure Proposal).
Our DAO Structure and Risk Mitigation groups are drafting model forms, whether it be a model Joint Defense Agreement through which DAO contributors can set the stage to share legal counsel even though they do not work for a single company, innovating coop legal engineering for DAO members, or drafting Caymans and offshore model agreements, and providing supplemental explanatory guides and resources for organic use.
Our MiCA WG is comprised of top crypto lawyers from the EU who are drafting a guidance paper to clarify MiCA’s problem areas. They are looking into the distinction between investment tokens, payment tokens, and utility tokens by providing guidance on terms "issuer," "issuance" and potential for hybrid use tokens. They are also analyzing "asset-referenced payment tokens" and understanding whether non-custodial DeFi protocols would undergo the rules on crypto-asset service providers.
Our SEC Disclosure Proposal is crafting an offering exemption coupled with a disclosure framework to provide a basis for issuers seeking to make token distributions in a compliant way. We’re also drafting Safe Harbor X which will serve as a carve out to this proposal (our draft is currently out and we are seeking feedback!)
Suffice to say, autonomous lawyering takes time. We’re looking forward to rolling out these deliverables by the end of Q1. Expect Us!
Where is LeXpunK positioning itself for the future?
In the near term, following the roll out of our active Working Group deliverables, we are positioning ourselves to focus on more public goods efforts for DAOs and DeFi communities. We also have interest in funding proposals with an English/Common Law thesis, along with IP dedicated groups, and “legal tools.”
As we grow, we will be building out our partnerships with other similarly situated, grass-roots organizations. LeXpunK is just over six months old, with over 200 members in the Army, spanning the globe. As I noted myself in 2018, and as many knew prior, as the crypto-economy continues to soar and builders develop ground-breaking projects, there will always be room for open-source, collaborative efforts. At LeXpunK, we will continue to secure the relationship between builders and lawyers so that we can ensure a viable and legitimized ecosystem.
🏛 Regulation
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The International Swaps and Derivatives Association (ISDA) recently published a paper on the development of contractual standards for crypto-based over-the-counter (OTC) derivatives. A derivative is a financial product the value of which is linked to an underlying asset (such as an option to purchase BTC on a certain date at an agreed price). Exchange-traded derivatives, such as BTC futures and options, are standardized "off the shelf" products that can't be varied or tailored. OTC derivatives, on the other hand, allow parties flexibility to tailor a transaction to their particular objectives. For example, if you are paid in BTC but have obligations in ETH, you could hedge your pricing risk by entering into a derivative (a swap) that would pay out on the settlement date if BTC had declined sufficiently relative to the price ETH (on the other hand, if the price of BTC had increased relative to ETH, you could up having to pay your counterparty). You could also enter into a swap for speculative purposes -- if you think the flippening is definitely happening in 2022, a BTC/ETH swap would be one way to profit on that view if it turned out to be correct. Having access to OTC crypto derivatives, particularly when combined with automated smart contracts that can do the calculations, will provide traders and investors with a much broader range of investment strategies.
Standard contractual documentation from ISDA will be key to driving the availability and development of OTC crypto derivatives. ISDA creates templates that parties can use for the terms that will apply on their obligations to each other and how they may change over time, how and when payments and deliveries must be made to each other, and other terms such as close-outs and netting, contract termination, and disputes. The parties are free to vary the standard terms, but starting from a template streamlines their negotiations and reduces the risk of protracted disputes. Instead of having their lawyers wordsmith every bit of boilerplate, the parties instead can focus on the key economic terms of their transaction.
ISDA laid the foundation for crypto derivatives in 2019 with the publication of guidelines for using smart contracts in derivatives. The focus, however, was on derivatives on traditional underlying assets such as foreign exchange and not on crypto assets. Derivatives are heavily dependent on conditional logic and formulas that are well-suited to automation. For example, if one party fails to deliver or pay as required, the other party may have the right to terminate or close out the contract. The contracts have detailed provisions on exactly which events have consequences and how and when the parties must pay or deliver to the other as a result of an event. Oracles can be established in advance in a distributed ledger to provide external data (such as the bankruptcy of one of the parties) to enable the smart contract to determine whether a particular event has occurred so that the contract code can perform as agreed. Automating the performance of derivatives may reduce costs and the risk of human error in derivatives and is a critical step towards the development of crypto OTC derivatives; however, the guidelines also recognized that some complex legal provisions may be difficult to automate. As the industry and technology develops further, the reliability of transaction data and protocols on valuations should continue to mature and promote more automation.
ISDA is now planning to bring together industry participants to establish standardized contractual terms for derivatives that reference a crypto-asset as an underlier. The standard terms will have to take into account the multiple technology and market-driven events that could disrupt a crypto derivative, such as hard forks, airdrops, cyberattacks, regulatory changes, and availability of reliable pricing data, as well as the valuation of assets needed for determining payments, close-outs, and collateralization. Since there is generally no single venue for trading of a specific crypto asset, pricing can be less reliable and subject to manipulation. Other issues to consider are the impact of price volatility, transaction fees, interaction with ISDA templates and master agreements, and using crypto assets as collateral. ISDA plans to focus on native crypto assets such as Bitcoin and Ether in 2022 and consider other assets and asset-referenced assets (such as stable coins like DAI) in 2023 and beyond.
The development of standardized terms for crypto-based derivatives, when combined with automation of performance through smart contracts, has the potential to fundamentally disrupt financial markets. However, the uncertain regulatory environment, particularly in the US, remains a stumbling block, and has led to centralized exchanges such as FTX, Binance, and DYDX refusing to offer derivatives to U.S.-based customers. But as interest in these products continues to grow and the infrastructure continues to mature, it seems inevitable that both decentralized globally available protocols and regulated centralized platforms will find innovative ways to meet investor demand.
⚖ Developments
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The Virtual Real Estate Revolution
House hunting can be a nightmare. From searching and visiting countless properties, choosing the right fit, signing the promissory sale and purchase agreement, getting funding ready and, finally, signing the deed, the entire process can take months, if you are lucky. Real Estate companies usually help you during this journey and, in compensation, they get a percentage of the consideration paid for the asset.
Now, imagine having a similar company onboarding you to the world of Virtual Real Estate, that is, digital plots of land in the Metaverse, where you can build virtually anything (no pun intended). In Mid-December, a Portuguese Traditional Luxury Real Estate company (Fine & Country Portugal) partnered with Exclusible, to explore marketing opportunities in the digital space so as to attract high net-worth individuals and digital nomads to premium real estate in Portugal. This is believed to be the first partnership of the like, and it seems to be a clever way to bridge Virtual Real Estate investors to the world of physical Real Estate investing.
Legal issues in a virtual real estate world
While we are still trying to resolve the myriad of legal issues presented by Web 2.0, adding the Metaverse to the picture certainly makes things even more complicated.
One of the widely debated topics between legal practitioners in the era of Second Life and Everquest was the nature and ownership of virtual property. At the time, non-fungible tokens (NFTs) were a technology no one could have predicted and the relationship between operators and players was governed by end-user license agreements where users where granted the right to use the software but any and all intellectual or industrial property rights, which players could possibly be entitled to, were assigned to or retained by the virtual world operators.
However, nowadays, one may argue that NFTs can represent someone’s ownership of a virtual asset. Accordingly, I could own an NFT of a virtual museum in a Metaverse where I display my digital art NFTs and be confident enough to know that such virtual museum and art are my property that I can therefore use, exclude others from, and alienate or transfer such digital assets, right?
Not quite. The legal concept of ownership in a virtual world can have a very different meaning to that same concept when applied to a physical asset in the physical world. In the latter you can have property rights over tangible property and intellectual property, which may be separately or jointly owned, whereas, online, since everything is intangible, one can only possess intellectual property over its digital assets, insofar as the applicable law deems it to be protectable by intellectual property rights. Moreover, these rights originally belong to the creator, only if assigned may these belong to others.
Hence, when NFTs come into play, the conclusion that may be reached is that things have not changed a lot with Web 3.0. Most NFTs are intended to merely evidence the identity of the creator of such digital asset (serving as a digital certificate of authenticity) while some may also grant the holder a license to use and enjoy such asset, similar to what the end-user license agreements did.
By applying these concepts to virtual real estate, it may be argued that the owner of a virtual plot of land does not actually have any property right associated with such virtual asset. Instead, the NFT holder acquires a certificate that such plot of land belongs to a certain Metaverse and that he/she is granted the right to use and enjoy such plot of land as he/she pleases. It is, in fact, a right to use the intellectual property of a third party.
In practice, this means that although I may be the sole holder of an unique NFT representing a clearly identifiable plot of digital land, in fact, I may not be permitted to sell, publish, reproduce, commercialize or allow others to use any of the software associated with such virtual asset.
Will this be enough?
In 2021 alone, The Sandbox's user base grew five-fold, reaching 500,000 wallets, while also having over 30,000 monthly active users, about half of whom spend more than an hour per day on this Metaverse. Users are building, creating businesses, transacting and interacting with each other. In addition, brands are entering into Web 3.0, providing professional services and opening virtual stores.
With such inbound of users and innovation, maybe the law will have to adapt and be amended so as to create a concept of property in the virtual world, which might have to mean something entirely different from the legal concept we are familiar with. It is undeniable that disputes will arise in the Metaverse and that legal practitioners will have their hands full, notably since these may be entirely new from those typical disputes in the physical world lawyers are used to.
It is unlikely that debates regarding the property of a NFT will arise, at least concerning those which are registered in sufficiently decentralized blockchains. However, with the current state of affairs, we can envisage disputes over intellectual property created in the Metaverse, which may affect virtual real estate assets.
Conclusion
One would certainly welcome having some similar help when acquiring virtual real estate as Traditional Real Estate companies provide in the process of acquiring physical properties. PwC Hong Kong has already acquired a plot of land in The Sandbox in order to provide advice to clients who pretend to enter into the Metaverse, and it would not be a surprise if many followed.
While users are tempted with the scarcity of virtual real estate, businesses are leveraging on the fact that virtual house hunting can be a nightmare for newcomers. A buyer beware approach may not be perfectly fitted for this ecosystem and the lack of a clear regulatory framework or, at least, some developments in the concept of ownership of virtual assets will definitively impair the Metaverse from getting the credibility stamp it may need to reach universal adoption.
Latin America’s Tryst with Cryptocurrency
Cryptocurrency as a concept was exclusively theorised in the United States of America. However, its adoption has not been exclusive to the nation. Latin America and APAC have led the regional crypto adoption race posing a challenge to the American hegemony over crypto assets. As compared to 6% Americans, 16% Columbians indicate transacting in crypto assets. Latin America was largely colonised by Portugese, British, French and Spanish till the 19th Century and was largely exploited for its labour and natural resources. During the 20th century, United States of America’s government used its interventionist agenda to control the region by creating shadow states bound to fail. Today, due to prolonged historical marginalisation by the west, Latin American nations lag behind the US and Europe in terms of economic development. However, for the first time in recent history, Latin America has surpassed the wester powers in terms of innovation by being far ahead in terms of adopting decentralised finance.
Figure 1.1 [Source: Statista Global Consumer Survey, 2021]
Due to the combination of political instability, lack of foreign direct investment, import penetration and prolonged pandemic, Latin American currencies have seen major devaluation in recent times. For example, the inflation rate in Argentina has been close to 50% during the last three years. Interestingly, Argentina also has the third highest cryptocurrency adoption ratio. As countries like Venezuela and Argentina saw their national currencies crumble, the citizens of these nations have turned to cryptocurrency as a source of economic security. It can be observed that a nation’s rate of cryptocurrency adoption is inversely proportionate to the strength of its national currency.
Twitter’s ex-CEO, Jack Dorsey recently stirred a controversy by expressing that USA’s web3 ecosystem is a venture capitalist enrichment scheme. Such involvement of institutional investors defeats the decentralised nature of cryptocurrencies as retail investors are unable to own the ecosystem built for everyone. According to Figure 1.2, Latin America is the leading region in terms of retail market participants. The high ratio of cryptocurrency adoption by retail investors as compared to institutional investors is a strong indicator that the spread of adoption is more equitable. Due to widespread adoption and the goal of accelerated growth, Latin American nations have been forced to undertake regulatory innovation. In September 2021, El Salvador became the first nation-state to recognize Bitcoin as a legal tender. While this development was appreciated by crypto asset enthusiasts, the International Monetary Fund (IMF) strongly opposed the decision citing concerns about anonymity and volatility associated with the world’s largest cryptocurrency by market capitalization.
Figure 1.2 [Source: Cambridge Judge Business School, 2020]
The El Salvador authorities developed a special ‘Chivo Wallet’ to facilitate transactions and even gave a USD 30$ one-time bonus to accelerate adoption. In November 2021, El Salvador’s President Bukele stated that the government is planning to build the world’s first “Bitcoin City”, which will be a tax-free region to attract foreign investors. However, Value Added Tax will be collected to pay for the municipal costs. Such developments will be facilitated through 20 draft laws covering aspects such as Bitcoin Bonds worth more than a billion USD which are being introduced to build the Bitcoin City. It will function like a special economic zone that will also aim to achieve zero CO2 emissions. Politicians in Argentina, Paraguay, Brazil and Panama have supported El Salvador’s decision over social media. In December 2021, Paraguay’s Senate approved a bill to regulate the crypto-asset industry. A licensing regime has been introduced for mining activities in order to leverage the nation’s surplus electricity produce. The bill will become a law after a discussion by Paraguay’s Higher law-making body (Chamber of Deputies) in 2022. In June 2021, a lawmaker from Panama, Gabriel Silva stated that he is looking forward to drafting a law to facilitate transactions in cryptocurrency. Similarly, Mexico is home to one of the world’s largest cryptocurrency exchanges, Bitso and one of its largest banks, Banco Azteca has hinted that they are open to exploring the possibility of facilitating transactions in cryptocurrency.
It is important to note that Latin America’s journey with crypto assets has not been smooth. 91% of El Salvador’s citizens still desire payments in USD and Chivo Wallet only saw mass adoption for the signup bonus. In December 2021, 50 complaints were identified by El Comisionado authority about missing cryptocurrency from various Chivo Wallets. It has also been alleged that politicians support crypto assets for the ease of corruption. Besides such allegations, the country’s president continues to make factually unverified predictions. Bolivia is the first Latin American nation to ban crypto assets and Ecuador is also moving towards strict regulations.
Cryptocurrencies are an excellent alternative for devaluing currencies which are result of unstable and negligent governments. Latin America’s experimentation, adoption and innovation with respect to cryptocurrencies is indicative of the fact that decentralised finance is meeting the needs of its targeted audience. Being an instrument of financial inclusion cryptocurrency is serving the digitally literate (but unbanked/underbanked) population of Latin America. As the abovementioned research indicates, it is advisable that national governments in the Latin American region should overcome their insecurities about economic sovereignty and regulate crypto assets to facilitate innovation to fuel financial inclusiveness instead of prohibiting it.
Lex_Punk Army Deploys | Decentralized Law #3 | January 19, 2021
BanklessDAO Legal Newsletter
Dear Crypto-Legal Observers,
Every person familiar with the blockchain industry knows that crypto regulations are incredibly complex: they involve different branches of law, ranging from civil liability, to corporate and securities law. Projects spring from the mind of talented people who initially only think about their technological or artistic work and dream to impact the web 3.0 dimension. Once they have reached confidence about the quality and originality of their ideas, things could become more difficult in two different ways.
Some people start directly to operate on-chain and eventually they also have success and generate significant profits. Once people feel satisfied, things become more shadowy, and questions begin to arise: is all this lawful? How can I convert cryptocurrency to fiat currency? Am I ok with taxation? They then contact a lawyer and discover that the activity should have been organized in a completely different way and that many legal steps would have been needed to avoid the difficulties that the project faces now.
Other people try to follow a more virtuous path and decide to get legal advice before the launch of the project, but …
Obtaining proper advice can be incredibly expensive. Also in the early days, crypto projects are often run by international groups and required framing global corporate strategies, with the intervention of many professionals. Not everyone can afford such costs. It is even thought that normally people do not even get the possibility of having knowledge of how a proper legal framework could look like.
This situation is constituting a severe obstacle for the growth of our industry and for the achievement of original and enduring results.
The LexPunK movement, funded by leading DeFi protocols, tackles these issues in preparing open-source legal materials and guidelines, which could directly be used by entrepreneurs and developers willing to launch an activity in the crypto-space. It further advocates for clear and fair rules to help communities to organize themselves and assess legal risks.
Decentralized Law intends to stress the importance of such community driven initiatives in hosting SydLauren for an interview concerning LexPunK and her role within the organization. The present issue will further […]
Although this newsletter may help to familiarize readers with the legal implications arising out of blockchain technology, the contents of Decentralized Law are not legal advice. This newsletter is intended only as general information. Writers’ opinions are their own; therefore, nothing in this newsletter constitutes or should be considered legal advice. Contact a legal expert in your jurisdiction for legal advice.
Contributors: BanklessDAO Legal Guild (BanklessDAO Legal Guild (eaglelex, lion917, hirokennelly.eth, COYSrUS.eth, Trewkat, MDLawyer, ARTICLE AUTHORS)
This is the official legal newsletter of BanklessDAO. You are subscribed to this newsletter because you were a Premium Member of the Bankless Newsletter as of May 1, 2021. To unsubscribe, edit your settings.
🎙 Interview
SydLauren Deploys the Lex_Punk Army to Fight for Builders
CB Image and Syd Banner
Please tell us something about your background and how you started to engage with crypto-legal issues
As a Brooklyn Law 1L, I joined a student incubator for coding and innovation, an offshoot of the NY Legal Hackers Organization. I was quickly immersed in legal tech and saw a potential for a career in creative lawyering.
I wasn’t shy in finding my niche – networking is in my nature – but I had to carve it out for myself. It’s very encouraging to see law schools offering courses at the nexus of the crypto-economy and the law, but my tenure in law school was just a bit too early to enjoy the benefits of the current environment where there are actual opportunities to call yourself a #cryptolawstudent.
In 2018, during the height of the ICO-boom, I attended a fireside chat with former SEC Chairman Jay Clayton (funny enough, I met him on the train at Times Square after the event heading back to Brooklyn and pitched him my law Note). At the time, he claimed that cryptosystems needed to adapt to current securities regimes as opposed to the securities markets adapting to the emerging tech. It was a seminal moment for me – it was obvious that work needed to be done; more participation and education was needed between regulators and industry leaders. It was then that I decided that finding a way to help address the intersection of cryptosystems and law as part of my career was imperative.
For the rest of law school, I spent as much of my time as possible outside of the classroom attending crypto-related events, studying, and writing on crypto and blockchain applications. I helped form the official Brooklyn Law chapter of Legal Hackers – which was also Legal Hackers’ first official student chapter – and interned at Coinbase’s Legal Department and the Legal Working Group of the Wall Street Blockchain Association. These opportunities have resulted in some truly incredible relationships and the ability to forge amazing connections in cryptolaw quite early in my career.
What is the LeXpunK movement?
LeXpunK was developed to bring builders, lawyers, advocates, and users together under the shared ethos that regulatory and policy initiatives that affect DeFi should value openness, transparency, and decentralization; more specifically, we are a builder and community-first group that works in the interest of spontaneous crypto-native communities.
As part of that mission, a major focus in our first six months has been finding decentralized funding models that can encourage lawyers and developers to come together, build in public, open-source the work product, and still get paid for this effort. “Open-source-lawyering” is a concept very foreign to most lawyers – and, aside from our recent efforts, there is no funding for it. Through our bounty program – generously funded by the Yearn, Curve, and Lido communities – we have been able to encourage lawyers and developers to work together in new ways while still getting paid for their time. We use Coordinape to help score each others’ contributions and we encourage participants to work on Github so that anyone can use and improve the resulting work product.
What is your role within LeXpunK?
My title is L3X Ops Commander, a full-time position that I started in October 2021. I moderate our channels and Working Groups, recruit Army members, ideate new work products, and keep current work moving and “on mission”. My role requires me to be very “member-facing”– so, although I spend a good amount of time working on our deliverables myself, I also stay active on Telegram all day working with the Army.
Where do the most hopeful and challenging parts of your work intersect and do you find that tension to catalyze change?
That is a really great question. It is our responsibility to stay plugged into the builder ecosystem and anticipate the need for legal thought/reasoning. At LeXpunK, we focus on delivering legal work product – such as contract templates, standard policies and disclaimers, and model governance charters – that will be useful in practice to the communities we interface with. Legal guilds and organizations typically produce content meant to be read and used by other lawyers. *IANAL* sentiments set in quickly for non-JDs and the thought-leadership remains siloed in the legal field. Bridging the language gap between devs, lawyers, advocates, and users – stewarding our mission – through our work products and conversations, is not an easy feat.
Change is not accomplished alone. We have a fantastic group in the Army who frequently ping me with new ideas and directions, which makes my job a lot easier, however, once we start building – we are focusing on the harder questions. When calls for our various Working Groups go for more than an hour, and I remind our members that all the work that we are doing is funded work, it’s truly inspiring to hear that some of our contributors are not “in it” for the funds, they’re motivated by our mission and how they’re expanding their own knowledge base from the work we’re producing.
How is LeXpunK different from other DAOs that bring together crypto-lawyers and innovative legal technology?
We are closely integrated in the builder-ecosystem; as noted before, Curve, Lido, and Yearn supported and funded our initial slate of proposals. Representatives from their communities remain active in our channels and are instrumental in our decisions for rapid-response initiatives. The LeXpunK Army includes some of the most technically proficient practitioners in the space, many who contribute to other grass-roots, crypto-advocacy/cryptolaw driven groups, which allows for collaboration from all ends of the ecosystem.
Many well-known, but traditional, crypto advocacy groups publish guidance papers, reports, and commentary, calling for regulatory clarity or share policy recommendations. We feel we are uniquely positioned by embracing autonomous lawyering: law is a public good and should be available in an open source environment. We are developing new legal standards and protocols for DeFi developers to utilize in building projects. In some ways, we’re building a new lexicon that incorporates technical functioning of a cryptosystem to best fit existing regulatory regimes. We are building composable governance pieces to form industry standards. To my knowledge, we’re the only group that functions with an autonomous lawyering ethos.
Can you describe the scope of LeXpunK’s current projects?
Right now, we have five active working groups, noting many have BanklessDAO member contributors! Since launching our funded proposals in October, we’re focusing on DAO Structure & Risk Mitigation (specifically in our DAO Defense WG, DAO Model Foundation Structure WG, and DAO Coop WG), Policy/Legal Position Papers (MiCA Commission’s Proposal) and Model Legislation/Regulation (SEC Disclosure Proposal).
Our DAO Structure and Risk Mitigation groups are drafting model forms, whether it be a model Joint Defense Agreement through which DAO contributors can set the stage to share legal counsel even though they do not work for a single company, innovating coop legal engineering for DAO members, or drafting Caymans and offshore model agreements, and providing supplemental explanatory guides and resources for organic use.
Our MiCA WG is comprised of top crypto lawyers from the EU who are drafting a guidance paper to clarify MiCA’s problem areas. They are looking into the distinction between investment tokens, payment tokens, and utility tokens by providing guidance on terms "issuer," "issuance" and potential for hybrid use tokens. They are also analyzing "asset-referenced payment tokens" and understanding whether non-custodial DeFi protocols would undergo the rules on crypto-asset service providers.
Our SEC Disclosure Proposal is crafting an offering exemption coupled with a disclosure framework to provide a basis for issuers seeking to make token distributions in a compliant way. We’re also drafting Safe Harbor X which will serve as a carve out to this proposal (our draft is currently out and we are seeking feedback!)
Suffice to say, autonomous lawyering takes time. We’re looking forward to rolling out these deliverables by the end of Q1. Expect Us!
Where is LeXpunK positioning itself for the future?
In the near term, following the roll out of our active Working Group deliverables, we are positioning ourselves to focus on more public goods efforts for DAOs and DeFi communities. We also have interest in funding proposals with an English/Common Law thesis, along with IP dedicated groups, and “legal tools.”
As we grow, we will be building out our partnerships with other similarly situated, grass-roots organizations. LeXpunK is just over six months old, with over 200 members in the Army, spanning the globe. As I noted myself in 2018, and as many knew prior, as the crypto-economy continues to soar and builders develop ground-breaking projects, there will always be room for open-source, collaborative efforts. At LeXpunK, we will continue to secure the relationship between builders and lawyers so that we can ensure a viable and legitimized ecosystem.
🏛 Regulation
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The International Swaps and Derivatives Association (ISDA) recently published a paper on the development of contractual standards for crypto-based over-the-counter (OTC) derivatives. A derivative is a financial product the value of which is linked to an underlying asset (such as an option to purchase BTC on a certain date at an agreed price). Exchange-traded derivatives, such as BTC futures and options, are standardized "off the shelf" products that can't be varied or tailored. OTC derivatives, on the other hand, allow parties flexibility to tailor a transaction to their particular objectives. For example, if you are paid in BTC but have obligations in ETH, you could hedge your pricing risk by entering into a derivative (a swap) that would pay out on the settlement date if BTC had declined sufficiently relative to the price ETH (on the other hand, if the price of BTC had increased relative to ETH, you could up having to pay your counterparty). You could also enter into a swap for speculative purposes -- if you think the flippening is definitely happening in 2022, a BTC/ETH swap would be one way to profit on that view if it turned out to be correct. Having access to OTC crypto derivatives, particularly when combined with automated smart contracts that can do the calculations, will provide traders and investors with a much broader range of investment strategies.
Standard contractual documentation from ISDA will be key to driving the availability and development of OTC crypto derivatives. ISDA creates templates that parties can use for the terms that will apply on their obligations to each other and how they may change over time, how and when payments and deliveries must be made to each other, and other terms such as close-outs and netting, contract termination, and disputes. The parties are free to vary the standard terms, but starting from a template streamlines their negotiations and reduces the risk of protracted disputes. Instead of having their lawyers wordsmith every bit of boilerplate, the parties instead can focus on the key economic terms of their transaction.
ISDA laid the foundation for crypto derivatives in 2019 with the publication of guidelines for using smart contracts in derivatives. The focus, however, was on derivatives on traditional underlying assets such as foreign exchange and not on crypto assets. Derivatives are heavily dependent on conditional logic and formulas that are well-suited to automation. For example, if one party fails to deliver or pay as required, the other party may have the right to terminate or close out the contract. The contracts have detailed provisions on exactly which events have consequences and how and when the parties must pay or deliver to the other as a result of an event. Oracles can be established in advance in a distributed ledger to provide external data (such as the bankruptcy of one of the parties) to enable the smart contract to determine whether a particular event has occurred so that the contract code can perform as agreed. Automating the performance of derivatives may reduce costs and the risk of human error in derivatives and is a critical step towards the development of crypto OTC derivatives; however, the guidelines also recognized that some complex legal provisions may be difficult to automate. As the industry and technology develops further, the reliability of transaction data and protocols on valuations should continue to mature and promote more automation.
ISDA is now planning to bring together industry participants to establish standardized contractual terms for derivatives that reference a crypto-asset as an underlier. The standard terms will have to take into account the multiple technology and market-driven events that could disrupt a crypto derivative, such as hard forks, airdrops, cyberattacks, regulatory changes, and availability of reliable pricing data, as well as the valuation of assets needed for determining payments, close-outs, and collateralization. Since there is generally no single venue for trading of a specific crypto asset, pricing can be less reliable and subject to manipulation. Other issues to consider are the impact of price volatility, transaction fees, interaction with ISDA templates and master agreements, and using crypto assets as collateral. ISDA plans to focus on native crypto assets such as Bitcoin and Ether in 2022 and consider other assets and asset-referenced assets (such as stable coins like DAI) in 2023 and beyond.
The development of standardized terms for crypto-based derivatives, when combined with automation of performance through smart contracts, has the potential to fundamentally disrupt financial markets. However, the uncertain regulatory environment, particularly in the US, remains a stumbling block, and has led to centralized exchanges such as FTX, Binance, and DYDX refusing to offer derivatives to U.S.-based customers. But as interest in these products continues to grow and the infrastructure continues to mature, it seems inevitable that both decentralized globally available protocols and regulated centralized platforms will find innovative ways to meet investor demand.
⚖ Developments
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The Virtual Real Estate Revolution
House hunting can be a nightmare. From searching and visiting countless properties, choosing the right fit, signing the promissory sale and purchase agreement, getting funding ready and, finally, signing the deed, the entire process can take months, if you are lucky. Real Estate companies usually help you during this journey and, in compensation, they get a percentage of the consideration paid for the asset.
Now, imagine having a similar company onboarding you to the world of Virtual Real Estate, that is, digital plots of land in the Metaverse, where you can build virtually anything (no pun intended). In Mid-December, a Portuguese Traditional Luxury Real Estate company (Fine & Country Portugal) partnered with Exclusible, to explore marketing opportunities in the digital space so as to attract high net-worth individuals and digital nomads to premium real estate in Portugal. This is believed to be the first partnership of the like, and it seems to be a clever way to bridge Virtual Real Estate investors to the world of physical Real Estate investing.
Legal issues in a virtual real estate world
While we are still trying to resolve the myriad of legal issues presented by Web 2.0, adding the Metaverse to the picture certainly makes things even more complicated.
One of the widely debated topics between legal practitioners in the era of Second Life and Everquest was the nature and ownership of virtual property. At the time, non-fungible tokens (NFTs) were a technology no one could have predicted and the relationship between operators and players was governed by end-user license agreements where users where granted the right to use the software but any and all intellectual or industrial property rights, which players could possibly be entitled to, were assigned to or retained by the virtual world operators.
However, nowadays, one may argue that NFTs can represent someone’s ownership of a virtual asset. Accordingly, I could own an NFT of a virtual museum in a Metaverse where I display my digital art NFTs and be confident enough to know that such virtual museum and art are my property that I can therefore use, exclude others from, and alienate or transfer such digital assets, right?
Not quite. The legal concept of ownership in a virtual world can have a very different meaning to that same concept when applied to a physical asset in the physical world. In the latter you can have property rights over tangible property and intellectual property, which may be separately or jointly owned, whereas, online, since everything is intangible, one can only possess intellectual property over its digital assets, insofar as the applicable law deems it to be protectable by intellectual property rights. Moreover, these rights originally belong to the creator, only if assigned may these belong to others.
Hence, when NFTs come into play, the conclusion that may be reached is that things have not changed a lot with Web 3.0. Most NFTs are intended to merely evidence the identity of the creator of such digital asset (serving as a digital certificate of authenticity) while some may also grant the holder a license to use and enjoy such asset, similar to what the end-user license agreements did.
By applying these concepts to virtual real estate, it may be argued that the owner of a virtual plot of land does not actually have any property right associated with such virtual asset. Instead, the NFT holder acquires a certificate that such plot of land belongs to a certain Metaverse and that he/she is granted the right to use and enjoy such plot of land as he/she pleases. It is, in fact, a right to use the intellectual property of a third party.
In practice, this means that although I may be the sole holder of an unique NFT representing a clearly identifiable plot of digital land, in fact, I may not be permitted to sell, publish, reproduce, commercialize or allow others to use any of the software associated with such virtual asset.
Will this be enough?
In 2021 alone, The Sandbox's user base grew five-fold, reaching 500,000 wallets, while also having over 30,000 monthly active users, about half of whom spend more than an hour per day on this Metaverse. Users are building, creating businesses, transacting and interacting with each other. In addition, brands are entering into Web 3.0, providing professional services and opening virtual stores.
With such inbound of users and innovation, maybe the law will have to adapt and be amended so as to create a concept of property in the virtual world, which might have to mean something entirely different from the legal concept we are familiar with. It is undeniable that disputes will arise in the Metaverse and that legal practitioners will have their hands full, notably since these may be entirely new from those typical disputes in the physical world lawyers are used to.
It is unlikely that debates regarding the property of a NFT will arise, at least concerning those which are registered in sufficiently decentralized blockchains. However, with the current state of affairs, we can envisage disputes over intellectual property created in the Metaverse, which may affect virtual real estate assets.
Conclusion
One would certainly welcome having some similar help when acquiring virtual real estate as Traditional Real Estate companies provide in the process of acquiring physical properties. PwC Hong Kong has already acquired a plot of land in The Sandbox in order to provide advice to clients who pretend to enter into the Metaverse, and it would not be a surprise if many followed.
While users are tempted with the scarcity of virtual real estate, businesses are leveraging on the fact that virtual house hunting can be a nightmare for newcomers. A buyer beware approach may not be perfectly fitted for this ecosystem and the lack of a clear regulatory framework or, at least, some developments in the concept of ownership of virtual assets will definitively impair the Metaverse from getting the credibility stamp it may need to reach universal adoption.
Latin America’s Tryst with Cryptocurrency
Cryptocurrency as a concept was exclusively theorised in the United States of America. However, its adoption has not been exclusive to the nation. Latin America and APAC have led the regional crypto adoption race posing a challenge to the American hegemony over crypto assets. As compared to 6% Americans, 16% Columbians indicate transacting in crypto assets. Latin America was largely colonised by Portugese, British, French and Spanish till the 19th Century and was largely exploited for its labour and natural resources. During the 20th century, United States of America’s government used its interventionist agenda to control the region by creating shadow states bound to fail. Today, due to prolonged historical marginalisation by the west, Latin American nations lag behind the US and Europe in terms of economic development. However, for the first time in recent history, Latin America has surpassed the wester powers in terms of innovation by being far ahead in terms of adopting decentralised finance.
Figure 1.1 [Source: Statista Global Consumer Survey, 2021]
Due to the combination of political instability, lack of foreign direct investment, import penetration and prolonged pandemic, Latin American currencies have seen major devaluation in recent times. For example, the inflation rate in Argentina has been close to 50% during the last three years. Interestingly, Argentina also has the third highest cryptocurrency adoption ratio. As countries like Venezuela and Argentina saw their national currencies crumble, the citizens of these nations have turned to cryptocurrency as a source of economic security. It can be observed that a nation’s rate of cryptocurrency adoption is inversely proportionate to the strength of its national currency.
Twitter’s ex-CEO, Jack Dorsey recently stirred a controversy by expressing that USA’s web3 ecosystem is a venture capitalist enrichment scheme. Such involvement of institutional investors defeats the decentralised nature of cryptocurrencies as retail investors are unable to own the ecosystem built for everyone. According to Figure 1.2, Latin America is the leading region in terms of retail market participants. The high ratio of cryptocurrency adoption by retail investors as compared to institutional investors is a strong indicator that the spread of adoption is more equitable. Due to widespread adoption and the goal of accelerated growth, Latin American nations have been forced to undertake regulatory innovation. In September 2021, El Salvador became the first nation-state to recognize Bitcoin as a legal tender. While this development was appreciated by crypto asset enthusiasts, the International Monetary Fund (IMF) strongly opposed the decision citing concerns about anonymity and volatility associated with the world’s largest cryptocurrency by market capitalization.
Figure 1.2 [Source: Cambridge Judge Business School, 2020]
The El Salvador authorities developed a special ‘Chivo Wallet’ to facilitate transactions and even gave a USD 30$ one-time bonus to accelerate adoption. In November 2021, El Salvador’s President Bukele stated that the government is planning to build the world’s first “Bitcoin City”, which will be a tax-free region to attract foreign investors. However, Value Added Tax will be collected to pay for the municipal costs. Such developments will be facilitated through 20 draft laws covering aspects such as Bitcoin Bonds worth more than a billion USD which are being introduced to build the Bitcoin City. It will function like a special economic zone that will also aim to achieve zero CO2 emissions. Politicians in Argentina, Paraguay, Brazil and Panama have supported El Salvador’s decision over social media. In December 2021, Paraguay’s Senate approved a bill to regulate the crypto-asset industry. A licensing regime has been introduced for mining activities in order to leverage the nation’s surplus electricity produce. The bill will become a law after a discussion by Paraguay’s Higher law-making body (Chamber of Deputies) in 2022. In June 2021, a lawmaker from Panama, Gabriel Silva stated that he is looking forward to drafting a law to facilitate transactions in cryptocurrency. Similarly, Mexico is home to one of the world’s largest cryptocurrency exchanges, Bitso and one of its largest banks, Banco Azteca has hinted that they are open to exploring the possibility of facilitating transactions in cryptocurrency.
It is important to note that Latin America’s journey with crypto assets has not been smooth. 91% of El Salvador’s citizens still desire payments in USD and Chivo Wallet only saw mass adoption for the signup bonus. In December 2021, 50 complaints were identified by El Comisionado authority about missing cryptocurrency from various Chivo Wallets. It has also been alleged that politicians support crypto assets for the ease of corruption. Besides such allegations, the country’s president continues to make factually unverified predictions. Bolivia is the first Latin American nation to ban crypto assets and Ecuador is also moving towards strict regulations.
Cryptocurrencies are an excellent alternative for devaluing currencies which are result of unstable and negligent governments. Latin America’s experimentation, adoption and innovation with respect to cryptocurrencies is indicative of the fact that decentralised finance is meeting the needs of its targeted audience. Being an instrument of financial inclusion cryptocurrency is serving the digitally literate (but unbanked/underbanked) population of Latin America. As the abovementioned research indicates, it is advisable that national governments in the Latin American region should overcome their insecurities about economic sovereignty and regulate crypto assets to facilitate innovation to fuel financial inclusiveness instead of prohibiting it.