Articles Posted in Technology

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We end this month’s blog with an overview on virtual currencies and the risks. Last month, we fleshed out our understanding of blockchain technology and the legal quandaries that surround it. This month we narrowed our focus to the specifics of one of its uses: currency.  Virtual currencies have great potential to provide liquidity and trust to markets, and have ushered in the beginning of a modern era of prosperity and exponential economic growth. Regulators have not quite figured out how to manage them because they are innovative and unique. Also, the courts have not quite figured out how to handle cases brought about by disputes surrounding them.

Despite their many attributes, digital currencies pose risks as well. For example, their largely unregulated status leaves them more vulnerable to the threat of hacking and any crime that might be associated with it. There have been cases where virtual currencies have been used for illegal and immoral activities, like sex trafficking and purchasing illegal narcotics.  Not only companies, but potential investors, should be aware of all the risks of noncompliance with regulation.

To quickly clarify, digital currency is any currency that exists in digital form, whereas virtual currency, a subset of digital currency, is digital currency that is not tethered to any “real” or official currency.  All digital currencies pose risks of hacking, but legal approaches to the broader category of digital currency might differ from legal approaches to the narrower category of virtual currency.

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We have explored the emerging technology of virtual currencies, after delving into the blockchain space last month.  We explored how virtual currencies are being regulated—a hitherto unclear area of law that befits our general understanding of the technology itself.  After all, the blockchain was specifically designed to avoid the vicissitudes of politics that accompany regulation, which is what has allowed it to be such an engine of wealth.  The technology can be tethered to tokens and commodities, or simply used in exchange for Central Bank backed currencies.  We explored unclaimed property, gift, licensure, and tax laws, and how each applies to virtual currencies.  This week we hone our gaze on more specific laws and their effects on virtual currency: The Patriot Act and Bank Secrecy Act.  We will also focus on data privacy and security.

These two federal laws have achieved many things. Their statutory requirements can apply when something of value is exchanged between parties (e.g., goods, currencies), or stored value is issued, redeemed, or sold, or even when electronic wallets are simply held.

These requirements run the gamut regarding what those who fall under the federal statutes must accomplish. For example, often those engaging in the above-listed activities must retain specific information on whatever transfer or holding they engaged in the transaction. This helps the government track information it needs to bring the transactions under whatever legal scope it deems proper. Yet, much information is already stored, however, as the blockchain essentially acts as a ledger, but it can also be difficult to extract sometimes.

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We are continuing our discussion about virtual currencies and the related issues. Because this is a burgeoning technology producing a wonderful array of blockchain innovations, regulators have struggled to determine how, or whether at all, they should regulate it.  It poses an array of novel legal questions, and its economic impact renders it of crucial importance.  Hence, it behooves regulators to assess the market and technology in order to tailor regulation. Also, many companies are not well versed in the areas of law that might affect them.  In fact, many simply follow suit, and repeat what they see other companies doing, and assume the technology’s novelty leaves them in the clear.  However, it can steer them into problems, and they often will not know they are not in compliance with the legal requirements.

In general, taxation is one area where policy matters is one that unfortunately pervades most people. Congress is currently laying the groundwork for new regulations that are innovated and tailored towards virtual goods and virtual currencies.  It is conducting congressional studies to see how best to accomplish the task. So, congressional hearings on the subject are a frequent occurrence on Capitol Hill.

As it stands, a number of states have already passed legislation imposing the taxation of “digital downloads.”  Although, this type of legislation is not directly aimed at virtual currencies and goods specifically, some state statutes are so broad that they could effectively envelop such areas.  To date, this is the extent of laws applying to virtual goods, virtual currencies, and virtual-currency transactions in our country. There has yet to be comprehensive and standard legislation that applies definitively to the whole country in these areas.  As a result, specific guidance on how to comply with taxes is spotty and unreliable, and there are no institutions that shine a guiding light.

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Last month, we explored the area of law surrounding blockchain technology.  Last week, we focused on a narrower realm of blockchain technology – i.e., virtual currencies.  Today, we delve further into digital currencies that are adding so much value to the modern economy.  Because the technology is so innovative and new, its legal landscape remains hazy and nuanced.  Today, we explore the legal interplay between virtual currencies and money-transmittal licensure.

At this time, state, federal, and international laws require that individuals and companies obtain licenses to engage in activity that involves the acceptance of funds coupled with the agreement to transfer or pay them to another party. In some circumstances, the law even requires special registration.  The only exception to this typically is when the recipient of the funds uses them to pay directly for goods and services offered by someone else. This has a close bearing on virtual currencies because they are often considered to be funds themselves. Depending on the exchange, such currencies may be considered merely placeholders for an asset, rather than assets or funds themselves.  This means, however, for exchanges in which virtual currencies are considered funds, licensure laws apply.

Although, the word “funds” is used often in this regulatory sphere, it might not be in the traditional sense.  As it is applied in licensure law, funds do not require real cash or money to be involved.  Really, most any type of monetary value is covered within the language of these laws. This includes, but is not limited to, electronic value.

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We have narrowed our focus on blockchain’s legal issues to cryptocurrencies specifically.  Tokenizing is a recent capital innovation and its legal landscape is hazy and nuanced at this time. This week, we will hone our focus further to shed light on this new technology, its economic and social benefits, and its legal implications, so that its use may be optimized.  There is no legal constant for virtual currencies.  Instead, legal characterizations vary with the currency’s implementation.

In general, virtual currencies can be acquired and used in numerous ways.  Simple purchases with real money, to gambling, to sweepstakes, allow users to exchange it for other real-world products and services.  Furthermore, there are “dual currency” models, which limit the conditions regarding how the currencies may be spent and earned.

As we discussed in the previous post, jurisdiction often becomes a key issue in this space. Sometimes, simply offering a virtual currency to someone within a given jurisdiction is enough to trigger the application of that jurisdiction’s laws.  There are a number of areas of law that can be triggered jurisdictionally.

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Today, we continue our focus on blockchain technology and surrounding rules and regulations. It is a nascent area and the subject of much debate. Last week, we discussed the jurisdictional issues this technology poses, as well as questions of liability, contract, and intellectual property. Today, we narrow our focus to one particular area of the blockchain realm: Asset-backed ventures.

The blockchain is by definition an open-ended and malleable tool. One of its most useful applications is to provide liquidity and capital where previous market inefficiencies precluded them.  This makes the biggest difference for small and mid-market ventures.  Crowd-sourcing income for job-producing smaller corporations will compound wealth for the international community in the decades to come in the developed world, and even more starkly in Africa and South Asia.

An emerging innovation in the blockchain space is to hinge digital coins’ value on an asset – i.e., the area of asset-backed tokens.  Variations of this idea include a coinage system based on the productivity of oil and gas ventures.  Investors purchase coins and fund the venture in its early stages and throughout.  Once the venture starts producing and oil is sold, the investor has a right to exchange his or her coin for the market price of that asset. Hence, the supply of oil rises, the price declines, communities prosper, and investors get a healthy return.  If they do not, there is a mechanism within the coin-value determination that adjusts for the poor judgment of the investor and devalues the coin. So, it behooves owners of the coin to choose fruitful projects.

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This week our focus shifts to a topic buzzing about the modern world. We have written on numerous occasions about cryptocurrency, but we have not discussed more pointedly the technological mechanism that yields it – i.e., the blockchain.  A complex, decentralized technology with the power, accuracy, and security to replace traditional financial systems, blockchain is the process that gives cryptocurrencies their true mechanism and value.  Its international scope can pose jurisdictional questions, its decentralized nature can puzzle tort plaintiffs, and the enforceability of “smart contracts” is an issue of first impression for most courts.  Additionally, lines must be drawn with regard to intellectual property.

To provide a brief background, the blockchain is the structure by which value is produced and conserved in cryptocurrencies.  Through a complex system of checks and balances, rewarded for solving algorithms, “miners” validate transactions by mathematically verifying them against previous transactional history of the asset in question. A “block” is created when transactions consolidate after nodes in a given network unanimously corroborate their veracity. From the block, the “miners” compete to solve a highly complex algorithm; the winner receives a coin and the block is added to a “chain.”  An innovation has thus emerged onto which legal institutions must overlay their concepts.

Firstly, blockchain disputes run up against jurisdictional issues. The ubiquitous and decentralized nature of the blockchain requires careful consideration of the relevant contractual doctrines.  Applying the rules of whatever jurisdiction in which each node transacts would pose two problems: (1) the location of the transaction in question would be incredibly difficult to pinpoint; and (2) requiring compliance with every single potential location’s rules would be overwhelmingly unwieldy.  Therefore, choosing a governing law for the entire network is essential to ensure certainty.

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On April 10, 2018, Mark Zuckerberg, founder and chief executive of Facebook, took a chair beneath an array of Senators to answer for the uneasiness his company’s behavior had been giving the public.  The testimony comprised a broad variety of concerns – from user privacy to election meddling, to misinformation and an alleged bias in combatting it. The latter concern has fascinating legal implications we will discuss today.

More pointedly speaking, allegations that the large social media companies’ community guidelines have been enforced selectively have sparked a public controversy.  The accounts of some particularly controversial speakers, for better or worse, have been shut down, and others report that the volume of exposure their content gets has suddenly dwindled.  Pundits, for the most part on the right wing, have strongly condemned the companies, and ensuing arguments tend to hit all the philosophical tenets of the classical debate over free speech.

The First Amendment does not ensure anyone’s place on a private platform; it only restricts the government from discriminating with regard to speech, including, but not limited to, hate speech.  For the most part, it is left to market pressures to correct any perceived bias or wrongdoing on the part of the social media companies.  There are other areas of the law, however, that social media companies have some potential to run afoul of.  Critics and commentators have brought up both antitrust law and publishing law issues.  Although, there is debate over the likelihood that companies like Facebook infract upon either, yet the potential does exist.

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Most, if not all, of our readers are familiar with e-commerce websites and related transactions.  Notably, Amazon.com’s empire, as well as other forms of e-commerce such as iTunes subscription services or purchasing an e-Book are part of these transactions.  In recent news, one of China’s largest e-commerce websites is being sued in the United States for selling counterfeit and knock-off products. Shares of the company, Pinduoduo, plummeted after news of the lawsuit was made public.  Currently, six law firms are in the process of filing class actions on behalf of investors who purchased shares of Pinduoduo.  The company went public in the United States earlier this year, raising over $1.6 billion from investors. Pinduoduo is traded on NASDAQ under PDD, and currently has a $25 billion market cap.

Pinduoduo is known for combining online shopping with entertainment. It was founded in September 2015 by Colin Guang, a former Google employee.  As of now, however, the company has faced an influx of negative media in China, with claims that the platform sells knock-offs of major brand names. This selling of fake goods could give investors standing to sue.  If the investors were misled, and invested because of the false information, they will have a cause of action under the federal securities laws. Executives of companies, and insiders who communicate information to investors about a company, have a duty not to make any misleading or materially false statements about the company.  This includes information about the financial health of the business.

Started only three years ago, Pinduoduo had 295 million active users and 4.3 billion total orders in 2017.  China is the largest online retail market, with other e-commerce names such as Alibaba and JD.com.  Pinduoduo sells groceries, electronics, clothing, and household items, among other things.  While Amazon may be the number one e-commerce website in the United States, Pinduoduo is the second larges e-commerce website in China behind Alibaba.

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Do you monitor what personal information companies access and store when you visit a website?  Do you wish you had more ability to know what companies do with such data?  In 2018, user data privacy rights have become a major topic for discussion. Starting with Europe’s enactment of the General Data Privacy Regulation earlier in the year, and California’s passing of the Consumer Privacy Act, we have seen many changes in the online legal world.  The trend continues, with internet giants now lobbying for a federal regulatory scheme, which would ease the number of laws they have to comply with if each state follows California and enacts its own user privacy legislation.  In this blog, we will provide an overview of the recent changes.

After California passed a law this year, which grants consumers greater data privacy rights, there has been much backlash from technology giants.  Facebook, Google, Microsoft, and IBM are currently lobbying officials in Washington for a federal privacy law that would overrule California’s legislation.  These technology giants are hoping for such legislation to be passed through Congress, as the lobbyists would influence how the law is written, giving them discretion over their ability to use personal data and information.  Because federal law on such a matter would supersede state law, California’s user privacy law may become naught.

According to Ernesto Falcon of Electronic Frontier Foundation, a user rights group, the strategy of Facebook, Google, and Microsoft here is “to neuter California[‘s law] for something much weaker on the federal level.  The companies are afraid of California because it sets the bar for other states.”  As user data and information is such a key part of the business model of the social media companies – who use such information to sell advertisements – they want as much freedom as possible to collect and exploit such data.