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BLOCKCHAIN RAFAEL ZAHRALDDIN & ERIC SUTTY

AUGUST 13, 2019 – SEATTLE, WASHINGTON

WHAT IS CRYPTOCURRENCY?

• At its most basic level, cryptocurrency is a string of computer-generated code, identified in a public decentralized ledger called a “blockchain.”

• This line of code is accessed by an owner’s unique passcode: a secret and private key giving access to the owner’s “virtual wallet” (an account where cryptocurrencies are held).

• The interface is functionally similar to traditional banking portals for customers

• However, if a user loses his/her private key, the wallet would be forever inaccessible because it is impossible to recover a lost key.

• Ownership and use of cryptocurrency is, for the most part, anonymous.

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CRYPTOCURRENCY (VIRTUAL CURRENCY) VS. DIGITAL TOKEN

• Cryptocurrency –digital representation of value that can be traded and functions as a unit of account or stored value.

• Token –representation of a unit functionality, service, or rights in or to an asset.

• Wallet (or Digital Wallet) –storage mechanism for digital assets. Wallets are cryptographically protected by a digital key that is personal to the owner of the wallet.

THE BASICS OF A CRYPTOCURRENCY TRANSACTION

• Any blockchain transfer occurs through the blockchain protocol.

• A transaction is initiated by the transferor (using his/her private key) to

broadcast to other holders of the decentralized ledger that he/she is

decreasing their virtual wallet and correspondingly increasing the virtual

wallet of the transferee.

• The other members of the network verify and confirm the transaction, which is

then recorded on the blockchain ledger.

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CRYPTO-CURRENCY

• Cryptocurrency takes many forms with many names such as Bitcoin (the most well known), Ethereum, Komodo and KodakCoin.

• There are more than 1,500 of these alternative currencies that operate outside the control of any central bank or sovereign treasury department.

• Exchange platforms such as BitConnect and Bitfinex maintain the virtual wallets and facilitate transfers, and the structures of these platforms vary.

Special thanks: Rick Rein and John Guzzardo, The Trustee and Bitcoin, Identifying and Recovering International Cryptocurrency Assets, ABI Journal August 2018.

CRYPTOCURRENCY? BLOCKCHAIN? WHAT IS IT?

• At its most basic level, cryptocurrency is a string of computer-generated code,

identified in a public decentralized ledger called a “blockchain.”

• This line of code is accessed by an owner’s unique passcode: a secret and

private key giving access to the owner’s “virtual wallet” (an account where

cryptocurrencies are held).

• The interface is functionally similar to traditional banking portals for

customers

• However, if a user loses his/her private key, the wallet would be forever

inaccessible because it is impossible to recover a lost key.

• Ownership and use of cryptocurrency is, for the most part, anonymous.

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BLOCKCHAIN VS. DISTRIBUTED LEDGER TECHNOLOGY (“DLT”)

• NOT the same thing• Blockchain is a type of DLT• Other types of DLT include Tempo (Radix) and Directed

Acyclic Graph (Tangle)• These DLT platforms argue that they are more scalable than blockchain

• Distributed ledgers use independent computers (referred to as nodes) to record, share and synchronize transactions in their respective electronic ledgers (instead of keeping data centralized as in a traditional ledger).

• Blockchain organizes data into blocks, which are chained together in an append only mode.

HOW BLOCKCHAIN WORKS 1

A wants to send money or digital asset to

B

2The transaction is represented

online as a “block”

3The block is

broadcast to every party in the

network

4 Those in the network approve the

transaction is valid

5 The block is added to the chain, providing an

indelible and transparent record of

transactions

6 The money or digital asset

moves from A to B

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DISTRIBUTED LEDGERS

A DISTRIBUTED LEDGER HAS NO CENTRAL AUTHORITY AND EVERY NODE IS RESPONSIBLE FOR MAINTAINING THE LEDGER

BLOCKCHAIN CURRENT USES

Blockchain allows for the confirmation and ownership transfer of basically

anything:

•  virtual currency,

• financial services,

• corporate and commercial transactions, and

• supply chain verification.

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U.S. FINANCIAL SERVICES REGULATION

The SEC has made cryptocurrency an area of concern:

• The current SEC position is that Bitcoin and Ether, two of the largest cryptocurrencies are not

securities.

• When a cryptocurrency becomes sufficiently decentralized the SEC no longer views it as a security.

• Smaller initial coin offerings, or ICOs, are almost always securities in the SEC's eyes and subject to

the same regulations as normal stocks.

The Commodity Futures Trading Commission now permits the trading of cryptocurrency derivatives publicly.

• The CFTC has designated bitcoin as a commodity and announced that fraud and manipulation

involving bitcoin traded in interstate commerce and the regulation of commodity futures tied

directly to bitcoin is under its authority.

• The CFTC allowed the CME and CBOE to launch bitcoin futures. CFTC also approved a platform for

the trading and clearing of virtual currency derivatives for LedgerX, LLC, a swap execution facility

and derivatives clearing organization.

EXCHANGE PLATFORMS

Example Bitfinex

• Bitfinex utilized multi-signature segregated wallets, where both the owner of the

account, the exchange platform and a third-party vendor held separate keys — all

of which were necessary in order to authorize fund transfers.

• These exchanges often reside outside the U.S., making their reach by trustees

difficult.

• Some exchanges maintain the identity and contact information of their customers, but

this is not currently the norm.

• However, these exchanges could (and should) have traditional bank account

information whenever their customers “cash in” or “cash out” of the cryptocurrencies.

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VOLATILITY

Source: Messari. Prices as of 11:30 a.m. on July 26, 2019

CRIMINAL ORIGINS

“It all started with an online marketplace to buy drugs. Well, it had started a couple of years before that, but the darknet outfit known as Silk Road was the first time most people heard about bitcoin and cryptocurrency. After doing more than a billion dollars’ worth of trades in a little more than two years, Silk Road was shut down in 2013 following an FBI investigation. Despite this shady origin story, the technology behind the drug bazaar’s currency — blockchain — is now being touted as the most disruptive technology since the internet.”

THE FUTURE OF CRIME IN THE BLOCKCHAIN ECONOMY

By James Watkins

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REGULATION

EXCHANGE LICENSING

• It is possible to start a cryptocurrency exchange without a license.

• Some of the world’s largest crypto exchanges are not regulated.

• The most common current regulation is an Electronic Money/Payment Institution License.

• These licenses allow wallets to be enabled and therefore support currencies in the exchange but their adequacy with respect to cryptocurrency activities is limited.

• Specific regulations adapted to cryptocurrency have yet to be developed or are in their infancy.

• Existing regulatory bodies are all watching cryptocurrency activity and some have outright banned all digital currency and others are busy trying to determine whether digital currency falls within existing statutory definitions.

• Other jurisdictions have official cryptocurrency licensing and regimes encouraging the expansion of digital currency.

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FINANCIAL SERVICES: CRYPTOCURRENCY EXCHANGE LICENSES

•There is no licensing for cryptocurrency exchanges by the U.S Federal government

•New York State, for instance, implemented “BitLicense” regulations, which grant licenses to virtual currency businesses, in 2015.

•California has refused to implement regulations

FINANCIAL SERVICES: MONEY TRANSMITTER LICENSES AND REGISTRATION REQUIREMENTS • All types of money service businesses must register with FinCEN, the Financial Crimes Enforcement

Network, which is part of the U.S. Treasury in order to obtain a money transmitter license, but to operate in 46 of the 50 US states you also need individual state licenses if you will be facilitating payments of residents of those states (California, New York, Texas and Illinois). There is no reciprocal licensing system in the US. The National Conference of Commissioners on Uniform State Laws voted in July 2017 to approve a model act providing for the regulation of digital currency businesses at the state level.

• In Europe, there is a Payment Services Directive last updated in 2015 that provides for a unified license system to facilitate payments in the UK/EU so that individual licenses are not required in each country.

• Canada has no licensing system (except in Quebec), though there is a registration requirement Federally, with the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”) and provincially, in Quebec only, with the Autorite des Marche s Financiers (“AMF”). In Que bec, a business that operates a virtual currency ATM or that provides a platform for trading virtual currencies is required to obtain a license under the Money-Services Businesses Act

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SEC

• Bitcoin and Ether, two of the largest cryptocurrencies, are not securities.

• When a cryptocurrency becomes sufficiently decentralized the SEC no longer

views it as a security.

• Smaller initial coin offerings (ICOs) are almost always securities in the eyes of

the SEC.

• SEC has not approved any exchange – traded products holding

cryptocurrency related assets for listing or trading.

CRYPTOCURRENCY AND CRYPTOEXCHANGES INTERNATIONALLY

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OTHER JURISDICTIONS AND CRYPTOCURRENCY

• Digital currency/Initial Coin Offerings are banned in China, South Korea and

Macau.

• Others encouraging expansion of digital currency: New York, Japan, Estonia,

Lithuania, Isle of Mann, Bermuda.

• ICO guidance has been issued in: Canada, United Kingdom, Hong Kong,

Australia, Gibraltar and Thailand.

VENEZUELA

• On Dec. 3, 2017, Venezuela launched its own digital currency, the “petro”, backed by oil, gas, gold and diamond reserves. President Nicolas Maduro announced the launch, which he said would Help Venezuela advance its sovereignty and overcome the burdens of global economic sanctions.

IRAN• On Dec. 2, 2017, bucking international sanctions, the High Council of Cyberspace in Iran (HCC)

announced that it will accept the use of bitcoin but the digital currency will be subject to strict regulation.

ESTONIA• On Sept. 7, 2017,European Central Bank President Draghi rejected Estonia’s plans to launch its own

state-run digital currency, “estcoin,” and indicated that the ECB would not allow Estonia or any other EU member state to introduce its own currency.

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JAPAN

• Japan approved a law regulating Virtual Currencies on May 25, 2016 which was promulgated on June 

3, 2016. The law was enacted and came into effect on April 1, 2017.

• On Sept. 30, 2017, the Financial Services Agency (FSA) of Japan granted its first licenses for digital 

currency exchanges to 11 companies. 

• On April 1, 2017, Japan’s Financial Services Agency enacted a new law authorizing the use of digital 

currency as a method of payment, essentially granting it the same legal status as any other currency. 

• The law follows months of debate which ultimately brought Bitcoin exchanges under anti‐money 

laundering/know‐your‐customer rules, and resulted in the categorization of Bitcoin as a kind of 

prepaid payment instrument.

SINGAPORE

• On Nov. 21, 2017, the Monetary Authority of Singapore (MAS) published a consultation paper 

proposing legislation for payment services. The proposed bill would expand the scope of regulation to 

include the purchase and sale of virtual currencies and other innovations used in domestic money 

transfers and merchant transactions via point‐of‐sale or online payment gateways.

BERMUDA

• The Government of Bermuda announced it will begin to regulate virtual currency exchanges, coins 

and securitized tokens, in early 2018. 

• The new regulation would include the activities of firms, operating in or from Bermuda, that use 

distributed ledger technologies (DLT) to store or transmit value.

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ISRAEL

• On December 27, 2017 media reports said Israel’s markets regulator will propose 

regulation to ban companies based on bitcoin and other digital currencies from trading on 

the Tel Aviv Stock Exchange. 

• In Jan. 2017, Israel’s government said it was set to apply capital gains tax to bitcoin sales, 

categorizing digital currencies as a type of property.

INDIA

• On Nov. 16, 2017, the Indian Supreme Court issued a notice to the central bank and several 

other agencies asking them to respond to a petition made to the court to regulate bitcoin. 

• The petition called on the Court to make cryptocurrencies accountable to the exchequer, 

expressing concerns about the untraceablility of digital currency transactions.

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CHINA

•On Sept. 4, 2017, China banned all companies and individuals

from raising funds through ICO activities, reiterating that ICOs are

considered illegal activity in the country.

• Hong Kong and Singapore have not banned ICOs and appear to

be moving to encourage cryptocurrencies.

BLOCKCHAIN: THE FUTURE IS NOW• Blockchain is already being used today in many industries.

• The trucking, commercial transportation, and industries shipping have been particularly active with blockchain implementation.

• The promise of blockchain is that it will reduce inefficiencies, meaning, among other things:

• Quicker payments, with less disputes

• Reduced administrative costs

• Less spoilage/returned goods

• Better capacity monitoring

• Blockchain-enabled platforms will allow easy coordination of documents, eliminating much of the physical paperwork currently used today.

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BENEFITS THAT FINANCIAL INSTITUTIONS SEE FROM USE OF BLOCKCHAIN

• Increased Security

• Reliable record of transaction

• Access is secure and centralized

• Easy to onboard participants

• Transparency

Easy to identify where a delay or error occurs

Ease in fixing problems (with potential reduction in need for dispute

resolution or litigation)

PRIVACY

• While each transaction of each particular crypto- currency unit is recorded on the blockchain, there is (typically) no online record that identifies the person associated with any particular address.

• An analogy of this in practice would be a wall of glass post office boxes, where each box is a virtual wallet.

• Anyone can see the cryptocurrencies inside and watch the transactions taking place among the boxes, but you cannot determine who owns any particular box and, unless you have the key, you cannot access the box.

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THE LURE AND PROMISE OF BLOCKCHAIN

IBM Global Financing reduced time spent resolving financial disputes by 75% using

blockchain technology. With blockchain, participants in the transaction:

• Share a single platform with permissioned and secure access

• Receive a full view of the process and history

• Provide ability to see all steps in the process

• Give ability to pinpoint the moment when a delay or error occurs

• Allow quick-fix of problems without filing a dispute (due to increased transparency)

• Achieve on-boarding with minimal disruption (due to easy access)

EARLY ADOPTION IN FINANCIAL SERVICES HAS BEEN IN:

•Clearing and Settlements;

•Wholesale Payments;

•Equity and Debt Issuance; and

•Reference Data

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GLOBAL PAYMENT SYSTEMS

• One of the most compelling use cases for blockchain is in global payment systems.

• In the global financial industry, most international payments are facilitated by SWIFT, which provides payment services to 11,000 financial institutions across 200 countries.

• The SWIFT infrastructure was built decades ago and can require the linking of multiple participants to process payments which can take several business days.

• SWIFT partnerships with blockchain companies are eagerly watched by the crypto community with the most significant being a February 19, 2019 announcement of the SWIFT partnership with R3, which is a blockchain banking consortium made up of leading investment banks.

Business Intelligence: Blockchain Technology use cases (Source: Business Insider)

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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE DOLE FOOD COMPANY, INC. ) CONSOLIDATEDSTOCKHOLDER LITIGATION ) C.A. NO. 8703-VCL

MEMORANDUM OPINION

DATE SUBMITTED: FEBRUARY 2, 2017DATE DECIDED: FEBRUARY 15, 2017

LASTER, VICE CHANCELLOR

This problem is an unintended consequence of the top-down federal solution to the paperwork crisis that threatened

Wall Street in the 1970s. Through the policy of share immobilization, Congress and the Securities and Exchange Commission

addressed the crisis using the 1970s-era technologies of depository institutions, jumbo paper certificates, and centralized

ledger. See generally In re Appraisal of Dell Inc. (Dell Ownership), 2015 WL 4313206, at *3-7 (Del. Ch. July 30, 2015).

It was an incomplete solution at the time. Since then, despite laudable and largely successful efforts by the

incumbent intermediaries to keep the system working, the problems have grown. See, e.g., In re Appraisal of Dell Inc., 143 A.3d

20 59, (Del. Ch. 2016) (holding that under current Delaware law, beneficial owners forfeited their appraisal rights by

inadvertently voting in favor of the merger due to complexities created by depository system); Dell Ownership, 2015 WL

4313206, at *9-10 (holding that under current Delaware law, beneficial owners forfeited their appraisal rights due to

administrative change in the name of the nominee on the share certificate necessitated by depository system).

Distributed ledger technology offers a potential technological solution by maintaining multiple, current copies of a

single and comprehensive stock ownership ledger. The State of Delaware has announced its support for distributed ledger

initiatives. See Marco A. Santori, Governor Jack Markell Announces Delaware Blockchain Initiative, global Delaware Blog (June

10, 2016), http://global.blogs.delaware.gov/2016/06/10/delaware-to-create-distributed-ledger-based-share-ownership-

structure-as-part-of-blockchain-initiative/.

THE BLOCK CHAIN PLUNGER:

USING TECHNOLOGY TO CLEAN UP PROXY PLUMBING AND TAKE BACK THE VOTE

VICE CHANCELLOR J. TRAVIS LASTER KEYNOTE SPEECH

COUNCIL OF INSTITUTIONAL INVESTORS CHICAGO, SEPTEMBER 29, 2016

THIS DOCUMENT WAS THE BASIS FOR THE KEYNOTE SPEECH OF VICE CHANCELLOR TO THE FALL 2016 MEETING OF THE COUNCIL OF INSTITUTIONAL INVESTORS. THE REMARKS AS DELIVERED WERE SOMEWHAT ABBREVIATED AND OTHERWISE DIFFERED IN MINOR RESPECTS FROM THIS WRITTEN DOCUMENT.

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THE SOLUTION

A superior external solution is comes in the form of technological

opportunity. Distributed ledger technologies can provide better

accuracy, greater transparency, and superior efficiency for settling

securities trades and voting in corporate elections. These

technologies could reunite legal and beneficial ownership of stock

and eliminate many of the problems I identified earlier today.

THE SOLUTION

With distributed ledgers, a central accountant like DTC becomes

unnecessary. Custodians become unnecessary. Ownership lies only

with beneficial owners. A single distributed ledger would allow

straight-through accounting. It is a utopian vision of a share

ownership system where there is only one type of owner: record

owners.

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THE SOLUTION

Smart contracts allow people to embed contractual obligations in a distributed ledger: people can cause automatic responses to specified conditions or events. So, for example, issuer could provide for automatic transactions to take place in the ledger in response to a specific corporate action or market event, such as the payment of a dividend or a coupon payment. Or, an issuer can send out proxy statements to beneficial holders, as defined by the ledger, at a pre-determined time before an annual meeting. Rather than relying on glorified messengers, dividend payments and proxy statements can go directly to the owner’s account. Smart contracts can also improve the voting system.

THE MOMENT

The opportunity is pretty obvious and it is also monetizable.

According to Accenture, banks are embracing this movement.

For banks, the alternative is obsolescence. This is a carpe diem

moment. You can take the lead on distributed ledger

technology, or you can let the intermediaries replace one

intervening institution with another.

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THE SOLUTION

On May 2, 2016, Governor Jack Markell announced

the Delaware Blockchain initiative. Delaware hired a

blockchain technology company to begin a pilot

program to move state archival records onto a

distributed ledger.

FORMER DELAWARE GOVERNOR JACK MARKELL

“The blockchain system will be faster and cheaper than the existing process

since it automates a number of processes, including share registry, capital-

table management, and shareholder communications. …We see companies

allocate significant financial resources to correct and validate stock

authorization and issuance errors that could have been correctly and seamlessly

handled from the outset…Distributed ledger shares hold the promise of

immediate clearance, immediate settlement and bring with them dramatic

increases in efficiency and speed in the sophisticated commercial

transactions for which Delaware is known.”

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CARRIER ONBOARDING

• Blockchain can allow parties to see solid and definitive evidence of past performance in all the relevant metrics.

• Like a Car Fax for carriers

• This removes the trust aspect from all deals.

• Blockchain offers transparency to know when and where capacity opens up, so all parties can take advantage of shifts in demand.

• Potential to offer Proof of Work (PoW) incentives similar to how miners are currently rewarded with cryptocurrency

WORK IN PROGRESS

• IBM will design blueprints for what could become Delaware's future blockchain-

based corporate filing system, according to a $738,000 single-bid state contract

recently awarded to the Armonk, New York-based tech giant.

• Deputy Secretary of State Kristopher Knight compared IBM's work to an architect

building a model of a skyscraper before construction. The state will use the scale

model to gauge how blockchain may benefit Delaware-registered entities, he said.

Delaware New Journal July3, 2018.

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CORPORATE AND COMMERCIAL TRANSACTIONS

•Delaware Blockchain Initiative

•Groundbreaking amendments to the Delaware General

Corporation Law (“DGCL” effective August 2017)

•Digital/Virtual Stock Ledger

•Smart UCC Filings

CORPORATE AND COMMERCIAL TRANSACTIONS

• July 2018: Delaware began testing its DLT processes:

• Stock Ledger: A new system in which state employees, company

representatives, registered agents and attorneys all contribute to a

distributed ledger holding data for a corporation incorporating in Delaware.

• “Smart UCC” : Project will examine whether blockchain can improve the

notification process when files are changed or deadlines come due and allow

ways to query UCCs in real-time as information is added.

• The UCC prototype also will feature a dashboard or user interface to allow

the Department of State to get a better view of the various UCC transactions.

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OTHER STATES ARE ALSO ADOPTING SIMILAR LEGISLATION

• Arizona

• California

• Florida

• Nebraska

• New York

• Tennessee

• Vermont

ARIZONA’S SMART CONTRACT LAW

• The statute includes a very specific definition of “blockchain technology” as a “distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless” and provides that the “data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.”

• It includes a definition of “smart contracts” as an “event driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger that can take custody over and instruct transfer of assets on that ledger.”

• Problems with statute’s language include terms that are not defined, such as “permissionless” or terms like “immutable” without accounting for technical limitations of the technology.

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OTHER STATES ARE PASSING STATUTES RELATED TO BLOCKCHAIN

• Tennessee passed a law with a similar effect as Arizona, i.e.,

recognition of smart contracts as legal documents, but used the

word “execute “ in two different ways : (1) signing a document; (2)

computer code performing a task

• Rules of Evidence: A law enacted in Vermont in 2016, H.868,

provides that a blockchain-based digital record will be

considered a business record under the Vermont Rules of Evidence

BLOCKCHAIN AND THE SUPPLY CHAIN

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BLOCKCHAIN AND SUPPLY CHAINS• Blockchain technology offers a secure digital ledger in which the multiple participants on a given supply

chain can update data in real time.

• It exists in multiple copies spread over multiple computers—secure because each new block of

transactions is linked back to previous blocks—making tampering practically impossible.

• Thoughtful incorporation of blockchain technology into a supply chain will have a tremendous impact on:

• transparency,

• data Interchange and consolidation,

• identity & trust,

• payments,

• contracting,

• compliance,

• flexibility & responsiveness, and

• stakeholder management—resulting in an efficient, cost-saving, risk-reducing demand chain.

INEFFICIENCIES IN THE TRANSPORTATION INDUSTRY

•Every day, $140 billion is tied up in disputes for payments in the transportation industry.

• Source: Blockchain in Trucking: What happened to the middle man, FleetOwner.com, Oct. 20, 2017, available at https://www.fleetowner.com/electronic-security/blockchain-trucking-what-about-middlemen

• Processing and administrative costs are as high as 20% of transportation’s overall cost.

• Source: Maersk, IBM launch first blockchain joint venture for trade, transportation, DCVelocity, Jan. 16, 2018, available at http://www.dcvelocity.com/articles/20160116-maersk-ibm-launch-first-blockchain-joint-venture-for-trade-transportation/

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INEFFICIENCIES IN THE TRANSPORTATION INDUSTRY

• In September 2016, IBM and Maersk tracked a shipping container of flowers from

Mombasa, Kenya, to Rotterdam in the Netherlands.

• The shipment of refrigerated goods went through nearly 30 people and

organizations, including more than 200 different interactions and communications.

• These communications created a stack of documents about 25 centimeters in height.

• Source: Tom Groenfeldt, IBM And Maersk Apply Blockchain To Container Shipping, Forbes.com, Mar. 5, 2017, available at:

https://www.forbes.com/sites/tomgroenfeldt/2017/03/05/ibm-and-maersk-apply-blockchain-to-container-shipping/#210730013f05

INEFFICIENCIES IN THE TRANSPORTATION INDUSTRY

• One study showed that, on average, trucking companies wait 42 days before

receiving payment.

• Source: https://www.winnesota.com/blockchain

• Globally, 8.5% of sensitive pharmaceutical shipments experience temperature

deviations; in the Middle East, that number rises to between 15-20%. These

shipments cannot be used and never make it past customs.

• Source: Swiss firm brings blockchain to the biopharmaceutical cold chain, John Paul Hampstead, FreightWaves, Feb.

23, 2018, available at https://www.freightwaves.com/news/blockchain/skycellblockchaincoldchain

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INEFFICIENCIES IN THE TRANSPORTATION INDUSTRY

• It is estimated that truckers drive more than 29 billion miles with partial or empty truckloads.

•90 percent of trucking companies worldwide have six trucks or fewer. This causes the industry to struggle with matching shippers (the demand) with carriers (the supply).

Source: Jonathan Selama, Blockchain will work in trucking — but only if these three things happen, Tech Crunch, Mar. 2, 2018, available at https://techcrunch.com/2018/03/02/blockchain-will-work-in-trucking-but-only-if-these-three-things-happen/

FREIGHT TRACKING – EXAMPLE

• In August 2018, Maersk and IBM introduced the “TradeLens Blockchain Shipping Solution”

• In one case, the platform reduced the transit time of a shipment of packaging materials to a production line in the United States by 40 percent.

• It is also estimated that the platform can simplify operational questions, such as determining the location of a container, from 10 steps involving five middlemen to one step and one person.

• Source: Maersk and IBM Introduce TradeLens Blockchain Shipping Solution, August 9, 2018, available at https://www.prnewswire.com/news-releases/maersk-and-ibm-introduce-tradelens-blockchain-shipping-solution-300694642.html

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FREIGHT TRACKING, EXAMPLE 2

• Certain blockchain-based systems, such as Easy Trading Connect (“ETC”), are being used to process all steps of a typical “on chain” transaction.

• In early 2018, ETC was used in a transaction involving a shipment of soybean cargo. In that transaction, ETC was used to process all steps of the transaction, which reportedly had no paper contracts, certificates or other documents exchange hands.

• Reportedly, the time spent on processing documents and data was reduced five-fold.

• Source: US soy cargo to China traded using blockchain, Business Times, Jan. 22, 2018, available at https://www.businesstimes.com.sg/energy-commodities/us-soy-cargo-to-china-traded-using-blockchain

TRUST LOAD BOARD

• Today, load board data is frequently outdated and inauthentic.

• When shipper works with set of freight brokers to transport goods, data is

typically entered into multiple load boards, which causes duplication and

inaccurate demand forecasts.

• With blockchain, when a shipper posts a load, it would be posted once with a

time-stamp and key and each broker could see whether the load has already

been posted and also when a carrier has taken the load.

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CURRENT LOAD BOARD SYSTEM

LOAD BOARD SYSTEM USING BLOCKCHAIN

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LEGAL ISSUES

HOW ARE DIGITAL ASSETS TREATED BY THE LAW

• Financial services regulation

• Enforceability of “Smart Contracts” and other automatically/self-executing transactions that lack a centralized authority

• What is it?

• Security

• Commodity

• Currency

• General Intangible

• Where is it?

• Jurisdiction/Choice of Law

• Liability if platform malfunctions

• Data privacy

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IS IT A SECURITY?

• The Securities and Exchange Commission (SEC) has not approved any exchange-traded products (such as ETFs) holding cryptocurrency related assets for listing or trading.

• The SEC has also never registered an initial coin offering (ICO).

• The court in SEC v. Shavers held that Ponzi scheme Bitcoin “investments” could be considered securities under federal securities laws because the Bitcoin itself was a “currency” — giving the SEC jurisdiction to prosecute claims.

• Bankruptcy Trustees could benefit from this classification as, under Article 8, if cryptocurrency is a “security,” it would not be perpetually encumbered by previous creditors’ security interests.

IS IT A COMMODITY?

• The Commodity Futures Trading Commission (CFTC) has designated Bitcoin as a commodity and announced that fraud and manipulation involving Bitcoin traded in interstate commerce and the regulation of commodity futures fall directly under its authority.

• The CFTC permitted the CME and CBOE to launch Bitcoin futures.

• The CFTC also approved a platform for the trading and clearing of virtual currency derivatives.

• If cryptocurrencies are deemed commodities, there are fewer protections extended under the Bankruptcy Code. The Code affords commodity transactions significant protection only if the transactions contract constitutes a “forward contract,” providing for the commodity’s delivery two days in advance of the contract’s maturity date.

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IS IT CURRENCY?• Virtual currencies do not meet the Uniform Commercial Code (UCC) definition

of “money” under 1-201(b)(24), since they are not authorized or adopted by

a government.

• However, courts have found that bitcoins are “funds” under 18 U.S.C. § 1960

for actions involving conspiracy with the operation of an unlicensed money-

transmitting business. For example, the United States v. Murgio court reasoned

that bitcoins are funds because they can be accepted “as payment for goods

and services” or are bought “directly from an exchange with [a] bank

account.” Therefore, they “function as ‘pecuniary resources’ and are ‘used as a

medium of exchange’ and ‘a means of payment.’”

CURRENCY

• If classified as currency, cryptocurrency transfers would receive beneficial protections under the Bankruptcy Code as swap agreements. Under §§ 362(b), 546(g) and 560, the Code protects swaps from avoidance as constructive fraudulent transfers and from the constraints of the automatic stay. Thus, cryptocurrency traders would receive the same protections as though they were exchanging U.S. dollars and euros.

• At least one bankruptcy judge has concluded that Bitcoin is not currency for the purposes of a trustee’s recovery of avoidable transfers. In Hashfast Technologies LLC, a trustee sought the return of the value of Bitcoin that a debtor paid to a promotor. The court concluded that Bitcoin was property for purposes of § 550(a) of the Bankruptcy Code, but were not U.S. dollars.

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IS IT A GENERAL INTANGIBLE?

• UCC § 9-102(a)(42) - a general intangible is defined to include

payment intangibles.

• If virtual currencies are general intangibles, the secured party is

left to perfect its security interest by filing a UCC-1 financing

statement.

• This leaves the secured party with a perfected security interest, but

no fast mechanism to prevent a borrower from transferring its

virtual currencies after a default or other triggering event.

GENERAL INTANGIBLE

• Under the current system, a creditor who perfects by filing remains susceptible to unauthorized

transfers of pledged virtual currency. To compound the problem, most virtual currencies are

transferred between parties in an anonymous fashion that, in all likelihood, make it impossible for

the creditor to identify the recipient or take possession of the transfers.

• Further, a general intangible cannot be perfected by use of a contract agreement because virtual

currency is not held in a deposit account.

• This leads to other problems for transferees of virtual currencies. UCC §§ 9-315(a) and 9-332

provide that a security interest travels with a general intangible to transferees and subsequent

transferees unless the secured party authorizes the disposition free of the security interests.

• While lenders can easily authorize such dispositions for ordinary course operations, it is impossible

for transferees to know what liens, if any, are attached to the cryptocurrencies it stands to receive.

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BANKRUPTCY “PROPERTY OF THE ESTATE”

• Section 541 of the bankruptcy code broadly defines “property of the estate” to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”

• Given that expansive definition, there is no question that bitcoin will be considered property of the bankruptcy estate in the event of a bankruptcy filing.

• How bitcoin will be treated in bankruptcy cases remains an open issue.

• While there are no published decisions, the U.S. Bankruptcy Court for the Northern District of California was faced with the question of whether bitcoin constitutes a currency or a commodity in the case of HashFast Technologies LLC v. Lowe (In re HashFast Technologies LLC).

• In that case, the bankruptcy trustee sought to avoid the transfer of

bitcoin by the debtor to a third party as a preference and/or

fraudulent conveyance.

• The trustee contended that the bitcoin was a commodity, such that

the bankruptcy estate would be entitled to recover any increase in

its value as of the date of recovery.

• The value of the bitcoin at stake in the case had increased

substantially since the transfer, from $363,000 to $1.3 million.

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“The court does not need to decide whether bitcoin are currency or commodities

for the purposes of fraudulent transfer provisions of the Bankruptcy Code.

Rather, it is sufficient to determine that, despite defendant’s arguments to the

contrary, bitcoin are not United States dollars,” the court said. “If and when the

liquidating trustee prevails and avoids the subject transfer of bitcoin to

defendant, the court will decide whether, under 11 U.S.C.A. §550(a), he may

recover the bitcoin (property) transferred or their value, and if the latter, valued

as of what date.”

• While the California Bankruptcy Court did not find that bitcoin was a commodity for

purposes of bankruptcy, its comment that “bitcoin are not United States dollars” may

signal that it believed bitcoin is more akin to a commodity than currency.

BANKRUPTCY OR COLLECTION ISSUES

• Identifying the holder of the cryptocurrency for:

•Recovery from a debtor

•Recovering fraudulent conveyances and other

avoidance actions

•Held overseas and anonymously.

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MALFUNCTION OR COMPROMISE OF PLATFORM

• Who is responsible?

• Person who set up system?

• Person who approved it?

• Person who lost key?

• How do you get around the problem?

JURISDICTIONAL ISSUES WITH BLOCKCHAIN

•Personal jurisdiction.

•Subject matter jurisdiction.

•Choice of law.

•Forum Non Conveniens.

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JURISDICTION• A distributed ledger is decentralized so nodes might be located in various jurisdictions, different

countries or states and thus complicate personal jurisdiction issues.

• Multiple Courts might wish to assert jurisdiction over a node and subject the ledger to conflicting or

inconsistent rulings or other decisions.

• Subject matter jurisdiction is also evolving as legislation has not yet addressed blockchain.

• In March 2018, the U.S. District for the EDNY entered an order for a preliminary injunction in which the

Court upheld the jurisdiction of the U.S. Commodity Futures Trading Commission stating “[u]ntil Congress

clarifies the matter, the CFTC has concurrent authority, along with other state and federal administrative

agencies, and civil and criminal courts, over dealings in virtual currency.” Commodity Futures Trading

Commission v. Patrick K. McDonnell, and Cabbagetech, Corp. d/b/a Coin Drop Markets, Case 1:18-cv-

00361-JBW-RLM Docket No. 29 (March 6, 2018).

CHOICE OF LAW

• One potential solution is to include the appropriate choice of law and choice

of forum.

• Choice of law/forum clauses will usually allow for the selection of contract or

commercial law, but not for regulation such as data privacy or financial

regulation, especially those laws designed to prevent money laundering and

terrorism.

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COLLECTION OF DIGITAL ASSETS IN FOREIGN JURISDICTIONS

THERE ARE THREE EQUITABLE REMEDIES THAT EXIST UNDER ENGLISH COMMON

LAW THAT COULD BE FLEXIBLY APPLIED TO OVERCOME THE OBSTACLES OF

IDENTIFYING HOLDERS AND RECIPIENTS OF CRYPTOCURRENCY REGARDLESS OF

THE INTERNATIONAL NATURE OF THE TRANSACTION.

NORWICH PHARMACAL

• requires (usually innocent) third parties to disclose information to identify a wrongdoer,

trace funds or assist parties in determining whether a cause of action exists.

• relief does not create a property right but is a means to discover assets and recover

information — as a party who becomes involved in the potentially actionable conduct of

another is under a duty to disclose information to the victim.

• Certain exchange platforms could have identifying “know your customer” information,

and proceedings could be initiated against “the Bitcoin holder with key number.”

• Further, if a virtual currency customer “cashed in” or “cashed out” of the exchange, there

might be a trail to a traditional financial account that could ultimately serve to identify

that customer.

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ANTON PILLER K.G. V. MANUFACTURING PROCESSES (ANTON PILLER):

• Allows for limited discovery prior to commencement of an action. The party who is a beneficiary of

an Anton Piller order has certain rights to seize and secure evidence so that the judicial process is

not rendered useless.

• The victim must show that he/she had a business relationship with a defendant who is likely to be in

possession of documents that can help prove the claim.

• The applicant must also be able to plead a strong prima facie case with demonstrably serious

potential or actual damage.

• The defendant respondents must possess or control evidence that inculpates them with the

underlying claim and that they could destroy that evidence before the typical discovery process

can be pursued and completed.

• Practically speaking, to obtain an Anton Piller order, the matter needs to be replete with bad

dealings and dishonesty on the part of the target. There would need to be strong evidence that the

foreign holder of the virtual wallet would likely destroy or transfer the evidence and that that

evidence is necessary to recover assets of the estate.

WORLDWIDE (MAREVA) INJUNCTION:

• Injunctive relief. Courts have granted worldwide injunctions, called Mareva injunctions, when the

impugned conduct occurs globally.

• Mareva injunctions do not create property rights but freeze assets in the possession of third parties

in foreign countries until subsequent adjudication.

• To obtain a Mareva injunction, an applicant must show a good case and a serious risk that the

respondent will either remove or dissipate assets to frustrate any judgment ultimately obtained.

• In Google Inc. v. Equustete, the Supreme Court of Canada recently held that injunctive relief can be

ordered against somebody who is not a party to the underlying lawsuit — even if that third party

is not guilty of wrongdoing. Google was ordered to stop displaying search results globally for any

websites that mislead consumers, opining that as the internet is naturally global, the only way to

ensure that the interlocutory injunction attained its objective was to apply it where Google

operates: globally.

• Extending this doctrine, if a third party to the blockchain transaction can be identified, there might

be a remedy to enjoin the third-party operations, even if those operations are global.

41

THANK YOU

Rafael X. ZahralddinElliott Greenleaf,

P.C. Wilmington, DE

302.545.2888302.384.9401

Eric M. SuttyElliott Greenleaf, P.C.

Wilmington, DE

302.383.9402