Dec 6, 2018
Morvareed Salehpour joins us today to discuss the complex legal
issues around blockchain technology and cryptocurrency. An attorney
and public speaker, Morvareed became interested in the space back
in 2012 when she began reading about how cryptocurrency was being
used in role-playing games (RPG). As these digital assets gained
traction in real-world financial transactions, she started studying
the complex jurisdiction, liability, and enforcement challenges of
this decentralized technology. Morvareed shares some of her
perspectives on how blockchain and cryptocurrency are transforming
the legal landscape thanks to the rise in cryptocurrency securities
– How she got started in this space
– Biggest legal issues of blockchain technology
– Cases now working their way through courts
– Case law being developed
– How various countries are handling legal challenges
– The questions around intellectual property
– How can businesses protect themselves
– The rise of cryptocurrency lawsuits
– How average investors are affected
– Top three takeaways
– Closing thoughts
Questions and Comments?
Guest Contact Information
Attorney & Public Speaker
Transcript: Interview with Morvareed Salehpour
Interview Recorded On: September 17, 2018
Chitra Ragavan: Welcome to Chasing Unicorns, your portal to the world of cryptocurrency. I’m Chitra Ragavan, Chief Strategy Officer here at Gem. Today’s topic is how blockchain technology and cryptocurrency are disrupting the legal landscape. Joining me is Morvareed Salehpour. She’s a noted attorney and speaker on blockchain technology and cryptocurrency. She’s based here in Los Angeles.
Chitra: Welcome, Morvareed.
Morvareed Salehpour: Thanks for having me, Chitra.
Chitra: Tell us a little about yourself, and how you first became interested in crypto and blockchain legal cases.
Morvareed: Sure. So I am a lawyer, and I first learned about the blockchain cryptocurrency space in 2012, 2013. It was a point where it was being used for RPG games as a way to buy virtual beers in virtual bars, and there was a double spend problem at that point, so digital currencies weren’t an actual thing that could be used in business. But I started learning about that in the legal context as people started exploring that as an option for conducting financial transactions and the potential there. So I stayed on top of it and continued to learn more and more about it and started to get more and more involved and working on matters in the legal space that continued to evolve as the double spend problem was resolved, and it became more of a real space that people were transacting business in.
Chitra: And what are you finding now are the biggest challenges now in the legal space? Let’s start with blockchain technology before we start exploring cryptocurrency, since blockchain is sort of the rails of cryptocurrency.
Morvareed: Yes, so blockchain technology is basically a system that, if it’s true blockchain, it’s decentralized. So in a decentralized system, there are issues with jurisdiction, liability, and enforcement, which are different than when it’s centralized, as a source of business. So, for example, with any type of jurisdictional issues, it could be the case that any location where there is a node physically located for a blockchain - that is a source of jurisdiction. Which means that conflicting laws can apply, and there are issues regarding where you can even bring suit or where you will be brought into court.
Chitra: Because this is a global phenomenon.
Morvareed: Exactly. It’s an issue that it’s a technology that spans the globe, and there are new issues with that because this is not something that we have dealt with before. Similarly with liability, one feature of blockchain is there is a lot of anonymity with it, so in that kind of situation, if there is a something that goes wrong like an error, or there is a fraud committed on a blockchain transaction, you then have to find issues of who’s held liable. And you may not be able to find the guilty party if there’s a fraud, for example, on a supply chain blockchain where someone has removed a tracker and put it on another product of what was supposed to arrive. How do you find that person? Two, if there’s an error in the transaction because of an error in their code, who do you hold liable in that situation? Is it the developer? Is it the central entity maybe still in control of the blockchain? So these are some of the issues that are being developed on the liability front. Similarly on the enforcement front, those issues arise again when there is a court order that is going to be issued. How do you enforce that on a blockchain where the court may not have jurisdiction over everyone - or may not even be able to logistically enforce that order in any real manner we can think of?
Chitra: And this is not just theoretical. You’re actually already starting to see cases working their way up through courts, right?
Morvareed: Yes, that’s correct. There are already these cases that are coming down and the case laws starting to develop. So these are all issues that some forethought should be put in by blockchain entrepreneurs and businesses to address some of these issues on the front end in their transactions and their contracts so that when things do go wrong they are put into a position where they have strong arguments for what they want the outcome to be.
For example, one case is the case against NANO (RaiBlocks) in the eastern district of New York where there’s a securities violations and fraud class action by a plaintiff who lost money in the BitGrail hack. BitGrail was an Italian cryptocurrency exchange, but the plaintiff has now sued the actual NANO token founders and their company - instead of the cryptocurrency exchange - and one of the reliefs that has been asked for in that case is a court ordered rescue fork. It brings up the issues of all three jurisdiction, liability, and enforcement. Because one, jurisdictionally, how does the court effectuate jurisdiction over people in Italy or people who are part of that blockchain but are not in the U.S.? Two, how does it hold the developers liable. Is that who is going to be held liable in this case - even though they weren’t the ones who committed the theft? Three, how are they going to enforce this rescue fork? Even if they decide to rule in its favor, how are they going to stop everyone from proceeding on the unforked protocol? So that’s something that’s now pending in the courts, and it will be decided probably in another year or so.
Chitra: And this also goes to this larger issue. We hear a lot about of these court-ordered rescue forks that may be coming down the pike in years or months, but that kind of almost goes against the very grain of what blockchain technology is supposed to be - kind of this decentralized democratic system of decision-making.
Morvareed: Yes - so yes, that’s one of the issues with a true public blockchain. It’s not functional with a lot of our systems that are in place, and it actually creates problems and makes it more complicated for people. So it becomes a situation where one - the governments are not going to promote truly decentralized blockchain. It’ll be more private blockchains or ones with some sort of centralized actor that are going to succeed and supported by the government. In fact, we are already seeing that a lot of the blockchains we are familiar with have centralized actors. Think of bitcoin - they are centralized actors. EOS, they’re centralized actors. Those are the ones that even take off. We don’t see many truly decentralized entities. There was one - you could say maybe DAO was one, but we saw how badly that ended when there was an error in the code, and it went out of control when someone hacked it.
Chitra: Talk about that - how that ended and the precedent it helped set.
Morvareed: Sure. So one of the issues there was that they had created this entity that was supposed to be decentralized and people were investing Ethereum. Then basically someone hacked it because there was an error in the smart contract code and they were able to take advantage of that vulnerability and take out the funds. That created a situation where Ether had to fork to resolve that problem. So these are some of the issues that are present with a decentralized entity. There’s no central entity to try and stop a hack or to help recover. It has to be something that’s more difficult to address in those kinds of situations. And there are other kinds of cases that are coming down that bear on that realm as well.
For example, there’s a big consolidated class action against Tezos for securities violations. A couple of the defendants in that case are Swiss-based entities, and they have tried to file a motion to dismiss to get out of the case based on the fact that they may not be a U.S. entity. There might not be jurisdiction over them. There is not a most convenient forum. You’re applying the SEC rules outside of the country. And the judge actually came up with a very interesting ruling. He denied a lot of the motions to dismiss, and some of the takeaways in that case are that you cannot avoid U.S. law by just structuring entities abroad. Two, the way you format your transaction, you don’t get to, for example, just pick. You don’t automatically get Switzerland even if that is included in your transaction as the subject of jurisdiction when it is a browser wrap agreement rather than a click wrap agreement so that the consumers who are entering in these transactions are not on notice. Three, the judge actually focused on the circumstances of the transaction, which was the contractual terms of the transaction. So where the effects are being felt, how it’s being effectuated, where it’s being effectuated, are more important than necessarily what the contract says.
Chitra: And the number-two point, which was the browser versus the click—what was that?
Morvareed: So, they basically said that Tezos, the contracts for the token sales in that situation had browser-wrapped agreements basically saying the jurisdiction is Switzerland so basically agreement was assumed. There was nothing putting the person buying the token on notice that this was what the jurisdiction would be, and there was no affirmative action by them to agree to that so it was just a boilerplate assumption of jurisdiction. The court said that doesn’t work in this case.
Chitra: So you’re seeing cases in the U.S. and abroad in other countries too. Is everyone grappling with this in different ways?
Morvareed: Yes. There are other countries that are stepping up in this space too. There are other countries that even tried to outlaw cryptocurrency. Other states are trying to embrace it, but one of the things to point out is that a lot of people say, “Oh, the U.S. is being very strict. They’re getting involved in the space.” But actually the U.S. is taking a very measured approach, and they have not come out saying you can’t do this. They’re basically saying that these are investment contracts, and you need to comply with securities law. There is flexibility in securities law in covering all this so they haven’t passed new regulations saying the existing rules apply. It makes sense that it applies when you’re raising funds.
Second to that, when people say we should go into a foreign country because it’s more beneficial etc, they fail to realize that a lot of the different countries rely on the U.S. for their rules and regulations. We are the world leader. They follow us in terms of what the standards are, and we’re already starting to see that the U.K. is taking similar positions. I believe Switzerland has recently been taking similar positions to us as well, so the days of trying to find loopholes are very, very limited.
Chitra: But even if these cases are being brought, isn’t it going to take an unprecedented amount of international cooperation to actually bring these cases to bear? Because this is a global phenomenon, and there are no boundaries, no nation borders like in other cases. So how does this work?
Morvareed: It’ll be a lot of choice of law issues, which is something that we already handle in different contexts, where parties may be in different jurisdictions. You basically do this choice of law analysis as was done in Tezos case. The court decides where is jurisdiction, is jurisdiction appropriate, can I exercise jurisdiction over this entity. One of the interesting things to think about in a way is - are you taking advantage of commerce in a specific jurisdiction? If you are, it doesn’t seem unrealistic for you to be called into court and held liable for your actions. So that’s one way to think of it there, and I think there needs to be some thought put in to structuring your transactions as well as some thought put into your contracts. It can’t just be boilerplate, it has to be well thought out. You should be thinking about these issues already, because you may not realize they're coming, but they’re already in courts and these will all be addressed and new issues are rising.
For example, in that Tezos case, one of the factors the judge used to determine that the actual geographical jurisdictional location would be the U.S. was that most of the nodes were located in the U.S. So these are some of the issues—where are nodes located, where is marketing happening, where are the founders located. That was another factor—where is the website located for the securities offering, or for any kind of blockchain. So it’s a holistic factor contest that is being developed, and you need to have people that understand it on your side and helping you formulate your structures on the front end. So when it goes to litigation you’re not left scrambling, trying to come up with an argument to save yourself.
Chitra: When laws are written, there’s often this idea that you want to not have them be too prescriptive, too narrow because as tech changes, as the world changes, that the law should be able to keep abreast with changes in society. Do you think that current laws - both in the U.S. and internationally - are built in such a way as to be able to adapt to this revolutionary technology, or are lawyers and courts just struggling to and scrambling to kind of understand what’s happening and to keep pace with it?
Morvareed: No, so that’s what I always like to say—the law has always embraced innovation, and this has happened multiple times in the past. Case law in the U.S. specifically always sets precedent. So it’s always interpretation of laws and regulations that is how our case law develops. So it is always whenever some type of technological innovation happens - for example the internet and utilities even when those came out - our laws adapted to it, our judges interpreted it, we had arguments that the lawyers made on behalf of their clients, and they basically had the law developed. And it may take some time to get clarity, because there’s a lot of gray areas, so you need someone who’s going to be able to make persuasive arguments on your behalf. And once they’re able to do that, it will depend on the judge and jurisdiction you are before too, because there are certain situations where we can have conflicting laws even in our country because there are several circuits and our circuits can have splits where a certain number of them believe it should be one outcome and a certain number believe it should be another outcome. Again, similarly for example, in an area that’s more established - employment law. There are specific jurisdictions that are more beneficial to the employee versus not. So that jurisdictional issue is very important, and that’s something you should be talking with your lawyer to see. How do I pick a jurisdiction that’s beneficial to me, and how do I structure my transaction and my contract in a way to make it most likely that if something goes wrong, that is the jurisdictional result I will end up with?
Chitra: And doesn’t it also matter who your judge is? Because if your judge is technologically savvy, is doing a lot of self education on cutting-edge tech, then it would make a difference in the outcome. But if you have a judge who is not so cutting-edge, it could have the opposite outcome.
Morvareed: I think a lot of judges are pretty good about that. There was a judge in the northern district of California who has actually taught himself coding because he was getting a lot of software copyright infringement cases. So a lot of them actually make the effort to understand what is going on. They’re likely as interested by these issues because they’re new issues and they’re innovative. And it’s just interesting for us as lawyers to come up with resolutions for our clients, so I think a lot of them are excited about this. They understand it. Obviously, the opinions I’ve seen so far in these cases I’ve mentioned and several other ones have been really well thought out and really making a good look at the factors to consider and how to come up with a logistical and fair outcome in this case.
Chitra: And it seems at least from our perspective, we found that with trademark law, this could have pretty groundbreaking consequences because of the idea of irreparable damage. For instance, we had to sue another company that was using our name and our likeness of our logo and had even registered its token with our name and what we discovered was - obviously it was settled in our favor and the other company has to change the name and notify exchanges that it has to change the name of its token. However, once it’s registered on the blockchain then you can’t change it, so this idea of irreparable harm is something that’s going to be revisited a lot when it comes to blockchain technology and cryptocurrency.
Morvareed: It’s a big issue, and I don’t think people quite realize it. Intellectual property is one of the areas where this is really a big issue, because not only is it a legitimate infringement like you’re talking about, trademark copyright infringement. A lot of it is even by actors you may not be able to pinpoint. For example, with copyright infringement, there’s embedded material on blockchain ledger entries. Someone can put encrypted versions of movies or other copyright material on this blockchain, and then you have given the liability issue of finding these people. You don’t know who to send a digital millennium takedown request to. You don’t know who to call into court if there is an infringement that you want to stop. Similarly going along those lines you have issues with people embedding other inappropriate material. For example, state secrets, malware, blackmail material, all these things are things that can be embedded. And it then raises the question - you may not be able to locate the people who actually embedded that material, but there’s a copy of it on the blockchain, and the node operators are now storing that. Are they liable for that?
Potentially yes, because there are certain locations where there is strict liability associated with that. For example, in China there’s strict liability for state secrets, and that is broadly defined from my understanding, so the node operators could all be liable for spreading state secrets. If they’re in China, that is a scary situation to be held liable for, so these are some of the considerations to take into effect. At that point, these node operators are faced basically with a choice: do we delete this? Then it’s not a blockchain, if we are changing it, and can we even delete it? How can we, can we all agree, is that even going to be effective? So it’s one of those issues that’s developing in terms of liability. And another kind of example to think about. I’m sure you’ve heard of Augur’s assassination markets. I’m sure something’s going to go wrong based on that, sooner or later, and I would not be surprised if Augur is called into court for that and has to address the issue of node operator and developer liability there.
Chitra: And then you also have the request for information, warrants being issued, how do these companies… all of a sudden they’re on the hook for information and they find themselves in a very interesting position. How can companies protect themselves if they’re interested in getting into the space or are in the space?
Morvareed: I think they need to work with lawyers who understand the space and start structuring businesses in a way that put some forethought and put some safeguards as how to address each of these issues. You need to have that forethought, because otherwise you’re going to be in a situation where you have no protocol or policy to address these issues when they do arise. Because they are arising already. And so you need a way to address it. And if someone approaches you and says there’s a copyrighted material on your blockchain, figure out a way to come to some agreement with them to resolve that. You don’t want to be the one called into court and incurring the cost of setting that precedent in the cases.
Chitra: So, what are your top three takeaways or advice for companies that are in the space? What should they know, what should they be aware of, and what should they do?
Morvareed: Sure. I think number one is—you’re not going to be able to get out of liability simply by structuring these entities abroad as has been established with these cases now. So stop trying to look for loopholes, and start actually thinking about how can I set up a legally complying business and make it grow. Two, you need to put forethought into how you’re structuring your business and your transactions. So you should be engaging lawyers who understand the space and business operations people who understand the space to set up your business appropriately and to have that forethought in your business structure. Three, if you realize something is going wrong, please go get council from an attorney right away. It’s so much more cost-effective to address this upfront instead of waiting for things to go really wrong before doing so.
Chitra: And what about investors? Are there things they need to think about? Is this going to affect them as well, in terms of getting redress? For instance, you hear more and more about class action lawsuits being filed. Average investors—what are things they need to consider, and what redress do they have if something goes wrong?
Morvareed: So, one kind of redress is this class action there’s a lot of pending. There’s Tezos, there’s NANO, one against Centra, there’s a Coinbase one. So the class actions are something that is a growing space for people who have lost money in these spaces. But I think before even getting there, the smarter thing to do would be to actually analyze any type of opportunity that you are looking to put your money in and never invest more than you can afford to lose, because the facts are that 90% of startups fail, all these people doing ICOs or token raises are all startups. So do your due diligence and really consider, is this something I think is going to succeed? And if I lose the money, am I okay with that?
Chitra: Great. And looking back, is there any one moment or any one case or any one incident or anecdote that made you realize, wow, you know this is really going to be transformative—blockchain and cryptocurrency are going to be transformative to the law and the realization of the impact it’s going to have?
Morvareed: I think it’s the technology itself and one of the strongest use cases in my opinion is supply chain blockchains; they create such advantages for business transactions there. For example, Walmart is doing this supply chain blockchain with IBM’s blockchain technology. And they did a beta test. They basically tracked a box of sliced mangos to its origination point doing their normal method, which took—I believe it was 6 days 18 hours and 2 minutes. They did it on their beta testing blockchain—it took 2 seconds. So that’s amazing in terms of how fast it was and, more importantly, when you think about it, it has advantages in terms of doing targeted recalls. So now you don’t have to recall all your lettuce if it’s bad. You know which farm it went to, which store it went to—targeted recall.
Even if that’s still private blockchain, it still creates a competitive advantage because you’re spending less on recalls and you’re providing transparency to your consumers at the same time, and that’s something your competitors may not be able to provide. So I think those are the kind of use cases that will take off first and have really strong implications in an enterprise application.
Chitra: Great. Do you have any closing thoughts?
Morvareed: I think it’s - people like to apply blockchain technology to all sorts of different applications, and I think they need to consider if they are a business entrepreneur or business, whether their project actually needs a blockchain. Not everything needs a blockchain to succeed.
Chitra: And this could actually protect them from all kinds of legal headaches.
Morvareed: Not only legal headaches, but you know a cost of doing an ICO is actually a significant amount, both on the compliance and legal side as well as the engineering side in setting it up. So consider whether you really need that or a typical fundraising method may be better for you.
Chitra: Great. Thanks, Morvareed. Where can people learn more about you, read more about you and your work?
Chitra: Great - thanks so much.
Morvareed: Thanks for having me, Chitra. It was a lot of fun.
Chitra: Thanks for watching! Join me again next week for another edition of Chasing Unicorns. Until then, enjoy your crypto journey, unicorns!