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      "body": "Congratulations @gulovsen! You received a personal award!\n\n<table><tr><td>https://steemitimages.com/70x70/http://steemitboard.com/@gulovsen/birthday2.png</td><td>Happy Birthday! - You are on the Steem blockchain for 2 years!</td></tr></table>\n\n<sub>_You can view [your badges on your Steem Board](https://steemitboard.com/@gulovsen) and compare to others on the [Steem Ranking](https://steemitboard.com/ranking/index.php?name=gulovsen)_</sub>\n\n\n###### [Vote for @Steemitboard as a witness](https://v2.steemconnect.com/sign/account-witness-vote?witness=steemitboard&approve=1) to get one more award and increased upvotes!",
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  "trx_id": "45cd11de7fd2d9c75bc2aa3bf10b6d6f5b71be25",
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      "parent_permlink": "gulovsen",
      "author": "gulovsen",
      "permlink": "mypredictionfor2020alongwithlotsofothercryptopersonalitiesonthe98thepisodeofsashahoddershodlcast-zrqv84vzes",
      "title": "My Prediction for 2020 (Along With Lots of Other Crypto Personalities) on the 98th Episode of Sasha Hodder’s HodlCast",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2020/01/60EBB8F2-EBF7-4319-B7B1-0C42C2ED4EB1.jpeg</center> <br/><p>I was fortunate enough to be asked to provide my “Crypto Prediction for 2020” (along with a wide variety of other crypto personalities) as part of <a rel=\"noreferrer noopener\" aria-label=\"Sasha Hodder’s HodlCast Podcast (opens in a new tab)\" href=\"https://www.sashahodler.com/the-hodlcast-podcast\" target=\"_blank\"><strong>Sasha Hodder’s HodlCast Podcast</strong></a> Episode 98: “The PredictionCast - 2020,” which you can listen to below:</p>\n<iframe width=\"100%\" height=\"166\" scrolling=\"no\" frameborder=\"no\" src=\"https://w.soundcloud.com/player/?url=https%3A//api.soundcloud.com/tracks/736864462&amp;color=16b1f7\"></iframe>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/hodlcast-ep98/ </em><hr/></center>",
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      "author": "gulovsen",
      "permlink": "ethereum20snewconsensusprotocolproofofsecurity-2rr1duj6eo",
      "title": "Ethereum 2.0’s New Consensus Protocol: “Proof of Security?”",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/12/77B7C803-8D4F-4BE5-91EE-CBDBA376A4E3.png</center> <br/><p><em>The author would like to thank <a href=\"https://www.linkedin.com/in/darrensandler\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Darren Sandler (opens in a new tab)\">Darren Sandler</a>, <a rel=\"noreferrer noopener\" aria-label=\"Gabriel Shapiro (opens in a new tab)\" href=\"https://twitter.com/lex_node\" target=\"_blank\">Gabriel Shapiro</a> and <a rel=\"noreferrer noopener\" aria-label=\"Adrian Cortez (opens in a new tab)\" href=\"https://www.linkedin.com/in/adrian-cortez-3b04363/\" target=\"_blank\">Adrian Cortez</a> for sharing their insights and providing invaluable suggestions during the drafting of this article.</em></p>\n<h2>Introduction</h2>\n<p>On Tuesday, November 12, 2019, Heath Tarbert, Chairman of the U.S. Commodities and Futures Trading Commission (CFTC), indicated that both his agency and the U.S. Securities and Exchange Commission (SEC), were undertaking a careful analysis of Ethereum 2.0’s new proof-of-stake (PoS)-based transaction validation model.<mfn>Christine Kim, <em>What the CFTC Chairman Actually Said About Ether Futures and Ethereum 2.0</em>, CoinDesk (last updated Nov. 17, 2019), <a href=\"https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0\">https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0</a>.</mfn> As recently as October 10, 2019, the same Heath Tarbert stated approvingly that “It is my view as chairman of the CFTC that ether is a commodity.”<mfn>Daniel Roberts, <em>CFTC says cryptocurrency ether is a commodity, and ether futures are next</em>, Yahoo! Finance (Oct. 10, 2019), <a href=\"https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html\">https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html</a>.</mfn> And in June of 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, stated, “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.\"<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>.</mfn> Some commentators already believe that Ethereum dodged a bullet for not being brought to task for its token sale in 2014,<mfn><em>See, e.g.</em>, Preston Byrne, <em>Ether is not a Security?</em>, The Back of the Envelope (a blog) (June 14, 2018), <a href=\"https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/\">https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/</a>; Chris Padovano, <em>What Nobody Wants to Hear: The Sale of Ether Tokens was Likely a Sale of Securities</em>, Decentralized Legal: Emergent Legal Issues Facing Distributed Systems (September 6, 2016), <a href=\"https://web.archive.org/web/20190517210405/https://decentralizedlegal.com/ether-is-a-security/\"> https://web.archive.org/web/20190517210405/https://decentralizedlegal.com/ether-is-a-security/</a>.</mfn> so the fact that it is now back under SEC review is legitimate cause for concern. If the SEC concludes that Ethereum’s new PoS validation model involves securities transactions, it could have significant negative implications for the Ethereum Network’s planned upgrade to version 2.0, as well as the wider cryptocurrency market.</p>\n<h2>What is Proof-of-Stake?</h2>\n<p>In contrast to the \"global, statistical gamble which is played every 10 or so minutes\" in the case of Bitcoin known as  proof-of-work (PoW) mining,<mfn><em>mining pools - What are bitcoin miners really solving?</em>, Bitcoin Stack Exchange, (answer updated Dec. 9, 2017), https://bitcoin.stackexchange.com/questions/8031/what-are-bitcoin-miners-really-solving/8034#8034</mfn> PoS mining typically requires operators  of validator nodes (i.e., “validators”) to store (i.e., “stake”) a specified amount of cryptocurrency in their digital wallet and keep the wallet online so it can automatically broadcast its balance to the network.<mfn>Darren J. Sandler, <em>Citrus Groves in the Cloud: Is Cryptocurrency Cloud Mining A Security?</em>, 34 Santa Clara High Tech. L.J. 250, 258 (2018).</mfn> Furthermore, whereas PoW rewards miners who successfully prove their work with a fixed amount of cryptocurrency upon block creation,<mfn><em>See, e.g.</em>, Andreas Antonopoulos, <em>Mastering Bitcoin: Programming the Open Blockchain</em> 26 (2d ed. 2018) (“A successful miner will collect a reward in the form of new bitcoin and transaction fees.”)</mfn> PoS protocols typically reward validators with a block reward in proportion to their stake.<mfn>Ameer Rosic, <em>Proof of Work vs Proof of Stake: Basic Mining Guide</em>, Blockgeeks (Mar. 15, 2017), <a href=\"https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/\">https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/</a>. </mfn></p>\n<p>In the case of Ethereum 2.0, users “can post Ether as collateral and verify and attest to the validity of blocks to seek financial returns in exchange for building and securing the protocol.”<mfn>Diederik Loerakker,&nbsp;<em>Ethereum 2.0 Phase 0 — Honest Validator</em>, GitHub (updated Nov. 15, 2019),&nbsp;<a href=\"https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md\">https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md</a>.</mfn> The requirements to become an Ethereum 2.0 validator are as follows:</p>\n<ul><li>Configure and run a validator client; and</li><li>Stake 32 Ether to the validator’s wallet.<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>. </mfn></li></ul>\n<p>To collect staking rewards / transaction fees, validators\nmust also do the following:</p>\n<ul><li>Maintain a balance of 32 Ether in the validator wallet;</li><li>Ensure that the validator is updated with the latest software; and</li><li>Ensure that the validator client stays online and can communicate with the network.<em><mfn>Id.</mfn></em> </li></ul>\n<h2>How Might Ethereum 2.0’s PoS Model Implicate Securities Laws?</h2>\n<p>The starting point for determining whether something qualifies as a “security” under U.S. law is by looking at the statutory definition of “security,” which can be found in Section 5 of the Securities Act of 1933<mfn>15 U.S.C.A. §77b(a)(1) (West 2019).</mfn> and Section 12(g) of the Securities Exchange Act of 1934.<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn> “‘Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.’ To that end, it enacted a broad definition of ‘security,’ sufficient ‘to encompass virtually any instrument that might be sold as an investment.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 393 (2004) (<em>quoting Reves v. Ernst &amp; Young</em>, 494 U.S. 56, 61 (1990)).</mfn> In both statutes, the term “investment contract” is included in the definition of a “security.” As has been stated by the SEC<mfn><em>See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO</em>, Exchange Act Release No. 81207, 117 SEC Docket 745 (July 25, 2017) (applying the “investment contract” analysis to DAO Tokens),&nbsp;<a href=\"https://www.sec.gov/litigation/investreport/34-81207.pdf\">https://www.sec.gov/litigation/investreport/34-81207.pdf</a>;&nbsp;<em>In re Munchee Inc.</em>, Securities Act Release No. 10445, 118 SEC Docket 975 (Dec. 11, 2017) (concluding that MUN tokens were securities because they were investment contracts).</mfn> and at least one U.S. federal district court,<mfn><em>See</em>&nbsp;<em>Balestra v. ATBCOIN LLC</em>, 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (holding that ATB Coins qualify as “investment contracts” and therefore “securities”).</mfn> arrangements involving digital assets are properly analyzed by considering whether they are “investment contracts” as that term is used in the statutes mentioned above. Since Ethereum 2.0’s PoS model involves digital assets, the “investment contract” analysis is similarly appropriate.</p>\n<p>In the seminal case <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946), the United States Supreme Court proclaimed, “[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”<mfn><em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293, 298–99 (1946).</mfn> Known popularly now as the “<em>Howey</em> test,” this definition of investment contract “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”<mfn><em>Id.</em>&nbsp;at 299. </mfn></p>\n<p>The <em>Howey</em> test requires the following elements to be present for a “contract, transaction or scheme” to be considered an “investment contract” (and therefore a security):<mfn>See, e.g., Howey, 328 U.S. at 300 (“Thus all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise. It follows that the arrangements whereby the investors’ interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed.”); cf. United Hous. Found., Inc. v. Forman, 421 U.S. 837, 858 (1975) (“What distinguishes a security transaction—and what is absent here—is an investment where one parts with his money in the hope of receiving profits from the efforts of others…”).</mfn></p>\n<ol><li>An\nInvestment of Money</li><li>In\na Common Enterprise</li><li>With\na Reasonable Expectation of Profits</li><li>Derived\nfrom the Efforts of Others</li></ol>\n<p>Each of these elements are\nconsidered in turn as they relate to Ethereum 2.0’s proposed PoS protocol.</p>\n<h3>An Investment of Money</h3>\n<p>The first question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “an investment of money.” According to the latest Ethereum 2.0 GitHub repositories, users must stake 32 Ether to operate a validator node,<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> so the answer quite clearly appears to be “yes.” The fact that the consideration paid is not in the form of cash is irrelevant for purposes of this part of the <em>Howey</em> test.<mfn><em>See, e.g., Uselton v. Comm. Lovelace Motor Freight, Inc.</em>, 940 F.2d 564, 574 (10th Cir. 1991) (“[I]n spite of&nbsp;<em>Howey</em>’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.”).</mfn> </p>\n<h3>In a Common Enterprise</h3>\n<p>The second question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “a common enterprise.” The U.S. federal court system recognizes three different tests, which vary depending upon which federal court circuit has jurisdiction over the matter: (1) horizontal commonality; (2) broad vertical commonality; and (3) narrow vertical commonality.<mfn>“The D.C., First, Second, Third, Fourth, Sixth, and Seventh Circuits use horizontal commonality[;] the Fifth, Tenth, and Eleventh Circuits use broad vertical commonality[; and] the Ninth Circuit recognizes narrow vertical commonality.” Sandler,&nbsp;<em>supra</em>&nbsp;note 5, at 272-75.</mfn> </p>\n<p>However, to the extent that the SEC is the agency performing a “careful analysis” of Ethereum 2.0, this is effectively a non-issue. That is because in its <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em> published on April 3, 2019, the SEC Strategic Hub for Innovation and Financial Technology (FinHub) stated the following: “The [SEC] does not require vertical or horizontal commonality <em>per se</em>, nor does it view a ‘common enterprise’ as a distinct element of the term ‘investment contract.’”<mfn>FinHub, <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em>, U.S. Securities and Exchange Commission (Apr. 3, 2019) [hereinafter <em>Framework</em>] <a href=\"https://www.sec.gov/files/dlt-framework.pdf\">https://www.sec.gov/files/dlt-framework.pdf</a>, at 13 n. 10, (citing<em> In re Barkate</em>, 57 S.E.C. 488, 496 n.13 (Apr. 8, 2004)).</mfn> Furthermore, FinHub states in its <em>Framework</em> that “in evaluating digital assets, [the SEC has] found that a ‘common enterprise’ typically exists.” Whether the federal courts would side with the SEC on this issue is beyond the scope of this article, but given the foregoing, there is every reason to believe that the SEC (at least) will find this element satisfied in the case of Ethereum 2.0.</p>\n<h3>With a Reasonable Expectation of Profits</h3>\n<p>Of all the questions that need to be answered when applying the <em>Howey</em> test, the third, whether Ethereum 2.0 involves a “reasonable expectation of profits,” is the simplest to answer. That is because Ethereum 2.0’s own specifications state the following: “[A validator] is an optional role for users in which they can post ETH as collateral and verify and attest to the validity of blocks to <em>seek financial returns</em> in exchange for building and securing the protocol.”<mfn>Loerakker<em>, supra</em>&nbsp;note 8 (emphasis added).</mfn> As stated by the U.S. Supreme Court in <em>S.E.C. v. Edwards</em>, 540 U.S. 389 (2004), “[T]he commonsense understanding of ‘profits’ in the <em>Howey</em> test [is] simply ‘<em>financial returns on ... investments</em>.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 396 (2004) (quoting&nbsp;<em>United Hous. Found., Inc. v. Forman</em>, 421 U.S. 837, 853 (1975)).</mfn> Thus, this third element of the <em>Howey</em> test is also satisfied.</p>\n<h3>Derived from the Efforts of Others</h3>\n<p>The fourth and final question that needs to be answered when\napplying the <em>Howey</em> test is whether the reasonable expectation of profits\nfrom the arrangement being considered is “derived from the efforts of others.” Or,\nas stated by the <em>Howey</em> court, derived “solely from the efforts of the\npromoter or a third party.”</p>\n<p>Relying upon the explicit language found in <em>Howey</em>, an argument could be made that an arrangement to run a validator node on the Ethereum 2.0 network actually fails this part of the test, because users have to expend quite a bit of effort before they are eligible to collect any “financial rewards.” As stated previously, in order to collect staking rewards / transaction fees, validators must do all of the following: (1) configure and run the validator client software; (2) stake 32 Ether to the validator’s wallet address; &nbsp;(3) maintain a continuous balance of 32 Ether in the validator wallet; (4) ensure that the validator client is updated with the latest software; and (5) ensure that the validator client stays online and can communicate with the network.<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> A failure to perform any of these tasks will result in users losing their right to collect any staking rewards / transaction fees (at least until the problem is rectified), thereby suggesting that the ability to receive any financial returns is derived solely from the efforts of the <em>user</em>, and <em>not</em> “solely from the efforts of [any] promoter or a third party.”</p>\n<p>Unfortunately, “in light of the remedial nature of the [U.S. securities] legislation,” the federal courts have “adopt[ed] a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”<mfn><em>Sec. &amp; Exch. Comm’n v. Glenn W. Turner Enterprises, Inc.</em>, 474 F.2d 476, 482 (9th Cir. 1973).</mfn> It is therefore the efforts which affect the failure or success of the Ethereum Network as a whole which is the correct focus of the analysis, and in fact was the focus of the previously referenced speech made by SEC Director William Hinman in concluding that the current iteration of Ethereum does not implicate securities laws.<mfn>Hinman,&nbsp;<em>supra</em>&nbsp;note 3.</mfn> As stated by Director Hinman,</p>\n<blockquote class=\"wp-block-quote\"><p>If the <strong>network</strong> on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.<mfn><em>Id</em>&nbsp;(emphasis added)<em>.</em></mfn></p>\n</blockquote>\n<p>The ultimate question, then, is whether the rollout of\nEthereum 2.0 signals that the Ethereum Network itself is not as “sufficiently\ndecentralized” as the SEC previously thought.</p>\n<h2>What Does “Sufficiently Decentralized” Mean?</h2>\n<p>Ever since Director Hinman’s speech was published, much digital ink has been spilled debating the usefulness of a “sufficiently decentralized” standard, with some commentators suggesting that “[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership”<mfn>Blockchain Association,&nbsp;<em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019),&nbsp;<a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a>.</mfn> while others arguing that “it is highly problematic to use ‘decentralized’ as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.”<mfn>Angela Walch,&nbsp;<em>Deconstructing “Decentralization”: Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN:&nbsp;<a href=\"https://ssrn.com/abstract=3326244\">https://ssrn.com/abstract=3326244</a>.</mfn> In fact, focusing solely on those two words independent of the rest of Director Hinman’s speech is troublesome, especially considering the fact that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin,&nbsp;<em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017),&nbsp;<a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a> .</mfn></p>\n<p>Whether a blockchain protocol or system is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>Hinman,&nbsp;<em>supra</em>&nbsp;note 3.</mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p>[W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.<br> …<br> [O]f course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.<mfn><em>Id.</em> </mfn></p>\n</blockquote>\n<p>The question that the SEC is therefore likely to be grappling with—given both the manner in which Ethereum 2.0 is being rolled out as well as the new specifications involving PoS—is whether Ethereum can continue to be successful without the involvement of individuals like Vitalik Buterin (one of the co-founders and considered by many to be the “face” of Ethereum) and organizations like the Ethereum Foundation.<mfn>The stated mission of the Ethereum Foundation is to “promote and support Ethereum platform and base layer research, development and education to bring decentralized protocols and tools to the world that empower developers to produce next generation decentralized applications (dapps).” [34]&nbsp;<em>Ethereum Foundation</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>.</mfn> If the answer is yes, then it is still likely to be considered “sufficiently decentralized” for purposes of the <em>Howey</em> test. Otherwise, it is not. And for the reasons discussed above, if it is no longer “sufficiently decentralized” for purposes of the <em>Howey</em> test, the SEC may conclude that Ethereum 2.0’s <a>PoS implementation</a> implicates U.S. securities law, possibly requiring registration under the Section 12(g) of the Securities Exchange Act of 1934<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn>—something that the Ethereum Foundation is unlikely to want to do. </p>\n<h2>Is Ethereum 2.0 “Sufficiently Decentralized?”</h2>\n<p>Exactly how the SEC will come down on this question is anyone’s guess, but guidance can be gleaned from FinHub’s <em>Framework</em> (mentioned above). In particular, the <em>Framework</em> provides several examples which, “[a]lthough [not] necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>,&nbsp;<em>supra</em>&nbsp;note 22, at 3.</mfn> (and thus less likely that the network is “sufficiently decentralized”), including the following: </p>\n<blockquote class=\"wp-block-quote\"><p>An AP<mfn>The term “AP” is short for “Active Participant,” which is defined in the <em>Framework</em> as “a promoter, sponsor, or other third party (or affiliated group of third parties).” <em>Id.</em> </mfn> is <strong>responsible for the development, improvement (or enhancement), operation, or promotion of the network</strong>, particularly if purchasers of the digital asset expect an AP to be <strong>performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality</strong>.<br> …<br> An AP has<strong> a lead or central role in the direction of the ongoing development of the network or the digital asset</strong>.<br> …<br> An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example[,<strong> d]etermining whether and how to compensate persons providing services to the network</strong> or to the entity or entities charged with oversight of the network.<br> …<br> Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where[ t]he AP has the ability to realize capital appreciation from the value of the digital asset. This can be demonstrated, for example, if the AP <strong>retains a stake or interest in the digital asset</strong>. In these instances, purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset[; or where t]he AP<strong> owns or controls ownership of intellectual property rights of the network or digital asset</strong>, directly or indirectly.<mfn><em>Id.</em> at 3-5 (emphasis added).</mfn> </p>\n</blockquote>\n<p>Applying the examples given above to Ethereum 2.0:</p>\n<ol><li>It is generally understood that the specifications for Ethereum 2.0 were developed by a small team at Ethereum Foundation including Vitalik Buterin, and the Ethereum Foundation is primarily responsible for the “development and (in the case of Ethereum 2.0) improvement or enhancement (via the 2.0 upgrade) of the network.”<mfn><em>Ethereum Foundation</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>. </mfn></li><li>The Ethereum Foundation therefore “has a lead or central role in the direction of the ongoing development of the network or the digital asset” and purchasers of Ether (or those who decide to become validators by staking a minimum of 32 Ether to validator nodes when they come online via the 2.0 rollout) obviously expect the Ethereum Foundation to “perform[] or oversee[] tasks that are necessary for the [Ethereum] network or [Ether] to achieve or retain its intended purpose or functionality.”</li><li>The Ethereum Foundation gives various independent teams grants to build the specifications, thus “[d]etermining whether and how to compensate persons providing services to the network,” although “[i]t is currently not known how much the Ethereum Foundation spends on its organization and grants every year.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “owns or controls ownership of intellectual property rights of the network or digital asset,” including “the following trademarks: ETHEREUM, ETHER, ENTERPRISE ETHEREUM and ENTERPRISE ETHEREUM ALLIANCE.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “retains a stake or interest in the digital asset” as can be demonstrated by the fact that “[t]he Ethereum Foundation’s multisig wallet is known and as of 4/10/19 [held] 645,137 Ether. That equate[d] to ~$118,000,000.”<em><mfn>Id.</mfn></em></li></ol>\n<p>Do all these factors indicating reliance on the efforts of the Ethereum Foundation for the success of Ethereum 2.0 mean that the SEC is going to reverse its previous-held position that the Ethereum Network is “sufficiently decentralized” and find Ethereum 2.0 as currently spec’d out involves “investment contracts” and therefore securities transactions? Of course not, but as the <em>Framework</em> states, “the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>,&nbsp;<em>supra</em>&nbsp;note 22, at 3.</mfn> and thus less likely that the network is “sufficiently decentralized,” so the fact that it is now back under SEC review means a reversal is entirely possible.<mfn>Note that even if the SEC concludes that an arrangement to operate a validator node on Ethereum 2.0 qualifies as an “investment contract,” it does not automatically imply that Ether is a security. </mfn></p>\n<h2>Conclusion</h2>\n<p>Note that the purpose of this article is not to create “fear, uncertainty and doubt,” or “FUD” as it is frequently shorthanded in the crypto space. In fact, its purpose is quite the opposite: to encourage those who develop digital asset-based technology to accept the fact that the laws apply to what they’re doing and to proactively engage with regulators to make sure that their work does not run afoul of applicable legal and regulatory frameworks. Failing or refusing to do that can have serious negative consequences not just for the project they happen to be working on, but in the case of Ethereum, which as of this writing maintains the second-largest market capitalization of any cryptocurrency at $13,960,096,932,<mfn><em>Ethereum (ETH) price, charts, market cap, and other metrics</em>, CoinMarketCap (retrieved Dec. 21, 2019),&nbsp;<a href=\"https://coinmarketcap.com/currencies/ethereum/\">https://coinmarketcap.com/currencies/ethereum/</a>.</mfn> it can have wide-ranging implications across the entire cryptocurrency market. Regardless of how this unfolds, it is something that needs to be watched very carefully for anyone interested in this asset class.</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/proof-of-security/ </em><hr/></center>",
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      "parent_permlink": "gulovsen",
      "author": "gulovsen",
      "permlink": "ethereum20snewconsensusprotocolproofofsecurity-2rr1duj6eo",
      "title": "Ethereum 2.0’s New Consensus Protocol: “Proof of Security?”",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/12/77B7C803-8D4F-4BE5-91EE-CBDBA376A4E3.png</center> <br/><p><em>The author would like to thank <a href=\"https://www.linkedin.com/in/darrensandler\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Darren Sandler (opens in a new tab)\">Darren Sandler</a>, <a rel=\"noreferrer noopener\" aria-label=\"Gabriel Shapiro (opens in a new tab)\" href=\"https://twitter.com/lex_node\" target=\"_blank\">Gabriel Shapiro</a> and <a rel=\"noreferrer noopener\" aria-label=\"Adrian Cortez (opens in a new tab)\" href=\"https://www.linkedin.com/in/adrian-cortez-3b04363/\" target=\"_blank\">Adrian Cortez</a> for sharing their insights and providing invaluable suggestions during the drafting of this article.</em></p>\n<h2>Introduction</h2>\n<p>On Tuesday, November 12, 2019, Heath Tarbert, Chairman of the U.S. Commodities and Futures Trading Commission (CFTC), indicated that both his agency and the U.S. Securities and Exchange Commission (SEC), were undertaking a careful analysis of Ethereum 2.0’s new proof-of-stake (PoS)-based transaction validation model.<mfn>Christine Kim, <em>What the CFTC Chairman Actually Said About Ether Futures and Ethereum 2.0</em>, CoinDesk (last updated Nov. 17, 2019), <a href=\"https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0\">https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0</a>.</mfn> As recently as October 10, 2019, the same Heath Tarbert stated approvingly that “It is my view as chairman of the CFTC that ether is a commodity.”<mfn>Daniel Roberts, <em>CFTC says cryptocurrency ether is a commodity, and ether futures are next</em>, Yahoo! Finance (Oct. 10, 2019), <a href=\"https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html\">https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html</a>.</mfn> And in June of 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, stated, “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.\"<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>.</mfn> Some commentators already believe that Ethereum dodged a bullet for not being brought to task for its token sale in 2014,<mfn><em>See, e.g.</em>, Preston Byrne, <em>Ether is not a Security?</em>, The Back of the Envelope (a blog) (June 14, 2018), <a href=\"https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/\">https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/</a>; Chris Padovano, <em>What Nobody Wants to Hear: The Sale of Ether Tokens was Likely a Sale of Securities</em>, Decentralized Legal: Emergent Legal Issues Facing Distributed Systems (September 6, 2016), <a href=\"“https://web.archive.org/web/20190517210405/https://decentralizedlegal.com/ether-is-a-security/“\"> https://web.archive.org/web/20190517210405/https://decentralizedlegal.com/ether-is-a-security/</a>.</mfn> so the fact that it is now back under SEC review is legitimate cause for concern. If the SEC concludes that Ethereum’s new PoS validation model involves securities transactions, it could have significant negative implications for the Ethereum Network’s planned upgrade to version 2.0, as well as the wider cryptocurrency market.</p>\n<h2>What is Proof-of-Stake?</h2>\n<p>In contrast to proof-of-work (PoW) mining, which requires solving increasingly complicated mathematical computations to create blocks and validate/verify transactions, PoS mining typically requires operators &nbsp;of validator nodes (i.e., “validators”) to store (i.e., “stake”) a specified amount of cryptocurrency in their digital wallet and keep the wallet online so it can automatically broadcast its balance to the network.<mfn>Darren J. Sandler, <em>Citrus Groves in the Cloud: Is Cryptocurrency Cloud Mining A Security?</em>, 34 Santa Clara High Tech. L.J. 250, 258 (2018).</mfn> Furthermore, whereas PoW rewards miners who successfully solve the mathematical computations with a fixed amount of cryptocurrency upon block creation,<mfn><em>See, e.g.</em>, Andreas Antonopoulos, <em>Mastering Bitcoin: Programming the Open Blockchain</em> 26 (2d ed. 2018) (“A successful miner will collect a reward in the form of new bitcoin and transaction fees.”)</mfn> PoS protocols typically reward validators with a block reward in proportion to their stake.<mfn>Ameer Rosic,&nbsp;<em>Proof of Work vs Proof of Stake: Basic Mining Guide</em>, Blockgeeks (Mar. 15, 2017),&nbsp;<a href=\"https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/\">https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/</a>. </mfn></p>\n<p>In the case of Ethereum 2.0, users “can post Ether as collateral and verify and attest to the validity of blocks to seek financial returns in exchange for building and securing the protocol.”<mfn>Diederik Loerakker,&nbsp;<em>Ethereum 2.0 Phase 0 — Honest Validator</em>, GitHub (updated Nov. 15, 2019),&nbsp;<a href=\"https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md\">https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md</a>.</mfn> The requirements to become an Ethereum 2.0 validator are as follows:</p>\n<ul><li>Configure and run a validator client; and</li><li>Stake 32 Ether to the validator’s wallet.<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>. </mfn></li></ul>\n<p>To collect staking rewards / transaction fees, validators\nmust also do the following:</p>\n<ul><li>Maintain a balance of 32 Ether in the validator wallet;</li><li>Ensure that the validator is updated with the latest software; and</li><li>Ensure that the validator client stays online and can communicate with the network.<em><mfn>Id.</mfn></em> </li></ul>\n<h2>How Might Ethereum 2.0’s PoS Model Implicate Securities Laws?</h2>\n<p>The starting point for determining whether something qualifies as a “security” under U.S. law is by looking at the statutory definition of “security,” which can be found in Section 5 of the Securities Act of 1933<mfn>15 U.S.C.A. §77b(a)(1) (West 2019).</mfn> and Section 12(g) of the Securities Exchange Act of 1934.<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn> “‘Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.’ To that end, it enacted a broad definition of ‘security,’ sufficient ‘to encompass virtually any instrument that might be sold as an investment.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 393 (2004) (<em>quoting Reves v. Ernst &amp; Young</em>, 494 U.S. 56, 61 (1990)).</mfn> In both statutes, the term “investment contract” is included in the definition of a “security.” As has been stated by the SEC<mfn><em>See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO</em>, Exchange Act Release No. 81207, 117 SEC Docket 745 (July 25, 2017) (applying the “investment contract” analysis to DAO Tokens),&nbsp;<a href=\"https://www.sec.gov/litigation/investreport/34-81207.pdf\">https://www.sec.gov/litigation/investreport/34-81207.pdf</a>;&nbsp;<em>In re Munchee Inc.</em>, Securities Act Release No. 10445, 118 SEC Docket 975 (Dec. 11, 2017) (concluding that MUN tokens were securities because they were investment contracts).</mfn> and at least one U.S. federal district court,<mfn><em>See</em>&nbsp;<em>Balestra v. ATBCOIN LLC</em>, 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (holding that ATB Coins qualify as “investment contracts” and therefore “securities”).</mfn> arrangements involving digital assets are properly analyzed by considering whether they are “investment contracts” as that term is used in the statutes mentioned above. Since Ethereum 2.0’s PoS model involves digital assets, the “investment contract” analysis is similarly appropriate.</p>\n<p>In the seminal case <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946), the United States Supreme Court proclaimed, “[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”<mfn><em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293, 298–99 (1946).</mfn> Known popularly now as the “<em>Howey</em> test,” this definition of investment contract “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”<mfn><em>Id.</em>&nbsp;at 299. </mfn></p>\n<p>The <em>Howey</em> test requires the following elements to be present for a “contract, transaction or scheme” to be considered an “investment contract” (and therefore a security):<mfn>See, e.g., Howey, 328 U.S. at 300 (“Thus all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise. It follows that the arrangements whereby the investors’ interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed.”); cf. United Hous. Found., Inc. v. Forman, 421 U.S. 837, 858 (1975) (“What distinguishes a security transaction—and what is absent here—is an investment where one parts with his money in the hope of receiving profits from the efforts of others…”).</mfn></p>\n<ol><li>An\nInvestment of Money</li><li>In\na Common Enterprise</li><li>With\na Reasonable Expectation of Profits</li><li>Derived\nfrom the Efforts of Others</li></ol>\n<p>Each of these elements are\nconsidered in turn as they relate to Ethereum 2.0’s proposed PoS protocol.</p>\n<h3>An Investment of Money</h3>\n<p>The first question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “an investment of money.” According to the latest Ethereum 2.0 GitHub repositories, users must stake 32 Ether to operate a validator node,<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> so the answer quite clearly appears to be “yes.” The fact that the consideration paid is not in the form of cash is irrelevant for purposes of this part of the <em>Howey</em> test.<mfn><em>See, e.g., Uselton v. Comm. Lovelace Motor Freight, Inc.</em>, 940 F.2d 564, 574 (10th Cir. 1991) (“[I]n spite of&nbsp;<em>Howey</em>’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.”).</mfn> </p>\n<h3>In a Common Enterprise</h3>\n<p>The second question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “a common enterprise.” The U.S. federal court system recognizes three different tests, which vary depending upon which federal court circuit has jurisdiction over the matter: (1) horizontal commonality; (2) broad vertical commonality; and (3) narrow vertical commonality.<mfn>“The D.C., First, Second, Third, Fourth, Sixth, and Seventh Circuits use horizontal commonality[;] the Fifth, Tenth, and Eleventh Circuits use broad vertical commonality[; and] the Ninth Circuit recognizes narrow vertical commonality.” Sandler,&nbsp;<em>supra</em>&nbsp;note 5, at 272-75.</mfn> </p>\n<p>However, to the extent that the SEC is the agency performing a “careful analysis” of Ethereum 2.0, this is effectively a non-issue. That is because in its <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em> published on April 3, 2019, the SEC Strategic Hub for Innovation and Financial Technology (FinHub) stated the following: “The [SEC] does not require vertical or horizontal commonality <em>per se</em>, nor does it view a ‘common enterprise’ as a distinct element of the term ‘investment contract.’”<mfn>FinHub, <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em>, U.S. Securities and Exchange Commission (Apr. 3, 2019) [hereinafter <em>Framework</em>] <a href=\"https://www.sec.gov/files/dlt-framework.pdf\">https://www.sec.gov/files/dlt-framework.pdf</a>, at 13 n. 10, (citing<em> In re Barkate</em>, 57 S.E.C. 488, 496 n.13 (Apr. 8, 2004)).</mfn> Furthermore, FinHub states in its <em>Framework</em> that “in evaluating digital assets, [the SEC has] found that a ‘common enterprise’ typically exists.” Whether the federal courts would side with the SEC on this issue is beyond the scope of this article, but given the foregoing, there is every reason to believe that the SEC (at least) will find this element satisfied in the case of Ethereum 2.0.</p>\n<h3>With a Reasonable Expectation of Profits</h3>\n<p>Of all the questions that need to be answered when applying the <em>Howey</em> test, the third, whether Ethereum 2.0 involves a “reasonable expectation of profits,” is the simplest to answer. That is because Ethereum 2.0’s own specifications state the following: “[A validator] is an optional role for users in which they can post ETH as collateral and verify and attest to the validity of blocks to <em>seek financial returns</em> in exchange for building and securing the protocol.”<mfn>Loerakker<em>, supra</em>&nbsp;note 8 (emphasis added).</mfn> As stated by the U.S. Supreme Court in <em>S.E.C. v. Edwards</em>, 540 U.S. 389 (2004), “[T]he commonsense understanding of ‘profits’ in the <em>Howey</em> test [is] simply ‘<em>financial returns on ... investments</em>.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 396 (2004) (quoting&nbsp;<em>United Hous. Found., Inc. v. Forman</em>, 421 U.S. 837, 853 (1975)).</mfn> Thus, this third element of the <em>Howey</em> test is also satisfied.</p>\n<h3>Derived from the Efforts of Others</h3>\n<p>The fourth and final question that needs to be answered when\napplying the <em>Howey</em> test is whether the reasonable expectation of profits\nfrom the arrangement being considered is “derived from the efforts of others.” Or,\nas stated by the <em>Howey</em> court, derived “solely from the efforts of the\npromoter or a third party.”</p>\n<p>Relying upon the explicit language found in <em>Howey</em>, an argument could be made that an arrangement to run a validator node on the Ethereum 2.0 network actually fails this part of the test, because users have to expend quite a bit of effort before they are eligible to collect any “financial rewards.” As stated previously, in order to collect staking rewards / transaction fees, validators must do all of the following: (1) configure and run the validator client software; (2) stake 32 Ether to the validator’s wallet address; &nbsp;(3) maintain a continuous balance of 32 Ether in the validator wallet; (4) ensure that the validator client is updated with the latest software; and (5) ensure that the validator client stays online and can communicate with the network.<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> A failure to perform any of these tasks will result in users losing their right to collect any staking rewards / transaction fees (at least until the problem is rectified), thereby suggesting that the ability to receive any financial returns is derived solely from the efforts of the <em>user</em>, and <em>not</em> “solely from the efforts of [any] promoter or a third party.”</p>\n<p>Unfortunately, “in light of the remedial nature of the [U.S. securities] legislation,” the federal courts have “adopt[ed] a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”<mfn><em>Sec. &amp; Exch. Comm’n v. Glenn W. Turner Enterprises, Inc.</em>, 474 F.2d 476, 482 (9th Cir. 1973).</mfn> It is therefore the efforts which affect the failure or success of the Ethereum Network as a whole which is the correct focus of the analysis, and in fact was the focus of the previously referenced speech made by SEC Director William Hinman in concluding that the current iteration of Ethereum does not implicate securities laws.<mfn>Hinman,&nbsp;<em>supra</em>&nbsp;note 3.</mfn> As stated by Director Hinman,</p>\n<blockquote class=\"wp-block-quote\"><p>If the <strong>network</strong> on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.<mfn><em>Id</em>&nbsp;(emphasis added)<em>.</em></mfn></p>\n</blockquote>\n<p>The ultimate question, then, is whether the rollout of\nEthereum 2.0 signals that the Ethereum Network itself is not as “sufficiently\ndecentralized” as the SEC previously thought.</p>\n<h2>What Does “Sufficiently Decentralized” Mean?</h2>\n<p>Ever since Director Hinman’s speech was published, much digital ink has been spilled debating the usefulness of a “sufficiently decentralized” standard, with some commentators suggesting that “[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership”<mfn>Blockchain Association,&nbsp;<em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019),&nbsp;<a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a>.</mfn> while others arguing that “it is highly problematic to use ‘decentralized’ as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.”<mfn>Angela Walch,&nbsp;<em>Deconstructing “Decentralization”: Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN:&nbsp;<a href=\"https://ssrn.com/abstract=3326244\">https://ssrn.com/abstract=3326244</a>.</mfn> In fact, focusing solely on those two words independent of the rest of Director Hinman’s speech is troublesome, especially considering the fact that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin,&nbsp;<em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017),&nbsp;<a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a> .</mfn></p>\n<p>Whether a blockchain protocol or system is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>Hinman,&nbsp;<em>supra</em>&nbsp;note 3.</mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p>[W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.<br> …<br> [O]f course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.<mfn><em>Id.</em> </mfn></p>\n</blockquote>\n<p>The question that the SEC is therefore likely to be grappling with—given both the manner in which Ethereum 2.0 is being rolled out as well as the new specifications involving PoS—is whether Ethereum can continue to be successful without the involvement of individuals like Vitalik Buterin (one of the co-founders and considered by many to be the “face” of Ethereum) and organizations like the Ethereum Foundation.<mfn>The stated mission of the Ethereum Foundation is to “promote and support Ethereum platform and base layer research, development and education to bring decentralized protocols and tools to the world that empower developers to produce next generation decentralized applications (dapps).” [34]&nbsp;<em>Ethereum Foundation</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>.</mfn> If the answer is yes, then it is still likely to be considered “sufficiently decentralized” for purposes of the <em>Howey</em> test. Otherwise, it is not. And for the reasons discussed above, if it is no longer “sufficiently decentralized” for purposes of the <em>Howey</em> test, the SEC may conclude that Ethereum 2.0’s <a>PoS implementation</a> implicates U.S. securities law, possibly requiring registration under the Section 12(g) of the Securities Exchange Act of 1934<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn>—something that the Ethereum Foundation is unlikely to want to do. </p>\n<h2>Is Ethereum 2.0 “Sufficiently Decentralized?”</h2>\n<p>Exactly how the SEC will come down on this question is anyone’s guess, but guidance can be gleaned from FinHub’s <em>Framework</em> (mentioned above). In particular, the <em>Framework</em> provides several examples which, “[a]lthough [not] necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>,&nbsp;<em>supra</em>&nbsp;note 22, at 3.</mfn> (and thus less likely that the network is “sufficiently decentralized”), including the following: </p>\n<blockquote class=\"wp-block-quote\"><p>An AP<mfn>The term “AP” is short for “Active Participant,” which is defined in the&nbsp;<em>Framework</em>&nbsp;as “a promoter, sponsor, or other third party (or affiliated group of third parties).”&nbsp;<em>Id.</em> </mfn> is <strong>responsible for the development, improvement (or enhancement), operation, or promotion of the network</strong>, particularly if purchasers of the digital asset expect an AP to be <strong>performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality</strong>.<br> …<br> An AP<a> has<strong> a lead or central role in the direction of the ongoing development of the network or the digital asset</strong></a>.<br> …<br> An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example[,<strong> d]etermining whether and how to compensate persons providing services to the network</strong> or to the entity or entities charged with oversight of the network.<br> …<br> Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where[ t]he AP has the ability to realize capital appreciation from the value of the digital asset. This can be demonstrated, for example, if the AP <strong>retains a stake or interest in the digital asset</strong>. In these instances, purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset[; or where t]he AP<strong> owns or controls ownership of intellectual property rights of the network or digital asset</strong>, directly or indirectly.<mfn><em>Id.</em>&nbsp;at 3-5 (emphasis added).</mfn> </p>\n</blockquote>\n<p>Applying the examples given above to Ethereum 2.0:</p>\n<ol><li>It is generally understood that the specifications for Ethereum 2.0 were developed by a small team at Ethereum Foundation including Vitalik Buterin, and the Ethereum Foundation is primarily responsible for the “development and (in the case of Ethereum 2.0) improvement or enhancement (via the 2.0 upgrade) of the network.”<mfn><em>Ethereum Foundation</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>. </mfn></li><li>The Ethereum Foundation therefore “has a lead or central role in the direction of the ongoing development of the network or the digital asset” and purchasers of Ether (or those who decide to become validators by staking a minimum of 32 Ether to validator nodes when they come online via the 2.0 rollout) obviously expect the Ethereum Foundation to “perform[] or oversee[] tasks that are necessary for the [Ethereum] network or [Ether] to achieve or retain its intended purpose or functionality.”</li><li>The Ethereum Foundation gives various independent teams grants to build the specifications, thus “[d]etermining whether and how to compensate persons providing services to the network,” although “[i]t is currently not known how much the Ethereum Foundation spends on its organization and grants every year.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “owns or controls ownership of intellectual property rights of the network or digital asset,” including “the following trademarks: ETHEREUM, ETHER, ENTERPRISE ETHEREUM and ENTERPRISE ETHEREUM ALLIANCE.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “retains a stake or interest in the digital asset” as can be demonstrated by the fact that “[t]he Ethereum Foundation’s multisig wallet is known and as of 4/10/19 [held] 645,137 Ether. That equate[d] to ~$118,000,000.”<em><mfn>Id.</mfn></em></li></ol>\n<p>Do all these factors indicating reliance on the efforts of the Ethereum Foundation for the success of Ethereum 2.0 mean that the SEC is going to reverse its previous-held position that the Ethereum Network is “sufficiently decentralized” and find Ethereum 2.0 as currently spec’d out involves “investment contracts” and therefore securities transactions? Of course not, but as the <em>Framework</em> states, “the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>,&nbsp;<em>supra</em>&nbsp;note 22, at 3.</mfn> and thus less likely that the network is “sufficiently decentralized,” so the fact that it is now back under SEC review means a reversal is entirely possible.<mfn>Note that even if the SEC concludes that an arrangement to operate a validator node on Ethereum 2.0 qualifies as an “investment contract,” it does not automatically imply that Ether is a security. </mfn></p>\n<h2>Conclusion</h2>\n<p>Note that the purpose of this article is not to create “fear, uncertainty and doubt,” or “FUD” as it is frequently shorthanded in the crypto space. In fact, its purpose is quite the opposite: to encourage those who develop digital asset-based technology to accept the fact that the laws apply to what they’re doing and to proactively engage with regulators to make sure that their work does not run afoul of applicable legal and regulatory frameworks. Failing or refusing to do that can have serious negative consequences not just for the project they happen to be working on, but in the case of Ethereum, which as of this writing maintains the second-largest market capitalization of any cryptocurrency at $13,960,096,932,<mfn><em>Ethereum (ETH) price, charts, market cap, and other metrics</em>, CoinMarketCap (retrieved Dec. 21, 2019),&nbsp;<a href=\"https://coinmarketcap.com/currencies/ethereum/\">https://coinmarketcap.com/currencies/ethereum/</a>.</mfn> it can have wide-ranging implications across the entire cryptocurrency market. Regardless of how this unfolds, it is something that needs to be watched very carefully for anyone interested in this asset class.</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/proof-of-security/ </em><hr/></center>",
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      "permlink": "ethereum20snewconsensusprotocolproofofsecurity-2rr1duj6eo",
      "title": "Ethereum 2.0’s New Consensus Protocol: “Proof of Security?”",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/12/77B7C803-8D4F-4BE5-91EE-CBDBA376A4E3.png</center> <br/><p><em>The author would like to thank <a href=\"https://twitter.com/lex_node\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Gabriel Shapiro (opens in a new tab)\">Gabriel Shapiro</a> and <a href=\"https://www.linkedin.com/in/adrian-cortez-3b04363/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Adrian Cortez (opens in a new tab)\">Adrian Cortez</a> for sharing their insights and providing invaluable suggestions during the drafting of this article.</em></p>\n<h2>Introduction</h2>\n<p>On Tuesday, November 12, 2019, Heath Tarbert, Chairman of the U.S. Commodities and Futures Trading Commission (CFTC), indicated that both his agency and the U.S. Securities and Exchange Commission (SEC), were undertaking a careful analysis of Ethereum 2.0’s new proof-of-stake (PoS)-based transaction validation model.<mfn>Christine Kim, <em>What the CFTC Chairman Actually Said About Ether Futures and Ethereum 2.0</em>, CoinDesk (last updated Nov. 17, 2019), <a href=\"https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0\">https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0</a>.</mfn> As recently as October 10, 2019, the same Heath Tarbert stated approvingly that “It is my view as chairman of the CFTC that ether is a commodity.”<mfn>Daniel Roberts, <em>CFTC says cryptocurrency ether is a commodity, and ether futures are next</em>, Yahoo! Finance (Oct. 10, 2019), <a href=\"https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html\">https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html</a>.</mfn> And in June of 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, stated, “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.\"<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>.</mfn> Some commentators already believe that Ethereum dodged a bullet for not being brought to task for its token sale in 2014,<mfn><em>See, e.g.</em>, Preston Byrne, <em>Ether is not a Security?</em>, The Back of the Envelope (a blog) (June 14, 2018), <a href=\"https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/\">https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/</a>.</mfn> so the fact that it is now back under SEC review is legitimate cause for concern. If the SEC concludes that Ethereum’s new PoS validation model involves securities transactions, it could have significant negative implications for the Ethereum Network’s planned upgrade to version 2.0, as well as the wider cryptocurrency market.</p>\n<h2>What is Proof-of-Stake?</h2>\n<p>In contrast to proof-of-work (PoW) mining, which requires solving increasingly complicated mathematical computations to create blocks and validate/verify transactions, PoS mining typically requires operators &nbsp;of validator nodes (i.e., “validators”) to store (i.e., “stake”) a specified amount of cryptocurrency in their digital wallet and keep the wallet online so it can automatically broadcast its balance to the network.<mfn>Darren J. Sandler, <em>Citrus Groves in the Cloud: Is Cryptocurrency Cloud Mining A Security?</em>, 34 Santa Clara High Tech. L.J. 250, 258 (2018).</mfn> Furthermore, whereas PoW rewards miners who successfully solve the mathematical computations with a fixed amount of cryptocurrency upon block creation,<mfn><em>See, e.g.</em>, Andreas Antonopoulos, <em>Mastering Bitcoin: Programming the Open Blockchain</em> 26 (2d ed. 2018) (“A successful miner will collect a reward in the form of new bitcoin and transaction fees.”)</mfn> PoS protocols typically reward validators with a block reward in proportion to their stake.<mfn>Ameer Rosic,&nbsp;<em>Proof of Work vs Proof of Stake: Basic Mining Guide</em>, Blockgeeks (Mar. 15, 2017),&nbsp;<a href=\"https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/\">https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/</a>. </mfn></p>\n<p>In the case of Ethereum 2.0, users “can post Ether (ETH-USD) as collateral and verify and attest to the validity of blocks to seek financial returns in exchange for building and securing the protocol.”<mfn>Diederik Loerakker,&nbsp;<em>Ethereum 2.0 Phase 0 — Honest Validator</em>, GitHub (updated Nov. 15, 2019),&nbsp;<a href=\"https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md\">https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md</a>.</mfn> The requirements to become an Ethereum 2.0 validator are as follows:</p>\n<ul><li>Configure and run a validator client; and</li><li>Stake 32 Ether to the validator’s wallet.<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>. </mfn></li></ul>\n<p>To collect staking rewards / transaction fees, validators\nmust also do the following:</p>\n<ul><li>Maintain a balance of 32 Ether in the validator wallet;</li><li>Ensure that the validator is updated with the latest software; and</li><li>Ensure that the validator client stays online and can communicate with the network.<em><mfn>Id.</mfn></em> </li></ul>\n<h2>How Might Ethereum 2.0’s PoS Model Implicate Securities Laws?</h2>\n<p>The starting point for determining whether something qualifies as a “security” under U.S. law is by looking at the statutory definition of “security,” which can be found in Section 5 of the Securities Act of 1933<mfn>15 U.S.C.A. §77b(a)(1) (West 2019).</mfn> and Section 12(g) of the Securities Exchange Act of 1934.<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn> “‘Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.’ To that end, it enacted a broad definition of ‘security,’ sufficient ‘to encompass virtually any instrument that might be sold as an investment.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 393 (2004) (<em>quoting Reves v. Ernst &amp; Young</em>, 494 U.S. 56, 61 (1990)).</mfn> In both statutes, the term “investment contract” is included in the definition of a “security.” As has been stated by the SEC<mfn><em>See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO</em>, Exchange Act Release No. 81207, 117 SEC Docket 745 (July 25, 2017) (applying the “investment contract” analysis to DAO Tokens),&nbsp;<a href=\"https://www.sec.gov/litigation/investreport/34-81207.pdf\">https://www.sec.gov/litigation/investreport/34-81207.pdf</a>;&nbsp;<em>In re Munchee Inc.</em>, Securities Act Release No. 10445, 118 SEC Docket 975 (Dec. 11, 2017) (concluding that MUN tokens were securities because they were investment contracts).</mfn> and at least one U.S. federal district court,<mfn><em>See</em>&nbsp;<em>Balestra v. ATBCOIN LLC</em>, 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (holding that ATB Coins qualify as “investment contracts” and therefore “securities”).</mfn> arrangements involving digital assets are properly analyzed by considering whether they are “investment contracts” as that term is used in the statutes mentioned above. Since Ethereum 2.0’s PoS model involves digital assets, the “investment contract” analysis is similarly appropriate.</p>\n<p>In the seminal case <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946), the United States Supreme Court proclaimed, “[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”<mfn><em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293, 298–99 (1946).</mfn> Known popularly now as the “<em>Howey</em> test,” this definition of investment contract “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”<mfn><em>Id.</em>&nbsp;at 299. </mfn></p>\n<p>The <em>Howey</em> test requires the following elements to be present for a “contract, transaction or scheme” to be considered an “investment contract” (and therefore a security):<mfn>See, e.g., Howey, 328 U.S. at 300 (“Thus all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise. It follows that the arrangements whereby the investors’ interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed.”); cf. United Hous. Found., Inc. v. Forman, 421 U.S. 837, 858 (1975) (“What distinguishes a security transaction—and what is absent here—is an investment where one parts with his money in the hope of receiving profits from the efforts of others…”).</mfn></p>\n<ol><li>An\nInvestment of Money</li><li>In\na Common Enterprise</li><li>With\na Reasonable Expectation of Profits</li><li>Derived\nfrom the Efforts of Others</li></ol>\n<p>Each of these elements are\nconsidered in turn as they relate to Ethereum 2.0’s proposed PoS protocol.</p>\n<h3>An Investment of Money</h3>\n<p>The first question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “an investment of money.” According to the latest Ethereum 2.0 GitHub repositories, users must stake 32 Ether to operate a validator node,<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> so the answer quite clearly appears to be “yes.” The fact that the consideration paid is not in the form of cash is irrelevant for purposes of this part of the <em>Howey</em> test.<mfn><em>See, e.g., Uselton v. Comm. Lovelace Motor Freight, Inc.</em>, 940 F.2d 564, 574 (10th Cir. 1991) (“[I]n spite of&nbsp;<em>Howey</em>’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.”).</mfn> </p>\n<h3>In a Common Enterprise</h3>\n<p>The second question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “a common enterprise.” The U.S. federal court system recognizes three different tests, which vary depending upon which federal court circuit has jurisdiction over the matter: (1) horizontal commonality; (2) broad vertical commonality; and (3) narrow vertical commonality.<mfn>“The D.C., First, Second, Third, Fourth, Sixth, and Seventh Circuits use horizontal commonality[;] the Fifth, Tenth, and Eleventh Circuits use broad vertical commonality[; and] the Ninth Circuit recognizes narrow vertical commonality.” Sandler,&nbsp;<em>supra</em>&nbsp;note 5, at 272-75.</mfn> </p>\n<p>However, to the extent that the SEC is the agency performing a “careful analysis” of Ethereum 2.0, this is effectively a non-issue. That is because in its <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em> published on April 3, 2019, the SEC Strategic Hub for Innovation and Financial Technology (FinHub) stated the following: “The [SEC] does not require vertical or horizontal commonality <em>per se</em>, nor does it view a ‘common enterprise’ as a distinct element of the term ‘investment contract.’”<mfn>FinHub, <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em>, U.S. Securities and Exchange Commission (Apr. 3, 2019) [hereinafter <em>Framework</em>] <a href=\"https://www.sec.gov/files/dlt-framework.pdf\">https://www.sec.gov/files/dlt-framework.pdf</a>, at 13 n. 10, (citing<em> In re Barkate</em>, 57 S.E.C. 488, 496 n.13 (Apr. 8, 2004)).</mfn> Furthermore, FinHub states in its <em>Framework</em> that “in evaluating digital assets, [the SEC has] found that a ‘common enterprise’ typically exists.” Whether the federal courts would side with the SEC on this issue is beyond the scope of this article, but given the foregoing, there is every reason to believe that the SEC (at least) will find this element satisfied in the case of Ethereum 2.0.</p>\n<h3>With a Reasonable Expectation of Profits</h3>\n<p>Of all the questions that need to be answered when applying the <em>Howey</em> test, the third, whether Ethereum 2.0 involves a “reasonable expectation of profits,” is the simplest to answer. That is because Ethereum 2.0’s own specifications state the following: “[A validator] is an optional role for users in which they can post ETH as collateral and verify and attest to the validity of blocks to <em>seek financial returns</em> in exchange for building and securing the protocol.”<mfn>Loerakker<em>, supra</em>&nbsp;note 8 (emphasis added).</mfn> As stated by the U.S. Supreme Court in <em>S.E.C. v. Edwards</em>, 540 U.S. 389 (2004), “[T]he commonsense understanding of ‘profits’ in the <em>Howey</em> test [is] simply ‘<em>financial returns on ... investments</em>.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 396 (2004) (quoting&nbsp;<em>United Hous. Found., Inc. v. Forman</em>, 421 U.S. 837, 853 (1975)).</mfn> Thus, this third element of the <em>Howey</em> test is also satisfied.</p>\n<h3>Derived from the Efforts of Others</h3>\n<p>The fourth and final question that needs to be answered when\napplying the <em>Howey</em> test is whether the reasonable expectation of profits\nfrom the arrangement being considered is “derived from the efforts of others.” Or,\nas stated by the <em>Howey</em> court, derived “solely from the efforts of the\npromoter or a third party.”</p>\n<p>Relying upon the explicit language found in <em>Howey</em>, an argument could be made that an arrangement to run a validator node on the Ethereum 2.0 network actually fails this part of the test, because users have to expend quite a bit of effort before they are eligible to collect any “financial rewards.” As stated previously, in order to collect staking rewards / transaction fees, validators must do all of the following: (1) configure and run the validator client software; (2) stake 32 Ether to the validator’s wallet address; &nbsp;(3) maintain a continuous balance of 32 Ether in the validator wallet; (4) ensure that the validator client is updated with the latest software; and (5) ensure that the validator client stays online and can communicate with the network.<mfn><em>Eth 2.0 Economics</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> A failure to perform any of these tasks will result in users losing their right to collect any staking rewards / transaction fees (at least until the problem is rectified), thereby suggesting that the ability to receive any financial returns is derived solely from the efforts of the <em>user</em>, and <em>not</em> “solely from the efforts of [any] promoter or a third party.”</p>\n<p>Unfortunately, “in light of the remedial nature of the [U.S. securities] legislation,” the federal courts have “adopt[ed] a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”<mfn><em>Sec. &amp; Exch. Comm’n v. Glenn W. Turner Enterprises, Inc.</em>, 474 F.2d 476, 482 (9th Cir. 1973).</mfn> It is therefore the efforts which affect the failure or success of the Ethereum Network as a whole which is the correct focus of the analysis, and in fact was the focus of the previously referenced speech made by SEC Director William Hinman in concluding that the current iteration of Ethereum does not implicate securities laws.<mfn>Hinman,&nbsp;<em>supra</em>&nbsp;note 3.</mfn> As stated by Director Hinman,</p>\n<blockquote class=\"wp-block-quote\"><p>If the <strong>network</strong> on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.<mfn><em>Id</em> (emphasis added)<em>.</em></mfn></p>\n</blockquote>\n<p>The ultimate question, then, is whether the rollout of\nEthereum 2.0 signals that the Ethereum Network itself is not as “sufficiently\ndecentralized” as the SEC previously thought.</p>\n<h2>What Does “Sufficiently Decentralized” Mean?</h2>\n<p>Ever since Director Hinman’s speech was published, much digital ink has been spilled debating the usefulness of a “sufficiently decentralized” standard, with some commentators suggesting that “[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership”<mfn>Blockchain Association,&nbsp;<em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019),&nbsp;<a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a>.</mfn> while others arguing that “it is highly problematic to use ‘decentralized’ as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.”<mfn>Angela Walch,&nbsp;<em>Deconstructing “Decentralization”: Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN:&nbsp;<a href=\"https://ssrn.com/abstract=3326244\">https://ssrn.com/abstract=3326244</a>.</mfn> In fact, focusing solely on those two words independent of the rest of Director Hinman’s speech is troublesome, especially considering the fact that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin,&nbsp;<em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017),&nbsp;<a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a> .</mfn></p>\n<p>Whether a blockchain protocol or system is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>Hinman,&nbsp;<em>supra</em>&nbsp;note 3.</mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p>[W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.<br> …<br> [O]f course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.<mfn><em>Id.</em> </mfn></p>\n</blockquote>\n<p>The question that the SEC is therefore likely to be grappling with—given both the manner in which Ethereum 2.0 is being rolled out as well as the new specifications involving PoS—is whether Ethereum can continue to be successful without the involvement of individuals like Vitalik Buterin (one of the co-founders and considered by many to be the “face” of Ethereum) and organizations like the Ethereum Foundation.<mfn>The stated mission of the Ethereum Foundation is to “promote and support Ethereum platform and base layer research, development and education to bring decentralized protocols and tools to the world that empower developers to produce next generation decentralized applications (dapps).” [34]&nbsp;<em>Ethereum Foundation</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>.</mfn> If the answer is yes, then it is still likely to be considered “sufficiently decentralized” for purposes of the <em>Howey</em> test. Otherwise, it is not. And for the reasons discussed above, if it is no longer “sufficiently decentralized” for purposes of the <em>Howey</em> test, the SEC may conclude that Ethereum 2.0’s <a>PoS implementation</a> implicates U.S. securities law, possibly requiring registration under the Section 12(g) of the Securities Exchange Act of 1934<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn>—something that the Ethereum Foundation is unlikely to want to do. </p>\n<h2>Is Ethereum 2.0 “Sufficiently Decentralized?”</h2>\n<p>Exactly how the SEC will come down on this question is anyone’s guess, but guidance can be gleaned from FinHub’s <em>Framework</em> (mentioned above). In particular, the <em>Framework</em> provides several examples which, “[a]lthough [not] necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>,&nbsp;<em>supra</em>&nbsp;note 22, at 3.</mfn> (and thus less likely that the network is “sufficiently decentralized”), including the following: </p>\n<blockquote class=\"wp-block-quote\"><p>An AP<mfn>The term “AP” is short for “Active Participant,” which is defined in the&nbsp;<em>Framework</em>&nbsp;as “a promoter, sponsor, or other third party (or affiliated group of third parties).”&nbsp;<em>Id.</em> </mfn> is <strong>responsible for the development, improvement (or enhancement), operation, or promotion of the network</strong>, particularly if purchasers of the digital asset expect an AP to be <strong>performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality</strong>.<br> …<br> An AP<a> has<strong> a lead or central role in the direction of the ongoing development of the network or the digital asset</strong></a>.<br> …<br> An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example[,<strong> d]etermining whether and how to compensate persons providing services to the network</strong> or to the entity or entities charged with oversight of the network.<br> …<br> Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where[ t]he AP has the ability to realize capital appreciation from the value of the digital asset. This can be demonstrated, for example, if the AP <strong>retains a stake or interest in the digital asset</strong>. In these instances, purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset[; or where t]he AP<strong> owns or controls ownership of intellectual property rights of the network or digital asset</strong>, directly or indirectly.<mfn><em>Id.</em>&nbsp;at 3-5 (emphasis added).</mfn> </p>\n</blockquote>\n<p>Applying the examples given above to Ethereum 2.0:</p>\n<ol><li>It is generally understood that the specifications for Ethereum 2.0 were developed by a small team at Ethereum Foundation including Vitalik Buterin, and the Ethereum Foundation is primarily responsible for the “development and (in the case of Ethereum 2.0) improvement or enhancement (via the 2.0 upgrade) of the network.”<mfn><em>Ethereum Foundation</em>, EthHub,&nbsp;<a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>. </mfn></li><li>The Ethereum Foundation therefore “has a lead or central role in the direction of the ongoing development of the network or the digital asset” and purchasers of Ether (or those who decide to become validators by staking a minimum of 32 Ether to validator nodes when they come online via the 2.0 rollout) obviously expect the Ethereum Foundation to “perform[] or oversee[] tasks that are necessary for the [Ethereum] network or [Ether] to achieve or retain its intended purpose or functionality.”</li><li>The Ethereum Foundation gives various independent teams grants to build the specifications, thus “[d]etermining whether and how to compensate persons providing services to the network,” although “[i]t is currently not known how much the Ethereum Foundation spends on its organization and grants every year.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “owns or controls ownership of intellectual property rights of the network or digital asset,” including “the following trademarks: ETHEREUM, ETHER, ENTERPRISE ETHEREUM and ENTERPRISE ETHEREUM ALLIANCE.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “retains a stake or interest in the digital asset” as can be demonstrated by the fact that “[t]he Ethereum Foundation’s multisig wallet is known and as of 4/10/19 [held] 645,137 Ether. That equate[d] to ~$118,000,000.”<em><mfn>Id.</mfn></em></li></ol>\n<p>Do all these factors indicating reliance on the efforts of the Ethereum Foundation for the success of Ethereum 2.0 mean that the SEC is going to reverse its previous-held position that the Ethereum Network is “sufficiently decentralized” and find Ethereum 2.0 as currently spec’d out involves “investment contracts” and therefore securities transactions? Of course not, but as the <em>Framework</em> states, “the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>,&nbsp;<em>supra</em>&nbsp;note 22, at 3.</mfn> and thus less likely that the network is “sufficiently decentralized,” so the fact that it is now back under SEC review means a reversal is entirely possible.<mfn>Note that even if the SEC concludes that an arrangement to operate a validator node on Ethereum 2.0 qualifies as an “investment contract,” it does not automatically imply that Ether is a security. </mfn></p>\n<h2>Conclusion</h2>\n<p>Note that the purpose of this article is not to create “fear, uncertainty and doubt,” or “FUD” as it is frequently shorthanded in the crypto space. In fact, its purpose is quite the opposite: to encourage those who develop digital asset-based technology to accept the fact that the laws apply to what they’re doing and to proactively engage with regulators to make sure that their work does not run afoul of applicable legal and regulatory frameworks. Failing or refusing to do that can have serious negative consequences not just for the project they happen to be working on, but in the case of Ethereum, which as of this writing maintains the second-largest market capitalization of any cryptocurrency at $13,960,096,932,<mfn><em>Ethereum (ETH) price, charts, market cap, and other metrics</em>, CoinMarketCap (retrieved Dec. 21, 2019),&nbsp;<a href=\"https://coinmarketcap.com/currencies/ethereum/\">https://coinmarketcap.com/currencies/ethereum/</a>.</mfn> it can have wide-ranging implications across the entire cryptocurrency market. Regardless of how this unfolds, it is something that needs to be watched very carefully for anyone interested in this asset class.</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/proof-of-security/ </em><hr/></center>",
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      "permlink": "ethereum20snewconsensusprotocolproofofsecurity-2rr1duj6eo",
      "title": "Ethereum 2.0’s New Consensus Protocol: “Proof of Security?”",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/12/77B7C803-8D4F-4BE5-91EE-CBDBA376A4E3.png</center> <br/><p><em>The author would like to thank <a href=\"https://twitter.com/lex_node\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Gabriel Shapiro (opens in a new tab)\">Gabriel Shapiro</a> and <a href=\"https://www.linkedin.com/in/adrian-cortez-3b04363/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"Adrian Cortez (opens in a new tab)\">Adrian Cortez</a> for sharing their insights and providing invaluable suggestions during the drafting of this article.</em></p>\n<h2>Introduction</h2>\n<p>On Tuesday, November 12, 2019, Heath Tarbert, Chairman of the U.S. Commodities and Futures Trading Commission (CFTC), indicated that both his agency and the U.S. Securities and Exchange Commission (SEC), were undertaking a careful analysis of Ethereum 2.0’s new proof-of-stake (PoS)-based transaction validation model.<mfn>Christine Kim, <em>What the CFTC Chairman Actually Said About Ether Futures and Ethereum 2.0</em>, CoinDesk (last updated Nov. 17, 2019), <a href=\"https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0\">https://www.coindesk.com/what-the-cftc-chairman-actually-said-about-ether-futures-and-ethereum-2-0</a>.</mfn> As recently as October 10, 2019, the same Heath Tarbert stated approvingly that “It is my view as chairman of the CFTC that ether is a commodity.”<mfn>Daniel Roberts, <em>CFTC says cryptocurrency ether is a commodity, and ether futures are next</em>, Yahoo! Finance (Oct. 10, 2019), <a href=\"https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html\">https://finance.yahoo.com/news/cftc-says-cryptocurrency-ether-is-a-commodity-and-is-open-to-ether-derivatives-133455545.html</a>.</mfn> And in June of 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, stated, “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.\"<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>.</mfn> Some commentators already believe that Ethereum dodged a bullet for not being brought to task for its token sale in 2014,<mfn><em>See, e.g.</em>, Preston Byrne, <em>Ether is not a Security?</em>, The Back of the Envelope (a blog) (June 14, 2018), <a href=\"https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/\">https://prestonbyrne.com/2018/06/14/ether-is-not-a-security/</a>.</mfn> so the fact that it is now back under SEC review is legitimate cause for concern. If the SEC concludes that Ethereum’s new PoS validation model involves securities transactions, it could have significant negative implications for the Ethereum Network’s planned upgrade to version 2.0, as well as the wider cryptocurrency market.</p>\n<h2>What is Proof-of-Stake?</h2>\n<p>In contrast to proof-of-work (PoW) mining, which requires solving increasingly complicated mathematical computations to create blocks and validate/verify transactions, PoS mining typically requires operators  of validator nodes (i.e., “validators”) to store (i.e., “stake”) a specified amount of cryptocurrency in their digital wallet and keep the wallet online so it can automatically broadcast its balance to the network.<mfn>Darren J. Sandler, <em>Citrus Groves in the Cloud: Is Cryptocurrency Cloud Mining A Security?</em>, 34 Santa Clara High Tech. L.J. 250, 258 (2018).</mfn> Furthermore, whereas PoW rewards miners who successfully solve the mathematical computations with a fixed amount of cryptocurrency upon block creation,<mfn><em>See, e.g.</em>, Andreas Antonopoulos, <em>Mastering Bitcoin: Programming the Open Blockchain</em> 26 (2d ed. 2018) (“A successful miner will collect a reward in the form of new bitcoin and transaction fees.”)</mfn> PoS protocols typically reward validators with a block reward in proportion to their stake.<mfn>Ameer Rosic, <em>Proof of Work vs Proof of Stake: Basic Mining Guide</em>, Blockgeeks (Mar. 15, 2017), <a href=\"https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/\">https://blockgeeks.com/guides/proof-of-work-vs-proof-of-stake/</a>. </mfn></p>\n<p>In the case of Ethereum 2.0, users “can post Ether (ETH-USD) as collateral and verify and attest to the validity of blocks to seek financial returns in exchange for building and securing the protocol.”<mfn>Diederik Loerakker, <em>Ethereum 2.0 Phase 0 — Honest Validator</em>, GitHub (updated Nov. 15, 2019), <a href=\"https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md\">https://github.com/ethereum/eth2.0-specs/blob/dev/specs/validator/0_beacon-chain-validator.md</a>.</mfn> The requirements to become an Ethereum 2.0 validator are as follows:</p>\n<ul><li>Configure and run a validator client; and</li><li>Stake 32 Ether to the validator’s wallet.<mfn><em>Eth 2.0 Economics</em>, EthHub, <a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>. </mfn></li></ul>\n<p>To collect staking rewards / transaction fees, validators\nmust also do the following:</p>\n<ul><li>Maintain a balance of 32 Ether in the validator wallet;</li><li>Ensure that the validator is updated with the latest software; and</li><li>Ensure that the validator client stays online and can communicate with the network.<em><mfn>Id.</mfn></em> </li></ul>\n<h2>How Might Ethereum 2.0’s PoS Model Implicate Securities Laws?</h2>\n<p>The starting point for determining whether something qualifies as a “security” under U.S. law is by looking at the statutory definition of “security,” which can be found in Section 5 of the Securities Act of 1933<mfn>15 U.S.C.A. §77b(a)(1) (West 2019).</mfn> and Section 12(g) of the Securities Exchange Act of 1934.<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn> “‘Congress' purpose in enacting the securities laws was to regulate investments, in whatever form they are made and by whatever name they are called.’ To that end, it enacted a broad definition of ‘security,’ sufficient ‘to encompass virtually any instrument that might be sold as an investment.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 393 (2004) (<em>quoting Reves v. Ernst &amp; Young</em>, 494 U.S. 56, 61 (1990)).</mfn> In both statutes, the term “investment contract” is included in the definition of a “security.” As has been stated by the SEC<mfn><em>See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO</em>, Exchange Act Release No. 81207, 117 SEC Docket 745 (July 25, 2017) (applying the “investment contract” analysis to DAO Tokens), <a href=\"https://www.sec.gov/litigation/investreport/34-81207.pdf\">https://www.sec.gov/litigation/investreport/34-81207.pdf</a>; <em>In re Munchee Inc.</em>, Securities Act Release No. 10445, 118 SEC Docket 975 (Dec. 11, 2017) (concluding that MUN tokens were securities because they were investment contracts).</mfn> and at least one U.S. federal district court,<mfn><em>See</em> <em>Balestra v. ATBCOIN LLC</em>, 380 F. Supp. 3d 340 (S.D.N.Y. 2019) (holding that ATB Coins qualify as “investment contracts” and therefore “securities”).</mfn> arrangements involving digital assets are properly analyzed by considering whether they are “investment contracts” as that term is used in the statutes mentioned above. Since Ethereum 2.0’s PoS model involves digital assets, the “investment contract” analysis is similarly appropriate.</p>\n<p>In the seminal case <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946), the United States Supreme Court proclaimed, “[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”<mfn><em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293, 298–99 (1946).</mfn> Known popularly now as the “<em>Howey</em> test,” this definition of investment contract “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”<mfn><em>Id.</em> at 299. </mfn></p>\n<p>The <em>Howey</em> test requires the following elements to be present for a “contract, transaction or scheme” to be considered an “investment contract” (and therefore a security):<mfn>See, e.g., Howey, 328 U.S. at 300 (“Thus all the elements of a profit-seeking business venture are present here. The investors provide the capital and share in the earnings and profits; the promoters manage, control and operate the enterprise. It follows that the arrangements whereby the investors’ interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed.”); cf. United Hous. Found., Inc. v. Forman, 421 U.S. 837, 858 (1975) (“What distinguishes a security transaction—and what is absent here—is an investment where one parts with his money in the hope of receiving profits from the efforts of others…”).</mfn></p>\n<ol><li>An\nInvestment of Money</li><li>In\na Common Enterprise</li><li>With\na Reasonable Expectation of Profits</li><li>Derived\nfrom the Efforts of Others</li></ol>\n<p>Each of these elements are\nconsidered in turn as they relate to Ethereum 2.0’s proposed PoS protocol.</p>\n<h3>An Investment of Money</h3>\n<p>The first question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “an investment of money.” According to the latest Ethereum 2.0 GitHub repositories, users must stake 32 Ether to operate a validator node,<mfn><em>Eth 2.0 Economics</em>, EthHub, <a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> so the answer quite clearly appears to be “yes.” The fact that the consideration paid is not in the form of cash is irrelevant for purposes of this part of the <em>Howey</em> test.<mfn><em>See, e.g., Uselton v. Comm. Lovelace Motor Freight, Inc.</em>, 940 F.2d 564, 574 (10th Cir. 1991) (“[I]n spite of <em>Howey</em>’s reference to an ‘investment of money,’ it is well established that cash is not the only form of contribution or investment that will create an investment contract.”).</mfn> </p>\n<h3>In a Common Enterprise</h3>\n<p>The second question that needs to be answered when applying the <em>Howey</em> test is whether the arrangement involves “a common enterprise.” The U.S. federal court system recognizes three different tests, which vary depending upon which federal court circuit has jurisdiction over the matter: (1) horizontal commonality; (2) broad vertical commonality; and (3) narrow vertical commonality.<mfn>“The D.C., First, Second, Third, Fourth, Sixth, and Seventh Circuits use horizontal commonality[;] the Fifth, Tenth, and Eleventh Circuits use broad vertical commonality[; and] the Ninth Circuit recognizes narrow vertical commonality.” Sandler, <em>supra</em> note 5, at 272-75.</mfn> </p>\n<p>However, to the extent that the SEC is the agency performing a “careful analysis” of Ethereum 2.0, this is effectively a non-issue. That is because in its <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em> published on April 3, 2019, the SEC Strategic Hub for Innovation and Financial Technology (FinHub) stated the following: “The [SEC] does not require vertical or horizontal commonality <em>per se</em>, nor does it view a ‘common enterprise’ as a distinct element of the term ‘investment contract.’”<mfn>FinHub, <em>Framework for \"Investment Contract\" Analysis of Digital Assets</em>, U.S. Securities and Exchange Commission (Apr. 3, 2019) [hereinafter <em>Framework</em>] <a href=\"https://www.sec.gov/files/dlt-framework.pdf\">https://www.sec.gov/files/dlt-framework.pdf</a>, at 13 n. 10, (citing<em> In re Barkate</em>, 57 S.E.C. 488, 496 n.13 (Apr. 8, 2004)).</mfn> Furthermore, FinHub states in its <em>Framework</em> that “in evaluating digital assets, [the SEC has] found that a ‘common enterprise’ typically exists.” Whether the federal courts would side with the SEC on this issue is beyond the scope of this article, but given the foregoing, there is every reason to believe that the SEC (at least) will find this element satisfied in the case of Ethereum 2.0.</p>\n<h3>With a Reasonable Expectation of Profits</h3>\n<p>Of all the questions that need to be answered when applying the <em>Howey</em> test, the third, whether Ethereum 2.0 involves a “reasonable expectation of profits,” is the simplest to answer. That is because Ethereum 2.0’s own specifications state the following: “[A validator] is an optional role for users in which they can post ETH as collateral and verify and attest to the validity of blocks to <em>seek financial returns</em> in exchange for building and securing the protocol.”<mfn>Loerakker<em>, supra</em> note 8 (emphasis added).</mfn> As stated by the U.S. Supreme Court in <em>S.E.C. v. Edwards</em>, 540 U.S. 389 (2004), “[T]he commonsense understanding of ‘profits’ in the <em>Howey</em> test [is] simply ‘<em>financial returns on ... investments</em>.’”<mfn><em>S.E.C. v. Edwards</em>, 540 U.S. 389, 396 (2004) (quoting <em>United Hous. Found., Inc. v. Forman</em>, 421 U.S. 837, 853 (1975)).</mfn> Thus, this third element of the <em>Howey</em> test is also satisfied.</p>\n<h3>Derived from the Efforts of Others</h3>\n<p>The fourth and final question that needs to be answered when\napplying the <em>Howey</em> test is whether the reasonable expectation of profits\nfrom the arrangement being considered is “derived from the efforts of others.” Or,\nas stated by the <em>Howey</em> court, derived “solely from the efforts of the\npromoter or a third party.”</p>\n<p>Relying upon the explicit language found in <em>Howey</em>, an argument could be made that an arrangement to run a validator node on the Ethereum 2.0 network actually fails this part of the test, because users have to expend quite a bit of effort before they are eligible to collect any “financial rewards.” As stated previously, in order to collect staking rewards / transaction fees, validators must do all of the following: (1) configure and run the validator client software; (2) stake 32 Ether to the validator’s wallet address;  (3) maintain a continuous balance of 32 Ether in the validator wallet; (4) ensure that the validator client is updated with the latest software; and (5) ensure that the validator client stays online and can communicate with the network.<mfn><em>Eth 2.0 Economics</em>, EthHub, <a href=\"https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/\">https://docs.ethhub.io/ethereum-roadmap/ethereum-2.0/eth-2.0-economics/</a>.</mfn> A failure to perform any of these tasks will result in users losing their right to collect any staking rewards / transaction fees (at least until the problem is rectified), thereby suggesting that the ability to receive any financial returns is derived solely from the efforts of the <em>user</em>, and <em>not</em> “solely from the efforts of [any] promoter or a third party.”</p>\n<p>Unfortunately, “in light of the remedial nature of the [U.S. securities] legislation,” the federal courts have “adopt[ed] a more realistic test, whether the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.”<mfn><em>Sec. &amp; Exch. Comm’n v. Glenn W. Turner Enterprises, Inc.</em>, 474 F.2d 476, 482 (9th Cir. 1973).</mfn> It is therefore the efforts which affect the failure or success of the Ethereum Network as a whole which is the correct focus of the analysis, and in fact was the focus of the previously referenced speech made by SEC Director William Hinman in concluding that the current iteration of Ethereum does not implicate securities laws.<mfn>Hinman, <em>supra</em> note 3.</mfn> As stated by Director Hinman,</p>\n<p>If the <strong>network</strong> on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.<mfn><em>Id</em> (emphasis added)<em>.</em></mfn></p>\n<p>The ultimate question, then, is whether the rollout of\nEthereum 2.0 signals that the Ethereum Network itself is not as “sufficiently\ndecentralized” as the SEC previously thought.</p>\n<h2>What Does “Sufficiently Decentralized” Mean?</h2>\n<p>Ever since Director Hinman’s speech was published, much digital ink has been spilled debating the usefulness of a “sufficiently decentralized” standard, with some commentators suggesting that “[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership”<mfn>Blockchain Association, <em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019), <a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a>.</mfn> while others arguing that “it is highly problematic to use ‘decentralized’ as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.”<mfn>Angela Walch, <em>Deconstructing “Decentralization”: Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN: <a href=\"https://ssrn.com/abstract=3326244\">https://ssrn.com/abstract=3326244</a>.</mfn> In fact, focusing solely on those two words independent of the rest of Director Hinman’s speech is troublesome, especially considering the fact that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin, <em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017), <a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a> .</mfn></p>\n<p>Whether a blockchain protocol or system is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>Hinman, <em>supra</em> note 3.</mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p>[W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.<br> …<br> [O]f course there will continue to be systems that rely on central actors whose efforts are a key to the success of the enterprise. In those cases, application of the securities laws protects the investors who purchase the tokens or coins.<mfn><em>Id.</em> </mfn></p>\n</blockquote>\n<p>The question that the SEC is therefore likely to be grappling with—given both the manner in which Ethereum 2.0 is being rolled out as well as the new specifications involving PoS—is whether Ethereum can continue to be successful without the involvement of individuals like Vitalik Buterin (one of the co-founders and considered by many to be the “face” of Ethereum) and organizations like the Ethereum Foundation.<mfn>The stated mission of the Ethereum Foundation is to “promote and support Ethereum platform and base layer research, development and education to bring decentralized protocols and tools to the world that empower developers to produce next generation decentralized applications (dapps).” [34] <em>Ethereum Foundation</em>, EthHub, <a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>.</mfn> If the answer is yes, then it is still likely to be considered “sufficiently decentralized” for purposes of the <em>Howey</em> test. Otherwise, it is not. And for the reasons discussed above, if it is no longer “sufficiently decentralized” for purposes of the <em>Howey</em> test, the SEC may conclude that Ethereum 2.0’s <a>PoS implementation</a> implicates U.S. securities law, possibly requiring registration under the Section 12(g) of the Securities Exchange Act of 1934<mfn>15 U.S.C.A. §78c(a)(10) (West 2019).</mfn>—something that the Ethereum Foundation is unlikely to want to do. </p>\n<h2>Is Ethereum 2.0 “Sufficiently Decentralized?”</h2>\n<p>Exactly how the SEC will come down on this question is anyone’s guess, but guidance can be gleaned from FinHub’s <em>Framework</em> (mentioned above). In particular, the <em>Framework</em> provides several examples which, “[a]lthough [not] necessarily determinative, the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>, <em>supra</em> note 22, at 3.</mfn> (and thus less likely that the network is “sufficiently decentralized”), including the following: </p>\n<blockquote class=\"wp-block-quote\"><p>An AP<mfn>The term “AP” is short for “Active Participant,” which is defined in the <em>Framework</em> as “a promoter, sponsor, or other third party (or affiliated group of third parties).” <em>Id.</em> </mfn> is <strong>responsible for the development, improvement (or enhancement), operation, or promotion of the network</strong>, particularly if purchasers of the digital asset expect an AP to be <strong>performing or overseeing tasks that are necessary for the network or digital asset to achieve or retain its intended purpose or functionality</strong>.<br> …<br> An AP<a> has<strong> a lead or central role in the direction of the ongoing development of the network or the digital asset</strong></a>.<br> …<br> An AP has a continuing managerial role in making decisions about or exercising judgment concerning the network or the characteristics or rights the digital asset represents including, for example[,<strong> d]etermining whether and how to compensate persons providing services to the network</strong> or to the entity or entities charged with oversight of the network.<br> …<br> Purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset, such as where[ t]he AP has the ability to realize capital appreciation from the value of the digital asset. This can be demonstrated, for example, if the AP <strong>retains a stake or interest in the digital asset</strong>. In these instances, purchasers would reasonably expect the AP to undertake efforts to promote its own interests and enhance the value of the network or digital asset[; or where t]he AP<strong> owns or controls ownership of intellectual property rights of the network or digital asset</strong>, directly or indirectly.<mfn><em>Id.</em> at 3-5 (emphasis added).</mfn> </p>\n</blockquote>\n<p>Applying the examples given above to Ethereum 2.0:</p>\n<ol><li>It is generally understood that the specifications for Ethereum 2.0 were developed by a small team at Ethereum Foundation including Vitalik Buterin, and the Ethereum Foundation is primarily responsible for the “development and (in the case of Ethereum 2.0) improvement or enhancement (via the 2.0 upgrade) of the network.”<mfn><em>Ethereum Foundation</em>, EthHub, <a href=\"https://docs.ethhub.io/ethereum-basics/ethereum-foundation/\">https://docs.ethhub.io/ethereum-basics/ethereum-foundation/</a>. </mfn></li><li>The Ethereum Foundation therefore “has a lead or central role in the direction of the ongoing development of the network or the digital asset” and purchasers of Ether (or those who decide to become validators by staking a minimum of 32 Ether to validator nodes when they come online via the 2.0 rollout) obviously expect the Ethereum Foundation to “perform[] or oversee[] tasks that are necessary for the [Ethereum] network or [Ether] to achieve or retain its intended purpose or functionality.”</li><li>The Ethereum Foundation gives various independent teams grants to build the specifications, thus “[d]etermining whether and how to compensate persons providing services to the network,” although “[i]t is currently not known how much the Ethereum Foundation spends on its organization and grants every year.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “owns or controls ownership of intellectual property rights of the network or digital asset,” including “the following trademarks: ETHEREUM, ETHER, ENTERPRISE ETHEREUM and ENTERPRISE ETHEREUM ALLIANCE.”<em><mfn>Id.</mfn></em></li><li>The Ethereum Foundation “retains a stake or interest in the digital asset” as can be demonstrated by the fact that “[t]he Ethereum Foundation’s multisig wallet is known and as of 4/10/19 [held] 645,137 Ether. That equate[d] to ~$118,000,000.”<em><mfn>Id.</mfn></em></li></ol>\n<p>Do all these factors indicating reliance on the efforts of the Ethereum Foundation for the success of Ethereum 2.0 mean that the SEC is going to reverse its previous-held position that the Ethereum Network is “sufficiently decentralized” and find Ethereum 2.0 as currently spec’d out involves “investment contracts” and therefore securities transactions? Of course not, but as the <em>Framework</em> states, “the stronger their presence, the more likely it is that a purchaser of a digital asset is relying on the ‘efforts of others’”<mfn><em>Framework</em>, <em>supra</em> note 22, at 3.</mfn> and thus less likely that the network is “sufficiently decentralized,” so the fact that it is now back under SEC review means a reversal is entirely possible.<mfn>Note that even if the SEC concludes that an arrangement to operate a validator node on Ethereum 2.0 qualifies as an “investment contract,” it does not automatically imply that Ether is a security. </mfn></p>\n<h2>Conclusion</h2>\n<p>Note that the purpose of this article is not to create “fear, uncertainty and doubt,” or “FUD” as it is frequently shorthanded in the crypto space. In fact, its purpose is quite the opposite: to encourage those who develop digital asset-based technology to accept the fact that the laws apply to what they’re doing and to proactively engage with regulators to make sure that their work does not run afoul of applicable legal and regulatory frameworks. Failing or refusing to do that can have serious negative consequences not just for the project they happen to be working on, but in the case of Ethereum, which as of this writing maintains the second-largest market capitalization of any cryptocurrency at $13,960,096,932,<mfn><em>Ethereum (ETH) price, charts, market cap, and other metrics</em>, CoinMarketCap (retrieved Dec. 21, 2019), <a href=\"https://coinmarketcap.com/currencies/ethereum/\">https://coinmarketcap.com/currencies/ethereum/</a>.</mfn> it can have wide-ranging implications across the entire cryptocurrency market. Regardless of how this unfolds, it is something that needs to be watched very carefully for anyone interested in this asset class.</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/proof-of-security/ </em><hr/></center>",
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      "permlink": "whatisthemeaningofsufficientlydecentralized-6lqeodww3s",
      "title": "What is the Meaning of “Sufficiently Decentralized?”",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/12/1_WG5_xDDwHv0lMaVUYLNbVA.png</center> <br/><figure class=\"wp-block-embed-youtube wp-block-embed is-type-video is-provider-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\nhttps://youtu.be/HNH24KM2yto\n</div></figure>\n<p>On June 14, 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, made the following remarks at the Yahoo Finance All Markets Summit: Crypto in San Francisco, CA: “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a></mfn> Later in that same speech, he made this pronouncement which has been lovingly dubbed the \"Hinman Rule\" by some members of the crypto legal community:</p>\n<blockquote class=\"wp-block-quote\"><p> If the network on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.</p><cite>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a> (emphasis added).</cite>\n</blockquote>\n<p>Since giving that speech, much digital ink has been spilled debating the usefulness of a \"sufficiently decentralized\" standard, with some commentators suggesting that \"[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership\"<mfn>Blockchain Association, <em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019), <a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a></mfn> while others argue that \"it is highly problematic  to use 'decentralized' as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.\"<mfn>Angela Walch, <em>Deconstructing 'Decentralization': Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN:&nbsp;<a rel=\"noreferrer noopener\" href=\"https://ssrn.com/abstract=3326244\" target=\"_blank\">https://ssrn.com/abstract=3326244</a></mfn> </p>\n<p>The problem with focusing on the phrase \"sufficiently decentralized\" is that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin, <em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017), <a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a></mfn> As a result, attempting to craft a meaningful legal standard based that term, at least as it is understood in the blockchain/crypto space, is something of a fool's errand.</p>\n<p>In fact, whether a blockchain network is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a></mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p> [W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.</p><cite> William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>. </cite>\n</blockquote>\n<p>Since the entire foundation of U.S. securities legislation is based on the concept of disclosure, it only makes sense to enforce those laws when doing so will have any meaningful impact. To put it another way, if there is material non-public information about a blockchain network that is only known to a small group of developers or other \"insiders\" (including the fact that if those developers or insiders all decided to abandon the project the entire network would collapse), then it would at least arguably make sense, assuming all the other prongs of the \"investment contract\" test enunciated in <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946) are met, to require that this material information be disclosed publicly prior to the network and its related cryptocurrency being promoted to potential investors/purchasers. In that case, the network would fail to meet the \"sufficiently decentralized\" standard.</p>\n<p>If you have questions about how this standard might apply to your own blockchain or cryptocurrency project, be sure to<strong><a href=\"https://gulovsen.io/contact/\"> contact a qualified attorney</a></strong>, as the information presented on this website is meant for educational and informational purposes only and is not intended as legal advice.</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/what-is-the-meaning-of-sufficiently-decentralized/ </em><hr/></center>",
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      "parent_permlink": "gulovsen",
      "author": "gulovsen",
      "permlink": "whatisthemeaningofsufficientlydecentralized-6lqeodww3s",
      "title": "What is the Meaning of “Sufficiently Decentralized?”",
      "body": "<figure class=\"wp-block-embed-youtube wp-block-embed is-type-video is-provider-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\nhttps://youtu.be/HNH24KM2yto\n</div></figure>\n<p>On June 14, 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, made the following remarks at the Yahoo Finance All Markets Summit: Crypto in San Francisco, CA: “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a></mfn> Later in that same speech, he made this pronouncement which has been lovingly dubbed the \"Hinman Rule\" by some members of the crypto legal community:</p>\n<blockquote class=\"wp-block-quote\"><p> If the network on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.</p><cite>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a> (emphasis added).</cite>\n</blockquote>\n<p>Since giving that speech, much digital ink has been spilled debating the usefulness of a \"sufficiently decentralized\" standard, with some commentators suggesting that \"[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership\"<mfn>Blockchain Association, <em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019), <a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a></mfn> while others argue that \"it is highly problematic  to use 'decentralized' as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.\"<mfn>Angela Walch, <em>Deconstructing 'Decentralization': Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN:&nbsp;<a rel=\"noreferrer noopener\" href=\"https://ssrn.com/abstract=3326244\" target=\"_blank\">https://ssrn.com/abstract=3326244</a></mfn> </p>\n<p>The problem with focusing on the phrase \"sufficiently decentralized\" is that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin, <em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017), <a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a></mfn> As a result, attempting to craft a meaningful legal standard based that term, at least as it is understood in the blockchain/crypto space, is something of a fool's errand.</p>\n<p>In fact, whether a blockchain network is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a></mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p> [W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.</p><cite> William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>. </cite>\n</blockquote>\n<p>Since the entire foundation of U.S. securities legislation is based on the concept of disclosure, it only makes sense to enforce those laws when doing so will have any meaningful impact. To put it another way, if there is material non-public information about a blockchain network that is only known to a small group of developers or other \"insiders\" (including the fact that if those developers or insiders all decided to abandon the project the entire network would collapse), then it would at least arguably make sense, assuming all the other prongs of the \"investment contract\" test enunciated in <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946) are met, to require that this material information be disclosed publicly prior to the network and its related cryptocurrency being promoted to potential investors/purchasers. In that case, the network would fail to meet the \"sufficiently decentralized\" standard.</p>\n<p>If you have questions about how this standard might apply to your own blockchain or cryptocurrency project, be sure to<strong><a href=\"https://gulovsen.io/contact/\"> contact a qualified attorney</a></strong>, as the information presented on this website is meant for educational and informational purposes only and is not intended as legal advice.</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/what-is-the-meaning-of-sufficiently-decentralized/ </em><hr/></center>",
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      "author": "gulovsen",
      "permlink": "whatissufficientlydecentralized-06zy8nhh32",
      "title": "What is \"Sufficiently Decentralized?\"",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/12/1_WG5_xDDwHv0lMaVUYLNbVA.png</center> <br/><p>On June 14, 2018, William Hinman, Director of the SEC’s Division of Corporation Finance, made the following remarks at the Yahoo Finance All Markets Summit: Crypto in San Francisco, CA: “[B]ased on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a></mfn> Later in that same speech, he made this pronouncement which has been lovingly dubbed the \"Hinman Rule\" by some members of the crypto legal community:</p>\n<blockquote class=\"wp-block-quote\"><p> If the network on which the token or coin is to function is <strong>sufficiently decentralized</strong> – where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts – the assets may not represent an investment contract.</p><cite>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a> (emphasis added).</cite>\n</blockquote>\n<p>Since giving that speech, much digital ink has been spilled debating the usefulness of a \"sufficiently decentralized\" standard, with some commentators suggesting that \"[i]nnovators should take comfort that this standard for decentralization, properly understood, is not overly burdensome or unrealistic, and seems to permit projects to have significant, necessary centralized leadership\"<mfn>Blockchain Association, <em>Understanding the SEC’s Guidance on Digital Tokens: The Hinman Token Standard</em>, Medium (Jan. 10, 2019), <a href=\"https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a\">https://medium.com/@BlockchainAssoc/understanding-the-secs-guidance-on-digital-tokens-the-hinman-token-standard-dd51c6105e2a</a></mfn> while others argue that \"it is highly problematic  to use 'decentralized' as a legal standard, for a variety of reasons, from our poor understanding of the concept, to its inevitably shifting nature.\"<mfn>Angela Walch, <em>Deconstructing 'Decentralization': Exploring the Core Claim of Crypto Systems</em>, Crypto Assets: Legal and Monetary Perspectives (OUP, Forthcoming) (Jan. 30, 2019), available at SSRN: <a rel=\"noreferrer noopener\" href=\"https://ssrn.com/abstract=3326244\" target=\"_blank\">https://ssrn.com/abstract=3326244</a></mfn> </p>\n<p>The problem with focusing on the phrase \"sufficiently decentralized\" is that even in the context of blockchain protocols, “there is often a lot of confusion as to what this word [decentralization] actually means.”<mfn>Vitalik Buterin, <em>The Meaning of Decentralization</em>, Medium (Feb. 6, 2017), <a href=\"https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274\">https://medium.com/@VitalikButerin/the-meaning-of-decentralization-a0c92b76a274</a></mfn> As a result, attempting to craft a meaningful legal standard based that term, at least as it is understood in the blockchain/crypto space, is something of a fool's errand.</p>\n<p>In fact, whether a blockchain network is “sufficiently decentralized” for purposes of securities law has far less to do with blockchain technology or even “decentralization” and instead has much more to do with the fundamentals of securities law, which are designed, as Director Hinman put it, “to remove the information asymmetry between promoters and investors.”<mfn>William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a></mfn> In particular,</p>\n<blockquote class=\"wp-block-quote\"><p> [W]hen the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede. As a network becomes truly decentralized, the ability to identify an issuer or promoter to make the requisite disclosures becomes difficult, and less meaningful.</p><cite> William Hinman, <em>Digital Asset Transactions: When Howey Met Gary Plastic)</em>, U.S. Securities and Exchange Commission (June 14, 2018), <a href=\"https://www.sec.gov/news/speech/speech-hinman-061418\">https://www.sec.gov/news/speech/speech-hinman-061418</a>. </cite>\n</blockquote>\n<p>Since the entire foundation of U.S. securities legislation is based on the concept of disclosure, it only makes sense to enforce those laws when doing so will have any meaningful impact. To put it another way, if there is material non-public information about a blockchain network that is only known to a small group of developers or other \"insiders\" (including the fact that if those developers or insiders all decided to abandon the project the entire network would collapse), then it would at least arguably make sense, assuming all the other prongs of the \"investment contract\" test enunciated in <em>S.E.C. v. W.J. Howey Co.</em>, 328 U.S. 293 (1946) are met, to require that this material information be disclosed publicly prior to the network and its related cryptocurrency being promoted to potential investors/purchasers. In that case, the network would fail to meet the \"sufficiently decentralized\" standard.</p>\n<p>How, then, should you apply this standard to your own blockchain or cryptocurrency project? By<a href=\"https://gulovsen.io/contact/\"><strong> contacting a qualified attorney,</strong></a> of course, because, as clearly stated at the bottom of every page of this website, all of the information presented is intended solely for informational and educational purposes, and none of it is intended as legal advice. 😉</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/what-is-sufficiently-decentralized/ </em><hr/></center>",
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      "title": "Grant Gulovsen Featured on the End of the Chain Podcast",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/09/Untitled-picture.png</center> <br/><div class=\"wp-block-cover alignwide has-background-dim-80 has-background-dim has-parallax\" style=\"background-image:url(https://gulovsen.io/wp-content/uploads/2019/09/Untitled-picture.png);background-color:#223311\"><div class=\"wp-block-cover__inner-container\"><p style=\"text-align:center\" class=\"has-large-font-size\"><p style=\"text-align:center; font-family:Oswald\" class=\"has-large-font-size\">Grant Gulovsen, Crypto Attorney and Co-Host/Producer of The CryptoLaw Podcast, Interviewed on the End of the Chain Podcast</p></p>\n</div></div>\n<p>Back in July I was honored to be a guest on <strong><a rel=\"noreferrer noopener\" aria-label=\" (opens in a new tab)\" href=\"https://www.endofthechain.com/author/samuel/\" target=\"_blank\">Samuel McCulloch</a></strong>'s blockchain and crypto-focused podcast entitled <strong><a rel=\"noreferrer noopener\" aria-label=\"End of the Chain (opens in a new tab)\" href=\"https://www.endofthechain.com/\" target=\"_blank\">End of the Chain</a></strong>. Here's a summary from the liner notes:</p>\n<blockquote class=\"wp-block-quote is-style-large\"><p>In this episode, Grant and I chat about IEOs, ICO's, IDOs and every other three letter acronym connected with crypto. Grant tells how he became a crypto specialized lawyer and we discuss Kin, Tether and Libra coin. At the end we talk about China and its relationship with Crypto.</p><cite><a href=\"https://www.endofthechain.com/grant-gulovsen/\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"End of the Chain Podcast Episode 21 JUL 2019 -  Grant Gulovsen - Host of CryptoLaw Podcast  (opens in a new tab)\">End of the Chain Podcast Episode 21 JUL 2019 -  Grant Gulovsen - Host of CryptoLaw Podcast </a></cite>\n</blockquote>\n<p>You can check out the episode here:  <a href=\"https://www.endofthechain.com/grant-gulovsen/\"><strong>https://www.endofthechain.com/grant-gulovsen/</strong></a> </p>\n<p>While you're at it, please subscribe to  <strong><a rel=\"noreferrer noopener\" href=\"https://www.endofthechain.com/\" target=\"_blank\">End of the Chain</a></strong> as it is one of the better crypto podcasts out there (and that's coming from someone who produces <a rel=\"noreferrer noopener\" aria-label=\"The CryptoLaw Podcast (opens in a new tab)\" href=\"http://www.cryptolawpodcast.com/\" target=\"_blank\"><strong>The CryptoLaw Podcast</strong></a> 😃).</p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/grant-gulovsen-featured-on-the-end-of-the-chain-podcast/ </em><hr/></center>",
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      "memo": "Dear @gulovsen. I hope you don't mind this little memo. Every week I'm trying to help and promote content published by few selected authors and today I would like to share with you post published by my friend @honarparvar: \"WARNING: This might not be a trend!\". I'm curious if you believe in TA and what's your opinion on using indicators while trading crypto. Share your opinion, I read all valuable comments. Piotr // LINK: https://steemit.com/trading/@honarparvar/warning-this-might-not-be-a-trend"
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{
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      "parent_permlink": "gulovsen",
      "author": "gulovsen",
      "permlink": "cryptomnesiaresidualsclausesandbadlydraftedndas-cjhf563ch2",
      "title": "Cryptomnesia, \"Residuals Clauses\" and Badly Drafted NDAs",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/06/E7281713-3C1A-43BF-88B8-2578059649D6.jpeg</center> <br/><p style=\"background-color:#e8e0ef\" class=\"has-background has-drop-cap has-medium-font-size\">Lately most of the stuff I've written about has been related in one way or another to cryptocurrency, so I thought it was time to take a break and write about something else.*</p>\n<p class=\"has-background has-small-font-size has-very-light-gray-background-color\">*The fact that <em>Cryptomnesia</em> starts with “crypto” is a coincidence. Mostly.</p>\n<center><img src=\"https://gulovsen.io/wp-content/uploads/2019/06/E7281713-3C1A-43BF-88B8-2578059649D6-1024x576.jpeg\" alt=\"\" class=\"wp-image-2115\"/></center>\n\n<h2> Introduction</h2>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">I review a lot of confidentiality and non-disclosure agreements as part of my practice. And I do mean a LOT. So many, in fact, that I was asked to be a guinea pig in <strong><a rel=\"noreferrer noopener\" aria-label=\"an experiment to test the speed and accuracy of lawyers vs. AI software when analyzing NDAs (opens in a new tab)\" href=\"http://www.abajournal.com/news/article/ai_software_is_more_accurate_faster_than_attorneys_when_assessing_ndas\" target=\"_blank\">an experiment testing the resilience of lawyers' egos after getting their butts kicked by AI software when analyzing NDAs</a></strong>. I even posted a <strong><a href=\"https://gulovsen.io/resources/\">free NDA template on my website</a></strong> because it seemed silly to charge people for a contract that is really nothing more than <em>a written promise to keep a secret</em>.</p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-ef1edd78-4eb5-4ecc-a142-f4e754e3740c\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em>Unfortunately, lawyers are genetically engineered to take simple concepts and express them in ways that are incomprehensible to normal humans.</em></div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\">Grant Gulovsen, Esq.</cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Even if genetic engineering isn't (always) involved, lawyers do seem to have a tendency to make things more difficult than they need to be. For example, I have had the pleasure of actually reading an NDA (which is at its core nothing more than <em>a written promise to keep a secret</em>) that went on for 12 pages (I kid you not). This is the longest one I've ever seen, although I'm sure there are much worse out there. </p>\n<hr class=\"wp-block-separator\"/>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">But even that 12-page monstrosity was a good value compared to the most useless NDA I have ever laid my genetically engineered eyes upon. Not surprisingly (to me at least), it was due to something called a “residuals clause.” To understand the reasoning behind residuals clauses, those of you with normal human minds (the kind that have adapted to use things like logic and reason to make sense of the world) should first understand something called \"cryptomnesia.\"</p>\n<h2>What is \"Cryptomnesia?\"  </h2>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Based solely on the word roots <em>crypto </em>(Greek for \"coin covered in dung\") and <em>amnesia</em> (Greek for \"overused plot device\"), it would be entirely reasonable (but completely wrong) to conclude that <em>Cryptomnesia </em>means one or more of the following:  </p>\n<ul class=\"has-medium-font-size\"><li><em><strong>inability to remember one's private keys</strong></em><strong> 😳</strong></li><li><em><strong>inability to remember one's trading history when filing taxes</strong></em><strong> 😅</strong></li><li><em><strong>inability to remember one's (alleged) authorship of the Bitcoin whitepaper in the middle of a speech</strong></em><strong>** (ZING!) 🤬</strong></li></ul>\n<p class=\"has-background has-small-font-size has-very-light-gray-background-color\">**Okay, THAT was my last crypto reference. I’m absolutely certain. Mostly.</p>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">\"Cryptomnesia,\" besides being very hard to say without sounding like you have a speech impediment, is (properly) defined as follows:</p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-ab3cb50f-624e-4f0e-b1ed-d704e10a026b\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em><strong>Cryptomnesia</strong> refers to generating a word, an idea, a song, or a solution to a problem, with the belief that it is either totally original, or at least original within the present context. In actuality, the term is not original, but one which has been produced by someone else (or even oneself) at some earlier time. </em></div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\"><a rel=\"noreferrer noopener\" aria-label=\"Cryptomnesia: Delineating Inadvertent Plagiarism (opens in a new tab)\" href=\"https://warwick.ac.uk/fac/sci/psych/people/fsch/fsch/studentresources/3rdyearprojects/projects/plag2.pdf\" target=\"_blank\"><strong>Cryptomnesia: Delineating Inadvertent Plagiarism</strong></a></cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Also known as \"unintentional plagiarism,\" it basically means you published someone else's stuff as your own because you sincerely believed that you came up with the idea (even though you didn't). To better understand how this works in the context of an NDA, consider the following hypothetical:</p>\n<ol class=\"has-medium-font-size\"><li>C. Tom Nesia, a software developer, has just signed an NDA prior to interviewing with Alberta Einstein.</li><li>The NDA provides that no confidential information disclosed by Alberta may be used or shared by Tom.</li><li>During the interview, Alberta describes several key features of her latest project—a blockchain network powered entirely by hopium.***</li><li>Unfortunately for Tom, he doesn't get the job, but he still enjoyed learning about the Mathematically Impossible Rate of Return  (MIRoR) Blockchain Network.</li><li>Months later, Tom is developing his own blockchain network—powered by ennui and despair—but he is struggling to come up with a feature that makes it truly unique and marketable.</li><li>He decides to take a break and check the progress on one of the “blockchain for good” projects he supports.</li><li>He is disappointed to learn that it has pivoted to an online crypto casino and sugar dating service.</li><li>Bookmarking the website in disgust, Tom suddenly experiences an epiphany—as if rising from the depths of the repressed joy locked away in the darkest corners of his psyche, he knows \"exactly\" what is missing from his Edge Lord Blockchain Network.</li><li>He immediately gets to work programming in that missing feature and the next thing you know ELBN tokens are being minted at a rate of way more than is rational or justifiable for this (or any) project to have. Per second.</li><li>Although it is true that the missing feature was in his memory the whole time, it wasn't there prior to his interview with Alberta, since she described it to him as a key feature of the MIRoR Blockchain Network, which he had promised not to use or disclose when he signed the NDA.</li><li>Oops.</li></ol>\n<p class=\"has-background has-small-font-size has-very-light-gray-background-color\">***Hopefully by now you would have figured out that the whole \"I'm not going to write about cryptocurrency\" ain't gonna happen. Mostly.</p>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Note that although Tom clearly violated the terms of the NDA by including in his own blockchain network a feature that Alberta had shown him during a confidential interview, he didn’t ”copy” anything by taking photos or recording any audio or video during the interview. Plus, he wasn’t trying to be dishonest, because he sincerely believed that he came up with the idea himself, i.e, a textbook case of <em>cryptomnesia</em>.</p>\n<hr class=\"wp-block-separator\"/>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">So, let's assume that Tom goes on to make millions of dollars and employ hundreds of edge lords (and edge ladies). Should Alberta (who due to absent-mindedness completely forgot about the MIRoR project altogether just moments after telling Tom to “hit the bricks”) be allowed to get injunctive relief (i.e., shut down Tom’s project)?</p>\n<h2>Enter the <em>Residuals Clause</em></h2>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">If a residuals clause had been in the NDA signed by Tom, the answer would likely be “no.” That’s because a \"residuals clause\" is effectively a get out of jail free card for people in Tom's situation. Even thought he violated the NDA by using confidential information for his own benefit, a residuals clause carves out an exception if the information was general in nature (in this case a \"feature\" vs. source code), it came entirely from residual memory and did not involve anything recorded or copied.</p>\n<h2>Seems Fair, Right?</h2>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Maybe in this extreme cryptomnesia hypothetical it seems fair, but personally, I find all residuals clauses to be contrary to the whole purpose of an NDA, which is <em>a written promise to keep a secret</em>. Most NDAs already include lots of exceptions, e.g., where the law compels disclosure or where the information disclosed was already widely available. But the residuals clause goes much further, effectively acting as a hedge in case something <em>really good</em> turns up in the confidential information that can be memorized by the recipient.</p>\n<hr class=\"wp-block-separator\"/>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Residuals clauses can obviously be drafted to be quite limited in scope, so they only apply to something like the cryptomnesia hypothetical given above. But even when properly drafted, I've always felt that they undermine the entire point of an NDA in the first place. But not all of them are properly drafted—not even close—as the following example from <em>a real NDA I reviewed for one of my clients just a few days ago</em> clearly demonstrates...</p>\n<blockquote class=\"wp-block-quote is-style-large\"><p>Nothing in this Agreement prevents Recipient from using, for any purpose and without compensating Discloser, information retained in the memory of the Recipient’s Personnel who have had access to Confidential Information.</p><cite>An Attorney Who Should Be Hanging His or Her Head in Shame If They Actually Charged Their Client for This</cite>\n</blockquote>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">In other words, as long as confidential information is \"retained in the memory\" (not otherwise defined)of anyone who works for the recipient, the recipient can use it for any purpose without violating the NDA, <em>regardless of intent</em>, <em>regardless of sensitivity</em> and <em>regardless of how it is used</em>. On its face, this residuals clause would allow a company to send in an employee to discuss a possible \"collaboration\" with a competitor, that employee could memorize important business intelligence and critically sensitive information, and then use it to put the competitor out of business. Isn't the whole point of an NDA to prevent this exact thing from happening?</p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-caf6bc32-83d2-44ee-bb29-b93018eebd61\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em>When interpreting the law, U.S. judges are hesitant to allow too many exceptions \"[l]est the exceptions swallow the rule.\" See, e.g., U.S. v. Merritt Meridian Const. Corp., 95 F.3d 153, 167 (2d Cir. 1996) . However, this is the first time that I've seen a contract swallow itself.</em> </div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\">Grant Gulovsen, Esq.</cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<h2>Conclusion</h2>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">Almost without exception, and regardless of how carefully they are drafted, I advise my clients to refuse to sign any NDA that includes a residuals clause.  This is true even when NDAs are \"mutual.\" On paper, it appears fine, but in practice, collaborations where an NDA is used almost always involve one party obtaining confidential information from the other party and not the other way around. So in practice, they are rarely mutual. After seeing the residuals clause mentioned above, I don't expect my advice to my clients to be changing anytime soon.</p>\n<hr class=\"wp-block-separator\"/>\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\"><strong><em>Do you agree or disagree? Please comment below and share this with anyone whom you think might benefit from it.</em></strong></p>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/cryptomnesia/ </em><hr/></center>",
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      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/06/F2FED73C-D4D5-46BE-8B2C-ED1016AD6B08.png</center> <br/><center><img src='https://gulovsen.io/wp-content/uploads/2019/06/F2FED73C-D4D5-46BE-8B2C-ED1016AD6B08.png'></center>\n\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-drop-cap has-medium-font-size\">If we want to avoid a dystopian future for our children and their children, now is the time to start thinking about and discussing  the proper legal relationship between humans and machines. I’m excited to be a part of that discussion through an MIT Media Lab initiative focused on Automated &amp; Autonomous Legal Entities. You can watch our first publicly broadcast legal hack-a-thon below:</p>\n<figure class=\"wp-block-embed-youtube wp-block-embed is-type-video is-provider-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\nhttps://youtu.be/bVOXcp7Au1M\n</div><figcaption><a rel=\"noreferrer noopener\" aria-label=\"Law.MIT.edu (opens in a new tab)\" href=\"http://Law.MIT.edu\" target=\"_blank\"><strong>Law.MIT.edu</strong></a> Collaborative Hack of Agency Analysis for Automated &amp; Autonomous Legal Entities</figcaption></figure>\n<hr class=\"wp-block-separator\"/>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/humans-and-machines/ </em><hr/></center>",
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      "title": "Grant Gulovsen Publishes \"What is an Initial Exchange Offering: Must Read Guide\" on Blockgeeks",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/05/Annotation-2019-05-30-152827-e1560001844660.png</center> <br/><center><img src='https://gulovsen.io/wp-content/uploads/2019/05/Annotation-2019-05-30-152827.png'></center>\n\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-drop-cap has-medium-font-size\">On May 30, 2019, Attorney Grant Gulovsen of <strong><a href=\"https://gulovsen.io/\">Gulovsen Law Office</a></strong> published <strong><em><a rel=\"noreferrer noopener\" aria-label=\"What is an Initial Exchange Offering: Must Read Guide (opens in a new tab)\" href=\"https://blockgeeks.com/what-is-an-initial-exchange-offering-must-read-guide/\" target=\"_blank\">What is an Initial Exchange Offering: Must Read Guide</a></em></strong> on <strong><a rel=\"noreferrer noopener\" aria-label=\"Blockgeeks (opens in a new tab)\" href=\"http://blockgeeks.com\" target=\"_blank\">Blockgeeks</a></strong>.  Incredibly popular, but also incredibly controversial, this article attempts to cover all sides of the IEO phenomenon as objectively as possible. Click on the image above to read it now.</p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-e5528f27-a2a1-4a04-b522-ec95c59da625\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em>Blockgeeks is one of the most frequently-visited blockchain and cryptocurrency-related educational websites and initial exchange offerings, or IEOs, are one of the hottest topics in the industry, so I am very grateful to have an opportunity to write for Blockgeeks on this very important subject.</em></div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\">Grant Gulovsen, Esq.</cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<br/>\n\n\n<hr class=\"wp-block-separator\"/>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/blockgeeks-ieo/ </em><hr/></center>",
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      "permlink": "morenon-legaladviceforico-fundedstartupstohelpthemstayoutoftrouble-t7au7vb0r3",
      "title": "More Non-Legal Advice for ICO-Funded Startups to Help Them Stay Out of Trouble",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/05/humpback-whale-under-water-e1560002082871.jpg</center> <br/><center><img src='https://gulovsen.io/wp-content/uploads/2019/05/humpback-whale-under-water.jpg'></center>\n\n<h2>Introduction</h2>\n<p style=\"background-color:#eeddff\" class=\"has-background has-drop-cap has-medium-font-size\">On January 25, 2019, I posted an article to this blog entitled, <a href=\"https://gulovsen.io/the-best-non-legal-advice-i-can-give-to-icos-to-avoid-getting-sued/\"><strong>The Best Non-Legal Advice I Can Give to ICOs* to Avoid Getting Sued</strong></a>. It received positive reception and I've been wanting to do a follow up ever since. If you haven't read the previous article, I encourage you to do so, but I also realize this is the Internet so the tl;dr version is as follows...</p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-df24883b-ef17-4f2e-b330-1f0e2c451295\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em>If you or your startup raised funds via a token sale in 2017 or 2018, the best non-legal advice I can give to you to help you avoid getting sued is simply to talk to your community and let them know that you appreciate them</em>.</div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\">Grant Gulovsen, Esq.</cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">If this seems like common sense, please congratulate yourself, because it is common sense. But for some unknown reason, plenty of startups that raised funds via token sales in 2017 and 2018 kept screwing this up by ignoring (and in some cases outright abandoning) their communities. </p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-1f7e6407-f2d2-4fa2-a595-d819785823d3\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em>Ignoring or abandoning your community–you know, the one that put its faith in you as a crypto startup founder and bought your tokens so you could chase your dream–is a VERY BAD IDEA.</em></div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\">Grant Gulovsen, Esq.</cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">However, almost as bad as ignoring your community is trying too hard to please them, which is the subject of this article. In particular, you should avoid catering to the demands of one segment of your community over the others, as that can also get a founding team in trouble.</p>\n<h2>Community Management: Before and After the Token Sale</h2>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Managing a community is hard work, both before and after the token sale. But in many ways, managing the community after the sale is more important and certainly more difficult.</p>\n<h3>Before the Token Sale</h3>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size is-large-font\">Leading up to the token sale, the main purpose of community management is to increase the number of contributions to the token sale. Typical posts by members of your Telegram community during this phase should appear similar to the following:</p>\n<ul class=\"has-medium-font-size has-italic-font-style\"><li><em><strong>\"Great project!\"</strong></em> 😃</li><li><em><strong>\"Your team is so awesome!\"</strong></em>  😃 </li><li><em><strong>\"We're gonna moon for sure!\"</strong></em>  😃 </li><li><em><strong>[insert positive-themed Telegram sticker here]</strong></em>  😃 </li></ul>\n<h3>After the Token Sale</h3>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Note how positive and ego-boosting the pre-token sale community appears? That all comes to a screeching halt the moment the token sale is done. Once the dust finally settles, most posts are typically of the soul-crushing variety, as follows:</p>\n<ul class=\"has-medium-font-size\"><li><strong><em>\"We need more updates!\"</em></strong> 😐</li><li><strong><em>\"Is there an admin here?\"</em></strong> 😐</li><li><strong><em>\"I want a refund!\"</em></strong> 😐</li><li><strong><em>[insert negative (and perhaps even violent) Telegram sticker here]</em></strong> 😳</li></ul>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Seeing these sorts of comments day in and day out is exactly what drove many projects to abandon their Telegram communities, believing they had become too toxic. I suspect that given the chance, however, most projects that decided to pull the plug would have left it in. And if they haven't regretted doing it, they probably will. (<em>Note: If this is something that you have seriously considered doing, then you definitely need to read  </em><strong><a href=\"https://gulovsen.io/the-best-non-legal-advice-i-can-give-to-icos-to-avoid-getting-sued/\"><em>The Best Non-Legal Advice I Can Give to ICOs* to Avoid Getting Sued</em></a></strong>).</p>\n<h2>Too Much of a Good Thing?</h2>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">As already mentioned, abandoning your community is a VERY BAD IDEA. But that doesn't mean you should cater to their every whim, either, and if you try too hard to please them it can also get you into trouble. This is especially true if you only focus your attention and favors on a subset of your community, which is typically the subset with the most tokens. I shall refer to this group as \"whales.\" Whales all tend to have the following things in common:</p>\n<ol class=\"has-medium-font-size\"><li><em><strong>They don't care if your startup succeeds or fails because they don't have any equity in it</strong></em></li><li><strong><em>They only care about the price of your token and when they should sell it to get the maximum ROI</em></strong></li><li><strong><em>They hold enough of your tokens to crash the market for it if they wanted to</em></strong></li><li><strong><em>They are fully cognizant of the \"power\" they hold and will not hesitate to use manipulative or coercive tactics to pressure founders to do their bidding</em></strong></li></ol>\n<h2>Whales Can Get You in Trouble</h2>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Not all whales are bad. On the contrary, if it weren't for whales, it is doubtful that most ICOs would have ever gotten funded. But whales really only care about one thing, and it doesn't involve you or your project. </p>\n<div class=\"wp-block-uagb-blockquote uagb-blockquote__outer-wrap\" id=\"uagb-blockquote-ffc41b59-216c-47a0-a695-f32a50c131d1\"><div class=\"uagb-blockquote__wrap uagb-blockquote__skin-quotation uagb-blockquote__align-left uagb-blockquote__style-style_2 uagb-blockquote__with-tweet uagb-blockquote__tweet-style-link uagb-blockquote__tweet-icon_text uagb-blockquote__stack-img-none\"><blockquote class=\"uagb-blockquote\"><div class=\"uagb-blockquote__icon-wrap\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 32 32\"><path d=\"M7.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.357-0.056 0.724-0.086 1.097-0.086zM25.031 14c3.866 0 7 3.134 7 7s-3.134 7-7 7-7-3.134-7-7l-0.031-1c0-7.732 6.268-14 14-14v4c-2.671 0-5.182 1.040-7.071 2.929-0.364 0.364-0.695 0.751-0.995 1.157 0.358-0.056 0.724-0.086 1.097-0.086z\"></path></svg></div><div class=\"uagb-blockquote__content-wrap\"><div class=\"uagb-blockquote__content\"><em>Crypto whales only care about one thing. Here's a hint: It starts with the letter \"M\" and rhymes with \"money.\"  </em></div><footer><div class=\"uagb-blockquote__author-wrap uagb-blockquote__author-at-left\"><cite class=\"uagb-blockquote__author\">Grant Gulovsen, Esq.</cite></div><a href=\"javascript:void(0)\" class=\"uagb-blockquote__tweet-button\" target=\"_blank\" rel=\"noopener noreferrer\"><svg width=\"20\" height=\"20\" viewbox=\"0 0 512 512\"><path d=\"M459.37 151.716c.325 4.548.325 9.097.325 13.645 0 138.72-105.583 298.558-298.558 298.558-59.452 0-114.68-17.219-161.137-47.106 8.447.974 16.568 1.299 25.34 1.299 49.055 0 94.213-16.568 130.274-44.832-46.132-.975-84.792-31.188-98.112-72.772 6.498.974 12.995 1.624 19.818 1.624 9.421 0 18.843-1.3 27.614-3.573-48.081-9.747-84.143-51.98-84.143-102.985v-1.299c13.969 7.797 30.214 12.67 47.431 13.319-28.264-18.843-46.781-51.005-46.781-87.391 0-19.492 5.197-37.36 14.294-52.954 51.655 63.675 129.3 105.258 216.365 109.807-1.624-7.797-2.599-15.918-2.599-24.04 0-57.828 46.782-104.934 104.934-104.934 30.213 0 57.502 12.67 76.67 33.137 23.715-4.548 46.456-13.32 66.599-25.34-7.798 24.366-24.366 44.833-46.132 57.827 21.117-2.273 41.584-8.122 60.426-16.243-14.292 20.791-32.161 39.308-52.628 54.253z\"></path></svg>Tweet</a></footer></div>\n</blockquote></div></div>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Whales will typically get founders into trouble by asking them to do things that violate the terms of the token sale agreement or violate the law. The specific laws and regulations involved vary considerably, but this is not supposed to be legal advice, so I will keep it general. Some examples of what whales might ask founders to do for them include:</p>\n<ul class=\"has-medium-font-size\"><li><strong><em>Sharing exclusive insider information about:</em></strong><ul><li><strong><em>Upcoming exchange listings;</em></strong></li><li><strong><em>When a lockup period is about to expire; or</em></strong></li><li><strong><em>Details of a planned masternode implementation.</em></strong></li></ul></li><li><strong><em>Providing exclusive opportunities to whales, such as:</em></strong><ul><li><strong><em>A discounted tranche of tokens; or</em></strong></li><li><strong><em>Access to an exclusive rate of return for masternodes.</em></strong></li></ul></li><li><strong>C<em>ommitting fraud by lying about the crypto reserves of a company because the whales did not want the real numbers to get out (for whatever reason).</em></strong></li></ul>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">In short, anything that involves disclosing or concealing material information that would tend to put a whale in a better position than other token holders is the sort of thing that can get founders into trouble.</p>\n<h2> The Two-Step Whale Neutralizer </h2>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Acknowledging that whales can get founders into trouble is one thing, but preventing them from even having the opportunity is another matter. Neutralizing a whale's influence is a two stage process, as follows:</p>\n<h3>Stage 1: Realize That A Whale Only Has as Much Power as You Give Them</h3>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">The first step in neutralizing a whale's power is simply to realize that they only have as much power as you allow them to have. Can they crash the price of your token? Sure, but that's a temporary condition. Other than that, there's nothing they can do that anyone else couldn't also do. They cannot have you arrested, put you in jail or force you to return all the money you raised in your ICO. But if they persuade you to violate the law or breach the terms of the token sale agreement to their benefit, all of those things can happen.</p>\n<h3>Stage 2: Limit the Opportunities for Whales to Gain Power</h3>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">Once you realize that whales only have as much power as you allow them to have, the next step is to reduce or eliminate any opportunity for them to gain that power. Below are some useful suggestions that you may consider:</p>\n<div class=\"wp-block-uagb-advanced-heading\" id=\"uagb-adv-heading-5218d526-dfd3-4088-9e14-5f49866b144e\"><h4 class=\"uagb-heading-text\">Always Keep the Whales at Arm's Length</h4><p class=\"uagb-desc-text\">Do not give whales any special or exclusive access to confidential information that is not also available to every other token holder. Avoid one-on-one meetings and conversations whenever possible;</p></div>\n<hr class=\"wp-block-separator\"/>\n<div class=\"wp-block-uagb-advanced-heading\" id=\"uagb-adv-heading-6156f92f-10c6-43ce-a413-14f725543c1b\"><h4 class=\"uagb-heading-text\"> Always Read the Token Sale Agreement </h4><p class=\"uagb-desc-text\">The token sale agreement is what defines the relationship between you and your token holders (including the whales) so knowing what it allows and what it prohibits will make it much easier to deal with \"special requests\" by whales.</p></div>\n<hr class=\"wp-block-separator\"/>\n<div class=\"wp-block-uagb-advanced-heading\" id=\"uagb-adv-heading-a36f1f3b-705f-4d2e-991f-4555d66c4459\"><h4 class=\"uagb-heading-text\"> Keep Your Head Down and Fulfill the Promises You Made to the Entire Community </h4><p class=\"uagb-desc-text\">Just as the token sale agreement defines the rights and responsibilities of the token holders, so too does it define the rights and responsibilities of the project and its founders. Remember that part where it says  you are supposed to be building a platform or a distributed application or something? That means you're supposed to be building it. so get to work and stop worrying about the whales. </p></div>\n<hr class=\"wp-block-separator\"/>\n<div class=\"wp-block-uagb-advanced-heading\" id=\"uagb-adv-heading-a8a1e28e-f506-45d3-9427-5db245b75c2d\"><h4 class=\"uagb-heading-text\">Don't Do It Alone</h4><p class=\"uagb-desc-text\"> Running a company is hard enough without having your largest token holders trying to make you feel guilty because your token isn't performing as well as they would like. Sometimes whales can be very persuasive. When that happens, you need a reality check. Someone who can tell you whether you're being asked to do something that may result in a very harsh set of consequences for you and the project. So find that person you can trust and add them to your team.</p></div>\n<h2>Conclusion</h2>\n<p style=\"background-color:#eeddff\" class=\"has-background has-medium-font-size\">The best way to protect yourself is to have someone on your team whose task it is to help you make good choices, avoid making bad ones, and answer the tough questions when they come up. I regularly fill this role for my clients and it is one of the most rewarding parts of the job. If I can answer any questions about anything you've read here, please drop me a line below.</p>\n\n\n<br/>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/more-non-legal-advice/ </em><hr/></center>",
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      "title": "Author David Gerard & Lawyer Gabriel Shapiro on the CryptoLaw Podcast",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/05/gerardshapiro-e1560002535168.jpg</center> <br/><p style=\"background-color:#e8e0ef\" class=\"has-background has-drop-cap has-medium-font-size\">If you haven't gotten a chance to listen to the latest episode of the CryptoLaw Podcast, you are definitely missing out. Chain Agnostic's Adrian Cortez and attorney <a href=\"https://twitter.com/lex_node\"><strong>Gabriel Shapiro</strong></a>, founder of ZeroLaw, speak with journalist <strong><a rel=\"noreferrer noopener\" href=\"https://davidgerard.co.uk/\" target=\"_blank\">David Gerard</a></strong>, perennial skeptic and author of the book <a rel=\"noreferrer noopener\" href=\"https://davidgerard.co.uk/blockchain/book/\" target=\"_blank\"><strong>Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum &amp; Smart Contracts</strong></a>. No spoilers here, but I guarantee you will enjoy it. 😂</p>\n<center><a href=\"http://www.cryptolawpodcast.com/episodes/50-foot/\" target=\"_blank\" rel=\"noreferrer noopener\"><img src=\"https://i0.wp.com/gulovsen.io/wp-content/uploads/2019/05/gerardshapiro.jpg?fit=688%2C688&amp;ssl=1\" alt=\"\" class=\"wp-image-1732\"/></a><br/><i> <a href=\"http://www.cryptolawpodcast.com/episodes/50-foot/\">Attack of the 50 Foot CryptoLaw Podcast</a> </i></center> <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/author-david-gerard-lawyer-gabriel-shapiro-on-the-cryptolaw-podcast/ </em><hr/></center>",
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{
  "trx_id": "cad601ca8282071a46124a13c9c0221966c25af4",
  "block": 34386768,
  "trx_in_block": 8,
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  "timestamp": "2019-07-05T04:53:54",
  "op": [
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    {
      "parent_author": "",
      "parent_permlink": "gulovsen",
      "author": "gulovsen",
      "permlink": "areieosfordummies-mq4d7a2k38",
      "title": "(Are) IEOs for Dummies(?)",
      "body": "<center>https://gulovsen.io/wp-content/uploads/2019/05/935d28bb-8a11-4a3c-8409-63b77e45853e-e1560002914791.jpg</center> <br/>\n\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-drop-cap has-medium-font-size\">The initial exchange offering, or \"IEO,\" was originally heralded as a \"new and improved\" version of the ICO and “ICO 2.0.\" But recently the crypto fundraising model has come under fire, with several examples losing substantial token value in a very short period of time (including two on the incredibly popular cryptocurrency exchange Binance losing 70% of value). Worse yet, rumors are beginning to surface which, if they are to be believed, suggest that many IEOs are nothing more than elaborate cryptocurrency exchange-sanctioned pump-and-dump schemes.</p>\n<center><img src=\"https://gulovsen.io/wp-content/uploads/2019/05/935d28bb-8a11-4a3c-8409-63b77e45853e.jpg\" alt=\"\" class=\"wp-image-1582\"/><br/><i>IEO: ICO 2.0 or scam?</i></center>\n\n<p style=\"background-color:#e8e0ef\" class=\"has-background has-medium-font-size\">So what is the real story? Gulovsen Law Office is trying to find out and has begun investigating these rumors in order to try and uncover the truth. With that in mind, if you have participated in an IEO please take a moment to review the following four options and if any of them apply to you, <a href=\"https://gulovsen.io/contact/\"><strong>fill out the secure PGP-encrypted contact form</strong></a> and someone from Gulovsen Law Office will follow up with you as quickly as possible. <b>There is no charge whatsoever for this as we are simply investigating whether regulatory violations may have occurred.</b> If they do turn out to be true and you suffered financial loss as a result, you may be entitled to an award of damages.</p>\n<hr class=\"wp-block-separator\"/>\n<h3 id=\"E\">Please select one of the following:</h3>\n<div class=\"wp-block-uagb-icon-list uagb-icon-list__outer-wrap uagb-icon-list__layout-vertical uagb-icon-list__icon-at-top\" id=\"uagb-icon-list-6f3ed8d3-3924-45e5-b4c4-086ce1a3e6a4\"><div class=\"uagb-icon-list__wrap\"><a class=\"uagb-icon-list-repeater-0 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#A\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 512 512\"><path d=\"M256 8c137 0 248 111 248 248S393 504 256 504 8 393 8 256 119 8 256 8zm-28.9 143.6l75.5 72.4H120c-13.3 0-24 10.7-24 24v16c0 13.3 10.7 24 24 24h182.6l-75.5 72.4c-9.7 9.3-9.9 24.8-.4 34.3l11 10.9c9.4 9.4 24.6 9.4 33.9 0L404.3 273c9.4-9.4 9.4-24.6 0-33.9L271.6 106.3c-9.4-9.4-24.6-9.4-33.9 0l-11 10.9c-9.5 9.6-9.3 25.1.4 34.4z\"></path></svg><div class=\"uagb-icon-list__label-wrap\">I worked for a project that launched an IEO</div></div></a><a class=\"uagb-icon-list-repeater-1 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#B\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 512 512\"><path d=\"M256 8c137 0 248 111 248 248S393 504 256 504 8 393 8 256 119 8 256 8zm-28.9 143.6l75.5 72.4H120c-13.3 0-24 10.7-24 24v16c0 13.3 10.7 24 24 24h182.6l-75.5 72.4c-9.7 9.3-9.9 24.8-.4 34.3l11 10.9c9.4 9.4 24.6 9.4 33.9 0L404.3 273c9.4-9.4 9.4-24.6 0-33.9L271.6 106.3c-9.4-9.4-24.6-9.4-33.9 0l-11 10.9c-9.5 9.6-9.3 25.1.4 34.4z\"></path></svg><div class=\"uagb-icon-list__label-wrap\">I tried to purchase tokens during an IEO token sale<strong><br></strong></div></div></a><a class=\"uagb-icon-list-repeater-2 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#C\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 512 512\"><path d=\"M256 8c137 0 248 111 248 248S393 504 256 504 8 393 8 256 119 8 256 8zm-28.9 143.6l75.5 72.4H120c-13.3 0-24 10.7-24 24v16c0 13.3 10.7 24 24 24h182.6l-75.5 72.4c-9.7 9.3-9.9 24.8-.4 34.3l11 10.9c9.4 9.4 24.6 9.4 33.9 0L404.3 273c9.4-9.4 9.4-24.6 0-33.9L271.6 106.3c-9.4-9.4-24.6-9.4-33.9 0l-11 10.9c-9.5 9.6-9.3 25.1.4 34.4z\"></path></svg><div class=\"uagb-icon-list__label-wrap\">I purchased tokens from a project after it completed its IEO<br></div></div></a><a class=\"uagb-icon-list-repeater-3 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#D\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 512 512\"><path d=\"M256 8c137 0 248 111 248 248S393 504 256 504 8 393 8 256 119 8 256 8zm-28.9 143.6l75.5 72.4H120c-13.3 0-24 10.7-24 24v16c0 13.3 10.7 24 24 24h182.6l-75.5 72.4c-9.7 9.3-9.9 24.8-.4 34.3l11 10.9c9.4 9.4 24.6 9.4 33.9 0L404.3 273c9.4-9.4 9.4-24.6 0-33.9L271.6 106.3c-9.4-9.4-24.6-9.4-33.9 0l-11 10.9c-9.5 9.6-9.3 25.1.4 34.4z\"></path></svg><div class=\"uagb-icon-list__label-wrap\">I do not meet any of the above criteria but I know someone who does</div></div></a></div></div>\n<hr class=\"wp-block-separator\"/>\n<h3 style=\"text-align:left\" id=\"A\">Did you work for a project that launched an IEO?</h3>\n<p style=\"background-color:#e8efe0\" class=\"has-background has-medium-font-size\">If you worked for a project that launched an IEO on one of the major cryptocurrency exchanges and either witnessed or suspect unethical or inappropriate conduct by the exchange and would like to speak with an attorney about your possible rights, please <a href=\"https://gulovsen.io/contact/\"><strong>fill out the secure PGP-encrypted contact form</strong></a> and we will follow up immediately. </p>\n<div class=\"wp-block-uagb-icon-list uagb-icon-list__outer-wrap uagb-icon-list__layout-vertical\" id=\"uagb-icon-list-870a1e8e-f96a-4529-bf0b-e3d5879a5abe\"><div class=\"uagb-icon-list__wrap\"><a class=\"uagb-icon-list-repeater-0 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#E\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 448 512\"><path d=\"M240.971 130.524l194.343 194.343c9.373 9.373 9.373 24.569 0 33.941l-22.667 22.667c-9.357 9.357-24.522 9.375-33.901.04L224 227.495 69.255 381.516c-9.379 9.335-24.544 9.317-33.901-.04l-22.667-22.667c-9.373-9.373-9.373-24.569 0-33.941L207.03 130.525c9.372-9.373 24.568-9.373 33.941-.001z\"></path></svg><div class=\"uagb-icon-list__label-wrap\"><strong><a href=\"#E\">Back to Options</a></strong></div></div></a></div></div>\n<hr class=\"wp-block-separator\"/>\n<h3 id=\"B\">Did you attempt to purchase tokens during an IEO token sale?</h3>\n<p style=\"background-color:#e8efe0\" class=\"has-background has-medium-font-size\">If you attempted to purchase tokens during a recent IEO token sale on one of the major cryptocurrency exchanges but were unable to successfully conclude the transaction for any reason and you would like to speak with an attorney about your possible rights, please <a href=\"https://gulovsen.io/contact/\"><strong>fill out the secure PGP-encrypted contact form</strong></a> and we will follow up immediately.</p>\n<div class=\"wp-block-uagb-icon-list uagb-icon-list__outer-wrap uagb-icon-list__layout-vertical\" id=\"uagb-icon-list-82a3ad91-00c9-4003-b141-9d9e63a27db9\"><div class=\"uagb-icon-list__wrap\"><a class=\"uagb-icon-list-repeater-0 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#E\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 448 512\"><path d=\"M240.971 130.524l194.343 194.343c9.373 9.373 9.373 24.569 0 33.941l-22.667 22.667c-9.357 9.357-24.522 9.375-33.901.04L224 227.495 69.255 381.516c-9.379 9.335-24.544 9.317-33.901-.04l-22.667-22.667c-9.373-9.373-9.373-24.569 0-33.941L207.03 130.525c9.372-9.373 24.568-9.373 33.941-.001z\"></path></svg><div class=\"uagb-icon-list__label-wrap\"><strong><a href=\"#E\">Back to Options</a></strong></div></div></a></div></div>\n<hr class=\"wp-block-separator\"/>\n<h3 id=\"C\">Did you purchase tokens from a project after it completed its IEO?</h3>\n<p style=\"background-color:#e8efe0\" class=\"has-background has-medium-font-size\">If you purchased tokens from a project that had previously conducted an IEO on one of the major cryptocurrency exchanges and you ended up losing money due to a sharp drop in the price of the token and would like to speak with an attorney about your possible rights, please <a href=\"https://gulovsen.io/contact/\"><strong>fill out the secure PGP-encrypted contact form</strong></a> and we will follow up immediately.</p>\n<div class=\"wp-block-uagb-icon-list uagb-icon-list__outer-wrap uagb-icon-list__layout-vertical\" id=\"uagb-icon-list-01740433-7c9d-489b-880d-fd69d3a584ad\"><div class=\"uagb-icon-list__wrap\"><a class=\"uagb-icon-list-repeater-0 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#E\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 448 512\"><path d=\"M240.971 130.524l194.343 194.343c9.373 9.373 9.373 24.569 0 33.941l-22.667 22.667c-9.357 9.357-24.522 9.375-33.901.04L224 227.495 69.255 381.516c-9.379 9.335-24.544 9.317-33.901-.04l-22.667-22.667c-9.373-9.373-9.373-24.569 0-33.941L207.03 130.525c9.372-9.373 24.568-9.373 33.941-.001z\"></path></svg><div class=\"uagb-icon-list__label-wrap\"><strong><a href=\"#E\">Back to Options</a></strong></div></div></a></div></div>\n<hr class=\"wp-block-separator is-style-default\"/>\n<h3 id=\"D\">Do You Know Someone Else Who Might Have Information Pertaining to an Alleged IEO Scam?</h3>\n<p style=\"background-color:#e8efe0\" class=\"has-background has-medium-font-size\">If you do not have direct firsthand knowledge about any IEO-related legal or regulatory violations but know someone else who does, please forward this page to them using one of the sharing buttons below. Although we do not yet know the extent to which this alleged activity is occurring, if it ends up being as bad as some people have suggested, letting it continue unchecked will only further damage cryptocurrency as a movement. Thank you.</p>\n<div class=\"wp-block-uagb-icon-list uagb-icon-list__outer-wrap uagb-icon-list__layout-vertical\" id=\"uagb-icon-list-139b5374-4f10-4141-90e8-dbf75cbf0f6f\"><div class=\"uagb-icon-list__wrap\"><a class=\"uagb-icon-list-repeater-0 uagb-icon-list__wrapper\" target=\"_self\" rel=\"noopener noreferrer\" href=\"#E\"><div class=\"uagb-icon-list__content-wrap\"><svg xmlns=\"http://www.w3.org/2000/svg\" viewbox=\"0 0 448 512\"><path d=\"M240.971 130.524l194.343 194.343c9.373 9.373 9.373 24.569 0 33.941l-22.667 22.667c-9.357 9.357-24.522 9.375-33.901.04L224 227.495 69.255 381.516c-9.379 9.335-24.544 9.317-33.901-.04l-22.667-22.667c-9.373-9.373-9.373-24.569 0-33.941L207.03 130.525c9.372-9.373 24.568-9.373 33.941-.001z\"></path></svg><div class=\"uagb-icon-list__label-wrap\"><strong><a href=\"#E\">Back to Options</a></strong></div></div></a></div></div>\n <br /><center><hr/><em>Posted from Gulovsen Law Office: https://gulovsen.io/ieo-scam/ </em><hr/></center>",
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