Classification of Cryptocurrency: Coins, Tokens & Securitized Tokens

Originally published in the Legal Executive Institute

By Joseph Raczynski

One of the most contentious debates in the cryptocurrency world surrounds classification of blockchain-based digital assets, tokens and cryptocurrencies. A panel at the recent Thomson Reuters Regulation of Financial Services Conference discussing the basics of cryptocurrenciesexamined this argument. With more than 1,650 cryptocurrencies or tokens trading in the public domain, it is important to understand their nuanced differences.

Cryptocurrency

Dominating this conversation in the United States is whether specific coins are securities, and secondly, if a utility token can exist. In addressing the first part, the US Securities and Exchange Commission (SEC) recently shed some light by declaring both Bitcoin and Ethereum non-securities. This assertion defines that there is no expectation of equity or return on any investment in these virtual currencies. The overarching belief had held that Bitcoin is a currency and thus a competitor to the US Dollar or Euro; and Ethereum is more complicated.

Tokens

The original intent behind Ethereum was that it supported smart contracts by using their blockchain token called Ether or ETH. In this case, a token stands as a digitized tool to perform a service, similar to those physical token coins used in some video game arcades or laundromats. In this digitized version, the Ethereum platform was intended to perform a service and store more complex, automated, yet immutable code on their blockchain (for example, storing a contract on the blockchain that dictates a sell order if the stock of Amazon reaches $2,000 per share on January 1, 2020).

What differentiates Ethereum from Bitcoin is that the token ETH is used to upload and save that smart contract to a blockchain using “gas”, basically the payment of ETH for each transaction. Therefore, many argue that ETH is a “utility token”, performing a service, i.e. saving that contract to the blockchain. What complicates this is that many start-up tech companies are using Initial Coin Offerings (ICOs) on the Ethereum platform to launch crowd-funding campaigns and raising money. The complication — raising money in this form — have some regulators and industry watchers arguing that these ICOs are more like securities, similar to stocks, even if they are sitting atop of the Ethereum token-based platform rather than on a stock exchange.

Tokenized Securities

Now, a hybrid product that is emerging quickly is the tokenized security. Recently at Consensus in New York City, a company called Polymath created a platform for anyone who wishes to raise money for their company quickly can do so by issuing tokenized securities. The primary difference with this model is that the issuer is offering shares or portions of ownership of the company. There is also a belief that these types of securities will eventually adhere to SEC regulation, which is yet to be determined. What drives the regulatory discussion is a 1946 Supreme Court ruling now called the Howey Test, which determine if something is a security or not. The tenets of the Howey Test are as follows:

  1.  It is an investment of money
  2.  There is an expectation of profits from the investment
  3.  The investment of money is in a common enterprise
  4.  Any profit comes from the efforts of a promoter or third party

 

For a token to be considered a security, each of the above must be true. The primary point of contention is around point four, “Any profit comes from the efforts of a promoter or third party”. This aspect is typically out of the hands of the investor and not something they can control. When these tokens are launched on third-party exchanges, this falls outside of that individual investors domain, and for many, nullifies the Howey Test.

Or as Ash Bennington of CoinDesk phrased it:

A long time ago, someone named Howey owned an orange grove.

Howey said: “I’ve got this orange grove and I’ve got no way to make money out of it — because I need money to make money.”

Tell you what. I’m going to sell you this orange grove and, in exchange, you get whatever profits are made from that little plot.

I’ll work the land. I’m going to pick the oranges. I’m going to squeeze the juice. You just pay me the money.

The plaintiffs said: “That’s a security.”

The SEC said: “That’s a security.”

Howey said: ‘No, no. That’s just selling plots of oranges.”

Ultimately, the Supreme Court said: “That’s a security” – because it passed this test: There was an investment of money. And a common enterprise. With the expectation of profit, primarily from the efforts of others.

Governments around the world are grappling with the classification of cryptocurrencies in what should become a multi-trillion-dollar industry within the next decade. With so much at stake for everyone from the garage startups to the Morgan Stanleys of the world, some regulation is inevitable. Most are merely hoping for clarity, not confines, which could hurt the innovation stemming from the once-a-generation revolutionary platform technology called blockchain.

Kill Chain: The 7 Stages of a Cyberattack

Originally published in the Thomson Reuters Tax & Accounting Blog

By Joseph Raczynski

In our new world reality where cyberattacks are a daily occurrence and every organization must focus on critical infrastructure surrounding cybersecurity, businesses have begun to think like the military. How can we defend our enterprise? To that end, it’s not surprising that companies have adopted soldierly, combative mindsets and terminology.

The term “kill chain” originates from the armed forces and refers to the structure—or seven stages—of a cyberattack:

1. Reconnaissance
2. Weaponization
3. Delivery
4. Exploitation
5. Installation
6. Command & Control
7. Action on Objectives

Now, many proactive institutions are attempting to “break” an opponent’s kill chain as a defense method or preemptive action. One of the leaders in this space adapting the concept for Information Security is Lockheed Martin.

Thinking Like a Hacker
A hacker typically has a creative, analytical mindset. These individuals search for paths toward a solution—often devising serpentine and circuitous routes to attain their goal. It’s this approach that we need to build awareness around if we are to thwart an onslaught of attacks.

As an example, let’s pretend that a hacker wants to get into your Tax Consultancy LLP organization to pilfer the Social Security numbers of your clients. This is how they may think at every stage of the kill chain. Your goal is to understand the steps and proactively counter each one to protect your network.

Stage 1: Reconnaissance
Hackers begin by researching your company online—gathering names, titles, and email addresses of people who work for the organization. They identify one person to target and then plan their avenue of attack. They may use e-mail attachments with viruses, port surf the company network, drop a memory card containing malicious code in the parking lot, or decrypt WiFi traffic. In this scenario, let’s say they choose e-mail as their method. An e-mail containing a link is sent to the selected individual, who, once they click on the link, inadvertently downloads the malware.

Stage 2: Weaponization
Hackers have libraries of code at their disposal that they use and tweak for their attacks. They consider the networks, operating systems, and software that Tax Consultancy LLP—and every company they target—may run. By identifying these components through research, the hackers can customize their code to work in those environments. One of the most common ways to compromise a computer or network is to attack unpatched software by companies such as Microsoft Cisco—applications that have known vulnerabilities, but ones that Tax Consultancy LLP may not have updated.

Stage 3: Delivery
In this instance, the hacker has decided to target the CFO of Tax Consultancy LLP. Through research, the hacker knows the name of the CFO, where she lives, works and even personal information gathered from the Web. He knows she coaches an eighth-grade softball team, enjoys camping, and shops at a local Safeway Food store she once complained about on Google reviews. Armed with this information, the hacker decides to lure the CFO with a spear phishing tactic.

Stage 4: Exploitation
The hacker crafts a perfectly feasible email to the CFO.

“Dear Jenny, it has been too long since we last spoke! I hope all is well. The last time we chatted we were at Safeway, complaining about their so called “fresh fish” section. One of these days they will have fresh shrimp, not just the frozen variety. The reason I am writing is that our daughters are in the same softball league. They have grown up so fast! I know you are busy, so you may not be aware, but they are hoping to go to Florida for a tournament in a few months. We are trying to raise some money for the kids who currently don’t have the means to get there, can you please help by donating say $20 to the cause? You can click here to donate.”

Stage 5: Installation
There is a 96 percent likelihood that the CFO will click on the link in the spear phishing e-mail. When she does, the malicious software takes root.

Stage 6: Command & Control
Once the malicious code has been installed, it phones home to the hacker. The hacker then has the ability to control it, let it sit for an extended period of time, automatically listen to packets across the network, or crawl through the network. All of this depends on what was deployed and what the hacker wants from the system. In our imaginary scenario, the hacker is after Social Security numbers, so he may attack the central database of Tax Consultancy LLP that houses all of their clients’ information, most likely found in an unencrypted DBA system, or perhaps Excel spreadsheets or other email accounts. The hacker is then able to harvest the information and send it out through the firm’s firewall to a remote server as a repository.

Stage 7: Action on Objectives
Finally, the hacker is able to extract whatever information they’ve been targeting. They can now easily gather Social Security numbers contained in the firm’s data. Of course, the options for exploiting this sort of information are many. The hacker may sell the numbers on the dark web, file fake tax returns, or use them to apply for credit or new identities.

Be Vigilant
All of this happened because the hacker was able to effectively use each stage of the kill chain to astutely identify the company’s possible vulnerabilities and leverage them. Today, all businesses should spend time walking through these stages, identify vulnerabilities, and shoring up their defenses to eliminate them. It’s not an easy task, but the more critically each of us look at these seven stages of the kill chain, the better we can prevent the next hack.

The Guardian: Driverless car crashes and data theft: law experts predict the court cases of the future

Very happy to have had a small role in this content.  Originally published in The Guardian Driverless car crashes and data theft: law experts predict the court cases of the future | Legal horizons | The Guardian 

The rise of technologies such as driverless cars, the Internet of Things (IoT) and smart cities will result in a proliferation of legal cases to establish who is responsible for automated, intelligent devices, while hackers and fraudsters take advantage of such innovations to find new ways to pry money out of people and companies. Meanwhile, in a bid to keep pace, regulators are writing new laws that require interpretation, while the courts re-imagine existing laws for the connected age.

Here, experts in the law and new technology predict the court cases of tomorrow, from class-action data-breach suits to liability for failures across smart homes, the IoT and self-driving cars. Technology is progressing at what seems like an ever-increasing rate. So, is the law as it stands able to provide clarity in this brave – and complicated – new world?

A car crash waiting to happen
Driverless cars are hurtling into the present, promising safer roads without inattentive humans behind the wheel. But there’s still work to do: on the same day that Google’s Waymo announced its driverless cars had been approved for public testing without a human behind the wheel, a Nayva driverless shuttle in Las Vegas took no evasive action to prevent a lorry from reversing into it.

In the UK, driverless vehicles are already being tested in Milton Keynes, Greenwich and elsewhere, with varying levels of automation. While it’s likely to be many years until fully driverless cars take over, UK transport secretary Chris Grayling believes completely self-driving cars will be on British roads by 2021.

Their arrival could be a boon for road safety around the world. According to the National Highway Traffic Safety Administration, 94% of crashes in the US are due to human error. Worldwide, says the World Health Organization, 1.25 million people die each year as a result of traffic accidents.

Despite this, one of the most common debates about driverless cars centres on what happens when driverless cars are involved in an accident: how do we decide who is at fault? It may not be as difficult as it sounds, says Joseph Raczynski, legal technologist and applications integrator with Thomson Reuters.

“Driverless cars with hundreds of sensors will…

Read more at Driverless car crashes and data theft: law experts predict the court cases of the future | Legal horizons | The Guardian 

Exploring Blockchain Proof of Concepts in Deployments and use Cases in the Finance Industry

By Joseph Raczynski

October 2017 – Blockchain 360 IoT Conference – InterContinental New York Times Square – An esteemed panel took the stage to discuss the state of the union surrounding proof of concepts in the financial industry.  The focus of the six; to delve into what is working with blockchain, what is not, and what is ahead for the industry.

I had the good fortunate to moderate the group including Igor Telyatnikov, President & Chief Operating Officer at AlphaPoint; Ron Quaranta, Chairman, Wall Street Blockchain Alliance; Scott Matsumuto, CISO, Circle; Morgan Hill, Managing Partner, AxionV; and Yorke E. Rhodes III, Global Business Strategist, Microsoft.

The first topic lent itself to a deep dive in our current perspective within finance.  Quaranta, who comes from a background in the financial markets spoke about how blockchain has developed incredibly fast.  He has the perspective of an association where many groups of all sizes engage with the Wall Street Blockchain Alliance.  While the financial institutions have been involved with this for several years, there are other groups flocking into the space.  He said, “Now that you see the lawyers and accountants opening their eyes to it, you know it has legs”.  They need to be involved because those two groups will help “aid the industry” and create structure around the new technology as it is applied to the financial industry.  There was a bunch of head nodding on the panel in agreement.

Rhodes focused on what is preventing wider adoption of blockchain.  One of the primary areas he cites is a lack of trusted sources or oracles in the space.  These are known entities which can be a verifiable source of information.  Think of the Social Security Administration and their records of death certificates, or a known source which can verify the price of Facebook’s stock on a particular date.  While this data might be available currently it is not as well developed and built out to interact with the blockchain just yet.

Hill jumped into the fray by discussing integration and interoperability.  Right now most blockchain’s cannot interact with other blockchain’s.  They are siloed.  Rhodes said that Microsoft is looking at how to resolve this issue.

The panel discussed how ICOs (Initial Coin Offerings) impact POCs.  Telyatnikov described this phase as a mania that is currently a bit frothy, but noted this is a “new asset class” that will be here for the foreseeable future.  The ICOs are almost POCs, but in the nascent stages, as “often these companies have concepts, which are not built out yet”.  It is hard to have a POC when a company only has an idea spelled out via a whitepaper – with no working model.

The panel answered questions from the audience, including one around regulation.  What is ahead for the law makers when it comes to blockchain and the financial industry?  The panel chucked.  Quaranta and Yorke summed it up for everyone by stating these are the early days of blockchain.  “Legislators and other agencies are in the information gathering stage.  We are beginning to get a sense from them about guidance, but much more is on the horizon.

Legal Technology/Internet 4.0 – How will Legal Technology Change the Industry?

By Joseph Raczynski

INSOL Europe 2017 Annual Congress

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Warsaw, Poland – Sofitel Victoria. Before the full contingent of 400 attendees at the INSOL Europe Annual Congress a panel of three stepped into the future of legal technology and its impact on insolvency and the courts in Europe.  The panel consisted of Judge Erik Boerma – Court of the Nertherlands; Gunther Theis – CEO, STP Informationstechnologie, Germany; and Joseph Raczynski from Thomson Reuters, US; with Moderator – Joanna Goodman, United Kingdom.

Goodman introduced the session by discussing Internet 4.0 and AI, which is described as the fourth industrial revolution.  The concept is that we are now in a new era which will be as impactful as the machinery that was introduced to the assembly lines of the first factories. She went on to mention that each panelist offered various perspectives on technology transformation to insolvency cases in different ways. Erik Boerma as a judge is involved in digitizing courts in The Netherlands; Gunther Thies is a tech pioneer, whose software is used by 80% of German insolvency practitioners and (since 1991) to improve coordination between practitioners and the courts, and Joseph Raczynski works on emerging technology at Thomson Reuters, specializing in assisting law firms in understanding AI and Blockchain and how they can be applied to legal services.

Goodman set the stage for the first question by stating an important event within the industry, “In the past decade – since the UK’s liberalization of the legal market via the Legal Services Act – legal services delivery everywhere has changed beyond recognition.” Goodman noted that until recently the courts were lagging behind, with arcane processes and procedures, including inflexible schedules for court dates and piles of paper.  “Now at last all that is changing and many jurisdictions are involved in courts modernization projects, which include taking documentation and administrative procedures online.”

The panel first turned toward court digitization. Theis, described the current state of most courts, which are in general still struggling to deal with the pace of change and how to handle documentation and workflow.  He spoke about his organization STP Informationstechnologie which develops software and related services for insolvency administrators, insolvency courts, and corporate law firms. Judge Boerma mentioned one of his projects in The Netherlands where he cited how the obvious benefits of digitization around access to justice, legal advice and information, and some less obvious challenges around ensuring that automation does not compromise human needs.  That is, he attempts to adopt “a holistic strategy that balances economic, environment, and social access to legal advice, access to justice, and the human considerations in insolvency space. Goodman surmised that, “It’s about opening up information and not taking a blinkered view of cases that focuses only on the detail.”

The conversation then turned to what may be just ahead for Europe as they deal with insolvency.  Goodman posed the question about how the world in general is moving online and asked Raczynski, “How personal assets, which are now going digital – from tangible to virtual – will be handled with documents in the cloud, AI technologies that improve productivity and cryptocurrencies?

INSOL19Raczynski launched into an impassioned discussion around the rate of change that is happening for all of us personally and professionally.  He briefly discussed the impact of algorithms which are becoming more sophisticated and intuitive.  Saying these could help service up better information for attorneys and judges alike around bankruptcy.  He went on to state that there will be a clear push for change in the next several years for the courts, which are lagging behind.  The efficiencies, transparency and access for all will make this all but a necessity.

Goodman pushed on the digitization of assets and inquired about the Blockchain and cryptocurrencies and the impact of those on insolvency.  Raczynski first described Blockchain to level set with the attendees having asked by a show of hands who felt comfortable defining the technology – not many hands were raised.  Once that baseline was established, he dove into what he sees as the first “killer app” for Blockchain technology, cryptocurrency or tokens.  “In the not too distance future every asset with be represented by a digital token – saved to the Blockchain.”  He sees the full “tokenization of the world’s assets” including, cars, real-estate, collectibles, and these things are starting to happen now.

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Clearly this struck a chord with the audience as this will be a monumental shift in how they handle insolvency cases with their clients and within the courts.  He went on to discuss the positives of the Blockchain showing a history of ownership which could assist with rights to property and creditors.  However, he noted, “there are challenges ahead as some of these tokens or digital coins are specifically developed to hide assets.”  He summed it up by stating this is going to be a wild ride into digitization which will certainly impact the insolvency landscape.

Closing out the session, Goodman asked for final thoughts from each of the panelists.  The takeaway was that everyone in every role needs to think about how technology will impact the legal industry.  There are a myriad of opportunities to be had, but Judge Boerma emphasized it has to be done in a way that humans are still at the center of the equation – we have to develop systems that are reflective of our humanity and enable access to justice for all.

 

Some quotes and notes above from Joanna Goodman who has written Robots in Law: How Artificial Intelligence is Transforming Legal Services is now available from ARK Group https://www.ark-group.com/product/robots-law-how-artificial-intelligence-transforming-legal-services-0

Podcast: The Legal Implications of Autonomous Vehicle Technology with Akerman’s Gail Gottehrer (Part 1)

Originally published in the Legal Executive Institute.

By Joseph Raczynski, Gregg Wirth & Gail Gottehrer

In a new two-part Thomson Reuters’ Legal Executive Institute podcast, Joe Raczynski, Legal Technologist and Futurist with Thomson Reuters Legal, discusses the hot topic of autonomous vehicles and their impact on the legal industry with attorney Gail Gottehrer, partner at Akerman LLP.
In part 1 of the podcast, (available below) the pair discuss how the technology behind driverless cars continues to evolve and who are the main players in this area. In part 2, they will discuss the opportunities for law firms in this evolving area. For example, law firms focusing on autonomous vehicles can advise clients about various issues including: (i) changes in insurance coverage models; (ii) regulatory changes in affected industries, (iii) workforce/employment issues, (iv) data privacy and security issues, and (v) anticipating potential use of data in litigation.

Blockchain Takes the Stage at the British Legal Technology Forum 2017

Originally published in the Legal Executive Institute

By Joseph Raczynski

LONDON — The recent British Legal Technology Forum 2017 — Europe’s largest event with more than 1,400 attendees and emceed by Richard Susskind — peered into the future of the legal industry by hosting a provocative talk on Blockchain technology.

I spoke at the event on how Blockchain has the potential to disrupt the legal industry greatly over the coming years. The initial focus for those in attendance was to “level set” or explain Blockchain technology or Distributed Ledger Technology (DLT). In short, Blockchain tech allows for a decentralized accounting of information into a “database” or “ledger” which is not owned by one entity, rather is stored by a multitude. Initially the concept seems counterintuitive, but in reality, it is vastly more secure, redundant and transparent than traditional transactional models of recording events or data, e.g. bank accounting, credit cards purchases or even legal verifications, such as notary publics. (You can read more about the fundamentals of Blockchain here.)

Thomson Reuters’ Joe Raczynski

As with most discussions, I built on the premise of the Exponential Growth of technology and the Trinity of Forces. These are core concepts to nearly everything happening around us now with technology; they are a set of unique influences that allow for this new technology to emerge today. These three pieces — infinite cloud storage, infinite processing power of computers and artificial intelligence — are enabling Blockchain to explode as a new Internet technology.

Blockchain’s Immediate History & Future within Legal

It may be valuable to trace Blockchain’s recent timeline:

2016 — The legal world began to wrap their collective minds around the technology. I spent time with chief information officers (CIOs) and practice heads at law firms, discussing the basics of this technology. They became evangelists to their attorneys and helped them to engage practice area experts on an awareness campaign to better understand Blockchain.

2017 — This is the year of pilots or proof of concepts (POCs). Law firms have begun setting up practice areas on the topic; and some top firms are accepting Bitcoin (Blockchain’s favorite crypto-currency) as payment. As a firm accepts Bitcoin, they are positioned two ways. One, it creates a buzz with the public by indicating that the firm is forward thinking; and two, and more importantly, it helps their internal staff understand how the technology works.

2018 — I believe there will be actual use of the technology for some firms. In discussions with the insurance industry and financial corporations, it’s clear that by next year they will have already built working prototypes. Law firms should be right behind them with smart contracts.

Legal Use Cases

In the presentation, the attendees were taken from understanding the technological concept of Blockchain and its immediate timeline to reviewing actual use cases. I cited 10 use cases for Blockchain in Legal. Honestly, there are probably hundreds that will unfold over time, but for this talk we dove into the following:

  •        Smart Contracts This is the most obvious and immediate use within Legal. The ability to create self-executing documents will be instrumental to most firms in the next two to five years. Once a transactional document has been crafted, it can be codified — tossed into program which looks at trigger points in the document — and then it, without human intervention, makes if/then decisions. (See a video example here.)
  •        Real Estate DeedsIn Honduras, a company called Factom was experimenting by using the Blockchain to keep track of real estate transactions. The rationale being that one day a citizen might trust the government which states the citizen owns a deed to their land that their family has lived on for decades, but the next day that land might be up for auction by that same government. If that deed is recorded on the Blockchain with multiple entities verifying the property’s ownership, it’s much less likely is that a waffling government (which might be open to corruption) would prevail.
  •        Rental ContractsBelieve it or not, companies like AirBnB are about to be disrupted. A company called Slock.it is using the Internet of Things (IoT) and Blockchain to transform what would be a 2,400-person company and turn it into a five-person establishment — while remaining just as efficient. Their technology uses smart contracts combined with an IoT smart front door lock to establish the who, when, and how a person should enter a rental home. The physical IoT front door knob has all the information needed to legally control the experience, with all being pulled from the Ethereum Blockchain. It knows when the person is to arrive, how much they paid, gives them a code to enter on the device to gain access, and even knows when they leave for the day, so it can automatically call the cleaning staff to straighten up. All of this, without any human intervention, as the Smart Contracts are sent to the IoT front door lock. Lastly, since the efficiencies are so much greater you, the renter of your home can go from paying a 10% to 15% fee to AirBnB to roughly 2% with Slock.it.
  •        Chain of Custody (CoC) —Another use case in this space is simply tracking from the moment something is entered into evidence all the way through to each person or organization that encounters the item. Any sort of corruption is eliminated as multiple entities have to verify the chain, rather than just one individual. In this case, you have a direct chain from the beginning to its current state.

In the next piece, I will investigate the coming age of the BoT (Blockchain of Things) and its impact on our personal and professional lives as it intersects with the law.


For more on this subject, listen to the related Podcast of Blockchain in The Legal Sector – Taking the Smart Approach from the British Legal Technology Forum 2017.

Emerging Technology in the Legal Industry (Video)

By Joseph Raczynski

In this Vlog, learn about Emerging Technology in the Legal industry. I focus on the impact of the Trinity of Forces (Cloud, Infinite Processing Power and AI) on Emerging Technology in the Legal industry. The Emerging Technologies discussed are: Artificial Intelligence, Blockchain, Analytics, VR/MR/AR (Virtual Reality, Mixed Reality and Augmented Reality) and VPAs (Virtual Personal Assistants) or Bots.

Blockchain Explained (59 mins)

By Joseph Raczynski

This is a talk that I gave recently about Blockchain technology based on my engagement and understanding of the technology since Bitcoin circa 2011. I preface this with how technology is having an impact on all of our lives – exponentially. It serves as a complete overview of what Blockchain technology is today and what we might be able to expect from it going forward. I touch on legal’s impact. This goes through the history and use cases of the technology. Various slides are credited to Joe Guagliardo.