BBW22 - Day 3 - Domestic & Global Legal & Accounting Considerations

already have the best currency in the world US dollar and crypto Bitcoin is far far away from the US dollar so so far so there is no threat to that now about the rest of the world you got uh the Chinese that are usually as usual like what they did with the internet they're trying to take the blockchain technology and control it in their own way so they've been trying to work on the digital un for several years still not coming out but it's okay we're used to that the Libra never came out GM never came out so we are still watching because basically everybody is watching each other and again it's the reflection of the world the Americans are watching the Chinese the Chinese are watching the Americans the Europeans are trying to act to look like they are doing something about it but of course we're not doing anything because we are watching the Americans that's all we can do we come up some with some lows that's very interesting we we're doing this the European way which means that we have 24 countries talking with each other one of them left you mentioned it UK they left and they came up with some new ways of trying to tax International Financial uh Network because they have one of the best financial Network which was one of the problems they had with Europe and this European law that is just being passed right now when I say right now understand for the last five years this law that is still not out has been for a strongly lobbied by which country the French usually is the French and the Germans who try to Lobby the European laws on that one the French were the fastest because we used some tricky way we are French we use some existing law we sleeed some some law about the crypto in it and then we came up with this low nobody follows it I'm a lawyer I can tell you we don't know how to apply it in France mostly because we don't have any crypto Market why because again America I mean seriously do you think are you guys going to invest on a French crypto company I don't think so I wouldn't now because of that we still have the right to go and knock on Brussels door and say we're the first one with a European law that's why the European law is influenced by French but don't worry again European law is not going to do anything because we're still watching for the American law and as you know there is still no American crypto law because your you're applying the existing Financial laws some of them dating back to 1933 or 1934 why because you can because you can because you have the best and strongest Financial Market we don't we have an atomized Market 15 is Friends 15 is uh is Germany and the rest is atomized between several European countries so we have no weight we are divided atomized but that's one way of protecting ourselves to another story now getting back to China stop me if I'm if I'm I mean I did a thesis on that so I could literally talk about it for two weeks but uh mapon is going back to China again they're trying to do with blockchain what they did with internet which means that try to use the technology control it through a couple of gateways and what they want to do with blockchain is have a blockchain that is controlled by the government which by definition is the complete opposite of blockchain but then again they can so we're going to have this we're having this dynamic between America and China and a little bit of partnership with Russia over there but Russia is yet different because their internet is even separated from the world internet now the interesting interesting part and that's what I'm I'm saying it's reflecting uh the world history is that six months ago when I completed my thesis and I defended it one of my conclusion was that the Russians have set up three crypto centers which which they're working on crypto and they have specific laws that there are Geographic geographically isolated it was Diana Russia Crimea and Donetsk in the donbassy area as you can tell it was surrounded Ukraine so my understanding is that whatever is happening in Ukraine they already knew they would of course they knew they were they would be doing that but they are using these crypto centers as a way to try and go around the international sanctions so again the crypto is a reflection of the current history and if you want to know what's going to happen with crypto roughly I would say just open a history book that's my understanding well and I think we also can look back to the evolution internationally of the standards adopted in Dodd-Frank and sarbanes-axley as far as a road map for how International regulation and laws might develop here there the U.S government adapted these standards U.S institutions commercial Banks investment Banks and so forth started requiring them even for companies that were not subject to the jurisdiction of the relevant U.S laws the security these and other regulatory authorities in the U.S worked internationally with their counterparts to extend our our standards under these laws to those State those countries and modify them somewhat for Unique National and and Country specific Market issues so my guess is that that's how this will work because it's a lot of the same Regulators who are involved in these issues and they are the either elbowing out new new developments in the regulatory space or the Touchstone for how all of the folks here your advisors accountants and lawyers think about these issues they're historic touch zones but that's the way our our laws develop here so I think that it might not just be because of um uh specific unique characteristics of of folks in different countries but there might be a model that will follow yeah and privacy is another good example of this Matt maybe you can talk a little bit about privacy concerns and security issues and how those um have evolved uh nationally as well yeah absolutely and uh great to be here uh it's really always great to be in an event like this like you mentioned uh I do spend a lot of time in banking and finance so uh it's kind of nice to have a little bit of a bright uh discussion but I think first before the privacy concerns I I think I want to touch on what both what tocia and Philippe said was uh the executive order I found to be a whole lot of nothing uh it was a hurry up and weight mentality that I think that we're now going to just wait again to look for what's the Frameworks that's going to come out what's going to be the sort of sanctions or the you know responsibilities of different agencies so uh you know reading that I think it was kind of strange but also to your point about cbdc's and the you know the the reasons that we have blockchain and those who are distributed ledgers is not to create transparency it's transparency with privacy and with cbdc's I'm going to start to get a sense that they just want everything to be out in the open they want to see all the transactions they want to see who's managing those transactions where it's going to and from and that's all well and good for government but you know that's not going to work for you know the original use cases of it is to you know have private immutable uh and hopefully authentic transactions between parties uh so I'm interested to kind of see as as we get closer to CBC cbdc's being established number one is it only going to be for uh corporate and government agencies municipalities that want to trade with each other but also what are they going to Peg it to uh because we've seen time and time again that as you're mentioning with Fiat currencies is that it's a it's a moving Target constantly and to Peg a digital currency to something that you know has uh no intrinsic value I think is going to be a very very difficult one for them to sort out so those are kind of my initial thoughts on on both what my panelists said but I also kind of wanted to speak a little bit to the privacy concerns as well and and uh I I don't necessarily know if there's uh there's privacy concerns but at a you know at a personal level I'm concerned about knowing your customer the authentication approaches that we're utilizing currently and what that's going to look like in the future because right now I'm sure many of you uh when you want to sign on to coinbase or onto any other you know exchange they're taking a photo of you and that's it and maybe you punch in some information that's pretty easy I'm a cyber guy that's pretty easy to get around and then you know with New York and things like that where uh they're being super restrictive there's really easy ways to get around the AML provisions and the knowing your customer Provisions like uh in New York or otherwise so uh the Privacy I think uh is for me not as much of a concern as the the authentication of that individual while you're seeing the transactions and the different money movements that are going to occur especially internationally uh the sort of sanctions that we're trying to push on China or Russia or North Korea and things like that it's really easy outside of the bounds of U.

S sanctions to move money and to move uh a lot of money and to manipulate markets frankly uh without that so uh those are kind of the the initial thoughts that I had uh with security concerns I would say and authentication concerns privacy uh I think it's still kind of up in the open uh I think that majority of transactions are private uh until someone steals the data off of uh you know API or off of you know a ledger or something like that but um I think time will tell as we kind of get better with managing data warehouses and managing key management and uh the governance around that level of infrastructure yeah I'll just say one more thing about um you mentioned the executive order again um kind of at the bottom of it um the thing that that I saw is that they were going to be increasing the penalty significantly for money transmission and we do so much of that work you know helping you know with the due diligence and um ensuring that that our clients have the proper licenses that they need and a lot of times they don't even know that they need them um we've had a few deals go through um with partners that after the deal they found out that they needed licenses in 50 states and that that can be pretty devastating for for people on both sides of the deal but um but the fact that they are I know that's not going to be good news to our clients so that was kind of like one thing though I was like ah ouch very high cost right very very high cost it's almost a barrier to entry that they're forcing uh which is concerning because I think to your point or I think it was your your point that they're creating an Innovation Hub they're looking to establish uh you know uh no name come in talk to us if you think there's a problem but at the same time I think they're stifling a lot of that Innovation and a lot of the practices that we kind of so need to become the Forefront uh as a us uh Nation uh for the digital assets and what comes next right and in ginsler's recent speech I think he said that out at the 10 000 tokens that he believes that the vast majority of them are securities um and so he's taking a pretty hard line on that um I know there was an enforcement action that just came out a couple days ago by the CFT cftc um that had you know fines and like the 180 million dollar range and then you know its successor um they immediately slapped them with a lawsuit um just uh um immediately thereafter um but um I think what was his quote he said Gensler says not liking the message um isn't the same as not receiving it um and so they are they're definitely um making it known that um that yes we want to play nice but um we're going to be pretty aggressive when it comes to enforcement and for the record I do think all tokens are securities uh I you're Trading a value for a second value and uh there's transactions and taxes have to come with that but put everything on the table and allow the companies and the you know retail investors to actually understand what you know that implication is because there's a lot of people out there making a lot of transactions and they don't know how to deal with attacks and uh the ramifications that come from it Philippe um the EU has been a leader in uh privacy issues maybe you can talk a little bit about how those issues may be different or evolving in this area in the in the uh International Arena you know we have this joke Americans coming up with new technologies Chinese copy new technologies and Europeans come up with laws for these new technologies so that's basically what's happening we come up with privacy laws what we call gdpr so it's very complicated it's like a syndrome there's lots of things to do and we are not even sure how to apply it to a blockchain because we have as you mentioned uh earlier with me we have this this thing that we call the right to be forgotten in and that's a strong opposition between Europe and America from this point of view in Europe we deem we have the right to be forgotten in America you don't think like that example if somebody insults me say about me that I stole money when I was 10 years old or something like that my idea would be of course I saw the guy libel I can prove he's wrong and then okay so the right to be forgotten would be me going through Google and say remove everything about that because I've proved that it's a lie and I don't want this light to be available otherwise we think if we want to tarnish the reputation of anybody we would have to do all we need to do would be say bad things about this person liable this person even if we pay a fine and it would be tarnished forever that's the European point of view we have to remove that the American point of view is no it's part of History even though it's wrong it's liable you won the trial so we put the light bulb and we put the trial the correction but it has to remain there it's pretty much like uh this Nazi Nazi Flags in France and Nazi flag is forbidden it's forbidden because it's a symbol of Oppression it's a bad souvenir we really don't want to have it anymore America sees it as a victory which makes sense for Americans to Victory not it's not so much for us so of course you're proud of it that's one strong difference now how do we apply it to the blockchain how do we apply the right to be forgotten to the blockchain and that's this takes us back to this problem that you mentioned between friends and America the right to be forgotten in France you can be you can ask Google Google is forced to delete everything that is asked to delete but he keeps it on American servers so a French Senator came up with this very funny conclusion we should tell Americans to delete everything regarding the French people when we when we ask them to I mean history has proved that when French people tell Americans what to do it really works fine right so that's a problem and the problem with blockchain is going to be the same so my understanding is that the blockchain will be tempered with in Europe we will have some overlaying protocol to correct or to hide some elements and it will not be the case in America so again getting back to past example but then again the blockchain will not be exactly what we call the blockchain because it's not going to be transparent so again adaptability so Philippe with this Patchwork of um issues and the the competing uh demands and requirements in the U.S versus Europe um how does an entrepreneur or a company create certainty about which laws apply to them whether through structure or through participants that they're working with and in addition are there jurisdictions to avoid like in the U.S we have sanctions and you you should not be doing business with Cuba I assume that may apply here as well or preferred jurisdictions for example when you're structuring something for tax purposes you might run through the Caymans or or the Netherlands yeah well frankly to tell you the truth we don't do a lot of that in France because we have new lows we have as I said we have a law in France that defines utility tokens I mean like Americans like pretty much every country in the world we don't need to Define Financial tokens we just apply existing Finance laws but then what is a utility token for Americans for the SEC for Gensler there is no such thing as utt token at least not so far for French people we came up with a law you can Define what is a utility token problem and that answers the question nobody is using that law why because if we were using that law if a French entrepreneur decided to create a utility token then American investors would never buy this UT token because they would be scared of what the SEC would do not today because you mentioned uh now we know what to do yeah that's true but the problem is that the SCC is actually studying cases that go back to 2017 and 2018 it's not me who said it it's Gensler we say that a couple of weeks ago so 2019 2020 everything that's been done in America so far it's still not under scrutiny by the SEC so we still don't know what they're going to do and French people are scared because like everybody else in the world we don't want to attract French investors we want to attract American investors so we are kind of blocked and that's where most of the investors in this space and Venture investors are are based so exactly you really have don't have a choice even if you wanted to get investors locally there that market doesn't really exist or hasn't been developed like it is in the U.S pretty much the only way we could do that is that when we come up with a website and again not the blockchain anymore uh this website where you can buy a token for example you have to answer several questions kyc related and the first question would be where are you and if you click United States of America then the website shuts off that's the only answer we have so far but then again this sensor doesn't come from the blockchain it comes from internet interesting yeah and then if I could add to that as well uh especially to a lot of the founders or startup folks that are in here uh focus on your threats and your risk assessment so to your point about what are the concerns that we could potentially have in the next 90 days or 180 days or five years if you scale out again identification of what is the industry threats what is the Regulatory Compliance threats what are the threats to the marketplace uh outside of you know your competitors uh actually like spend the time to build a matrix and to actually review it and evaluate it year after year if you need any help with that it's always someone that you can find a consultant or advisor for for but what we've found is that you're going to uncover a lot of things that you weren't aware of about where are you performing services or transactions in these 12 states that I didn't know I need the transmitter license for or I didn't know that this particular government agency looked for this in in this place versus this sort of transaction in this place those are the sorts of things that compliance people and Regulatory people spend their entire careers talking about but uh I think Founders sometimes Maybe be a don't always spend as much time on that you know they're very product focused very sales focused but I'll tell you the second thing when you have that threat Matrix and you have that risk assessment you show that to a potential investor showing that you got your game plan your roadmap for what that's going to look like for you uh that's really going to help you uh you know answer the right questions or avoid questions that you maybe not necessarily know how to answer right I mean we always say the nine most dangerous words and compliance or show me where it says I can't do that um and uh so you know going in and having that legal obligation inventory and understanding what those things are I mean we we try to do it but we try to like teach our clients how to fish so that we you know give them the framework so that they can repeat it next time maybe we we help you with your first business but then you have kind of the road map or you know as you move along yeah yeah you never want to jump into a pool where you don't know how to get out so well and even if there isn't a law that's developed in an area you want to move into you need to be aware of some of these enforcement and political under currents I was representing a client that was looking to raise money and several years ago the uh somebody in the San Francisco office of the SEC started fishing around with companies that were involved in the digital asset space that they work and they made an inquiry to the company the company hired a lot of lawyers they had already been talking to lawyers about how to structure this in a compliant way the inquiry went away but the government and the SEC in particular does not send a letter saying okay you're absolved disregard those Communications and those meetings we had fast forward several years later the statute of limitations hasn't run no one's heard from the enforcement Folks at the SEC yet however as we're trying to help the client raise money and one of the questions that any investor will ask or any strategic partner will ask is talk to me about compliance with law issues and Communications from regulators and so of course this is disclosed and it created a significant delay in the funding it created a significant concern about whether the value was there in the business and what the future might hold for it and whether the investor was coming into a situation where a big name would suddenly re-attract the attention of the SEC so as a as a startup founder as a developer you might think oh that's way down the road it can't come back to bite you even if you haven't done something that's in incorrect or illegal uh Matt do you want to Pivot for a moment and talk to us a little bit about tax and accounting issues in this space yeah I uh I think uh from a tax and accounting perspective uh we think about uh AML uh money transmitter licenses uh the sort of Provisions that you need uh at the onset of your uh your your accounting books and the way that you're actually creating uh your accounting ledgers uh so especially these days uh I think it's really important to recognize maybe for the the founders that are only utilizing blockchain or distributed Ledger Technologies for business functions we're eventually going to start to see you know finance companies and accounting departments utilizing the distributed Ledger technology to actually perform accounting transactions and services uh that's going to create a financial material principle uh you know for all of you gaap people out there uh that's going to make your blockchain distributed Ledger Technologies a financially relevant technology which is something that we haven't seen in the past traditionally so when you go look and see what are the potential uh controls that could materially affect if our books are complete accurate with Integrity valid everyone's looking at paper based documents now we're going to be looking at smart contracts we're going to be looking at the code development we're going to be looking at the Integrations for apis that all could potentially affect uh how your accounting systems are supporting the real uh the real tax and the real uh you know bottom lines I think ultimately what's going to happen there is uh people are going to approach that the fraudsters are going to approach that the hackers are going to approach that and try to manipulate uh the the smart code and the vulnerabilities that are within smart contracts either to change financial markets to create headaches for companies that they potentially don't like or you know that they have as competitors it's going to be a nation state based situation so I think those are all kind of the tax and accounting problems from a cyber security perspective uh that I think that I can speak to uh we're down where you know we're still a bit down the road uh for that for in terms of that applicability but we are all already seeing companies uh like isaka the institution uh for uh auditing control taking out blockchain security governance models so that they can apply them to publicly facing companies uh they're based off of standard Frameworks uh pretty similar to what uh executive Biden and his team uh have been talking about too so I think uh when I talk about tax and accounting I think it's also important to understand like what is the cyber security implications of that what we're also starting to see is in a lot of different states they're creating Safe Harbor Provisions so if you can prove that you have a cyber security framework in place and you are financially Material Company or have Financial transactions that you're processing and you can show that you know these 50 trolls we've designed and operated effectively by an internal auditor or an independent auditor if a hack happens and you have finances stolen or money stolen you might be able to receive Safe Harbor from that because that's what the law says in Connecticut at this point uh that's only going to be coming to the Commonwealth going to be coming to other uh liberal states that really want to Foster this sort of innovation and growth but also recognize that there's advanced persistent threats that are constantly looking to manipulate and to you know change the markets that we're dealing with yeah we were also talking this morning Matt about I think Pennsylvania and Washington state are the first states to to tax nfts um so Pennsylvania has taken the approach that they're adding nft to the taxability Matrix um and then Washington published a scheme for determining the source relative to where um it's actually taking place so these are guidelines and they're not legislation and kind of the Crux of that is that they can be applied retrospectively so Pennsylvania is taking the approach that they can go back to even like 2016. and tax interview yeah I think which review is on that I think it's really strange because nft is a is a function for uh technology and you know art is taxed differently uh Securities are taxed differently homes and real estate are taxed differently uh so I think they need to kind of put their you know eye on the ball I guess and try to you know bifurcate between what functions of an nft are establishing and how do you want to plan to tax that in the future because nfts have a bunch of different applications I'm gonna have to look over my shoulder after this with the uh the FBI and stuff these uh bottom stuff but uh yeah yeah it's a great Point well since this is a legal panel um let's talk a little bit about smart contracts lawyers and accountants uh deal with contracts all the time Matt maybe you can talk to us a bit about your uh what you're seeing with smart contracts and then Felipe and to see your you as well yeah it's a real problem uh so smart contracts uh we have thought for a you know half a decade or longer that that was going to be uh what helped to support uh the legitimacy of all of the blockchain technology and uh we come to find out that basically 30 to 40 percent of audited contracts can still be hacked uh 75 or less a slightly less of flash loan attacks I've had a smart contract audit that's performed uh in the last year uh so from a smart contract perspective are they safe are I mean they're incredible they're incredibly vulnerable you have to remember that it's people that are writing these there are people that understand them or maybe don't understand them the functions that are within smart contracts uh are different and sometimes very complex thousands of lines of code and it still goes back to a people in a process which can be manipulated and hacked by others uh so I think we're still kind of in the dawn of trying to figure out out uh really truly what vulnerabilities can be potentially present not only with the smart contracts themselves that create the functions and the legitimacy of blockchain Technology but going back to the risk assessments and driving what are the controls that govern the people process and Technologies around that it's really challenging right is phishing is still a problem social engineering is still a problem access and authentication to where development environments were smart contracts and the the test environments sit they're accessible by others that shouldn't be so I think it's really a matter of uh do you understand your threat do you understand the vulnerabilities that could be potentially present are you constantly looking to mitigate those threats utilizing a defense in depth which is ultimately a huge compliance and a huge regulatory uh risk that uh not only do founders need to address but also uh their Partners from a user and advisor perspective I do a fair amount of work with non-us companies and we do the contracts we negotiate the primary contracts because they're often governed by New York or UK law in English and there had been at one point in time a desire to then replicate that contract in the local language and that's kind of died away why is that because people spend a lot of time negotiating and drafting the primary agreement and nobody wants to have a contract that's ambiguous or differs from that and I think one issue that needs to be dealt with is how the coding of a smart contract translates back to you know what the legal expectations are particularly when it's not just a binary question you do this and and that follows but there might be a discretion from the parties they may have options within the contract and I'm not sure that there are many lawyers we have lawyers who are coders in our um in our blockchain practice but most lawyers are not very very uh Swift with some of the evolving Technologies so I think that's one hurdle companies are coming coming up we represent a leading uh blockchain audit company that is auditing contracts to make sure you know taking that that leap and making sure that it is in fact reflecting the smart contract is reflecting what the parties expect that it works if something develops a change develops or there's a force measure that it's properly playing out through the contract so I think that's an area of a lot of great opportunity in this air space as well the smart contracts are the crown jewels of most companies that are going to be planning to sit on the blockchain so I think uh we're going to have to find a place where that is the predominant risk area that we're going to be focused on probably the next five years yeah I agree it's a big problem for us because we have a huge shortage shortage of developers especially uh in France because we have the language barrier and on top of that we still have to go through the regular process like we have to register a company before even doing business we have to register the company properly it takes time and by then a competitor might already have stepped in from another country in the business that we were interested in so uh that's uh everything you mentioned is actually a bigger problem even for us I agree with my other panelists um you know how do you define an act of God for instance if something is supposed to be executed based on that definition I mean you can't necessarily list all of those things out so I think there's still a lot of work to be done there um I I think we're uh just at about the right time to wrap do you want us to wrap it up all right so one quick lightning round uh a question for the panelists I didn't tell you about this so you don't have to uh act quickly New York Yankees in a few words uh what do you think we'll be talking about on next year's legal and and uh compliance panel at this conference next year self-regulation I mean I think that that's um we can and I mean our firm and and my colleagues and I and and the folks I work with were taking a um position that we can and must have self-regulation for this industry and so hopefully we'll be you know continuing to engage there I think there will be a problem between coinbase and KU coin opinions whatever their name is right now these days I think we're gonna see some some huge problem between uh coinbase and binos and uh that's that's going to be some fight interactions big events that we're going to be dealing with I think subcontractor Arrangements forum-based parties that are working on uh us-based companies and entities that have code that are based in the US is going to create a a lot of headaches especially with the development teams that are in Poland or Ukraine or in other you know uh states that are outside of the US that have access to uh potentially really uh important and confidential information so I'm curious to see how that's going to be affected as well terrific well thank you everybody for taking the time to listen to us this morning and thank you Ian and your team for putting on a great conference we really appreciate it great thank you [Music]