J1 AG 01 Simon Polrot Compliance issues

okay hello everyone and welcome to this presentation identifying and managing legal risks in blockchain application so it's a very broad subject with potentially a lot of different issues and I will begin towards presently myself very quickly so I'm simple hoe I work with variable it's a consensus Polk's building derivative production material and before joining variable I was a lawyer for six years and I worked in the corporate and tax field and I've been seeing blockchain issues for a long time and at variable I'm new to be responsible for legal and operations I wanted to make this this presentation because everybody speaks about legal risks in blockchain but risk management in an environment where basically the law is unclear it can be extremely difficult so this is a kind of presentation to make an introduction to how to manage those risks so I begin with a short a short presentation of what I want and what I will do because I won't give proper legal advice in this presentation and that I can't do this and it would be very risky for me to do this and I won't give you precise instructions it doesn't make any sense every single project has its own issues and you cannot give precise instructions in a broad presentation like this what I will do is give a few practical advices on risk management strategies so how can you identify your legal risks and how can you try to mitigate them limit them and we also present variable slides because I made them yesterday and they're not very nice sorry element of context we are building the chain applications so basically all what we do is risky we are building on unstable technology so we face technological risks we are building with volatile assets so we are facing financial risks and we are building in a unclear environment and we are facing legal and tax risks so we are used to risks that that's what we hear but that doesn't mean that we need to be reckless with these risks notably regarding the different kind of consequences that the risk can have basically technological risks the worst case scenario is that you lose your client's money it's not very good and you they can sue you but basically you just build a better application to manage this kind of risks financial risks you can hedge them with financial instruments but the legal and tax risks it's more difficult you have to go deeper go with advisors and basically understand a lot of different fields because blockchain has concerns a lot a different legal field and you can be sued you can be fined you can be taxed and you can even be jailed so probably it's important to have in mind the few more important risks that you can face in the virtual space so as I said yeah everybody is talking about legal risks and you've probably heard about securities regulation and CFTC as you see security yeah we speak about security because every single analysis right now has been very centered around US law it's very logical because us the u.s. is the place where most of the early blockchain applications were developed but of course you can't commit yourself to these kind of issues and and maybe a last element of context is that the legal risks are actually increasing right now the regulator's around the world basically freaking out after the ico boom and the crypto bubble of the end of 2017 until now the general rule was okay with the blockchain saying it's funny they're geeks having fun way so is fake money it's not really a problem because it's like very small transactions it doesn't concern a lot of people and with the ico boom and the crypto bubble basically becomes a real subject and the regulators have to react so SEC warning an exchange yesterday they did one on ICS on December 17 SEC is the financial operator in in the US and basically you have the same kind of reaction in every single developed country you have of course this is in the risk is increased by bad behavior certain actors in the field and that attracts unnecessary attention in the global understanding of blockchain is increasing which is good news for our business and bad news for the risks because of course regulators and and judges and everybody understands much better what we are doing and probably understands also much better how to actually regulators and we still don't have any clear regulation which means that all this activity leads to more uncertainty and more risks to you how do you identify your risks I made a tentative risk legal risk scale so it's not legal advice anymore so once again but you can basically identify kind of projects and amount of legal risks they face so before is the worst case scenario and the one is the best case scenario so if you have a DF you should actually developing at the app that is not dealing with value you're building infrastructure apps provenance application proof of blockchain so it's more like you're using blockchain that to use tokens transfer value anything you're just using blockchain as a proof of something then you have legal entities on your activity but probably the legal risk you face are not as important as the next category is you have T apps dealing with simple exchange of value so basically you are selling something o which which is a service or good good oh you are incentivizing an exchange of service and you are operating as a market for for very small amount and on service provision or things like that so examples is like crypto kitties charity projects instant position of participation you have projects that incentivize answering to certain questions incentivize participating to open source projects everything and then bounties and this kind of thing so here you are actually dealing with value so you probably have a bit more risks but it's still nothing compared to category three and four I'm a material for basically it's almost the same amount of risks because here you are dealing with icos token sales and euros I put them together because basically I cos are the simplest form of the arrow you can you can imagine and you are actually dealing with huge amounts you are dealing with proposing value to avoid public and probably issuing some kind of securities to the public and of course financial the apps where you are creating exchanges derivative products or gambling this includes also projects like prediction markets which is probably something in the derivative product category so first thing to do is to identify okay where am I on this case and if category three and four you need a lawyer very soon and if you can't agree one you have to be aware of the risks and be careful on the way you're structuring activity but probably you have less less important to face then from there I just this is a very broad landscape of the potentially applicable regulations to any kind of reduction projects so my recommendation would be just read this list and if there is something here that you don't know at all that this is something that you really don't know what it is about you should probably have a look at that because it will have consequences on your project at some point in the future so the first thing is Colo thought-out contract law which is basically when you close the damage to someone and you have to repair the damage tax law of course very important consumer protection rules if you are selling to someone who is not a specialized investor someone who is not professional you need to take care of that data protection rules if you are collecting any kind of personal data from your clients you need to respect some very precise rules in every single country in the world you need to you need to know about that compression of course kyc Emily is know your customer and antimony rendering rules so these are rules applicable when you are collecting money from people you actually have to know who are those people and where the money they are giving you comes from and the general terms accredited investors rule so in certain country you can only get take money from people who are accredited which means that they have a certain level of understanding on money management and of course you are the sexual regulation so if you are building in a decent reputation on a very specific field you have to be extra careful to have a look at this and understand what it is so Financial Regulation energy regulation game and everything if you don't the potential consequences of not dealing with legal rules both immediate and long-term consequences so immediately if you don't respect anything you will probably have a troubles with your bank every time you want to it because if you you're dealing with okay you're creating a decentralized applications always go to your collecting eater but at some point you have to pay your rent you have to pay employees you have to pay for things in you in euros or any other fiat currency and you will probably need a account for that and now we are at a point where banks won't open the bank account for you if you didn't respect the regulation beforehand so you have to be extra careful in advance on that there is also of course the tax liability if you didn't anticipate the structuration of your project your tax liability can end up very very high and probably much higher than if you did an analysis beforehand and you will have troubles also with accountants that are supposed to actually certify in your books and probably they won't be able don't want to do this if you didn't respect the rules in the long term of course unhappy investors or consumer men may sue you or denounce you to regulators that will then in now basically you can have on your application either on yourself if you really badly structure the deal or on your company if you have a legal entity that is actually doing something maybe the red flags it's a list of four flags that probably you should in any case never do because it will attract unnecessary attention on your project the first thing is collecting huge amount of money from completely unknown people you could probably do that two years ago because the field was very new and nobody was having a look at what's going on with icos and what's going on doing with token sales or any other kind of ideas or things like that but today it's probably a very very bad idea to do this operating without any legal structure or with a badly structured one and this is very very important again if you are doing something by yourself you are basically the target of any kind of legal proceedings and you don't want to do that up in jail or something like that so create a legal structure and a good one not paying any tax anywhere is also a big red flag somebody will notice at some point and probably someone that you don't want so whether it is the country where you are actually living or the country whether the company is incorporated at some point you will have to pay some tax and of course avoid if you can deceiving people because 99 percent of the legal issues you face are created by someone who is not happy with what you did so those are the four red flags and once you have identified like okay I have this risks have to manage them how can I in practice but at the practical step that my company myself can do to move forward actually implement the new company I want to create and do this without too much risk so the first thing is yeah read maybe yourself or have someone in your team read about the legal rules and tax rules applicable to your industry in particular so general rules and probably the news that are related to blockchain industry in particular you should have a deeper look and that you should incorporate I said it before incorporate a ligature sure as soon as possible whether it's a company or nonprofit is irrelevant but you have you have to create something like that will actually host your activity and be most of the risks for you and of course you should hire an advisor very very soon like as soon as you can afford it and maybe even before if you can convince him to go for free until you have some money you need someone that actually has an experience in the field it's not something that you can buy yourself expert in you can try to do this but you will make very big mistakes at some point even lawyers make mistakes and they are very specialized in your field so you should have an advisor very very soon and it can be a internal adviser an external but you need an expertise and probably you need more than one and the last thing of course do not mess with your clients investors partner sanitizers they are those people who are the most likely to see you at some point and so those are really broad rules and I'm going a bit deeper like how to manage your risks properly properly means actually you need probably more than one know you you need a lawyer in the country where you will create your company and you probably need a lawyer for you like the issue is often the blockchain projects create a company in another country then the country where you're living for for various reasons that are somewhat related to taxes or to financial regulation or these kind of things but they're still living in another country and this can be the cause of important legal risks so you need to check with a local with a lawyer that actually operates in your country of residence to be sure that this structure that you create it bro abroad does not create legal risk for you personally in open three of residence and it's it's very likely that it will so you this is more like don't listen to you cognitive bias listen to all the advice especially don't those you don't want to hear when you are asking for advice is to a lawyer he will give you like okay those risks and probably one of them you have it you don't want to deal with it and you will probably make as if it doesn't exist don't do this because it probably the worst risk that you didn't listen to and it will have very bad consequences in the future so they were doing highest risk assessments and move forward how do you do Honus risk assessment you tell you advisor advisors to list the consequences of actually not implementing what they are advising you to do which helps you understand basically what is exactly the risk that I'm facing here because you will probably not be able to implement everything we are in an environment that is unclear some regulators won't follow you some people won't want to work with you so it's possible that you will have to just move forward without dealing with average kind of risk so probably you just need to check okay what do I what is it what is the exact risk that I'm taking by moving forward in this in this context and can I can I can I take this risk can I take this quiz but what risk makes sense from a business perspective can I accept them personally my team my investors so you just have to check this and and just move forward with with with the project you you won't be able to cover every single legal risk before moving forward so it's really a question of risk assessment I'll end my presentation with like four examples of risk management don't don't run I will be very quick on this so this is things like you think you're doing the things right and probably not so the first thing is thinking that you face no legal risks because your is decentralized probably you shouldn't say yourself you should ask yourself a second question in this kind of situation do you get any money from this day out yes this assumption is almost certainly wrong because you are actually using the application to get some money so you are responsible for this and if the answer is no it's still very likely wrong because you're still the creator of the application and even if you don't have any control in it it's very very likely that the regulator will think that you have some kind of responsibility for deploying deploying it on the blockchain I only need to care about local I involve us slow because I live here and this is probably wrong also except if all your clients are in the US and you are a u.s. resident and you have to be able to check that all your clients and in the in the US so if this is yes then probably it's no or I don't know then the answer is probably now you need to check in bro in broad not in every details but you need to check the RULES applicable everywhere I have this legal structure in a shady tax haven that handles everything so everything is fine this is of course not true and you should probably check with a lawyer that this structure is like operating with enough substance and so that children face any actual legal risks by just having the structure and that the legal structure is actually substantiated enough that it couldn't be considered as artificial arrangement or something like that so didn't inform you about a sufficient arrangement or substance then ask him again about this and if he or she says don't worry ask another lawyer and the last one I face no Reez because I have a lawyer so this is of course plain wrong will help you identify the risk but you will still be held responsible in the end so it shows you advisor wisely this is my last advice and thank you for listening and [Music]