Ron Segev, Technology, iGaming & DLT Lawyer at Segev LLP – discusses legal application in crypto & blockchain and emphasizes its importance

Ron Segev, Technology, iGaming & DLT Lawyer at Segev LLP – discusses legal application in crypto & blockchain and emphasizes its importance

The cryptocurrency market regulation can be divided into legislative and executive regulation.

Legislative regulation embraces the prospect of non-recognition of digital assets as a financial instrument by the state because the current legislation just does not have the needed regulatory framework. In such a case, the new draft legislation is supposed to be established which will influence the formation of the crypto industry within the law. An alternative to the legislative regulation foresees the recognition of the cryptocurrency as an analog of fiat money or a type of existing currency. In this case, the existing draft legislation would require additions and amendments.

Executive regulation includes two options:

  • to control cryptocurrencies within the legal framework;
  • to integrate digital currencies into different areas of activities and manage them by means of tools that influence these areas.

Many states note the importance of the issue related to cryptocurrency regulation. For this purpose, new solutions are being developed, as well as proven tools to standardize this segment of the economy. This is where legal firms such as Segev LLP come into play.

CoinPoint has consulted with one of the leading figures within the cryptocurrency regulatory sphere — Ron Segev to discuss legal jurisdictions & limitations, regulatory advice for start-ups, the application of blockchain in the legal sector, and general crypto and blockchain trends.

CP: The Crypto market is moving forward very fast, in a different jurisdiction, there are different legal limitations and therefore opportunities. Where do you see the best locations to run crypto related businesses like mining, trading, and development? Why these places are the best in your opinion?

Ron: Lately, we haven’t seen much investment or activity in mining infrastructure. Historically, our clients who have been mining crypto have always looked towards jurisdictions that offer several advantages: cost-effective real estate, cheap power, the ability to obtain hardware at a decent cost, and some ability to bank traditionally. The last factor has always proven the most challenging. The need for traditional banking takes on greater importance when the mining operation takes on a larger scale that requires transparent operations and governance for its shareholders and other stakeholders. In that case, good banking is always required, and many jurisdictions simply won’t support banking for a crypto mining company. Where that is an issue, we have seen companies go to Gibraltar, Singapore, Hong Kong and Cyprus for solutions.

With respect to crypto trading, our clients have not only based themselves in jurisdictions that are crypto friendly from a banking perspective, but most importantly from a securities law and regulation perspective. Our clients who run crypto investment funds also concern themselves with complying with securities laws in jurisdictions where their investors are located. We have several clients who have set up operations in the British Virgin Islands as well as Bermuda and Gibraltar. In particular, The British Virgin Islands is of interest because of its sophisticated and flexible investment fund structures. The latter two jurisdictions, Bermuda and Gibraltar are particularly crypto friendly and Bermuda has a good tax and information sharing treaties with many countries making the repatriation of profits fairly efficient. With Brexit looming, it is difficult to say how Gibraltar will function as a recommended jurisdiction. In light of the coming changes, we recommend our clients make sure to get as much information as possible before making the move to Gibraltar.

For crypto investment funds, choosing your base of operations is just one piece of the puzzle. For example, if your investors are located in the United States or Canada and you are marketing securities to those jurisdictions, complying with local securities laws is critical. Obtaining broker-dealer registrations, exempt dealer registrations, or similar, with applicable jurisdictions where necessary, is recommended. At a bare minimum, an investment company has to consult with the local securities laws in the regime to which it is marketing its products prior to marketing to those jurisdictions.

For a blockchain (used to say “walk-in”) or crypto development company choosing a place of business is usually an organic process. Our clients tend to locate themselves depending on where they can access talent and where valuable business networks reside. Increasingly, this is less tied to geography as the world works remotely and valuable online networks are easily accessed and leveraged.

CP: When a blockchain startup is established and looking for the best legal advice to begin with, what can you say? What will be the most important advice you can share?

Ron: The best advice I can give founders of a blockchain start-up is the same advice I give founders of any technology startup. It doesn’t matter if you are developing software as a service, a dog walking app, or a game-changing technology on the blockchain, it is the same advice. Founders need to make sure that their corporate house is in order. Their company needs to be properly formed with the correct share capital structure which will make raising money more frictionless than if they had the wrong share structure in place. We always recommend a simple share structure of common shares and blank check preferred shares.

A Shareholders Agreement is always recommended to be put in place as early as possible. It’s critical that the shareholders’ agreement is drafted so the company is a director-run company, not a shareholder-run company. The directors need to be able to run the company efficiently with transparency and foreseeability. We also recommend that the company’s intellectual property be protected from day one. Founder intellectual property transfer and assignment agreements should be put in place for the benefit of the company. Consulting and employment agreements and third-party development agreements with robust intellectual property, non-disclosure, non-compete, and non-solicit provisions should be put in place as early as possible.

Lastly, we always recommend entering into reverse vesting agreements so that if any of the founders decide to bail on the other co-founders early on, they are not taking their full stock allocation with them and overly prejudicing the remaining shareholders by leaving the company prematurely. The last piece of the puzzle is to make sure that any commercialization of the technology, whether it’s a free pilot or a well-paying enterprise agreement, contains the correct IP protection language. The company must be protected with appropriate liability limitations, indemnifications, and disclaimers. The focus of the agreement must not only be given to commercial terms.

The specific blockchain advice we give is that a company utilizes smart contracting to always get a third-party smart contract audit done, and for all blockchain companies to get a third-party security audit done prior to either going live or going to market whether it’s a test pilot project or invitation-only beta. Also, we recommend the founders understand what utilizing an open blockchain in their tech stack means from an intellectual property perspective, namely that a core component of their tech-stack is open source and what the ramifications of that can look like.

CP: We are aware of blockchain solutions for real estate, investments, server’s security, personal data monetization and more, where do you see (or want to see) blockchain solutions come into practice in your daily legal work? How do you believe this technology can help your business?

As we know, distributed ledger technology has its most powerful applications where trust and verifiability are crucial in a transaction, and where a transaction can be automated by the use of smart contracting. Banking, finance, online gambling, securities trading, commodities trading, foreign-exchange trading, the insurance industry, and sensitive data handling, are all excellent examples of industries that can benefit from DLT technology. Our law firm does a fair bit of work in the online gambling space, where we see too much friction and higher costs involved in payment processing. In particular, deposit and withdrawal methods commonly used by the industry are time-consuming and often very expensive. This can easily be rectified by the more common adoption and use of cryptocurrency technology. Furthermore, many players of online gambling websites have no choice but to trust the operator of the game they are playing to confirm the outcome of the game they are betting on. Players have to trust the operation that the random number generators utilized on the games are in fact random or that the game is generating a win rate as posted by the operator. By utilizing distributed ledger technology, those variables can be independently verified and by using smart contract technology, winnings can automatically be paid out to a player when the player wins a game or bet, immediately on winning.

Our firm also handles a fair number of real estate transactions that require a considerable amount of paperwork. Transactions today usually always involve the purchase of title insurance every time a property changes hands. Purchase and sale transactions require that lawyers make undertakings to each other that money will flow from a buyer to a seller and clear title will flow from a seller to a buyer. In light of modern distributed ledger technology, this process is very antiquated and ripe for a technological revolution. By utilizing cryptocurrencies, smart contracting and a publicly viewable, immutable, secure, blockchain platform, real estate transactions can happen in a fraction of the time and at the fraction of the cost currently required and titles can be transferred with great security and certainty.

CP: Can you share with us one promising crypto client of yours or a project you believe in and can recommend to the public to follow?

A project that we have been working on for some time which we are very excited about is RXB Healthcare Technologies. RXB utilizes the power of distributed ledger technology to properly harness medical data. In so doing it pays a patient for contributing his or her medical data set to the larger data pool which will be used by research labs to develop and improve drug therapies. This is a business model and application that can only exist on a distributed ledger technology.