Dear Crypto-Legal Observers,

Crypto is full of unique words, phrases, and memes. This shared language serves to cohere a community of crypto enthusiasts; it creates a culture of novel experimentation and a pervasive optimism that together, we go farther. 

And it’s true: together we do go farther. This month marks the one-year anniversary of Decentralized Law. Throughout this last year, Decentralized Law was produced by dozens of contributors, sent to tens of thousands of crypto-legal-curious readers, and has established itself as a go-to source for crypto-legal developments and analysis. But we couldn’t do any of this without you.

In the cryptoverse, in this new digital frontier, we rely on each other to learn about the best ways to organize people towards a common mission, to discover the next technological breakthrough that can help solve nagging societal problems, and to support each other during difficult times such as liquidations, project failures, or burnout.

In some respects, crypto is a community built upon the social analogs to the technology, but in the end it’s all about the people, the folks we build with each and every day. The crypto-legal space is no different, and in some ways those of us within this sphere depend on each other more than any other segment of crypto. Worldwide teams and the ever-changing global crypto-legal landscape demands such collaboration.

Which brings us to the Blockchain Lawyers Group. Founded by two long-time BanklessDAO Legal Guild contributors, Eagle and MDLawyer, this association seeks to serve as a hub for crypto lawyers to come together, work together, and go farther, together.

Blockchain Lawyers Group @BlockchainLG

We begun our introductory calls with the first cohort of applicants. It is such a great pleasure to get in touch with #web3Lawyers from all over the world 🌍 with different backgrounds and cultures. Diversity in legal dialogue will be an added value of @BlockchainLG❤️‍🔥

6:48 AM ∙ Oct 13, 2022

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In this issue of Decentralized Law, Eagle and MDLawyer share their reasons for creating the Blockchain Lawyers Group and how it’s rapidly building a diverse network of lawyers in over 30 jurisdictions to provide web3 projects and protocols with top-notch legal representation. As MDLawyer summarizes, “Our association wishes to collaborate on joint educational projects, position papers, and guidance. Nonetheless, its main focus will be on creating the necessary infrastructure for web3-native projects and businesses to get easy access to high-level legal advisory in the field of blockchain”. Great work, friends. 🚀

Also in this issue, we have two articles analyzing the CFTC’s action against Ooki DAO, review the latest on the EU’s MiCA legislation, get an update on Panama’s legal entities, provide an overview of regulations in various African jurisdictions, and summarize news and articles from throughout the cryptoverse.

Although this newsletter may help to familiarize readers with the legal implications arising out of blockchain technology, the contents of Decentralized Law are not legal advice. This newsletter is intended only as general information. Writers' opinions are their own; therefore, nothing in this newsletter constitutes or should be considered legal advice. Contact a legal expert in your jurisdiction for legal advice.

Welcome to Decentralized Law.

Contributors: Eagle, lion917, COYSrUS, Trewkat, Cheetah, pub-gmn.eth, MDLawyer, lawpanda, teresacd, Jay the Legal Wizard, RedHatRoss, Olokoji, Oluwasijibomi, ximpli_ana, Godwithus, KingIBK, Samuel BG, HiroKennelly

This is an official legal newsletter of BanklessDAO. To unsubscribe, edit your settings.

🙏 Thank You to Our Partner

Polygon Village - A full-stack ecosystem for developers to build and grow.

A Note From BanklessDAO's Legal Guild

Author: Teresa Carballo, Legal Guild Project Manager

As BanklessDAO's Season 6 approaches, we want to update you about some of the ongoing and upcoming projects and activities that the BanklessDAO Legal Guild is working on, and the ways you can join us and contribute.

1. One of the BanklessDAO Legal Guild's goals is to update the crypto community about international regulatory developments in the crypto ecosystem. We are currently working on Crypto Nomads, a research project where we will guide you through crypto-friendly jurisdictions. If you want to contribute, we are looking for people with extensive knowledge of Indonesia, Singapore, Puerto Rico, or other Caribbean nations (we’ve got Portugal and Panama covered).

2. The Legal Entity Research Project will be released soon, providing “an overview of potential legal entity structures that may or may not benefit their DAO or project, a discussion why association or wrapping with a legal entity may or may not be ideal, and some more technical considerations for the various jurisdictions and entities”.

3. Also for Season 6, we will start developing a research group on DAO Mergers and Acquisitions. Please let us know if you are interested in joining.

4. Even if you aren't a member of the Legal Guild, we are always looking for legal practitioners in the crypto space to contribute to the Decentralized Law newsletter. If you have an idea for an article, would like to be considered for an interview, or are interested in the publication process, please reach out to the coordinator, HiroKennelly! 

5. You can also find us on Twitter at @legal_bdao, where we post relevant crypto news and hold bi-weekly Twitter Spaces. Please follow us!

This is our Twitter Spaces event calendar for November:

One of the main questions we get asked is how to become active in the Guild. Join us every Thursday at 16:00 UTC in BanklessDAO’s Discord for our weekly planning call. Once you join the BanklessDAO Discord, go to the Get Involved channel to ask for a Guest Pass so you can view the Legal channels!

Our onboarding team also hosts weekly sessions on Tuesdays at 14:00 UTC and Saturdays at 20:00 UTC, held in our Discord.

Being a lawyer in the crypto space is something that many of us in the BanklessDAO Legal Guild would have never thought of as part of our career path; this thread will help you navigate the web3 crypto-legal environment.

eaglelex @eaglelex_eth

Every day crypto faces new regulatory challenges. But the attention and devotion of dedicated groups of lawyers and researchers increased. A thread to navigate the Web3 crypto-legal environment. 🧵

7:38 PM ∙ Sep 30, 2022

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If you have any questions, please send us a DM via Twitter. Hope to see you at our weekly meeting!

🎙 Interview

Eagle and MDLawyer Are Bringing Crypto Lawyers Together To Help Projects Succeed

Please tell us about your background and how you came to specialize in crypto-legal issues.

Eagle: I am an Italian law professor and attorney. I was born into a family of lawyers and, starting from high school, I used to spend lots of time at my father’s law firm. During the university years, I became really passionate about the law and after graduation I followed the academic path with an LL.M. and a Ph.D. I then became an attorney and law professor, and used to work as a litigator with a specific focus on contract law. In 2020, two former students asked me to help set up a crypto-fund. They came to me because I started to give classes on digital law. To be honest, back then I did not have practical knowledge about crypto-related issues, but I immediately understood the potential and the innovative nature of the industry. I got heavily involved and since then I dedicate myself almost exclusively to blockchain and crypto in my academic and professional life.

MD: I am a Portuguese qualified lawyer now working at Taylor Wessing’s Corporate Technology department in London. Similarly to Eagle, I have a lot of lawyers in the family and thus, after realising that I would not be able to be a (good) professional football player or an astronaut, I immediately thought of law as an interesting and challenging path, in particular given all the developments in technology and the many questions lawyers were now facing. Only in 2018, during my LL.M. in London did I get in contact with blockchain technology via a friend who was building a startup doing fractionalised ownership of physical collectibles on the blockchain. I immediately became interested in the technology and eventually did my dissertation of the regulatory framework of crypto assets in the EU. From then on, my experience in blockchain and crypto-related matters really is due to the great inbound of “crypto millionaires” to Portugal due to the tax exemption on capital gains derived from the sale of cryptocurrency. These massively developed the Portuguese blockchain ecosystem and a lot of work came from there either directly, as they became angel investors or founders, or indirectly since Portugal was then put on the map as a crypto-friendly jurisdiction, which brought a lot of attention to the country.

On October 10, the Blockchain Lawyers Group was launched on social media. Can you explain exactly what it is?

Eagle: Blockchain Lawyers Group is a non-profit association that aims to connect a global network of independent legal experts in blockchain and crypto-related matters. Its first goal is to increase the ease of access to competent and qualified legal advice around the globe. Lawyers with experience in advising web3 companies and professionals are featured in a public directory, in accordance with their jurisdiction, through an NFT membership model. Please go and check our website to have a more precise idea.

MD: It is important to point out that our directory seeks to ensure that its members in every jurisdiction are knowledgeable and tech-savvy, capable of providing world-class legal advice in blockchain and crypto-related matters due to their qualifications and high quality local expertise. All members are subject to a pre-approval process to assess their qualifications in the applied jurisdiction. Such a process begins after the candidate submits a form with the information to be presented in the directory. Everyone is free to apply through our website, but only lawyers with proven professional experience in blockchain and web3 legal matters are eligible.

How did you come to the idea of founding the Blockchain Lawyers Group?

Eagle: It came from our personal experience as legal advisors. It is not uncommon to assist founders of a project located in different parts of the world. This means that legal conditions for the place of incorporation, tax matters, and compliance requirements need to be carefully considered in the light of different legal systems. Moreover, blockchain legal issues involve several fields of expertise: corporate law, contract law, financial and securities’ law, IP law, tax law, and immigration law. A single crypto lawyer cannot face these types of tasks alone; a strong professional network is therefore necessary.

MD: It is becoming increasingly clear that the particular needs of a client in the web3 ecosystem require a legal advisor who understands the technological background and the blockchain and crypto community. More often than not, finding the right lawyer — someone who really understands the ecosystem, technology and the involved legal risks — is a problem for web3 projects and individuals. This has also been a struggle for lawyers in the blockchain ecosystem who often require local counsel expertise due to the immanent international nature of most questions they are posed.

What are the benefits of being part of the Blockchain Lawyers Group?

Eagle: I think that the benefits are enormous. We have tried to list them in our whitepaper: apart from being featured in the public directory, our members have access to a project management tool for international workstreams, a NFT-gated Discord, our members-only Telegram group, and benefit from a free advice policy between members, which, to be honest, is working incredibly well. Finally, our members also have the opportunity to write opinion pieces in relevant web3 media outlets and participate (either by attending or speaking) in educational events.

What have I forgotten MD?

MD: Internally, our members benefit from being part of a strong and responsive network of specialized lawyers all around the globe to discuss legal issues with experts in their national legal systems. We have also implemented an informal referral fee policy for our members to be incentivised to collaborate with each other.

Externally, potential clients in the web3 ecosystem who look for legal advisors in the directory know that the featured lawyers are qualified in such jurisdictions, have past experience in advising in similar matters, have digital wallets, are part of an association with an NFT membership model, are in a NFT-gated Discord, are on Telegram and Twitter, and have immediate access to professionals in several other jurisdictions to aid in every matter or new question that the situation may pose. I believe that brings a sense of security and relief to these clients as there is no knowledge gap or bridge to cross when speaking with one of our members as they understand the ecosystem since they too are a part of it.

How does the Blockchain Lawyers Group position itself towards other crypto-legal organizations?

Eagle: From the very beginning, we made clear that the Blockchain Lawyers Group is a great supporter of web3 legal initiatives such as LexDAO, Lex_PunK, the Bankless DAO Legal Guild, and LegalDAO. We appreciate the educational role and the guidance provided by such organizations. Many members of the Blockchain Lawyers Group are also members of the aforementioned web3 legal organizations and will continue to provide their contribution. Differently from the mentioned organizations, our focus is mainly on legal advisory and practical matters, but we are part of the same family and will always be ready to advocate for crypto, to participate in public goods initiatives, and to perform an educational role.

MD: Ultimately, we encourage no competition in the web3 legal environment. Our association wishes to collaborate on joint educational projects, position papers, and guidance. Nonetheless, its main focus will be on creating the necessary infrastructure for web3 native projects and businesses to get easy access to high-level legal advisory in the field of blockchain. The Blockchain Lawyers Group intends to become the go-to place for people, DAOs, projects, and service providers who are in need of qualified legal advice.

I also would like to mention that the Blockchain Lawyers Group is building solid partnerships in web3. In the first two weeks we have concluded partnerships with Polygon Village and Kill B, which join our previous existing partners DeWork and Questbook. Other partnerships are in the pipeline and will be announced soon!

What is the most important goal that you want to achieve with the Blockchain Lawyers Group?

Eagle: Our official goal is to become a go-to place for projects seeking high-level legal advice in web3 and blockchain-related matters. The directory and the Discord server should ease the search for a good advisor for every kind of crypto project. But after these first weeks from the launch, I firmly believe that membership will lead to professional and personal growth for the involved persons. The dialogue and the cooperation between members opens up the mind towards unknown legal dimensions. Given that many parts of the law on blockchain related matters still need to be shaped, I think that such an international cooperation can lead to an enhanced awareness and capacity of assessment about the legal risks.

MD: In addition, our ultimate goal as lawyers is to render the best possible advice to our clients. That is the main purpose of Blockchain Lawyers Group: to foster an environment of cooperation between members where questions may be raised, constructive discussions can take place, and local counsel expertise is readily available. 

How are things going so far?

Eagle: So far everything is going great. We have received a huge amount of applications that we are trying to manage in the best possible way. But it takes time, as we want to get personally in touch with every applicant. As to the numbers, after almost three weeks since launch, our association already covers more than 30 jurisdictions, we have published five articles, and announced two partnerships. On Twitter and LinkedIn we caught a good number of followers. Finally, we are honored to have received the support of leading crypto lawyers in the ecosystem, who have from the outset showed an interest in our organization and joined as members. All of this demonstrates, perhaps, that the Blockchain Lawyers group has filled an existing gap. In any case, we are still at the beginning and it’s early to present a balance.

MD: As stated, having only launched on October 10, everything is going better than expected. There clearly was an appetite for an organisation of this sort and we are happy to have contributed to that. Nonetheless, we are still very early in our development and have a lot to improve. Therefore, we welcome any feedback or comments to our mission and the way we have been doing things! 

Eagle is a Law Professor and Attorney. PhD in European Private law. Advisor of Polygon technology, member of Lex Punk DAO and of the Aragon Compliance subDAO

MDLawyer is a Portuguese qualified lawyer who renders legal advice to founders and emerging companies throughout the startup’s lifecycle. Also, he has been very active in advising clients regarding blockchain and cryptoasset-related matters.

⚖ Developments

The CFTC’s Alternative Service on Ooki DAO Violates Procedural Due Process

Author: lawpanda

A decentralized autonomous organization is a non-entity technological structure that facilitates social coordination and collective online decision making. DAOs are, by definition, community-led entities with no central leadership, and they sometimes govern themselves on the blockchain using smart contracts. They are particularly attractive in the digital age because the members are not limited by geographic location, enabling organization on an international level.

Unlike corporate shareholders, limited liability company members, or participants in other, more traditional legal entities, DAO members do not enjoy the type of personal liability protection granted through an entity’s fictional legal personhood. Decentralization makes conducting enforcement actions or otherwise suing a DAO more technically difficult because there is no centralized leadership, entity, or place of business. Beyond that, many DAO members are anonymous or pseudonymous, providing a further layer of insulation against legal action. Even so, a recent lawsuit against Ooki DAO has highlighted how the Commodity Futures Trading Commission (CFTC) is attempting to subject unidentified DAO members and token holders to liability — in violation of their full and fair procedural due process rights.

The CFTC's Action Against Ooki DAO

In September 2022, the CFTC issued an agreed administrative settlement order imposing a $250,000 civil penalty on bZerox (bZx) LLC and its founders, Tom Bean and Kyle Kistner. bZx and the founders did not admit wrongdoing but agreed to cease violations of federal commodities laws.

The complaint and accompanying settlement order alleged that Bean and Kistner designed the protocol as a collection of smart contracts on the Ethereum blockchain, which facilitated transactions without intermediaries and created an unregistered retail digital commodity derivatives exchange, in violation of the Commodity Exchange Act (CEA) and CFTC regulations. In the United States, these types of margin retail commodity transactions are required to take place on designated regulated contract markets, such as the Chicago Mercantile Exchange.

The CFTC concurrently commenced an enforcement action in California federal district court against bZx DAO, which had been rebranded to Ooki DAO (Ooki). The CFTC's complaint says that Bean and Kistner transferred control of the protocol from bZeroX to a DAO in August 2021 because they thought it would be “enforcement-proof.” The civil enforcement action is based on the same alleged violations by the bZx entity and its founders. According to the CFTC's complaint, Ooki is comprised of token holders who vote on the governance of the protocol, regardless of whether directly (as a token holder) or indirectly (as a delegate of a token holder), and this voting constitutes membership in an “unincorporated association” of the Ooki DAO.

The CFTC intends to prevent DAOs from using their decentralized nature and lack of legal structure to avoid liability from enforcement actions, asserting that “Ooki DAO exists for the exact same purpose as bZeroX before it — to run a business, and specifically, to operate and monetize the Ooki Protocol”, and alleging that Ooki permitted leveraged commodities transactions that can only be lawfully conducted on a designated contract market (DCM) pursuant to the CEA Act and acted as an unregistered futures commission merchant (FCM) by soliciting and accepting orders for trading on the protocol.

The CFTC also alleges that Ooki's failure to comply with Bank Secrecy Act provisions requiring FCMs to implement a customer identification program, know-your-customer (KYC) policies, and an anti-money laundering (AML) program violated CFTC rules. The CFTC has requested an injunction precluding further activity and that Ooki rescind any contracts or agreements with investors and pay restitution for funds it unlawfully obtained.

While an enforcement action against founders or their associated startup entity is not unusual, the CFTC's expansion of the action to DAO members is unprecedented and has been decried by many as arbitrary and blatant regulation by enforcement. The action is particularly unusual and novel based on the CFTC’s theory that Ooki is an unincorporated association under California law, which allows the DAO, in theory, to be sued as a whole and encompassing each alleged individual member of the association.

Putative Expansion of DAO Member and Token Holder Liability 

The CFTC's decision to expand the enforcement action to DAO members is the subject of vigorous internal debate. CFTC Commissioner Summer K. Mersinger issued a dissenting statement, calling the decision to impose liability on the DAO and token holders “arbitrary” and “based on an unsupported legal theory amounting to regulation by enforcement while federal and state policy is developing”. Mersinger, a Republican who was appointed to the CFTC by President Joe Biden, said the agency should have engaged in formal rulemaking on DAO liability. “The commission's approach in these actions will have public policy implications that extend far beyond this particular settlement and lawsuit,” Mersinger said, “yet the commission has made this consequential decision with no public notice or input whatsoever. It is regulation by enforcement, plain and simple”.

One of Commissioner Mersinger's — and indeed most practitioners' who have reviewed the case — main criticisms of the CFTC's action against Ooki is that the CFTC based their theory of liability on California state law precedents from contract and tort law that hold individual members of a for-profit unincorporated association personally liable for the debts of the association. However, arguments relating to Ooki's liability are substantive arguments, meaning the CFTC is required to first comply with certain procedural requirements before it can attempt to hold Ooki DAO or its members liable.

While some of the substantive and procedural issues are intertwined, this article isn’t about whether the CFTC can hold the DAO and its members liable or enforce a judgment against them. It’s about how the CFTC has improperly served legal papers on ‘the DAO’ which has been characterized as an unincorporated association for purposes of the lawsuit to attach liability to each individual member. 

In California, an unincorporated association has the ability to sue or be sued, but liability flows to the individual members jointly and severally instead of to a legal entity. Members of an unincorporated association have duties and liabilities to each other that stem from the rules of the association. The members agree — usually through a written constitution — to cooperate in furthering a common purpose, and will normally appoint a committee to manage the unincorporated association’s affairs. While clubs and charities are often constituted as unincorporated associations, the members of a management committee of a charity that is formed as an unincorporated association are likely to be trustees, which inherently limits their liability.

Unincorporated associations generally have one or more places of business or are registered with the state in some way. As noted by the CFTC, however, Ooki DAO is not registered with any state, does not have a principal place of business, and has not designated representatives to accept service on its behalf. A key characteristic of DAOs is that unrelated, and often anonymous, individuals coordinate ad hoc proposals about how to run the underlying protocol. An individual may have voted or delegated their votes on none, some, or all of these proposals.

This is in contrast with an association with a clear decision-making structure and constituency. In other words, despite the CFTC’s allegations, Ooki does not particularly look like an unincorporated association, and the CFTC’s inability to effectuate service on Ooki by standard mechanisms is just one of several factors highlighting that difference.

How Do You Serve a Chatbot?

In late September, the CFTC filed a Motion for Alternative Service asking for the court's permission to serve the DAO and its members by posting the complaint via a help chat box and posting a notice on the online forum to check the chat box. The CFTC argued that it should be able to effectuate service in this manner because the DAO has “no physical office address or any publicly identifiable persons associated with its business” and “the Help Chat Box and Online Forum are the sole mechanisms the Ooki DAO has chosen for the public to contact it directly”. In support of its request, the CFTC relies on prior 9th Circuit jurisprudence where federal district courts authorized email service on allegedly similarly situated organizations, i.e. organizations that only operated a website, had no known physical location, and provided only an email address to be contacted on the website.

In support of its Motion for Alternative Service, the CFTC supplied a detailed affidavit documenting the CFTC’s search for mechanisms to effectuate service on Ooki. The affidavit described the “extensive steps” the CFTC took to “identify an individual authorized to accept service of process on the Ooki DAO’s behalf or a physical location to which a summons and complaint could be mailed”. Efforts included searches of law enforcement databases and of business registration information in all fifty states. The CFTC also filed a supplemental motion and affidavit describing a post in Ooki’s Online Forum that refers to the litigation against Ooki. The CFTC proffered these communications about the lawsuit as demonstrative that service through the forum would provide appropriate notice to the Ooki members who were supposedly already aware of the litigation based on posts and discussions. The CFTC also argues that this method of service is appropriate and “reasonably calculated to give actual notice to the Ooki DAO because it is the method the Ooki DAO itself holds out to communicate with it”. (See Motion for Alternative Service, p.9).

The court subsequently granted the motion with minimal explanation and noted service was effective on the DAO on September 22, 2022. This means that Ooki — as a whole and with respect to each alleged member — is required to file a responsive pleading within twenty-one, sixty, or ninety days from the date of service — dependant on a variety of factors — or face default judgment against the DAO and alleged members jointly and severally.

Why Courts Are Obsessed With Procedural Due Process 

In the United States court system, substance yields to procedure. What this means is that before a court can hear the merits of a legal argument, that argument must first meet certain requisite procedural requirements in its presentation to the defendant. These requirements are necessary to comply with state and federal procedural due process and ensure proper notice of the plaintiff's claims is provided in a timely manner that allows a ‘full-throated response’.

Civil actions must follow the procedures set out in the jurisdiction’s rules of civil procedure, and in the federal system, the procedures set out in the Federal Rules of Civil Procedure (FRCP). Under FRCP 4(e)(1), a plaintiff may serve a defendant according to the laws of the “state where the district court is located or where service is made”. California law, for example, allows a court to authorize “alternative service” through “a manner which is reasonably calculated to give actual notice to the party to be served …” Notwithstanding any service procedures allowed by state law, service on a defendant must also comport with constitutional notions of due process. The Due Process Clause of the Fourteenth Amendment to the United States Constitution commands, 

“nor shall any State deprive any person of life, liberty, or property, without due process of law”.

The protections enumerated in the Due Process Clause require that deprivation of life, liberty, or property by adjudication be preceded by notice and opportunity for hearing appropriate to the nature of the case. These notice requirements are designed to provide a defendant the information necessary to prepare and defend against claims brought against them and prevent deprivation of the rights set forth in the Constitution.

Generally, both a summons and a complaint must be served on the defendant within a certain amount of time. Service by a process server is the most recognized mechanism, but methods such as certified mail, posting notices on property, or publication in newspapers are now widely accepted. More recently, email and social media forums have also been found to provide appropriate notice, but only in certain specific instances where the court deems the mechanism to be “reasonably calculated” to put the defendant on notice.

Due Process Must Be “Reasonably Calculated”

The Constitution does not require any particular means of service of process, only that the method selected be reasonably calculated to provide notice and an opportunity to respond. That standard was articulated in the 1950s Supreme Court's opinion in Mullane v. Central Hanover Bank & Trust Co. and has remained largely the same to present day.

In Mullane, the bank relied on a New York banking law to provide notice of a settlement to beneficiaries through newspaper publication. It is important to note, however, that while statutory notice by publication was sufficient for beneficiaries whose interests or addresses were unknown because there was “no other means of giving them practicable and effective notice,” for beneficiaries with a “known location,” the Court held statutory notice through a newspaper publication was “not reasonably calculated to reach those who could easily be informed by other means at hand”. In other words, where the identity or address of the beneficiary was known, service in-person or by mail was required.

The Supreme Court was noticeably careful not to commit itself to any formula, and balanced the individual interests sought to be protected by due process with the interests of the state. However, as time passes and as technology evolves, what mechanisms qualify under the standard of “reasonably calculated” notice has and will continue to change.

The Reasonably Calculated Standard in the Digital Age 

 In 2002, the United States Court of Appeals for the Ninth Circuit allowed service of process through e-mail as an alternate method in Rio Properties, Inc. v. Rio International Interlink. The court found that the defendant created a scenario where email was the only way to reach it for the purposes of service. The court opined that the defendant “acquiesced” to service via email because their business structure not only desired contact through email but also declined to list an “easily discoverable street address in the United States or in Costa Rica”. Given the circumstances, the court found that “[email] may be the only means of effecting service of process”.

The Rio court acknowledged the gravity of its decision, noting that there were no prior U.S. Court of Appeals decisions addressing the propriety and constitutionality of service of process by email. Because the Constitution only requires that the method of service selected be reasonably calculated to provide notice and an opportunity to respond, “[t]his broad constitutional principle unshackles the federal courts from anachronistic methods of service and permits them entry into the technological renaissance”. 

Ten years after Rio, in Baidoo v. Blood-Dzraku, the New York Supreme Court allowed service by Facebook. “Under the circumstances presented here, service by Facebook, albeit novel and non-traditional, is the form of service that most comports with the constitutional standards of due process”. To demonstrate this method of service was proper, the plaintiff in Baidoo had to show that they could not locate the defendant — i.e. a physical address — to use the “nail and mail” or other method of alternate service.

As with the Baidoo plaintiff, the CFTC’s Motion for Alternative Service, and accompanying affidavits on Ooki included detailed affidavits (See DE 11-1 and DE 13-1) demonstrating their process, articulating why no other means of service was viable, showing the account or forum truly belonged to the defendant, and that the defendant logged in often enough to see the message. The Baidoo court made clear that “inasmuch as plaintiff is unable to find defendant, personal delivery of the summons to [the defendant] is an impossibility”. In allowing the plaintiff to effectuate service through Facebook message, the court in Baidoo emphasized that their decision would be based on the more flexible constitutional standard than the dearth of bright line precedent.

In 2018, in Democratic Nat'l Comm. v. Russian Fed'n, the Democratic National Committee (DNC) obtained leave to serve process on Wikileaks via Twitter because Wikileaks was a seemingly unincorporated “virtual” presence with no confirmable physical address. The DNC’s motion stated, “WikiLeaks is an organization of unknown structure whose primary activity is running a website, Wikileaks.org, on which it publishes confidential or classified information . . . [w]hile WikiLeaks’ physical presence is difficult to discern, it has a robust online presence, including an active presence on Twitter, using the handle @WikiLeaks”. The DNC alleged WikiLeaks was an unincorporated association and subject to service based on the same rules. WikiLeaks had also openly admitted to having read the complaint through Twitter. It is, however, somewhat distinguishable that WikiLeaks maintained P.O. box addresses in multiple locations, something Ooki clearly does not do, and service was directed to those addresses in addition to through Twitter.

While not yet attempted in a federal district court, several courts have also now allowed service via “airdrop,” including a court in the U.K. and a New York State court. These courts permitted service via transmission of a digital token to the defendant's wallet address. The service token contained a hyperlink to the relevant court filings in the case and a mechanism that allowed the data of any individual who clicked on the hyperlink to be tracked. It is not clear to what extent this mechanism of service would comport with procedural due process requirements for U.S. defendants; however, it would not be surprising to see plaintiffs attempt to utilize the mechanism in the near future in federal district court litigation.

Service of Process Outside the U.S. 

One notable flaw in the CFTC's Motion for Alternative Service is its failure to address whether any Ooki defendants reside outside the U.S. This is problematic to the extent that an order allowing alternative service could be unenforceable and violate international treaties relating to service of process on non-U.S. residents outside the U.S.

Generally, a plaintiff may serve process on an individual in a foreign country under U.S. federal rules through certain specified means outlined in FRCP 4(f), including: 1) by any internationally agreed means of service that is reasonably calculated to give notice, such as those authorized by the Hague Convention; 2) if there is no internationally agreed means, or if an international agreement allows but does not specify other means, by a method that is reasonably calculated to give notice, or 3) by other means not prohibited by international agreement as may be directed by the court. As with the due process requirements discussed previously, this rule is a flexible standard that allows service through any means that comports with due process.

For example, the court in WhosHere, Inc. v. Orun allowed, along with a demonstration of proof of actual account ownership and regular use, service on a defendant located in Turkey via LinkedIn. In 2016, in St. Francis Assisi v. Kuwait Finance House, the United States District Court for the Northern District of California allowed the plaintiff to effectuate service of process on an otherwise unreachable international defendant via Twitter. However, in both of these cases the plaintiff's identity and nationality were readily identifiable.

Conversely, in Cox v. Coinmarketcap OpCo, LLC, the court denied the plaintiff’s request for alternative service via social media because “w]ithout further proof of the country of residency for the individual Defendants . . . [t]he Court can only speculate as to whether service by Twitter is prohibited by international agreement as the country of residency cannot be identified”. Similarly, with respect to Ooki, the CFTC’s allegation that alternative service on unknown defendants of unknown nationalities and residing outside of the U.S. is allowed would seem to be facially improper.

Can a Chatbot Appear in Court?

At publication of this article, no defendant has filed a responsive pleading or had counsel enter appearance in the case. However, the presiding judge, Hon. William H. Orrick, has set a remote hearing for November 30, 2022, in order to allow parties who have filed amicus curiae — friend of the court — briefs to present the arguments set forth in their briefs. See Docket Entry 28. Briefs have been filed by LexPunK, the Defi Defense Fund, and Paradigm (the Amicus Parties). Because the CFTC’s motion to effectuate alternative service was already granted, briefs filed by the Amicus Parties are being accepted and interpreted as motions for reconsideration of the court’s decision to permit alternative service on Ooki. The CFTC’s response to the Amicus Parties’ briefs is due November 7, 2022, with replies due one-week later.

The hearing will also likely address, to some extent, Ooki’s characterization as an unincorporated association under California law and its ability to sue and be sued. The substance of the Amicus Parties’ briefs is more fully addressed in our next article. The hearing can be publicly viewed via Zoom consistent with the instructions set forth on Judge Orrick’s bio page and as described at Docket Entry 28.

In Closing 

Ultimately, the CFTC seeks to sanction anonymous individuals, who may reside across the world, who have not entered into a partnership or similar contract with each other, and whose only common connection seems to be their shared use of Ooki software on the blockchain. The CFTC’s main argument is that service via help chat box as well as a notice on its online forum is the appropriate mechanism for service because that is the only mechanism provided by Ooki to facilitate communication; and, based on discussion in the forum, members are aware of the lawsuit. However, this position does not take into account that while the DAO non-entity may conceivably be aware of the lawsuit and certain members of the community may be aware of the lawsuit, there are countless other token holders who are not and may be improperly determined to have been served and face default judgment.

Additionally, because of the Ooki token’s delegation feature, Ooki token holders may not have ever voted to direct the DAO, and delegation functionally renders the identity and location of the delegated voters unidentifiable. This means the token holders — at least for the purposes of service of process — are more similar to ‘doe’ defendants, requiring further investigation to properly identify and join into the lawsuit. The CFTC’s inability to identify Ooki members would also seem to further undermine the substantive argument that Ooki is a collective business enterprise directed by token holders. Ultimately, the CFTC’s novel use of California law to facilitate performative service and impose joint and several liability against countless unnamed U.S. and international token holders seems to fail to comport with notions of fair play and procedural due process.

If the CFTC is able to circumvent procedural due process requirements through alternative service mechanism that do not actually put every potential defendant on notice, the flawed substantive argument that Ooki is an “unincorporated association comprised of Ooki Token holders” cannot effectively be addressed through dispositive motion or subsequent presentation of evidence, and that is why substance must always yield to procedure.

lawpanda is a U.S. attorney with an active litigation and counseling practice. He is a member of BanklessDAO’s Legal Guild, LexDAO, the LexPunkArmy, and member/consultant/contributor to a variety of DAOs and protocols. When he’s not writing for Decentralized Law, he is working to reduce operational and governance friction between on-chain and legacy entities through corporate structuring and common-sense legal solutions. Connect on Twitter, LinkedIn, or at lawpanda.eth@gmail.com.

With a Little Help From My Friends — Amicus Briefs in CFTC vs. Ooki DAO

Author: Jay the Legal Wizard

A Day To Remember

September 22, 2022 is a date the web3 community will long remember. On the last day of the Northern Hemisphere's astronomical summer, the Commodity Futures Trading Commission (CFTC) filed a federal civil lawsuit in a California court that foreshadowed that winter indeed might be coming soon for decentralized autonomous organizations. In what is probably the first government action against a DAO, the CFTC brought out the big guns to take down Ooki DAO, which ran a crypto margin trading platform, and to impose joint and several liability on Ooki token holders who had voted on governance proposals.

Ooki Protocol 

The Ooki Protocol used smart contracts to allow its users to create leveraged positions to bet on the increase (long position) or decrease (short position) of popular cryptoassets (e.g. ETH) against DAI (a crypto collateralized stablecoin pegged to USD). If a trader believes ETH will appreciate against DAI, the trader may open a leveraged (say 5x) long position worth five times the increase in the price of ETH relative to DAI from the time the position was opened until it was closed. If correct, and ETH rose in the relevant period by $10, the trader could cash in on their bet $50 on each ETH invested. Leveraged trading comes at a price though, amplifying betting off the mark. If the trader was wrong, and ETH depreciated, their collateral would be eaten up to cover the loss. To take advantage of the protocol, the traders have to pay some fees that ultimately become profits of the protocol and interest for the lenders providing funds to allow leveraged trading.

Crime and Punishment

Neither the Ooki Protocol nor the DAO behind it have properly registered with the CFTC. Traders using the protocol do not have to go through any screening process. Also, they do not need to reveal any personal data allowing for identification. After all, the Ooki Protocol is just a piece of code that allows anyone with an Ethereum wallet to participate. Isn't that what DeFi is all about? Free access, no restraints, publicly available open-source code running the protocol? Apparently not, at least as far as the CFTC is concerned.

The CFTC is a U.S.government agency that regulates derivatives markets, including futures, swaps, and certain kinds of options. Within its mandate, the CFTC is authorized to track down non-compliant actors and bring them to justice to face sanctions. In its complaint, the CFTC alleges that Ooki DAO facilitated retail commodity transactions by enabling leveraged trading in crypto through its platform. Such activity, the CFTC argues, may only be run by registered future commission merchants (FCM). FCMs need to have a customer identification program (CIP) in place and subject traders to Anti-Money-Laundering/Know-Your-Customer procedures. By running the Ooki Platform without registration and without CIP — the CFTC concludes — Ooki DAO violated the Commodity Exchange Act and Commission Regulations. Since such violations cannot go unpunished, the CFTC requested the court to stop the Ooki Platform from functioning. Abstracting away its feasibility given the nature of smart contracts, that seems like a reasonable request to make. However, the CFTC goes further and calls for the court to prevent not only Ooki DAO, but also its token holders from ever registering with the CFTC to run a lawful commodity trading platform. Then the CFTC moves in for the kill and asks the court to prohibit the token holders trading in commodity interests on any registered entity.

Needle in the Haystack

Delivering a document to a DAO, not to mention an official legal complaint, is anything but easy. Where to deliver, how to deliver, who to deliver it to — these are just a few obstacles on the way. But are they insurmountable for a powerful governmental agency equipped with legal means and considerable resources? It can for instance trace the wallet addresses of the token holders back to the place where they first onramped fiat into crypto and force the concerned exchange to reveal the identity of the user who transferred the purchased crypto to the wallet. Knowing the identity of a token holder, it is possible to pin down an address, e-mail, social media profile, or other means of communication to allow for delivery of information to the token holder.

Is that what the CFTC did to serve the complaint on Ooki DAO token holders? Not quite. The CFTC took a shortcut. First, the agency searched to no avail on the Ooki Platform's website for any contact details. Then they checked law enforcement databases and business registers in all 50 states looking for Ooki DAO (formerly bZx DAO), to no avail. The CFTC decided to provide Ooki DAO with the complaint via the Ooki DAO'S help chat box and posted on the DAO's online forum that the complaint had been delivered. To legitimize this way of service, the CFTC filed a motion with the court, with which the court concurred. Thereby Ooki DAO and all its token holders who ever voted on a governance proposal had supposedly been duly informed of the imminent litigation and given the opportunity to defend themselves.

Friend in Need Is a Friend Indeed

And here's where the web3 community's resilience takes the stage. Two eminent web3 advocacy groups, the Defi Education Fund (DEF) and LeXpunK, filed with the court amicus briefs to quash the CFTC's controversial service of the complaint on Ooki DAO and its token holders. Amicus curiae briefs (literally translated from Latin "friend of the court”) are intended to draw the court's attention to law that escaped consideration. Those are interventions from non-parties concerning legal issues that have potential ramifications beyond the parties directly involved, which are not brought up by any party to the litigation. The court hearing a case is generally free to decide whether to allow an amicus brief to be filed and deliberated upon.

It is noteworthy that each of the proponents is represented by a white-shoe law firm in their amicus interventions. In their brief, DEF argued that Ooki DAO is not necessarily an “unincorporated association of Ooki token holders” as asserted by the CFTC in its complaint. Not being an association (a category included in the umbrella term “person” under the Commodity Exchange Act), it cannot act as a defendant in an enforcement action. In addition, DEF contends that the CFTC's chosen method of service (i.e. through a chat-box) is not reasonably calculated to reach Ooki DAO's token holders. DEF emphasized that the CFTC did not use its vast resources to identify individual token holders believed to bear joint and several liability for the Ooki DAO's alleged wrongdoings and serve the complaints on them through ordinary channels. DEF noted that the CFTC had already reached a settlement with two individual Ooki token holders establishing their joint and several liability and ensuring full recovery.

Arguments presented in the LeXpunK brief are similar to those in the DEF's brief, although their brief is a bit more concise (to be fair, the LeXpunK's brief was filed one day earlier). LeXpunK also argued that the CFTC sought judgments against unknown individual Ooki token holders without providing them with constitutionally required notice. As LeXpunK rightly observed, without being properly noticed, defendants are unable to defend themselves and lose the opportunity to be heard. LeXpunK makes a clever observation that since the CFTC has no knowledge where Ooki DAO operates (as it states in the complaint) it is incoherent to assert that the DAO runs its business in the court’s district, which would justify the court's jurisdiction over the case. Moreover, LeXpunK pointed out that the CFTC's motion for alternative service through the mentioned chat-box does not qualify for expedited resolution since it does not satisfy the applicable requirements. Lastly, LeXpunK noted that the CFTC's motion exceeded a 5-page limit for motions of this kind.

Paradigm, a crypto venture capital firm, also submitted an amicus brief that, for the most part, echoed the arguments in the two other briefs. Paradigm also touched on the notion of decentralization arguing that a token holder cannot really control a DAO and be liable for its wrongdoings unless the token holder owns a sufficient number of tokens and thereby voting power. The CFTC had failed to indicate any such token holders in its complaint, Paradigm concluded. 

Both DEF and LeXPunK will be allowed to present their arguments against the CFTC’s service of process at a hearing scheduled for November 30, 2022. As of this writing, Paradigm’s motion to have its brief admitted had not yet been resolved. 

Way Forward

September 22 marks a day of transition. In the north, transition into cloudy, windy, gloomy days of autumn; in the south, into warm, hopeful, blooming days of spring. Unlike the change of seasons, the direction of governmental regulations and enforcement policy are far less deterministic. They may be influenced by many different factors, including the strength of the community, which the regulations target, in voicing concern. Luckily, the web3 community – although so diverse and decentralized – stands ready when a friend's house is on fire. If not extinguished on time, it may soon sweep through the whole decentralized community. Yet an ounce of prevention is worth a pound of cure. Hence the need for a dialogue between web3 community, lawmakers, and regulators to figure out what can be done to strike the right balance between consumer protection, reasonable compliance requirements, and, most of all, freedom to pursue innovation in the web3 space.

Jay Figurski is a tech-savvy attorney-at-law from Poland specializing in tax and corporate matters. He has 10 years of professional experience in the legal and consulting industry gained both in Poland and abroad.

🏛 Regulations

Panamanian Legal Entity Structures for Web3

Author: Teresa Carballo

For this edition of Decentralized Law, we are going to showcase one of the trending jurisdictions to incorporate a legal entity with crypto finalities. Panama is a small Central American country known for decades as a ‘go-to place’ for international financial and legal structures.

Panama Regulatory Overview

Panama has a number of characteristics that attract foreign investment; its legal entities are used for local and offshore purposes which are consistent with international standards. Panama has demonstrated a commitment to work alongside the FATF and GAFILAT to strengthen the effectiveness of its AML/CFT regime.

One of the advantages Panama offers is its territorial taxation system; only operations that occur inside its border — Panama-sourced income — are taxed for both residents and non-residents. Also, if a Panamanian legal entity has no local operations, it is not subject to Panamanian regulations.

Panama's legal tender is the U.S. dollar, which facilitates international transactions. It also has a democratic and stable government and has generally pro-crypto legislation.

On April 28, 2022, Panama's National Assembly approved the Bill “Law to regulate the commercialization and use of cryptoassets, emission of digital value, tokenization of precious metals and other assets, payment systems and which dictates other dispositions”. After that, the President, Laurentino Cortizo partially vetoed the proposed legislation so that it could fully comply with global anti-money laundering standards. It was revised by the Government and the Commerce Commissions. 

Following the veto, the law project was approved on October 28, 2022, in a third debate by the National Assembly, with some amendments. Gabriel Silva, the congressman who initially proposed it, thought these amendments might be harmful and lack technical understanding. The final bill is yet to be published, plus it could be vetoed again by the president.

Gabriel Silva @gabrielsilva8_7

La Ley Cripto que se quiere aprobar hoy en tercer debate en la Asamblea Nacional es un retroceso en materia de competitividad para el país Le metieron ayer decenas de modificaciones a mi propuesta, de manera no consensuada, dañando lo que era un buen proyecto

3:21 PM ∙ Oct 28, 2022

---

165Likes66Retweets

The intention of this bill is to give more legal certainty to crypto users and entrepreneurs and would permit the optional use of cryptoassets to pay for any legal civil, or commercial operation. Thanks to the borderless nature of the internet, cryptoassets would be treated as foreign-source income, which means no taxes on capital gains.

At the moment, there are no blockchain- or cryptocurrency-specific regulations in Panama. The Superintendent of Banks (SBP) and Superintendent of the Securities Market (SMV) have made pronouncements on the subject but these are not binding. There are no judicial precedents that grant any sort of recognition to cryptocurrencies as monetary instruments, securities, currencies, or digital assets.

Panamanian Legal Structures and Their Usage for Web3

The two types of legal entities mostly used for crypto in Panama are corporations and private interest foundations, which both provide for limited liability. As of September 2022, 2,245 foundations and 9,729 corporations have been registered. A key point for Panamanian legal entities is that their members are not required to be Panamanian nationals, and there is no need for them to go to Panama to file the documentation.

The Private Interest Foundation, approved by the National Assembly in 1995, was inspired by the Liechtenstein Foundation. It has no shareholders or partners and cannot be used to engage directly in the business or profit-yielding activities. The type of vehicle that most resembles a Panamanian foundation would be a Trust. The property of the foundation is completely independent of its members.

The creator of a foundation is the founder, and its Charter is registered in the Panama Public Registry with a Foundation Council of at least 3 people who are entrusted to pursue the objectives of the foundation and its management. Additionally, a Protector can be designated and has the right to remove the Foundation Council.

The beneficiaries are the people who benefit from the Foundation. They do not need to be set out in the charter; a separate document known as the Regulations of the Foundation lists them along with other confidential information. The founders and foundation council are typically nominated by the Resident Agent for more privacy. 

These foundations are used for specific purposes outlined in the Charter, such as owning property, opening bank accounts, and exercising a range of rights; also, typically, the founder is a shareholder of another entity to give an extra layer of protection.

As for the use of a foundation for crypto, the private Regulations document could be used to set out a governance model for a DAO, which could also be the shareholder of a Company that engages in for-profit crypto-related activities. It could hold DAO assets and could be compliant with a bank's KYC requirements.

In addition, there is the internationally known Panamanian corporation, or Sociedad Anónima in Spanish, which has been around since 1927 and is a legal structure that can engage in for-profit activities. 

A corporation is created by registering the Articles of Incorporation in the Panamanian Public Registry. It must have a minimum of two people as subscribers, and a Board of Directors of three people. It must also include other details such as the object of the corporation and information regarding the shares. A corporation can establish governance mechanisms and create and issue one or more classes of shares, with designations and preferences that determine privileges, voting powers, restrictions or requirements, and other rights.

The corporation's shares are issued through private documents, the shareholders may remain private, and their identity is not registered at the Panama Public Registry. However, this information must be maintained by the Resident Agent in the law firm's private files.

Crypto projects could benefit from “wrapping” around corporations because they provide flexibility and protection. Many initial coin offerings were registered under Panamanian corporations, but that isn't their only utility.

On October 26, 2022, Sushi DAO approved the proposal to constitute two Panamanian Legal Entities as wrappers for SushiSwap. 

The first is a Private Interest Foundation to “administer the existing Sushi protocol (including smart contracts related to the AMM/orderbook, Kashi and staking)” — they mention in the proposal that the Panamanian Foundation will enter into a services agreement with service providers to assist with developing the protocol. The second is a Panamanian Corporation “to operate the GUI layer (front-end) of the protocol”. Regarding the Corporation they also mention that “it will be a wholly-owned subsidiary of the Panamanian Foundation, will enter into a services agreement with service providers to assist with developing and maintaining the GUI layer of the protocol”.

It is useful to have a broad understanding of how different jurisdictions could be applied to our legal crypto questions, but we have to keep in mind that crypto projects should never be used as a way to engage in fraudulent conduct or cause harm to others.

Teresa has a background in litigation but now focuses on corporate preventive law. She is fascinated by lawyering in web3 and is licensed to practice law in Panama and Mexico.

MiCA and Solicitation of EU Clients

Author: RedHatRoss

The long-awaited EU legislation on cryptoassets took a major step on October 10, 2022, as a committee of the European Parliament approved the text of the Markets in Crypto-Assets regulation (MiCA), with a final vote by the full Parliament expected soon. The MiCa legislation will create a framework for regulation of cryptoassets and cryptoasset service providers (CASPs), including the creation of new rules requiring that CASPs obtain a specific authorization from their regulator to provide services and specifying operating conditions such as prudential safeguards, safekeeping of client assets, complaint handling, and other requirements commonly applied to providers of financial services.

To be authorized to provide cryptoasset services, MiCA requires a CASP to have a registered office in the EU from which it carries out at least part of their cryptoasset services. Its place of effective management must be in the EU and at least one of the directors must be a resident in the EU. Authorisation is granted by the competent authorities of a member state where a CASP has its registered office.

TradFi Notification Requirement

In addition to the native crypto firms that may obtain authorisation, MiCA anticipates that traditional financial institutions (TradFi), such as credit institutions, central securities depositories, investment firms, market operators, e-money institutions, and investment funds, may also provide cryptoasset services to EU residents. These institutions may do so only after notifying their regulators.

Provision of Cryptoasset Services to EU Clients

Once a CASP or TradFi firm has obtained authorization from and/or provided notification to its regulator, they may market their services to EU clients, subject to other applicable rules and regulations. Any form of active marketing of cryptoasset services to EU citizens requires either crypto authorisation (in the case of CASPs) or relevant notification (in the case of TradFi entities).

But what if clients do not wish to use an EU CASP or TradFi firm? What if a client seeks to receive services from a firm in a non-EU country that either is not EU-authorized or explicitly does not offer any services in the EU?

Client’s Exclusive Initiative Exemption

 MiCA allows the provision of cryptoasset services by non-EU authorized firms at the exclusive initiative of the client. This concept is not new. Article 42 of MIFID II, the second installment of the EU's flagship directive relating to investment firms, anticipates that if the EU client initiates the provision of an investment service or activity by a third‐country firm, the MIFID authorisation requirement will not apply. This approach is sound and understandable, as EU citizens have the right to choose whatever services they wish and are not limited to EU entities only.

Soliciting Clients or Potential Clients in the EU

Similarly to MIFID II, MiCA explicitly contemplates that soliciting clients or potential clients in the EU, regardless of the means of communication used for such solicitation, promotion or advertising in the EU, is not considered to be at the client's exclusive initiative. This includes a third-country firm acting through other entities on behalf of such firm or having close links with such firm, as well as through any other person acting on behalf of such entity. This rule applies regardless of any contractual clause or disclaimer purporting to state otherwise.

Marketing Following the Initiative of the Client

The exemption for client-initiated services relates to a particular cryptoasset service only. In practice this means that third country firms may only market the particular service the client requested. MiCA explicitly contemplates that initiative by a client does not entitle the third-country firm to market new categories of cryptoassets or cryptoasset services to that client. These other assets or services would still require the CASP authorization in accordance with MiCA.

What About Shilling?

There is a thin line between the exclusive initiative of a client and active marketing. What about YouTube videos describing some new, amazing crypto project, say, in German? What about a U.S. firm explicitly allowing the onboarding of new EU clients following its marketing campaign not directed to any particular target group, but coincidently launched at a crypto event in Warsaw? Such dilemmas will surely start popping up once MiCA comes into force. Perhaps in anticipation of this conundrum, MiCA contemplates the adoption of guidelines specifying when a third country firm is deemed to solicit clients established or situated in the EU to be adopted by the European Securities Markets Authority (ESMA) within 18 months of the entry into force of MiCA. Additionally, in order to promote the consistent supervision amongst competent authorities in the EU in relation to client's exclusive initiative exemption, ESMA will issue guidelines on supervision practices for regulators to detect and prevent any attempted circumvention of the exemption.

RedHatRoss is an EU-based attorney-at-law/compliance officer/MLRO with 10+ years background in the financial supervision and payment services industry. BanklessDAO Legal Guild and LeXpunK_Army contributor.

A Primer on Crypto Regulations in Africa 

Author: Olokoji

Africa has generally been slow to adapt to new technology, digitalisation and innovations, but that hasn't been the case for cryptocurrency. Africa is the second-leading continent in cryptocurrency users across the globe. Nigeria, Kenya, and Morocco are among the top 20 countries leading cryptocurrency global adoption. The massive growth and adoption of cryptocurrencies in Africa may be attributable to stunted economies and inflation, which can devalue the native currencies. Cryptocurrencies, particularly stablecoins, allow citizens to save in a more secure currency.

After all these statistics and facts, you might think African governments are very crypto-friendly, but the reality is that cryptocurrency popularity in Africa hasn't translated into governments regulating and supporting its use.

Africa, Crypto, Friends, and Foes

There are 54 countries in Africa. Most African governments have a neutral stance on cryptocurrency. Countries like Zimbabwe and Uganda have outright banned its use, and only a very few like South Africa have accepted it and have or are trying to provide regulations guiding its usage.

South Africa

On June 11, 2021, the South African government issued a position paper on cryptoassets stating that cryptoassets will be subject to regulatory oversight. This was the first glimpse of hope that cryptocurrency would be legislated in Africa. The following three regulatory pillars are addressed in the paper's recommendations:

• Implementation of a framework for anti-money laundering and combating terrorist financing.

• Framework for monitoring cross-border financial flows.

• Application of financial sector laws.

The paper also emphasises the need for consumer protection legislation for users and consumers. This came as a result of the reported $4 billion dollar crypto scams in the country. The recommendations are expected to be implemented in the coming months. 

The South African Revenue Service (SARS) emphasizes that traditional income tax laws apply to cryptocurrencies and that taxpayers must report any profits or losses as part of their taxable income. If a cryptocurrency asset is held and sold with the intention of making a profit, it may also be liable for capital gains tax. 

Some South African companies and businesses like RunwaySale, Earthchild, and Takealot.com have started collecting crypto as a form of payment.

The Financial Services Conduct Authority (FSCA) has yet to provide a regulatory framework. Given that South Africa seems to be relatively crypto friendly, it is possible that it could do so soon.

Central African Republic (CAR)

The first inkling of a cryptocurrency framework in CAR came directly from President Faustin-Archange Touadéra when he tweeted "Vires in Numeris" — a popular tagline of bitcoin, which means “Strength in Numbers”. He then announced that CAR would adopt bitcoin as a legal tender, becoming the second-ever country to do so after El Salvador.

There was a lot of confusion and speculation about why bitcoin was legalized and accepted in the country, given the country's lack of presence in the crypto market. In a press release from the Minister of State, the government announced that “As part of its initiative on tokens and digital assets, the Central African Republic is cooperating with regulators and relevant institutions for the development of an integrated legal framework that would allow their use in our country and throughout the Economic Community and Central African Monetary Fund .”

The President later announced the “Sango” project, which will provide a legal framework for crypto in the country with bitcoin as a legal tender signed into law. The President of CAR is convinced that the Sango is one of the best paths to economic growth. However, his vision is faced with serious criticism and drawbacks as the supreme court has challenged the provision that causes a major obstacle to the Sango project. 

The adoption of cryptocurrency may be tricky but it is clear that the Central African Republic is trying to become a crypto-friendly nation and has plans to create an enabling environment.

Mauritius

The Mauritius government published a Guidance Note on the recognition of digital assets, including cryptocurrencies, as an asset class for particular types of investors, in September 2018. This led to The Virtual Asset & Initial Token Offering Services Act 2021 which was passed into law on December 10, 2021. The intent of the Act was to encourage the development of the nascent fintech industry in Mauritius by providing a clear and comprehensive legal framework for regulating the virtual asset and initial coin offering framework and aligning the framework for anti-money laundering and combating the financing of terrorism with international standards. The government stated that the new law would "facilitate the trading of virtual assets in Mauritius and give a huge boost to the FinTech industry." 

As for the tax situation in Mauritius, income tax laws apply to cryptocurrencies, and taxpayers must report any profits or losses as part of their taxable income. If a cryptocurrency asset is held and sold with the intention of making a profit, the taxpayer may also be liable for capital gains tax.

Nigeria

Cryptocurrency has not been deemed illegal in Nigeria, but it is unregulated, and banks and other financial institutions are not allowed to deal in cryptocurrencies. Cryptocurrency transactions themselves are not illegal, but the use type in the transaction decides whether it is. There is no explicit law in Nigeria that forbids or criminalizes crypto trading.

In a statement on digital assets, their treatment, and classification, the Nigerian Securities and Exchange Commission (SEC) expressed concern about the regulation of cryptocurrencies in Nigeria. According to the Commission, there will be three ways to regulate innovation in the cryptocurrency space: safety, market expansion, and offering solutions to problems. These three factors will guide the Commission's regulations, strategy, and interactions with innovators looking for legitimacy and relevance in this expanding market. The SEC published a regulatory framework on digital assets, issuance, and usage whose primary aim was to protect consumers.

The Central Bank of Nigeria (CBN) emphasized the concerns of the SEC and released a report that banned banks and financial institutions in the country from dealing in cryptocurrency and also instructed them to identify accounts of individuals and businesses that deal in cryptocurrency and close them.

Although there is a tremendous desire to do so quickly, Nigeria has not yet established a legal framework or legislation for cryptocurrencies or crypto exchanges. Nigerian lawmakers have urged the regulatory bodies to move quickly to create a legal framework for cryptocurrencies in the nation in response to the CBN and SEC's initiatives.

On a more positive note, there are no taxes on cryptocurrency gains because the government doesn't recognize the cryptocurrency.

Kenya

A 2015 court case called Lipisha Consortium Ltd and Bitpesa Ltd v Safaricom set a precedent for potential future sanctions by the Central Bank of Kenya (CBK) against companies dealing in cryptocurrency in Kenya without first seeking its approval. In this case, Safaricom was found to have been justified in terminating the services of the plaintiffs on the grounds that they had not obtained the prior approval of CBK before dealing with money service businesses in bitcoin. The CBK subsequently issued a report that virtual assets are not legal tender in Kenya, stating it is an unregulated currency with no guarantee by any government or central bank. 

To encourage the development of new technologies, the Kenyan government stated on February 28, 2018, that it would create an 11-person task force to investigate the application of distributed ledger technology and artificial intelligence. In 2021, to protect investors and consumers, the Capital Markets Authority (CMK) also provided the draft capital markets (investment-based crowdfunding) regulation to control Initial Coin Offerings and crowdfunding.

As opposed to the CBK and the initial position of the government that cryptocurrency is bad for the economy, there is now a positive reaction from the government of Kenya. It is uncertain if the Central Bank of Kenya will change its opinion in light of the government's actions. The Judiciary in Kenya has supported the positive views of the Kenyan government on crypto. 

Zimbabwe

The Reserve Bank of Zimbabwe has ordered private banks to close the accounts of anyone using or transacting in virtual currencies, and it has outlawed the trading of any virtual currencies within the country. Individuals and organizations in the private sector utilize and exchange virtual currencies, but the Reserve Bank of Zimbabwe discourages this practice. The Zimbabwean Finance Minister, on the other hand, has urged the legislature to begin thinking about regulating the usage of virtual currencies in Zimbabwe.

Opening to Crypto

“As the value goes up, heads start to swivel, and sceptics soften…” — Adam B. Levine 

Cryptocurrency has been gaining popularity and thus its uses and importance have increased. Many countries are already shaping their laws and regulations to maximize the benefit of crypto, and Africa shouldn't be left behind.

Other than the nations discussed in this article, most African countries are indifferent to cryptocurrency even though their citizens are turning to crypto and its uses. The African regulators, central banks, and governments should look to ease the use of cryptocurrency. The potential of cryptocurrency, web3, and the blockchain could solve some of the problems by providing alternatives (stablecoins) to protect income from the ailing African currencies, generating extra income for creatives and artists through NFTs, or working in DAOs. Imagine Africa without censored media houses; crypto and web3 can give us that and other investment opportunities the crypto world has to offer.

Olokoji is a 3rd year law student in the University of Lagos, Nigeria. He is a web3 enthusiast and a contributor in various DAOs, including Aragon DAO, BanklessDAO and People DAO.

🙏 Polygon Village - A full-stack ecosystem for developers to build and grow

🌐 News and Selected Articles

The EU Eyes a Mining Crackdown as a Literal Crypto Winter Looms

Author: Benjamin Pimentel 

🔑 Insights:

• In the face of expected harsh winter weather, officials from the European Commission believe shutting down a key segment of the crypto industry is a potential solution to an energy crisis stemming from the war in Ukraine.

• EU members may have to stop mining of cryptoassets, an activity which has doubled its energy use in the last two years. The EU’s report says “care must be taken to use only the most energy efficient versions of the technology.”

• The report also deems crypto’s proof-of-work consensus mechanism “outdated” and cites the Ethereum network’s switch to proof-of-stake consensus as evidence that “the crypto world can move towards a more efficient system”.

SEC vs BAYC? Here’s What Legal Experts Say It Means for NFTs

Author: Sander Lutz

🔑 Insights:

• Rumors that the SEC is investigating Yuga Labs for possible securities violations are circulating and could have a significant impact on the NFT industry. NFTs sold by Yuga Labs, including the Bored Ape Yacht Club collection, may have violated registration laws and many think that the government may seek to regulate the NFT industry as a securities market. 

• Multiple legal experts see this development as SEC asserting its dominion over the virtual art market. Other legal minds dismissed the move as loud but empty political jockeying on the part of the SEC, some going so far as to suggest that the rumor was actually planted by the SEC.

• "What you're buying is a piece of Bored Ape Yacht Club," said law professor David Fyre. People buy into NFT collections like Bored Apes because of their collective reputations, not because of individual NFTs' artistic value. Some people believe the SEC could use the Yuga Labs project as a pawn to stave off competing regulators, including the Commodities Future Trading Commission (CFTC) and the Treasury Department.

• What would happen if the SEC went ahead with a case against Yuga Labs and won? Launching an NFT would become like going public with a stock. Fyre has, for years, insisted that the SEC should regulate NFTs but that doing so would open Pandora's Box, which would logically obligate the agency to handle the art market.

DAOs Need To Neutralize Whales (And More) If They Want Better Governance

Author: Lang Mei

🔑 Insights:

• Although decentralized autonomous organizations have introduced a clear paradigm shift in blockchain governance, they often fail to implement the types of checks and balances which ensure democratic processes can function, leaving many of them a long way from decentralized control.

• In DAOs where tokens are the basis for voting weight, higher purchasing power can equate to higher voting weight. This kind of bias could lead to voting outcomes which are skewed in favor of the wealthiest DAO members.

• In this way, DAOs do tend to reflect the broader socioeconomic differences of the people contributing, but introducing a tier-based (hierarchical) DAO governance system could address these disparities. For example, a small group of elected representatives are best placed to maintain honesty and fairness in each other's decision making, and transparency can be achieved by approving but retaining oversight of a central team's additional governance powers.

Crypto Adoption: How FDIC Insurance Could Bring Bitcoin to the Masses

Author: Francisco Rodrigues

🔑 Insights:

• Federal Deposit Insurance Corporation (FDIC) insurance refers to the government-backed insurance that safeguards U.S. customers’ deposits in the event of bank failures. If an FDIC-insured financial institution fails, depositors are insured up to $250,000. While there are currently no crypto firms able to offer depositors FDIC insurance, some speculate it could be the key to mass adoption for cryptocurrencies.

• If the FDIC were to insure deposits on U.S.-based cryptocurrency platforms, it could significantly boost confidence in the industry and several large exchanges have shown interest. However the FDIC has already warned crypto projects not to mislead consumers by suggesting they're insured.

• Crypto insurance from the FDIC would not replace the need for regulatory oversight and although it would be a strong drawcard, may bring in a false sense of security.

🧰 Legal Tools

Getting Jubi With It

Author: Trewkat

In the Tokenization issue of Decentralized Law in September this year, lawpanda gave readers an excellent overview of some of the steps and mechanisms involved in the funding and issuance of a token.

Getting to the point of token issuance can be a somewhat laborious process for project teams, and involves consideration of myriad legal and logistical factors which usually translates to high costs. As lawpanda wrote, “when an investor receives a startup’s native token instead of equity, a simple agreement for future tokens (SAFT) is utilized. … SAFT terms usually include:

• Total volume of the token issuance

• Amount of investor allocation of tokens

• Price of tokens at the time of transfer to the investor

• Conversion event (the moment when SAFT is converted into tokens for the investor)

• Information about vesting, lock-ups, and other encumbrances on the investor's tokens, which are important for the successful operation of the project's tokenomics.”

This is where Jubi DAO aims to assist. Jubi DAO promotes itself as “token management made easy”, and offers a streamlined set of “no-code smart contracts to manage your project tokens from pre-sale to launch”.

Launched in June 2022 at the Australian DeFi Association (ADA) meetup, Jubi DAO aims to take the manual administration and related headaches out of the process of launching a token. Jubi’s straightforward interface can handle on-chain funding, vesting, airdrops, and token launch — “Why would you be doing things manually in web3? It doesn’t make sense”, says Jubi’s co-founder, Harry Dell, in a video produced at the ADA meetup.

Note: The Decentralized Law team have not had first-hand experience with Jubi DAO, and this section should not be considered legal advice.

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