Questions and answers: Crypto lawyers talk about 3AC liquidation, whether ‘the code is law’

Blockchain and crypto may strive to be completely unlicensed, but in the meat area with high-effort financing, filled with conflicting interests and various regulatory regimes, litigation is becoming a prominent feature.

Spokesmen often focus on technology’s promise to eliminate intermediaries or trusted third parties. So where do lawyers – who often act as intermediaries to establish trust between transactors – fit in?

Blockworks spoke with three crypto-focused lawyers to get their perspective on crypto’s need for legal advice.

Timothy Spangler, Dechert LLP

Blockworks: What impact will the forthcoming trial of Three Arrows Capital (3AC) and Celsius have on the crypto industry in the years to come?

Spangler: This period of restructuring and bankruptcy will educate people in the area, and we will see that people who retained lawyers and increased levels of protection will have much better results than people who said, “well, crypto is a take-it-or-leave-it” the environment, it’s all risk, all reward. ” At this stage, there is a conceptual hurdle to jump in. People who invest and grow businesses need to understand that at a high level, lawyers and protection are moving the needle.

Blockworks: What is a misunderstanding people in the crypto space have about the law?

Spangler: So many people in crypto talk about “code is law.” Code says what code says and digital assets do what they do. Code is not law, code is code. The law applies to any form of transaction, and the purpose of the law is to move losses from where they fall to another party. Historically, as the sums of money increase, the amount of legal activity that goes on around these sums of money increases. And the sums of money are now high enough around the crypto that you will see it start to happen.

Blockworks: What do you think about the debate over whether decentralization is a myth in the crypto space?

Spangler: Decentralization is not a statement anyone can say. Decentralization is a fact that must be established and proven. Waving your finger in the air and saying “we are decentralized” is not enough. If people set one up [decentralized autonomous organization] and is involved in the operation, it is difficult for that platform to be decentralized enough to protect these people from responsibility. People hurt themselves because they behave as if they are bulletproof and have no care in the world and think they are out of reach of law enforcement, and that is the worst thing you can do. The responsibility is real. Prepare for it.

Timothy Spangler focuses his practice on the intersection of alternative investment management and financial technology, including the impact of blockchain, cryptocurrencies and digital assets on the financial industry and the innovation economy.

William Brannan, Lowenstein Sandler LLP

Blockworks: How do you think US regulatory efforts in the crypto area will shake out?

Brannan: I’m not sure there will be meaningful regulatory guidance in the short term – that has not been the case in six, seven, eight years now. At this time, cryptocurrencies are so diverse in their applications that you have a number of projects that seem to dive into different regulatory regimes. But these questions are not new – we now only see that these questions become more important to find solutions to. Regulation is a bit esoteric when the market is great and everyone is making money, but it is more urgent when the market is down and everyone is facing liquidity problems.

Blockworks: Should crypto companies strive for decentralization?

Brannan: There is a constant tension between the principles of decentralization and what I think most retail investors are really looking for – between the technology entrepreneurs who build these products and what the average customer wants. If crypto companies add a certain level of centralization, the trade-off from a retail perspective may be worth it.

Blockworks: In today’s market, many crypto companies are facing insolvency. What should companies do to stay sustainable in the long run?

Brannan: If you are a platform that meets retail customers, a big element in creating a successful platform is to make sure that you educate these retail customers. Retail customers see that they can earn a 12% return on cryptocurrencies, but it takes a long time to teach a customer about the risks involved. Losses become very worrying for the retail investor when they do not understand what it is they have bought into.

Will Brannan is a partner in Lowenstein Sandler and Deputy CEO of Lowenstein Crypto, which provides advice to the industry’s most sophisticated entrepreneurs, financial institutions, venture investors, asset managers and financial technology companies.

Paul Ferguson, Addleshaw Goddard LLP

Blockworks: What’s new with the 3AC liquidation from a legal perspective?

Ferguson: There is an interesting provision in the liquidation order that states that liquidators have the power to sell any crypto or convert to fiat currency to protect against volatility. That provision has never existed before, but the price of bitcoin has plummeted, allowing creditors to transfer money to a more stable asset. But no one really knows how a liquidator will handle cryptocurrencies.

Blockworks: How do you think the legal field experiences the liquidation?

Ferguson: 3AC is a test case. Everyone is watching what is going to happen, and then you will see a whole series of bankruptcy cases. People have lost their savings in this.

Blockworks: And what will be the broader outcome of these bankruptcy cases?

Ferguson: I think you want to see capital requirements as there are for banks. If you are going to take a deposit from Joe Public, you have to guarantee that you can pay it back. Post-Lehman meets most banks’ strict capital requirements, and I definitely see that something similar will happen in the cryptosphere. I do not see how crypto platforms can survive without similar protections, and I do not see why they would want that. If you want people to give you their money, why do not you want a claim in place? And given the volatility of cryptocurrencies, the capital requirement must be greater than for fiat.

Paul Ferguson is a UK-based lawyer whose practice is centered around claims involving digital assets, cryptocurrencies, online trading platforms and the recovery of assets from cybercrime. His previous company was hired by Craig Wright, who claims to be Bitcoin founder Satoshi Nakamoto.

Comments are edited a bit for clarity and brevity.

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