Hossein Nabilou (University of Amsterdam, Amsterdam Law School; UNIDROIT) has posted “Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations” on SSRN. Here is the abstract:

The concept of settlement finality sits at the heart of any type of commercial transaction; whether the transaction is in physical or electronic form or is mediated by fiat currencies or cryptocurrencies. Transaction finality refers to the exact moment in time when proprietary interests in the object or medium of transaction pass from one party to his counterparty and the obligations of the parties to a transaction are discharged in an unconditional and irrevocable manner, i.e., in a way that cannot be reversed even by the subsequent legal defenses or actions against the counterparty. Given the benefits of finality in terms of legal certainty and its potential systemic implications, legal systems throughout the globe have devised mechanisms to determine the exact moment of the finality of a transaction and settlement of obligations conducted using fiat currencies as a medium of exchange. However, as the transactions involving cryptocurrencies fall beyond the scope of such rules, they introduce new challenges to determining the exact moment of finality in on-chain cryptocurrency transactions. This complexity arises because the finality of the transactions in the cryptocurrencies that rely on proof-of- work (PoW) consensus algorithms is probabilistic. The probabilistic finality makes the determination of the exact moment of operational finality nearly impossible.

After discussing the mechanisms of settlement of contractual obligations in the traditional sale of goods as well as payment and settlement systems – which rather than relying on the concept of operational finality, rely upon the concept of legal finality – the paper argues that even in the traditional payment and settlement systems the determination of operational settlement finality is nearly impossible. This is because no transaction, even a transaction involving a cash payment, cannot be operationally deemed irrevocable as it remains prone to hacks or unwinding by electronic means or mere brute force. The paper suggests that the concept of finality is inherently a legal concept and, as is the case in the conventional finance, the moment of finality in PoW blockchains should also rely on the conceptual separation of operational finality from legal finality. However, given the decentralized nature of cryptocurrencies, defining the moment of finality in PoW blockchains, which may require a minimum level of institutional infrastructures and centralization to support the credibility of the finality, may face insurmountable challenges.

Kelsie Nabben (RMIT University – Blockchain Innovation Hub; Digital Ethnography Research Centre; RMIT University – ARC Centre of Excellence for Automated Decision-Making and Society) has posted “Governance of Algorithms, Governance by Algorithms: Are ‘Decentralised Autonomous Organisations’ a Blueprint for Participatory Digital Organisation?” on SSRN. Here is the abstract:

Algorithms are inherently centralised processes, from coding, to training, to deployment and maintenance. Meanwhile, blockchain communities are experimenting with “Decentralised Autonomous Organisations” (DAOs) as a participatory institutional framework for individual autonomy to organise outside organisations. DAOs are an attempt at decentralised organisation to self-govern, using algorithms, for autonomy from third-party mediation. This piece explores if DAOs can teach us anything decentralised approaches to the governance of algorithms. With the rise of algorithmic decision-making systems in public administrative processes, this research seeks to uncover the dynamics of DAOs as participatory ways to organise outside of organisations in the digital age. I explore the case study of “GitcoinDAO” as a decentralised organisation governed by algorithms, whilst simultaneously seeking to collectively govern algorithms to manage a machine learning process to detect fraudulent “sybil” attacks. With algorithms as peers in decentralised organisations, algorithms emerge as new political actors in how people organise outside of traditional organisations in the digital age. DAOs provide this institutional framework in the articulation of shared objectives, codes of conduct, and “constitutions”, to guide algorithmic governance design. This locates humans and algorithms as peers in organising, establishing algorithms as political actors in shaping and determining the outcomes of decentralised organisation and human autonomy. This research provides insights into the social outcomes of algorithmic governance for others seeking to explore participatory digital institutional infrastructures.

Wulf A. Kaal (University of St. Thomas, Minnesota – School of Law) has posted “Reputation as Capital – How DAOs Upgrade Finance” on SSRN. Here is the abstract:

Decentralized Autonomous Organizations (DAOs) have the potential to upgrade finance. This paper evaluates the design of and system requirements for a decentralized cryptocurrency venture capital investment club that is operating as a DAO (DAOIC). The design of the proposed DAOIC enables investors to substitute capital commitments by way of reputation token staking on proposed portfolio companies. The proposed design has the potential to lower capital requirements and free up liquidity for decentralized smart contract coordinated investment vehicles.

Anton N. Didenko (University of New South Wales – Faculty of Law) and Ross P. Buckley (same) have posted “Central Bank Digital Currencies as a Potential Response to Some Particularly Pacific Problems” (Asia Pacific Law Review) on SSRN. Here is the abstract:

Despite years of effort, financial inclusion persists as a major challenge in the Pacific Island Countries (PICs), with many in the region still lacking access to financial services. This article argues that central bank digital currencies (CBDCs) offer a potentially highly efficacious solution to (i) the financial inclusion challenges of the PICs and (ii) the problem of high remittance costs that currently serve as a tax on the earnings of Pacific Islanders abroad. We identify the key challenges that may inhibit the rollout of CBDCs in PICs but argue that in time such a rollout is nonetheless highly likely – since the key drivers of CBDC development in the region are likely to be external to PICs themselves. While their potential is very significant, we conclude that now is not the time to issue a CBDC in the region, but it is the time to begin laying the groundwork for this innovation by developing the expertise required within the region’s central banks.

Wulf A. Kaal (University of St. Thomas, Minnesota – School of Law) and Hayley Howe (Emerging Technology Association) have posted “Custody of Digital Assets” on SSRN. Here is the abstract:

The custody of digital assets plays an essential role in the evolution of the digital asset industry. Fully compliant legal custody solutions for digital assets increase legal certainty and mainstream investor confidence which, in turn, helps build markets in digital assets. Once digital asset markets evolved, self-custody solutions help increase the decentralization of the digital asset market. This article examines the evolving custody solutions for digital assets.

Chris Brummer (Georgetown University Law Center; Institute of International Economic Law (IIEL)) has posted “Disclosure, Dapps and DeFi” (Stanford Journal of Blockchain Law and Policy, forthcoming) on SSRN. Here is the abstract:

Disclosure in decentralized finance is an area where founders’ and regulators’ interests can overlap in important ways. Market participants need to differentiate their dapps to compete and grow—just as regulators have long demanded transparency in order for people to know what they’re buying. But adapting disclosure frameworks popularized in the 1930s to today’s digital marketplace requires bridging decades of technological evolution and fundamentally alien assumptions about market infrastructure.

This white paper contributes to that work. It observes that DeFi presents novel policy questions for disclosure because much of the material information required to participate in an informed way is already available to technologically sophisticated actors on blockchains. This feature is relevant when contemplating how and for whom a disclosure system for DeFi should be modeled. Securities law, with its focus on institutional actors, calls for voluminous and often technical disclosures designed to be filed with authorities; by contrast, consumer protection frameworks rely on targeted, retail-friendly disclosures meant to be digested by everyday shoppers and end users.

Against this backdrop, this white paper offers a framework transposable to securities law, but given the information already accessible to technologically savvy actors emphasizes the need for shorter, crisper disclosures typically associated with consumer protection law. It makes two key contributions. First, it highlights ambiguities inhabiting legacy disclosure obligations, and offers a conceptual roadmap for assisting developers and regulators seeking to identify relevant disclosure issue areas and principles. Second, it introduces a series of crypto-native tools to modernize disclosure delivery in DeFi systems, among them “Disclosure NFTs,” “Disclosure DAOs,” and “Disclosure DIDs.” If properly developed, the white paper shows how these tools could potentially provide more functionality and security than the SEC’s Edgar database and afford a new generation of developers and engineers a unique opportunity to reorient disclosure towards its original New Deal purpose: to be read.

Brian Elzweig (University of West Florida) and Lawrence J. Trautman (Prairie View A&M University – College of Business) have posted “When Does a Nonfungible Token (NFT) Become a Security?” on SSRN. Here is the abstract:

Non-fungible tokens (NFTs) gained prominence in the news cycle during March 2021when $69 million was paid in a cryptocurrency known as ether for a single piece of unique digital art titled “Everydays – The First 5000 Days.” Regulation of NFTs is complicated by the fact that the technology encompasses so many varied applications. Therefore, it is the particular use of a given NFT that will determine its appropriate regulatory regime, since it may take the form of a collectible, data associated with a physical item, financial instrument, or a permanent record associated with a person, such as marriage license, or property deed. Just as in the case of digital art in the form of NFTs, our laws and regulations are in a constant struggle to keep pace with rapid introduction and diffusion of technological changes. Unlike digital or cryptocurrencies which are fungible, NFTs are not. The effective regulation of U.S. securities markets has a significant impact on capital formation, job creation, economic security, and growth of both the American and global economies. In recent years, the advent of the Internet has created novel regulatory challenges for the SEC.

The focus of our article is how and when an NFT becomes a security for purposes of U.S. securities law. We proceed in six parts. First, we briefly explain the evolution of the digital world and emergence of virtual economies within. Second, we describe blockchain technology and the growth in virtual currencies. Third, is an explanation of NFTs along with some examples of their various uses. Fourth, we discuss when a nonfungible token is a security. Fifth, we explore SEC interpretations of when a crypto-asset is a regulatable security. And last, we conclude. Given the importance of U.S, securities markets in fostering job creation and global economic growth, we believe this work contributes to the understanding of this new technology and is of considerable interest to securities issuers, investors and the regulatory community.

Freya (Fangheng) Zhao (Georgetown University Law Center) has posted “Initial Coin Offerings and Extraterritorial Application of U.S. Securities Laws” (139 Banking L. J. 174 (2022) on SSRN. Here is the abstract:

Cryptocurrency transactions have grown exponentially since Satoshi Nakamoto published the Bitcoin White Paper on Halloween 2008. As of November 2021, the cryptocurrency market has transformed into an ecosystem with 14,710 tokens and $2.6 trillion market capitalization. The rise of initial coin offerings (“ICOs”) has been a major driver of the boom. Thousands of ICOs have raised billions of dollars since MasterCoin conducted the first reported ICO in 2013. Amid the boom, the Securities and Exchange Commission (“SEC”) has been grappling to apply the U.S. securities laws “extraterritorially” to regulate the ICOs, which are usually cross-border due to the inherent international nature of its underlying blockchain technology. The increasingly aggressive regulatory actions from the SEC have caused a massive flight of ICOs to offshore havens. In the first quarter of 2019, 86 ICOs specifically excluded U.S. investors.

However, these efforts to avoid the jurisdiction of the U.S. securities laws have mostly turned out to be futile. The SEC is not shy about reaching beyond the U.S. water’s edge to regulate offshore ICOs, as evidenced by its investigation of the DAO and the enforcement actions against PlexCorps, Block.one, Telegram, and Ripple. Class actions brought by investors against Tezos also suggested that the presumption against extraterritoriality is no panacea to prevent the application of the U.S. securities laws over offshore ICOs.

This article examines the extraterritorial application of the U.S. securities laws to regulate offshore ICOs. The first part of the article offers a brief introduction of the jurisprudence governing the extraterritoriality of the U.S. securities laws. The second part analyzes the application of the U.S. securities laws in proceedings against ICO issuers like PlexCorps, Tezos, Block.one, Telegram, and Ripple. The third part of this article summarizes the current legal framework of applying the U.S. securities laws to offshore ICOs and concludes that such a patchwork approach is a stopgap solution – expedient but imperfect. This article ends by discussing the potential future directions, including congressional legislation, international cooperation, a deferential substituted compliance approach, and adapting ICOs to existing registration exemptions.

Jillian Grennan (Duke University – Fuqua School of Business) has posted “FinTech Regulation in the United States: Past, Present, and Future” on SSRN. Here is the abstract:

This study reviews the regulatory issues developers and users of emerging financial technologies face as use cases expand. DeFi and DAOs, which build upon advances in AI and blockchain, reduce the cost of coordinating complex financial services. Yet the efficiency gains intertwine with potential legal risks associated with liability, financial crime, dispute resolution, jurisdiction, and taxes. Regulatory solutions may include adapted definitions and safe harbors, regulatory sandboxes, self-regulatory organizations, and/or policing misleading characterizations (e.g., regarding the extent of decentralization or agreed to data uses). As it will take time for regulators to implement effective policies, stakeholders can still influence policy.