Distributed Counsel 23 — So It’s Mostly Fake

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Is 95% of the Market Fake

The SEC has released a presentation it received from Bitwise concerning its proposed ETF.  The presentation (hat tip to my pal Pavel) is a marvel to behold.  No less than 200 clean and beautiful slides. The main thesis of the first part of the presentation is that a lot Bitcoin trading data is fake but somehow this isn’t a big deal.  

The analysis uses Coinbase as a benchmark and concludes that only about 10 exchanges have real volume; the rest is fake. Then on slide 61 they drop a big claim–the total reported trading volume is ~$6B, but the actual volume is about $273M.  95.5% of the market is fake? Yikes.

Yet Bitwise argues that this is a good thing.  If the $6B number was real, that would mean 8.6% of Bitcoin was changing hands daily, which would be alarming indeed.  The smaller volume is in line with similar assets, like gold, so no worries. The remaining problem of course is that all this suspect volume makes price discovery hard.

Bitwise claims it can get a real price by using something called a “volume weighted median price” among the 10 exchanges.  There are a bunch of slides on methodology, and much of it is beyond me. The point is that even with the lower volume and a lot of dislocations in suspect markets, the actual price is still fairly easy to discern if you know where to look.  This is amazing when you think about it. Ten virtually unregulated exchanges and their data can (and probably will) create a legitimate spot price in a regulated market. It’s happened with futures (I think) and now it’s happening with ETFs.  

Of course, Bitwise’s proposal has not been approved.  There is a long way to go there. But market manipulation has been one of the primary concerns previously articulated by SEC leadership.  Maybe it’s not a big deal after all.

New Illinois Legislation Introduces Blockchain LLCs

A bill has been introduced in the Illinois House, the Blockchain Business Development Act, which will permit corporate governance on the blockchain and maybe more.  The text of the bill is available here (hat tip to my friend Chris Nybo of Chris Nybo, LLC).  

The bill introduces a new type of legal entity, a Blockchain-based Limited Liability Company or “BBLLC,” and contemplates governance of the BBLLC “in whole or in part” on a blockchain. More importantly, the bill also appears to contemplate the issuance of “currency” which may theoretically represent ownership shares in the LLC.  

This last part is not all that clear–section 25(c)(5) provides that a BBLLC shall “provide how a person becomes a member of the company with an interest, which may be denominated in the form of units, shares of capital stock, or other forms of ownership or profit interests.”  Sounds fairly conventional. But section 25(d) provides that a member of manager of a BBLLC may “interact with the company in multiple roles, including as a . . . node, miner, . . . or as a trader and holder of the currency in its own account and for the account of others . . . .”  That sounds progressive indeed.

There are some details that need to be ironed out, not least of which may be the overbroad definitions of “Blockchain technology,” “protocol,” and “virtual currency.”  But this is an exciting step and will be a bill to watch in 2019.

Brexit and Data Transfers

Data transfers may not be at the top of everyone’s mind as England hurtles toward the oblivion of a “no deal” Brexit.  There is still some chance that transition agreement is reached, which could mean EU law, and thus GDPR, is applicable in the UK until 2020 or even longer.  But if there is a no deal Brexit, the IAPP has put together a lovely one page resourceto ease troubled minds.  

The good news is that even the “no deal” Brexit scenario is likely straightforward.  The UK probably will be treated like the US minus the Privacy Shield. So data from UK to EU, no problem.  Data from EU to UK, there needs to be Standard Contracts or Binding Corporate Rules. The question is whether the UK will get an adequacy decision from the EU (an adequacy decision allows data to be sent to the jurisdiction without further assurances because the EU has deemed the law to be sufficient).  Theoretically, if the UK keeps GDPR, there should be no problem. But the jilted may be in no mood, so let’s see.

For Privacy Shield qualified entities in the US, it may be necessary to update your disclosures to separately include the UK but it is still too soon to say. In the meantime, the Commerce Department has promised updates and issued this helpful FAQ.

Stay tuned and, as always, consult your counsel.

CCPA is Coming

The last item is a bit of a preview.  The California Consumer Protection Act is coming.  Enforcement will start January 1, 2020. I will be speaking on a panel in mid-April and devoting a significant amount of time in the coming months towards getting my clients and others ready for this new law, even as we await final details on its precise contours.  Please let me know if you are interested in attending the panel or would like more information.

As always, thank you for reading.

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