Blockchain & Smart Contracts

 

Blockchain & Smart Contracts

 
 
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Assessment of blockchain business models / whitepaper reviews

We assess your blockchain business model and operational practices, to consider the extent that your token-related activities invoke Canadian federal and Ontario laws.

For example, we regularly consider how your particular token-related activities invoke the laws of:

  • securities (e.g. ICOs / ITOs, SAFT issues, OSC LaunchPad representation, "securities" trigger, dealer exemptions, prospectus exemptions/private placements, secondary market issues, etc.);
  • mutual funds;
  • cryptocurrency contracting (e.g. Currency ActStatute of Frauds, Conveyancing and Law of Property Act, etc.);
  • income tax;
  • GST-HST;
  • anti-money laundering (AML);
  • know-your-customer (KYC);
  • financial institution issues (e.g. Bank Act and Trust and Loan Companies Act);
  • other fiduciary issues (e.g. trustee/bailee issues, sale of goods, consumer protection, payday loans, general negligence);
  • payments-system issues;
  • monetary/financial instruments;
  • token terms of use;
  • IT contracts with third-party tech vendors;
  • node agreements;
  • mining coalition agreements;
  • data privacy in Canada;
  • AI & algorithmic governance in smart contracts;
  • insurance;
  • corporate veil issues (e.g. regarding operations of a foreign wholly owned subsidiary);
  • public international law;
  • private international law (i.e. conflicts of laws);
  • division of legislative powers;
  • Customs Act issues (for import/export of tokens as non-money goods); and
  • export controls (i.e. "token coin" as controlled outside "Systems, Equipment and Components", international trade models).

As your blockchain lawyers, we also assess whether your smart contract mechanisms are likely to be considered a service, rather than a security or commodity, for tax and fiduciary purposes. (See Part 1 of our "Crypto-Tax Primer" blog series.)

We also work with counsel in other jurisdictions, if requested, for the purposes of cross-jurisdictional compliance.

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ICOs / ITOs and digital asset dealing / advising

There is increasing regulatory scrutiny on fundraising through the sale of digital assets, and dealing or advising with respect to digital assets.

This space in Canada is being developed primarily by the Canadian Securities Administrators, individual Canadian regulators, the U.S. Securities and Exchange Commission, and judicial precedent. We continually monitor the regulatory landscape for changes.

As your blockchain lawyers, we are equipped to assess your business model—as well as the nature, features, and use of your token—to assess the probability that your blockchain activities will engage securities laws in Ontario and Canadian passport jurisdictions. (See our blog posts, "Security Tokens – A Developing Concept", and "The Law of ICOs/ITOs: Simplified".)

In the event that securities laws are engaged, we will:

  1. work with the OSC LaunchPad/CSA Regulatory Sandbox toward your objectives;
     
  2. consider prospectus and registration exemptions, as appropriate (see our blog posts, "Prospectus Exemption Options for Blockchain Businesses", and "Securities Registration Requirements for Blockchain Businesses"); and
     
  3. consider any regulatory and/or criminal liability resulting from over-the-counter trades, as appropriate (see our blog post, "Foreign Issued Tokens Traded Over-the-Counter in Canada").

Most blockchain businesses intend to operate across jurisdictions. As your blockchain lawyers, we can work with counsel in other jurisdictions to maximize the chance of compliance from wherever your platform can be accessed.

We also consider more complicated token-sale arrangements. For example: a private placement under a Simple Agreement for Future Tokens ("SAFT") prior to platform/MVP development, followed by a public token offering and distribution after operations have begun. In such an arrangement, we work to limit risk that investors under the SAFT will compete with the subsequent public token distribution.

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Issues regarding privacy, trust, and duties among blockchain users and third parties

Data privacy issues are invoked by "closed" or "permissioned" blockchains, intending to limit read/write access to particular users. While the immutability of the records may be near impossible to hack, maliciously obtained read/write access to the blockchain through a platform's user account, or through the backdoor to the platform, can still cause unanticipated damage.

As your blockchain lawyers, we can deal with these issues:

  1. before they arise, in an opinion or through contracts; and
  2. after they arise, through arbitration or litigation.

Moreover, your business may want to relax the immutable nature of your distributed ledger in certain casesfor example, in the event of a hack. It may also need to expand or restrict its operations in foreign jurisdictions from time to time, based on regulatory developments in those jurisdictions.

As your blockchain lawyers, we can:

  1. draft a Blockchain Charter or Terms of Use; and
  2. work to enforce such a document in disputes between the platform and its users, or between users.

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Agreements re smart contract intentions and mechanisms

Smart contracts are executable scripts, not legal contracts.

This remains true irrespective of whether your blockchain:

  1. operates under a native platform run by a traditional corporation;
  2. has no native platform, and operates through a Turing-complete decentralized autonomous organization ("DAO"); or
  3. operates completely open-source with all operations governed through user consensus.

As your blockchain lawyers, we draft and negotiate legal contracts that capture the intention of the code in your smart contract. Such contracts are meant to: 

  • set a jurisdiction's law as governing the contract;
  • capture transaction mechanisms;
  • address algorithmic governance issues;
  • disclaim or plan liability issues arising from bugs resulting in damages;
  • establish a process for agreed-upon revisions to the code, or early termination of the smart contract; and
  • establish a dispute resolution mechanism, inclusive of establishing a chosen forum for resolving disputes.

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Due diligence or vetting smart contract development and execution

As your blockchain lawyers, we work with qualified third parties to vet a given smart contract.  This is done to maximize the alignment between the parties' intentions, and the code operating pursuant to those intentions.

This service is offered in conjunction with drafting/negotiating the legal contract which underpins your smart contract. Whether your business is responsible for smart contract development, and whether such development has completed or has yet to occur, will determine if this service is performed before or after the drafting/negotiation phase.

We can also represent you in a dispute arising from the alleged failure of a smart contract, whether or not a legally enforceable contract exists.

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Legal aspects of proof-of-work and proof-of-stake blockchain models

The incentives and rewards are quite different between these two systems of transaction validation. In proof of work ("PoW"), miners get block rewards in the form of new coins. In contrast, proof of stake ("PoS") does not involve the creation of new coins, and instead rewards forgers with transaction fees. 

Setting expectations among users and miners/forgers is crucial to ensuring all parties agree to the rewards associated with the underlying operations of your blockchain. Moreover, changing a blockchain's transaction validation system between PoW to PoS, or vice-versa, takes careful planning.

As your blockchain lawyers, we draft contracts and blockchain governance documents between affected parties, to ensure smooth operations associated with PoW and PoS models, and any transition between the two.

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Disclaimers re blockchain use, smart contracts and blockchain forking

There are risks to any blockchain business that encourages user activity, facilitates third party integrations, and implements algorithmic determinations. Such risks increase substantially when the business makes platform changes, or permits vendor integrations, that affect users' stakes. There are additional obligations where business operations result in a trust for the benefit of users. As your blockchain lawyers, we work to limit your exposure to such risks in advance.

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Agreements among or with full nodes

Blockchains, due to their decentralized nature, require nodes as network support pillars. Any independent party acting as a node has an interest in performing that function. That interest usually involves remuneration in some form. Node-platform and/or node-node contracts are recommended, particularly where such remuneration arises independently of blockchain operations (i.e. non-mining operations). As your blockchain lawyers, we can draft and negotiation such contracts.

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