In the almost 40 years since its founding, the Internet has become a monolith, with governments and giant technology corporations vying for control of information and users’ personal data. The advent of Web 3.0 (or Web3) represents an effort to reinvent digital communication, commerce, and more, all without centralized oversight or interference.
Web3 is an emerging term of art, but it currently includes legacy and new blockchain technology, cryptocurrency and decentralized finance (DeFi) generally, decentralized autonomous organizations (DAOs), and non-fungible tokens (NFTs).
Blockchain technology – an encrypted, decentralized, time-stamped and unalterable database – underpins Web3 and is already being implemented across a wide range of industries, including financial services, logistics, energy, healthcare, insurance, entertainment, and many more.
The connecting thread among all Web3 elements is users’ desire to be less-surveilled, less-regulated, and able to chart their own path forward. But as Web3 is evolving, even the staunchest proponents of decentralization acknowledge that some regulation of its underlying technologies is necessary in order to build trust among users and increase its adoption.
Our lawyers have been involved with companies on the leading edge of Web3 technologies and concepts in the U.S. and internationally.
Cryptocurrency and DeFi
Cryptocurrency entered the mainstream vernacular in 2009 with the development of Bitcoin, and later, numerous other cryptocurrencies. In June 2021, El Salvador’s Legislative Assembly voted to accept Bitcoin as legal tender, and in August 2021, Cuba followed suit. At the other end of the regulatory spectrum, in September 2021, China declared all cryptocurrency transactions illegal while simultaneously launching its native, closed-loop digital currency.
The evolution of cryptocurrency has been rapid (in mid-2021, the market for cryptocurrencies was estimated to be worth around $2 trillion). Financial regulators are struggling to fulfill their mission of ensuring consumer protection and the establishment of trust in the marketplace.
Without a central regulatory authority, cryptocurrency presents users with additional transaction risks and exposes institutions to additional compliance risks. An additional complication is the difficulty of ascertaining jurisdiction in a financial system that is globally distributed.
Cryptocurrency is not only fast-growing but also fast-evolving, and while most stakeholders see a need for increased regulation, there is little agreement about the extent of that regulation and which authority should be responsible. The inevitable introduction of regulatory processes will have implications in the areas of taxation, compliance, banking, intellectual property rights, and data privacy.
What is clear is that stakeholders will continue to rely on traditional transaction support mechanisms such as contracts and due diligence. Stakeholders will also require legal counsel that is highly experienced in supporting transactions that span multiple jurisdictions.
Decentralized Autonomous Organizations (DAOs)
DAOs offer a cohesive group for the people and by the people without government manipulation or involvement. A DAO is an online community that uses blockchain technology to function and transact toward a specific purpose or mission (e.g. an investment, global community service, or sending one lucky DAO member to the moon).
In DAOs there are no hierarchies and no central control. DAOs also have no corporate form and therefore no bylaws, operating agreements, contribution agreements, or subscription agreements. The “rules” of investing and participating, as for cryptocurrencies, are set out on the blockchain in “smart contracts,” which contain some key terms but rarely track existing corporate laws or securities laws and regulations governing investments.
In the optimal cases, DAOs create legal mechanisms that allow the DAO to interact with existing corporate, financial, and other structures to ensure continuity of the DAO’s membership and purpose with its obligations to third parties, including financial partners. DAOs that fail to implement optimal structural integrations risk being treated as unintentional partnerships complete with joint and several liability for all DAO participants and an inability to enforce any of its contracts with the outside world.
Like cryptocurrencies and blockchain itself, DAOs are inherently borderless and involve people and organizations across the globe, requiring legal expertise that also extends beyond national borders.
Non-fungible Tokens (NFTs)
NFTs are digital assets that sometimes intersect with the physical world. They can be held by collectors, traded, or sold. The NFT market is nascent but prominent and growing exponentially.
Although NFTs are “non-fungible”, the rights associated with them most certainly are. At the most basic level, NFTs are intellectual property rights initially owned by creators. Then those rights are packaged into an NFT or tokenized as part of an NFT and transferred to buyers.
NFT studios, intermediary platforms for buying and selling, and NFT creators, sellers, and buyers are all reliant on intellectual property rights protection. They need the complete range of legal work inherent in NFT creation, ownership, and transactions, including contracts, negotiation, translation, IP registration, and enforcement.
Harris Bricken’s Web3 team assists our clients with a wide range of legal services including:
- Entity formation (e.g. domestic and international jurisdiction selection, taxation, and risk appraisal for DAOs and related Web3 entities)
• Strategic planning regarding Web3 legal relationships in DAOs and related financing vehicles affiliated with DAOs.
- Contract negotiation, drafting, translation, and enforcement (e.g. NFT studio contracts)
• Intellectual property rights protection (e.g. trademark and copyright protection in NFTs, licensing, due diligence, data privacy issues, and international agreements)
• Mediation, arbitration, and litigation (domestic and international)
• Compliance (e.g. securities laws regarding tokenization, intellectual property rights, data privacy)
For nearly two decades, Harris Bricken has been a leader in emerging markets like China, cannabis, and psychedelics law, all areas in which stakeholders have had to contend with fast-evolving regulatory environments. Our attorneys have earned national and international recognition for their work providing businesses with the legal planning, regulatory support, corporate guidance, and compliance strategies they need.
Our Web3 team is following the same playbook, collaborating with their colleagues in other practice areas to leverage our wide range of legal strengths and our national and international network of industry-leading professionals to offer our clients creative, effective, and timely support.
With different jurisdictions come vastly different legal systems, and it takes a highly experienced legal team to navigate them. As leaders in some of the most complex areas of international law, our lawyers in the US, LatAm, Asia, and Europe stand ready to assist you wherever you need us.