How blockchain technology is revolutionizing business and the law

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How Blockchain Technology is Revolu5onizing Business the Law and

January 24, 2018

ScoC Kimpel, Partner Joseph McNamara, Tyler Maddry, Partner Senior Associate General Mayme Donohue, Associate Counsel Hunton & Williams LLP

Nasdaq, Inc.

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Overview Ø What is Blockchain? Ø Bitcoin and cryptocurrency Ø ICOs and Token Sales Ø Delaware Corporate Law Ø Blockchain’s PracLcal ApplicaLons Ø Smart Contracts Ø Intellectual Property Rights Ø Cybersecurity Ø Nasdaq’s Approach to Blockchain Ø Q&A January 24, 2018

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What is Blockchain? Ø Generally, blockchain = a data store (or distributed ledger) that: Ø contains transacLons (arranged in “blocks” -­‐-­‐ “chained” together); Ø is replicated across a peer-­‐to-­‐peer network in real-­‐Lme; Ø uses cryptography to prove idenLty / control access; and Ø is immutable (i.e., it’s difficult to change historical records). Ø There are many disLnct blockchain implementaLons. Ø Many blockchain-­‐based pla`orms allow for smart contracts.

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Hash

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Blockchain Transactions Network

Node Blockchain

Node Blockchain

Transaction

Node Blockchain

Source addr: ABC Dest addr: XYZ Tx amount Fee Signed by private key 12345

Public address: ABC

Public address: XYZ

Private key: 12345

Private key: 67890

Source January 24, 2018

DesLnaLon www.blockchainhq.blogspot.my 4

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Building the Chain Adding (“mining”) blocks -­‐ cryptographic hash funcLons Ø One-­‐way funcLon: input cannot be derived from output, but output can be verified if input is known. Ø Small changes in input result in changes to output that are (generally) impossible to predict. Ø If you want to find an output value with given characterisLcs, “brute force” is (generally) the only way to find the right input.

0000 0001

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Cryptographic hash funcLon

70082618269937651554445935 54464764369519925636199312 6870837541449102805772704

61760316120640447704607423 26765972008493790723681071 7765541770022777711324466

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Building the Chain Adding (“mining”) a block Ø Nodes run “consensus algorithm.” Ø Successful miner receives fees + “block reward.” Ø Possible hash outputs > 1e+77 possibiliLes Ø Bitcoin nonce: > 4 billion possibiliLes Ø Ethereum nonce: > 1.8e+19 possibiliLes Ø Why do this?

Hash of last block

Change nonce.

Hash potenLal block

Hash passes test?

No

Received Tx Received Tx Received Tx Nonce: 00010101 PotenLal block

January 24, 2018

Yes Success! Report to other nodes; add block to blockchain.

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Immutability Blockchain immutability – and why it’s a blockchain

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Blockchain and Smart Contracts Ø Smart contract = code running on nodes in the network. Ø Distributed applicaLons (“dApps”) can use smart contracts. Ø A contract has an address and can parLcipate in transacLons. Ø Compute power paid for in virtual currency. Ø Why smart contracts?

Network Contract

Contract Address Code

Address Code

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Types of Blockchains – Benefits Ø VariaLons: public / private; different consensus algorithms; etc. Ø Where can blockchain technology provide the greatest benefits? Ø MulLple parLcipants <-­‐-­‐> important to validate acLvity on the network.

Network Vote transacLon Source addr: Voter1Address

Node Blockchain

Node Blockchain

Vote transacLon Source addr: Voter2Address

Dest addr: Candidate A

Dest addr: Candidate B

Value: one vote

Value: one vote

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What is Cryptocurrency? Ø AKA “Digital Currency” and “Virtual Currency” Ø IRS definiLon: • A digital representaLon of value that funcLons as a medium of exchange, a unit of account, and/or a store of value.

• In some environments, it operates like ‘real’ currency, but it does not have legal tender status in the U.S. • Virtual currency that has an equivalent value in real currency, or that acts as a subsLtute for real currency, is referred to as “converLble” virtual currency.

• Bitcoin is one example of a converLble virtual currency.

• Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

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What is Bitcoin? Ø Created in 2008 by a person or group that used the pseudonym “Satoshi Nakamoto” Ø Is “pseudonymous” (i.e., parLally anonymous) in that an individual is idenLfied by an alpha-­‐numeric public key/address. Ø Relies on cryptography for security based on public and private keys and complex mathemaLcal algorithms. Ø Runs on a decentralized peer-­‐to-­‐peer network of computers.

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What is Bitcoin? Ø “Miners” operate on open-­‐source sowware; validate and irrevocably log transacLons on a permanent public distributed ledger visible to the enLre network. Ø By solving complicated mathemaLcal problems, miners can earn new Bitcoin. Ø Solves the lack of trust between parLcipants who may be strangers to each other. Ø Enables the transfer of ownership without the need for a central intermediary.

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What is an ICO? Ø Acronym for “IniLal Coin Offering” Ø Form of financing technique in which a company (typically operaLng in the digital currency space) makes a “token” available for sale. Ø The token gives the purchaser some future right in the business or other benefit. Ø ICO promoters prepare white paper describing token technology and market the offering on the basis of the white paper.

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Regulation of ICOs Ø SEC and CFTC have both taken the posiLon that “tokens” may be securiLes or commodiLes subject to their respecLve jurisdicLons. Ø China and other countries have moved to ban ICOs. Ø SEC, states and private plainLffs have begun suing ICO promoters.

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Practical Applications of Blockchain Ø IniLal blockchain applicaLons were developed for finance and banking. Ø Financial transacLons are just one type of transacLon that can be recorded and seyled using blockchain. Ø Blockchain soluLons are being developed across industries to solve inefficient systems. Ø BUT – beware of the hype. It is not the soluLon for everything.

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Supply Chain Management Ø Permanent record of the journey of the assets. Ø Shared among all network parLcipants.

Ø Timestamped for real-­‐Lme tracking of assets. Ø Smart contracts can automate approvals, paperwork and payments.

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www.blockchainhq.blogspot.my Source: Resolve Solution Partners 16

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Food and Product Safety Ø Traces the origin and source of each item at retail. Ø Faster idenLficaLon of contaminated or defecLve products. Ø Detailed info follows the product: farm/factory origin, batch numbers, processing data, expiraLon dates, storage temperatures, shipping details, etc.

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Source: Resolve Solution Partners

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Healthcare Ø PharmaceuLcals supply chain – MediLedger – built to the requirements of the U.S. Drug Supply Chain Security Act. Ø TesLng applicaLons for Electronic Medical Records. Ø Health insurance applicaLons and payer administraLon. Ø Healthcare provider licensure and credenLaling – being tested

by Illinois with the Hashed Health consorLum. Ø Revenue cycle management and fraud prevenLon.

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Energy Ø Improved grid management.

• Sun Pacific recently integrated blockchain into its renewable energy grid management. Ø Peer-­‐to-­‐Peer Energy Trading.

• Brooklyn Microgrid allows parLcipants to generate, store, buy and sell energy at the local level. Ø Energy CommodiLes Trading.

• BP, Shell and Statoil are working on a blockchain-­‐based digital pla`orm for post-­‐transacLon management of physical energy commodiLes trading.

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Consumer Confidence and Loyalty Ø Verify authenLcity of rare and valuable products.

• Same concept as the supply chain and food safety uses.

• Allows customers to scan barcodes in the retail environment and verify the origin and other key features of products

Ø Consumer rewards programs.

• Issue, track and spend rewards points on blockchain.

• Reduces balance of unspent or unused rewards.

• Improve targeted communicaLons based on individual behavior.

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Real Property Registry and UCC Filings Ø Register Ltle to real property assets.

• Cook County Recorder of Deeds Blockchain Pilot Program – “designed a blockchain real estate conveyance so:ware workflow that can be a framework for the first legal blockchain conveyance in Illinois (and possibly the US).”

• Projects underway in other countries – examples like Georgia, Sweden and the Ukraine. Ø UCC Filings.

• Delaware Blockchain IniLaLve – “smart UCC” filings intended to (1) automate the release or renewal of UCC filings and related collateral, (2) increase the speed of searching UCC records, (3) reduce mistakes and fraud and (4) cut cost.

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Smart Contracts Ø What is a Smart Contract?

• • • •

Computer code stored in a block Consent between two or more parties Code is fixed, state changes Code is automatically executed in each node upon trigger event • Ensures performance through automation

Ø Ethereum Platform, Solidity and EVM

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Smart Contracts vs Conventional Contracts Ø How is a Smart Contract different from a conventional contract?

• In many cases, only discrete elements of a contract can be automated • Applicable to situations where performance can be verified objectively by reference to an information source • No human judgment or intervention • Oracles

• May or may not be legally binding • Very difficult to amend • The DAO example January 24, 2018

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Blockchain IP Ø Development of Blockchain Intellectual Property • Significant increase in patent filings • • • •

Major Financial Institutions Major Technology Companies Blockchain startups EITC Holdings

• Examples of patents • • • • January 24, 2018

Accenture: rewritable blockchain Nasdaq: data matching system BofA: cryptocurrency exchange CME: mining derivatives www.blockchainhq.blogspot.my 24

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Protecting Your Company’s Blockchain IP Ø Integrate with your development team early to understand development projects and timeline Ø Ask about what innovative features are being created Ø Keep track of statutory bars that require early filing of patent application (35 USC 102) Ø Consider whether expense of patent filing is justified • How good is the idea?

• How valuable would the patent be?

• Consider other benefits of filing (proof of invention, deterrent effect, negotiations) Ø Expect some challenges related to patenting of IT-related inventions (Alice v. CLS Bank) Ø Contractual protections (nondisclosure, use restrictions, ownership of developed IP) January 24, 2018

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Handling Infringement Risks Ø No easy answer, although standard defenses are available • Abstract Idea under Alice v. CLS Bank • Invalidity based on prior art • Non-infringement

Ø Defensive patent filings Ø Blockchain patent initiatives • Blockchain Patents Roundtables • Patent pledges by Blockstream and Coinbase • Chamber of Digital Commerce

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Open Source Licensing Issues Ø Blockchain platforms commonly use open source software • Bitcoin uses MIT license • Ethereum uses GPL, Affero and others

Ø Your implementation on blockchain may involve distribution of code to third parties Ø OSS licenses are permissive or restrictive, with very different rights and obligations Ø Key actions include modification, distribution, and combining or linking software code Ø Implement an OSS policy to understand and comply with OSS licenses January 24, 2018

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Privacy and Cybersecurity Ø At a high level, concerns include: • Privacy and anonymity of informaLon • Preserving data integrity • Cybersecurity risks and safeguards Ø Blockchains may adopt varying levels of “permissions” • Permissioned blockchains allow for greater privacy • Bitcoin is an example of a “permissionless” blockchain

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Privacy and Cybersecurity Ø Data integrity is a key security risk that can be managed with blockchain technology • Data contained in a blockchain is unalterable • Data can only be added to a blockchain; it cannot be modified or removed • All systems maintaining the blockchain must agree on changes • Data stored in a blockchain can be encrypted as an added security layer

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Privacy and Cybersecurity Ø A key benefit of blockchain technology is its security • Blockchain is decentralized and transparent • These security features reduce blockchain technology’s vulnerability to cyberayacks Ø But key risks sLll exist • VulnerabiliLes at the intermediary level—target of hacker ayacks • Use of blockchain technology to facilitate cyberayacks (such as ransomware) by preserving a bad actor’s anonymity

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Nasdaq Blockchain Projects Ø Private securiLes transacLons (Linq) Ø SIX Swiss Exchange Ø Share e-­‐voLng in Estonia and South Africa Ø NYIAX: adverLsing exchange Ø NFF blockchain service

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Questions?

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Contacts Hunton & Williams LLP Ø Scoy Kimpel, Partner Ø Tyler Maddry, Partner Ø Mayme Donohue, Associate Nasdaq, Inc. Ø Joseph McNamara, Senior Associate General Counsel January 24, 2018

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