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Immersed In The Black Hole Of Blockchain

by Joel Telpner
January 31, 2020

Joel Telpner is a highly sought-after legal advisor in the blockchain space, actively working with a large number of clients in structuring token distributions and enterprise blockchain applications. Joel brings more than 30 years of legal experience in a career that includes time as an AmLaw 100 partner, the former U.S. general counsel of a global financial institution and a venture capitalist.

frank | Will you tell me a bit about your background?

Joel: I'm a partner in the global law firm, Sullivan and Worcester. I am the head of the firms FinTech and Blockchain Practice and have been at the firm slightly over three years now. 

Okay. How did you –

I'm happy to go into as much background as you'd like without putting you and everybody else to sleep. 

You won’t.

I immersed myself fairly deeply into the black hole of Blockchain. It was a lot more fun than anything else I've been doing for a long time. I decided to leave Jones Day and come to my current firm. Jones Day is a very well known firm, it's a huge firm of over 2,500 lawyers. By comparison Sullivan is very small. Big by global standards, they're only 200 lawyers, just not by U.S. standards. But Sullivan being a smaller firm is in a much better position to take on early stage tech clients, which represent a lot of what's going on in the Blockchain space today. 

Sullivan started out of Boston, so it's always had somewhat of a tech practice to begin with. And we're one of the few American law firms that also has an office in Tel Aviv. It has a strong presence coming from an Israeli side. So it was a perfect fit for me. 

Funny how something that starts off as random can dictate your path in life. 

I know, isn't it. The only thing I tell younger people about this is that if you think that you know what your career is going to look like, no you don't. 

Yeah, exactly. 

It always takes you in crazy directions you can never anticipate. 

My first question that has to do with your job is around the idea of regulating currency and looking at regulations without international borders, where money's not tied to the State in the same way. How does that even begin to work?

Well, there are a couple aspects of that. First, I want to make one slight clarification, which is that when we're talking about cryptocurrencies, some may be currency or at least function in a manner that's similar to currency – but cryptocurrencies can also mean other things. Some of them are really securities, or at least regulated as securities. Some of them are commodities. Some cryptocurrencies have multiple features and may fall in more than one regulatory regime, at the end of the day, cryptocurrencies are all based upon software. Since we can design software to do virtually anything we want, we have cryptocurrencies that may not be currency, may not be a security, may not be a commodity – regulators are trying to figure out just what the heck they are in the first place. You have to start with that context because although we throw out the phrase cryptocurrency, it really encompasses all different kinds. 

The other aspect of the assessment is that if you look at how we've regulated currency, how we've regulated securities, or how we've regulated commodities historically, we've always had to grapple with the fact that every country imposes their own regulatory scheme. And although there may be similarities to how we regulate currency, certainly on the global basis, at the end of the day, it's still a jurisdiction by jurisdiction approach, and the best we historically have seen are countries trying to harmonize regulation, trying to create the ability to promote global commerce and global capital markets without creating so many barriers that the global markets break down. 

Now when we come to cryptocurrency, the question you have to ask is, is it any different or just the same issues we've always had to deal with?

To the extent we've always had to deal with how you reconcile regulations and laws from different countries. 

Is it any different with respect to cryptocurrency? That's a complicated question, a complicated answer. When the internet was just being developed, a lot of people were arguing that this is all cyber, this is all metaphysical and existing laws and regulations no longer apply and there's no way to regulate quote, "the internet." And that proved not to be true.

You're not regulating internet, you're regulating applications or usage for the internet.

Again, it's to a large extent, the same now. Today we're still applying different regulatory regimes for currencies and for securities and for commodities the way we always have. 

So is there a difference in this world? 

No, the difference is that with Blockchain technology, because it's decentralized and because it's software, people can be anywhere in the world and access different Blockchain applications or build or contribute to Blockchain applications. We have a very distributed universe of participants, of users. That means it’s sometimes hard to figure out where somebody is, what country they're transacting from or doing business in.

Blockchain, you could argue, is jurisdictionally agnostic. It doesn't pay attention to borders.

So to the extent we're trying to regulate things like a cryptocurrency that nearly anybody, anywhere in the world can access, it does create challenges from a government standpoint. They have to figure out how to regulate within their border, as well as figure out where their borders end and where another border starts. There are definitely challenges, but the challenges aren't so great that it means that regulatory routines, the way countries look at them, fall apart. 


But it certainly brings in all kinds of new challenges. 

A lot of cryptocurrencies are country agnostic. I mean, there are certain currencies whose value is tied to the dollar, but where is the policy right now? A big part of the crypto conversation is centered around decentralization and the idea of regulation being absent or different. Depending on who I've spoken to, certainly in the examination of this month, people will say, "Well there are financial regulations on the Blockchain and within cryptocurrencies, just like any other financial institution." But what are they?

That's right. It's not that it's not regulated. Sometimes it's unclear what a cryptocurrency is, but let's say for a minute you have token A, B, and C, and let's say token A is treated as a security in the US – well the US is going to regulate it like any other security. And to the extent other countries also deem that token to be a security, they will regulate it according to their own capital markets, rules and requirements for securities. Where it gets complicated is let's say token A is deemed to be a security in the US by the SEC, but let's say that the EU regulators don't consider it to be a security. Now we've got an instrument that might be regulated security in one country but not be regulated as a security in another country. And there are certainly other precedents for that, but it's fairly unusual. 

In other words, it's not typical for a financial instrument to be deemed to be something in one country and something different in another country. So right now, again, because of the complexity of analyzing different types of crypto, you can have a situation where a token can be treated one way in a country based on its characterization of crypto’s attributes. That is one problem that is somewhat unique to the cryptocurrency world.

Now let's take token B and maybe that is intended to be used as some type of a payment mechanism. Well, one country may say that we're going to regulate it as if it's a real currency and apply the same rules and laws that we apply for legal tender. Another country may say it's similar to a currency so we may apply some of the laws that apply to a currency, like maybe money laundering requirements, but otherwise we're not going to regulate the currency. In that case, now you've got an instrument that both countries say is like a currency, but how far down that road they go varies. Those are the types of issues we're dealing with. But I think it's wrong for somebody to say that these are things that are not regulated. It's not true. It's simply a matter of a country applying the existing regulatory regimes based upon how they interpret a particular cryptocurrency to be treated, and what bucket it might fall in within that particular country. 

Does it further complicate regulations that Bitcoin for example, is created by an anonymous person or group, and runs on its own? No one’s in charge there. It does feel different than the dollar, which the government controls.

In certain respects it does make it more complicated. In other respects it doesn't. And here's one of the ways to think about it. The SEC has determined that Bitcoin is not a security. One of the reasons the SEC reached that conclusion is because security laws are imposed upon issuers of securities. So in other words, we have a regime in the US that for example, imposes upon issuers and obligations and discloses information to potential investors. In the case of Bitcoin, there is no issuer, there's no company, there's no entity, there's nobody, there's no thing, person, entity behind Bitcoin.

Even if the SEC wanted to call Bitcoin a security, who would they impose the disclosure and other obligations upon?

So the fact that there is no entity and Bitcoin simply exists, pragmatically prevented the SEC from deciding to treat it as a security. 

Now what can regulators or governments do? 

Well, the US government could say, if they wanted, that we don't like Bitcoin and so we're going to say that any transaction in Bitcoin by a US person is unlawful. Congress could pass a law saying anybody transacting in Bitcoin is breaking the law. The question would be would they have the ability to enforce that? Is there a way to track down everybody transacting in Bitcoin, determine if they're a US person and if so, impose some type of penalty on that US person for transacting in Bitcoin? Some people would say that's virtually impossible to do. Others would say no, it would be hard. If the government really wanted to outlaw Bitcoin in the US, they could do it. 

Not to ask you to make predictions, but where do you think that this is all going? Cryptocurrencies are gaining popularity. Facebook [Libra] is getting involved.


It seems like this is a direction we're moving in. Is it likely crypto becomes commonly used as currency in the United States? Maybe not replace the dollar, but exist as an alternate? Or will it remain an investment tool and less of a currency? 

Let's list again. Let's break that down into different buckets. By the way, you mentioned Libra, a lot of people believe that whether or not Libra ever goes forward, and I think more and more there are people saying that they don't think it ever will, Libra brought a lot of attention by the mainstream to the crypto world, and some people feel that that actually gave a boost to Bitcoin. 

Early on people thought Bitcoin would be a great source of payment, a way to make payments. But Bitcoin has been, for the most part, far too volatile to become a substitute payment form.

You can't walk into a Starbucks and try to pay with Bitcoin if the value of Bitcoin is going to depreciate 50% while you're in the store. Starbucks would have to say, "Sorry, give me back the rest of your cup of coffee." 


But at the same time, while Bitcoin may have disappointed people as a form of payment, it has proven itself as a potential stored value. In other words, there is some data out there that shows how Bitcoin has been a flight to safety type of investment. In fact, somebody was doing a presentation yesterday I was at that showed that when the United States killed Iranian General Solemani, at the point in time that it was announced, there was a spike in the price of Bitcoin. Some people would say Bitcoin has started to become a flight to safety investment. Just like when people flock to gold whenever they're concerned about something, we're starting to see people do the same thing with Bitcoin, so it may become, on a longer term basis, a very interesting alternative asset class. Even if it never really catches on as a form of payment. 


Now there are other categories of cryptocurrency that people are experimenting with right now that are called stable coins, where each cryptocurrency uses some type of methodology to try to maintain a relatively stable value, so they're backed, for example, by a Fiat currency. You create a stable coin that maybe is backed by dollars or stable coin that's backed by a commodity or, an approach by Libra, which is going to be backed by an asset – the point is, a cryptocurrency that has a value that's relatively stable, not that it will never change, the dollar changes value, but that it's not going to be so volatile that it's going up and down by large parameters. People would say well maybe that could become a substitute form of payment in lieu of Fiat currencies. 

To me that depends on a couple of things. A stable coin could replace using credit cards as a source of payment if we get to the point where Blockchain technology allows us to process transactions in a volume at the same rate that MasterCard and Visa can, which are something like 50,000 transactions a second. Right now, Blockchain technology is far too slow to allow any cryptocurrency to become a real form of payment because it is limited to how many transactions can be processed in any given time under existing Blockchain technology. On top of that, the cost of processing those transactions is still too high. So we're in very early stages. But let's say that we could get to the point where as Blockchain technology continues to develop, we can start processing transactions at the same rate as we process credit card transactions. 

Let's say the cost of processing the transaction is actually less. Well, if that becomes the case, then there's no reason why Starbucks wouldn't be very happy to take a stable coin as a form of payment. If it's paying somebody less money to process a stable coin transaction than it pays the credit card company, it would be incentivized to do that. If you look five or ten years out, the technology may start to evolve to the point where there are cryptocurrencies that start to become substitute forms of payment because there is an efficient and cheap way for people to make payments to one another. On top of that, you don't necessarily have to have a bank to do that. For people that don't have access to bank accounts, it may become a very viable substitute form of payment. But we're still a ways away from that. 

Then there's another factor which is that a number of governments around the world are looking at digitizing their currency. It's not a cryptocurrency, but it would be using Blockchain technology to issue their currency in a digital form, and if countries started doing that, there's an argument as to whether that would compliment cryptocurrencies that are intended to be used as form of payments or whether they would displace those categories or cryptocurrencies. There are all kinds of possibilities and all kinds of unanswered questions. 

The same problems with the Blockchain being too slow to handle the amount of transactions that a Visa or MasterCard or whatever handles, is the same for digitized currency right?

Yes. You would still have the same issues because some of the governments that are currently exploring issuing their currency in digital form are looking at using a Blockchain as the means to process those transactions. They would have the same issue for now. 

Do you think crypto occupies just a fraction of the space in Blockchain technology?

That's a great question because I think there's not enough discussion as to the distinction between crypto and Blockchain. It's always helpful to remind people that cryptocurrencies are an application of Blockchain technology, but you don't need to have a cryptocurrency to use distributed ledger or Blockchain technologies. There are areas that maybe don't get a lot of attention because they're not as sexy. Right now we're looking at very interesting and valid uses or proofs of concept for Blockchain technology. 

Example, supply chain management, where we can use Blockchain technology to make what's a very inefficient process and still a paper process, much more efficient. Walmart is implementing Blockchain for all of its suppliers so that it can improve the vendor process. Those are the types of things that I think over time will prove our Blockchain technology, because you don't need to do 50,000 transactions a second in order to get Blockchain technology to vastly improve supply chain management and you don't need a cryptocurrency to improve supply chain management. Those are some really cool things happening in the Blockchain space. 

There's another aspect where it, broadly speaking, falls within the cryptocurrency role and those are what we call tokenized assets or tokenized equity. When equities or other asset classes are issued in digital form using Blockchain, we can fractionalize ownership and create efficiencies of transferring title to securities or to bonds or to a fraction ownership of real estate, or a fraction ownership of art. This creates a type of cryptocurrency or digitized asset or a tokenized asset, depending on what you want to call it, and over time Blockchain technology may become a way to create greater access to different categories of assets much more efficiently than we do today. Eliminating some of the intermediaries which typically suck out costs, but don't necessarily provide a lot of benefits. You may see that part of the crypto world exploding over the next 10 years. 

Blockchain is completely fascinating on its own. We've talked to people who deal with the food supply chain. We've spoken to people who focus on transitioning the grid system to Blockchain, which I think would be very interesting. The technology seems limitless. 

Oh yeah. Medical records is another area where it's just terribly inefficient, and Blockchain technology could help tremendously. Or State using Blockchain could better manage keeping track of drivers licenses and birth certificates and things like that. There are all kinds of practical and pragmatic uses of the Blockchain that may or may not ever involve any type of cryptocurrency. 

Funny – next month’s theme is actually about continuity of care. A huge issue is the sharing or not sharing of patient information between facilities, hospitals, and doctors. HIPAA is part of it but the privatization of information systems hospitals use is another gigantic component. 

Oh yeah. Anytime you go to a doctor you have to fill out 40 pages of papers all over again, which is just ridiculous, maybe you can see how giving doctors access to an anonymized database of patient information would make things so much more efficient. 

What have you found most interesting in your work recently? 

Oh wow. That's such a tough question, but I guess the most interesting project right now that I'm working on involves the Marshall Islands. A tiny, tiny country, but they are successful. Right now they use the US dollars as legal tender. They want to create their own sovereign currency. But instead of issuing it in paper and coin form, they're going to issue it only in digital form on a Blockchain. 


It will be the first sovereign currency to exist in the world, only in digital form and they're building a Blockchain for purposes of issuing and trading that digital currency.

I'm working on that project and believe me when it comes to saying novel, novel is an understatement. 


I know it is wild isn't it? 

Yes. But it also seems sort of inevitable and obvious. What really is taking so long? 

Besides all the regulatory issues, think about it – you have to make sure that every citizen has a way to get their hands on a digital currency, which means integrating that with smartphones or smart cards or something so that instead of having currency in your wallet, you have your phone or your smart card in your pocket instead. 

The cash economy has obviously shrunk. There are still people who operate within a cash based system, but less and less so. 

Except in the city of New York where we're going backwards by the way. 

Why is that? 

Oh, city council this past week passed a law, which apparently the mayor is going to sign, that is going to make it illegal for businesses not to accept cash. 

What do you think about that? 

I think it's moronic because the argument is, well there are poor people that don't have access to credit cards or bank accounts and if you had a sandwich shop or a coffee bar that doesn't accept cash, these people now can't go in and buy a cup of coffee. So the city council's solution is to force all of those businesses to retrofit and go old fashioned and start to put in cash registers and stuff like that. 

My view is that we should be trying to help those people that don't have access to bank accounts, get them access to the financial system and make them part of the global financial system and bring them into the modern time and help them that way. Instead of going backwards, we should be going forward. But our so-called progressive New York seems to be going back to the 18th century. 

This really leads to another part of the conversation which is that there are a lot of people left out of the current financial system, and many who view crypto as a solution. Do you think that Blockchain and what it can offer as a technology is democratizing? 

I think that word's been used a little bit loosely in the Blockchain world, unfortunately. Or maybe aspirationally people would have it that way, so the answer is maybe, I don't think we're there yet. Let's use a real life example. Whether they're here legally or illegally, let's say there's somebody in the United States from Guatemala and they're here working and they're sending money home to their family. 

What do they usually do? Because they may not have a bank account, they go into Western Union and they give them dollars and lets Union transfer payments to the family in the local currency back in Guatemala. Those people have access to sources of financial services now. But the real issue is that they pay a lot of money for it. The fees charged by the Western Union's of the world are not cheap. 

Those folks are going through alternative channels as opposed to official banks, but paying a lot of money for it. In theory, Blockchain technology and cryptocurrency allow those people that don't have access to virtual bank accounts, potentially the way to move payments from the US to Guatemala to a cryptocurrency at a much lower cost than a Western Union. 

But the presumption there is that they have the sophistication and ability to figure out how to create a digital wallet, how to access one of these Blockchain services that does something like that, know how to buy a cryptocurrency, and then transfer that cryptocurrency to somebody in their own country who could then convert it into local currency. There are a lot of ifs and assumptions in that and we're pretty far away from that. 

In other words, you have to get to the point where somebody could download an app the way we do from the app store on your iPhone and simply press a button in order to transfer crypto without having to know how to create digital wallet, without having to know what to do with a private key, without having to know how you buy cryptocurrencies.

None of this has been simplified enough to the extent that it really becomes a form of democratization.

It has the potential, I think, but I think we're really far away from it until we can make it to the point where you don't have to have an education in order to simply accept Blockchain technology and cryptocurrency.