2017 Blockchain Technology and Digital Currency National Institute

Presented by the

American Bar Association

Criminal Justice Section

and Center for Professional Development

2017 Blockchain

Technology and

Digital Currency

National Institute

CE17Blockchain_Tech_and_Digital_Currency_COVER.indd 1 3/21/17 8:30 AM

2017 Blockchain

Technology and

Digital Currency

National Institute

Presented by the

American Bar Association

Criminal Justice Section

and Center for Professional Development

The materials contained herein represent the opinions of the authors and editors and should not be

construed to be the action of the American Bar Association Criminal Justice Section or Center for

Professional Development unless adopted pursuant to the bylaws of the Association.

Nothing contained in this book is to be considered as the rendering of legal advice for specific cases,

and readers are responsible for obtaining such advice from their own legal counsel. This book and

any forms and agreements herein are intended for educational and informational purposes only.

© 2017 American Bar Association. All rights reserved.

No part of the publication may be reproduced, stored in a retrieval system, or transmitted in any

form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the

prior written permission of the publisher.

Printed in the United States of America.

ISBN-13: 978-1-63425-920-0

Product Code: CE1704BTDOR

American Bar Association

Center for Professional Development

321 North Clark Street, Suite 1900

Chicago, IL 60654-7598

www.abacle.org

800.285.2221

To access the interactive version of these materials,

please go to: http://ambar.org/ce1704btdcor

2017 Blockchain Technology and

Digital Currency National Institute

Table of Contents

FACULTY AND AUTHOR BIOGRAPHIES ................................................................................................................... i

SPONSORS ................................................................................................................................................................... v

SECTION A: TECHNOLOGY PRIMER FIRESIDE CHAT

Bitcoin: A Peer-to-Peer Electronic Cash System

Satoshi Nakamoto ................................................................................................................A-1

SECTION B: REGULATORY DEVELOPMENTS

OCC’s New Special-Purpose Charter: Business Opportunities and Challenges

for Fintech and Beyond (Presentation Slides)

Reuben Grinberg...................................................................................................................B-1

SECTION C: BLOCKCHAIN INNOVATION AND OPPORTUNITY

Office of the Comptroller of the Currency Issues Draft Licensing Manual

Supplement for FinTech Companies......................................................................................C-1

DFS Issues Updated Proposed Cybersecurity Regulations ..................................... C-15

Online Resources........................................................................................................................... C-23

SECTION D: INTELLECTUAL PROPERTY ISSUES

Is a Blockchain Patent Still Possible?

Ira Schaefer and Ted Mlynar........................................................................................... D-1

The Bitcoin Patent – Only a Matter of Time?

Ira Schaefer and Ted Mlynar........................................................................................... D-5

Online Resources............................................................................................................................. D-7

SECTION E: ENFORCEMENT ACTIONS

A Securities Law Framework for Blockchain Tokens...................................................E-1

Coinbase Memos of Law.................................................................................................Interactive

United States’ Memorandum in Support of Ex Parte Petition for Leave to Serve

John Doe Summons (November 17, 2016)

Orders Granting Ex Parte Petition for Leave to Serve John Doe Summons

Declaration of Senior Revenue Agent David Utzke in Support of Ex Parte Petition

for Leave to Serve “John Doe” Summons (November 15, 2016)

Government Exhibit A: Internal Revenue Service Notice 2014-21 (April

14, 2014)

Government Exhibit B: Summons (November 17, 2016)

i

Faculty and Author Biographies

Mary Beth Buchanan is a partner with Bryan Cave LLP in Chicago. She is a co-leader of the firm’s digital

currency team, and a member of the white collar defense, investigations and securities enforcement client

service groups. Ms. Buchanan joined Bryan Cave from the United Nations, where she served as the ethics and

reputational risk officer, and conducted the UN’s first ethics and reputational risk assessment for

peacekeeping and special political operations. Ms. Buchanan also previously served as the U.S. Attorney for

the Western District of Pennsylvania from September 2001 to November 2009.

Eun Young Choi is an assistant U.S. attorney in New York.

Grant Fondo is a partner at Goodwin-Proctor, LLP, in Menlo Park, California. Mr. Fondo is an experienced

federal prosecutor and former assistant U.S. attorney in the Northern District of California. He represents

technology, FinTech, blockchain, digital currency, life sciences, private equity and venture capital clients in a

wide range of contested matters.

David Fragale is a director of forensic services at PricewaterhouseCoopers, LLP in Boston.

Yolanda Goettsch is a senior member of NASDAQ’s senior counsel and currently serves as vice president and

associate general counsel in Rockville, Maryland. She is a business-oriented legal executive with experience

providing legal guidance in the areas of corporate finance, SEC financial reporting, technology, mergers and

acquisitions, strategic initiatives and corporate governance. Prior to joining NASDAQ, Ms. Goettsch was senior

counsel, legal policy in the U.S. Securities and Exchange Commission’s Office of General Counsel, where she

counseled the commission on SEC rulemaking, enforcement actions and policy matters. She holds a J.D. from

Columbia University School of Law and a B.A. from Yale University.

Alexander Greenberg is of internet protocol and technology counsel at Americas Barclays in New York.

ReubenGrinberg is an associate in Davis Polk’s Financial Institutions Group in New York. He provides

strategic, transactional and regulatory advice to a wide array of both established and emerging participants in

the FinTech space, focusing on the regulatory treatment of virtual currencies and blockchain. He also advises

financial institutions and industry groups on a wide range of bank regulatory matters, including Dodd-Frank

regulatory implementation, the preparation of living wills, enhanced prudential standards, Basel III capital

and liquidly requirements, and intermediate holding company issues and bank M&A and capital markets

transactions. Before joining Davis Polk, Mr. Grinberg programmed trading server software for Bridgewater

Associates.

Varun Gupta is the chief legal officer of Bitfury Group Limited in San Francisco. Prior to joining Bitfury in

2014, Mr. Gupta was a partner in major international law firms specializing in international capital markets

transactions, cross border mergers & acquisitions and joint ventures. Mr. Gupta graduated from Georgetown

Law School in 1996.

Kathryn Haun is an assistant U.S. attorney with the U.S. Attorney’s Office in San Francisco.

Ari Juels is a professor at Cornell Tech-Jacobs Institute in New York City. His areas of interest include

cryptocurrency and smart contracts, applied cryptography, cloud security, user authentication, and privacy.

Mr. Juels is co-director of the Initiative for CryptoCurrencies and Contracts (IC3). He received his Ph.D. in

computer science from U.C. Berkeley in 1996.

Brian Klein is a partner at the boutique litigation firm Baker Marquart LLP in Los Angeles. His practice

focuses on high-stakes criminal and regulatory defense and civil litigation matters. He has extensive

experience representing financial technology companies, entrepreneurs, and early adopters. He serves as an

advisor to BlockSeer, a blockchain analytics company, and formerly volunteered as the outside general

counsel of the Bitcoin Foundation. Mr. Klein teaches a federal criminal practice seminar at University of

Southern California’s law school and served as a federal prosecutor in Los Angeles from 2007-2012.

ii

Caitlin Long is chairman and president of Symbiont, the smart contracts platform for institutional uses of

distributed ledger technology, in New York. She has spent 22 years on Wall Street as a managing director in

senior roles, working for Morgan Stanley, Credit Suisse, and Salomon Brothers. Ms. Long has been active in

bitcoin since 2012 and blockchains since 2014. She is a graduate of Harvard Law School, the Kennedy School

of Government and the University of Wyoming.

Nina Marino is a partner with Kaplan Marino, APC in Beverly Hills. She is certified as a criminal law specialist

in the State of California. Her practice focuses on white collar and complex criminal litigation on both a

national and international level. Ms. Marino regularly represents individuals in matters involving allegations

of all aspects of fraud, including, wire and mail fraud, health care fraud, insurance, and bank fraud, as well as

allegations of money laundering, conspiracy, computer crimes, bribery, and kickbacks, counterfeiting and

copyright infringement, tax crimes, securities cases, antitrust matters, and public corruption investigations

including FCPA violations.

Theodore (Ted) Mlynar is a partner at Hogan Lovells US LLP, in New York. For over 20years, he has

developed and implemented innovative solutions for intellectual property problems across the world.

Combining a keen legal acumen, first-chair trial experience, and a deep understanding of technology, he

works closely with clients to resolve disputes in- and outside the court room. He has a particular focus in

areas of complex technology, including electronics, wireless communications, software, and e-commerce.

Mr. Mlynar prepares and advises in the negotiation of intellectual property licenses, particularly focusing on

areas of high technology, including electronics, wireless communications, semiconductors, software, and

e-commerce. He majored in electrical engineering at Caltech and is a registered patent attorney.

Patrick Murck is of fellow special counsel at the Berkman Klein Center at Harvard University in Cambridge,

Massachusetts. He is a lawyer and expert on bitcoin and blockchain-based technologies. He conducts research

into the law and policy implications of bitcoin, distributed ledgers and smart contracts. Previously, Mr. Murck

was a co-founder of the Bitcoin Foundation where he served at times as general counsel and executive

director. He has engaged regulators and policymakers in the U.S. and Europe on bitcoin and the emerging

digital economy. Mr. Murck serves as president board member for the BitGive Foundation, a non-profit

organization focused on charitable giving and social impact using bitcoin.

Neha Narula is director of research at the Digital Currency Initiative, a part of the MIT Media Lab in New

York City, where she teaches courses and leads cryptocurrency and blockchain research. While completing

her PhD in computer science at MIT, she built fast, scalable databases and secure software systems, speaking

about these topics at dozens of industry and research conferences. In previous roles, Ms. Narula helped

relaunch the news aggregator Digg and was a senior software engineer at Google.

Marjorie J. Peerce is a partner with Ballard Spahr, LLP in New York. Her practice focuses on white collar

criminal defense, regulatory matters, and complex civil litigation. She has handled criminal and regulatory

investigations concerning violations of the Internal Revenue Code, securities fraud - including bitcoins, the

Foreign Corrupt Practices Act (FCPA), computer fraud and hacking, and criminal customs investigations.

Ms. Peerce is the current co-chair of the Sentencing Committee of the National Association of Criminal

Defense Lawyers, is on the national Steering Committee of Clemency Project 2014, as well as on the American

Bar Association Task Force to Reform the Economic Crimes Guidelines.

Marco Santori leads the FinTech practice and is an authority in the law of blockchain technology at Cooley

LLC in New York. He is the legal ambassador for the Delaware Blockchain Initiative and the drafter of the New

Jersey Digital Currency Jobs Creation Act. Mr. Santori focuses his practice on structuring innovative products

into existing regulations, as well as crafting new regulations where required. He counsels on compliance with

and disputes over money services, securities and derivatives laws, with both high-growth FinTech companies

and international financial institutions.

Rebecca Simmons is a partner with Sullivan & Cromwell, LLP in New York. Her practice areas include U.S.

banking and commodities laws and regulation, payments, technology and outsourcing matters, bankruptcy

and insolvency issues relating to complex transactions, corporate restructuring, derivatives structuring and

regulation, U.S. securities laws and capital markets transactions. Ms. Simmons has represented dealers in the

iii

derivatives markets in evaluating the risks including the establishment of the CLS Services foreign exchange

settlement system; and the negotiation of agreements with technology service providers and other

outsourcing arrangements. She has served as a member of the Committee on Futures Regulation and the

Committee on Banking Law of the New York City Bar Association.

Bryan Skarlatos is a partner at Kostelanetz & Fink, LLP in New York. He represents clients in tax audits, civil

tax litigation, criminal tax investigations, voluntary disclosures and IRS whistle-blower matters. Mr. Skarlatos

is an adjunct professor at NYU School of Law where he teaches a course on tax penalties. He has taught

several courses on tax procedure, penalties and ethics to various offices of the IRS. He is co-chair of the annual

NYU Tax Controversy Forum and chair of the annual Practicing Law Institute program on "Nuts and Bolts of

Tax Penalties." He has served as chair of several tax committees at the American Bar Association, New York

State Bar Association, New York City Bar Association and New York County Lawyer’s Association and he is a

Fellow of the American College of Tax Counsel.

Dana Syracuse is of senior counsel at Perkins Coie LLP in New York. He concentrates his practice in the

blockchain, FinTech, e-commerce and financial services sectors. He works with a range of FinTech and digital

business clients on federal and state regulatory, compliance and enforcement matters, complex bank

regulatory issues, including, privacy, data and cyber security, anti-money laundering, Bank Secrecy Act and

know-your-customer matters, consumer protection as well as contract drafting and negotiations.

Mr. Syracuse is the former associate general counsel for the New York Department of Financial Services

(NYDFS). While at the NYDFS, he helped oversee the department’s strategy regarding emerging payment

systems, virtual currency and blockchain technology, the drafting of New York State’s Bit License virtual

currency regulation and the chartering of New York State-based virtual currency exchanges.

Valerie A. Szczepanik is an assistant regional director in the division of enforcement at the U.S. Securities

and Exchange Commission (SEC) and is head of the SEC’s Distributed Ledger Technology working group in

New York. Prior to that, she was an assistant director in the division’s asset management unit, supervising

investigations of investment advisers to registered investment companies, private funds and retail investors.

Ms. Szczepanik received her JD from Georgetown University and her Bachelor of Science degree in

Engineering from the University of Pennsylvania.

Yvette D. Valdez is of counsel in the New York office of Latham & Watkins LLP. Ms. Valdez has significant

experience in the representation of dealers, intermediaries and end-users in connection with derivatives legal

and regulatory matters under the Dodd-Frank Act as well as related CFTC, SEC and prudential regulation. Ms.

Valdez represents the sell-side and buy-side as well as intermediaries in commodity derivatives (on and off￾exchange), fixed-income derivatives, foreign exchange transactions, total return swaps and futures and

options contracts. Ms. Valdez has also developed a regulatory practice in advising a wide range of FinTech

and financial institution clients with respect to regulation of blockchain technologies.

Kate Walters is of counsel at R3 CEV, in New York, a financial technology company representing the largest

shared effort of bringing distributed ledger technology to the financial markets. Prior to joining R3, she was

general counsel and a member of the advisory board at MLV & Co. Ms. Walters received her B.A. from

LeMoyne College and her J.D. from Villanova University. She also has an executive M.B.A. from New York

University Stern School of Business.

Aaron Wright is a clinical professor at Cardozo Law School in New York, and director of the school’s

Blockchain Project. He has a forthcoming book about blockchain technology and the law under contract with

Harvard University Press. Before joining Cardozo’s faculty, Professor Wright sold a company to Wikia, Inc.,

the for-profit sister project of Wikipedia, where he ran Wikia’s New York office, served as general counsel and

vice president of product and business development. Professor Wright also practiced at Patterson Belknap

and Jenner & Block, and clerked for the Honorable William J. Martini of the U.S. District Court for the District

of New Jersey.

David Yermack is chair of the finance department at the New York University Stern School of Business.

v

About PwC Network

At PwC, our purpose is to build trust in society and solve important problems.

We’re a network of firms in 157 countries with more than 208,000 people who

are committed to delivering quality in assurance, advisory and tax services. Find

out more and tell us what matters to you by visiting us at www.pwc.com.

About PwC’s Forensic Services

PwC’s Forensic Services team of experienced professionals are dedicated to

meeting the challenges caused by fraud allegations, economic crimes and other

irregularities. Our portfolio of services includes: Financial Crime Examinations,

Forensic Technology Solutions, Regulatory Compliance Reviews, Fraud Risk

Management and Prevention and Dispute Analysis. Please visit us at

www.pwc.com/us/forensics for more information.

Blockchain Technology and

Digital Currency

2017 Sponsors

Comprehensive Sponsor

vi

Goodwin

Hogan Lovells US LLP

Latham & Watkins LLP

Sullivan & Cromwell LLP

Meeting Patron

Goodwin

Break Sponsor

Reception Sponsors

SECTION A

TECHNOLOGY PRIMER FIRESIDE CHAT

Bitcoin: A Peer-to-Peer Electronic Cash System

Satoshi Nakamoto

[email protected]

www.bitcoin.org

Abstract. A purely peer-to-peer version of electronic cash would allow online

payments to be sent directly from one party to another without going through a

financial institution. Digital signatures provide part of the solution, but the main

benefits are lost if a trusted third party is still required to prevent double-spending.

We propose a solution to the double-spending problem using a peer-to-peer network.

The network timestamps transactions by hashing them into an ongoing chain of

hash-based proof-of-work, forming a record that cannot be changed without redoing

the proof-of-work. The longest chain not only serves as proof of the sequence of

events witnessed, but proof that it came from the largest pool of CPU power. As

long as a majority of CPU power is controlled by nodes that are not cooperating to

attack the network, they'll generate the longest chain and outpace attackers. The

network itself requires minimal structure. Messages are broadcast on a best effort

basis, and nodes can leave and rejoin the network at will, accepting the longest

proof-of-work chain as proof of what happened while they were gone.

1. Introduction

Commerce on the Internet has come to rely almost exclusively on financial institutions serving as

trusted third parties to process electronic payments. While the system works well enough for

most transactions, it still suffers from the inherent weaknesses of the trust based model.

Completely non-reversible transactions are not really possible, since financial institutions cannot

avoid mediating disputes. The cost of mediation increases transaction costs, limiting the

minimum practical transaction size and cutting off the possibility for small casual transactions,

and there is a broader cost in the loss of ability to make non-reversible payments for non￾reversible services. With the possibility of reversal, the need for trust spreads. Merchants must

be wary of their customers, hassling them for more information than they would otherwise need.

A certain percentage of fraud is accepted as unavoidable. These costs and payment uncertainties

can be avoided in person by using physical currency, but no mechanism exists to make payments

over a communications channel without a trusted party.

What is needed is an electronic payment system based on cryptographic proof instead of trust,

allowing any two willing parties to transact directly with each other without the need for a trusted

third party. Transactions that are computationally impractical to reverse would protect sellers

from fraud, and routine escrow mechanisms could easily be implemented to protect buyers. In

this paper, we propose a solution to the double-spending problem using a peer-to-peer distributed

timestamp server to generate computational proof of the chronological order of transactions. The

system is secure as long as honest nodes collectively control more CPU power than any

cooperating group of attacker nodes.

1

A-1

2. Transactions

We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the

next by digitally signing a hash of the previous transaction and the public key of the next owner

and adding these to the end of the coin. A payee can verify the signatures to verify the chain of

ownership.

The problem of course is the payee can't verify that one of the owners did not double-spend

the coin. A common solution is to introduce a trusted central authority, or mint, that checks every

transaction for double spending. After each transaction, the coin must be returned to the mint to

issue a new coin, and only coins issued directly from the mint are trusted not to be double-spent.

The problem with this solution is that the fate of the entire money system depends on the

company running the mint, with every transaction having to go through them, just like a bank.

We need a way for the payee to know that the previous owners did not sign any earlier

transactions. For our purposes, the earliest transaction is the one that counts, so we don't care

about later attempts to double-spend. The only way to confirm the absence of a transaction is to

be aware of all transactions. In the mint based model, the mint was aware of all transactions and

decided which arrived first. To accomplish this without a trusted party, transactions must be

publicly announced [1], and we need a system for participants to agree on a single history of the

order in which they were received. The payee needs proof that at the time of each transaction, the

majority of nodes agreed it was the first received.

3. Timestamp Server

The solution we propose begins with a timestamp server. A timestamp server works by taking a

hash of a block of items to be timestamped and widely publishing the hash, such as in a

newspaper or Usenet post [2-5]. The timestamp proves that the data must have existed at the

time, obviously, in order to get into the hash. Each timestamp includes the previous timestamp in

its hash, forming a chain, with each additional timestamp reinforcing the ones before it.

2

Block

Item Item ...

Hash

Block

Item Item ...

Hash

Transaction

Owner 1's

Public Key

Owner 0's

Signature

Hash

Transaction

Owner 2's

Public Key

Owner 1's

Signature

Hash

Verify

Transaction

Owner 3's

Public Key

Owner 2's

Signature

Hash

Verify

Owner 2's

Private Key

Owner 1's

Private Key

Sign

Sign

Owner 3's

Private Key

A-2

4. Proof-of-Work

To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof￾of-work system similar to Adam Back's Hashcash [6], rather than newspaper or Usenet posts.

The proof-of-work involves scanning for a value that when hashed, such as with SHA-256, the

hash begins with a number of zero bits. The average work required is exponential in the number

of zero bits required and can be verified by executing a single hash.

For our timestamp network, we implement the proof-of-work by incrementing a nonce in the

block until a value is found that gives the block's hash the required zero bits. Once the CPU

effort has been expended to make it satisfy the proof-of-work, the block cannot be changed

without redoing the work. As later blocks are chained after it, the work to change the block

would include redoing all the blocks after it.

The proof-of-work also solves the problem of determining representation in majority decision

making. If the majority were based on one-IP-address-one-vote, it could be subverted by anyone

able to allocate many IPs. Proof-of-work is essentially one-CPU-one-vote. The majority

decision is represented by the longest chain, which has the greatest proof-of-work effort invested

in it. If a majority of CPU power is controlled by honest nodes, the honest chain will grow the

fastest and outpace any competing chains. To modify a past block, an attacker would have to

redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the

work of the honest nodes. We will show later that the probability of a slower attacker catching up

diminishes exponentially as subsequent blocks are added.

To compensate for increasing hardware speed and varying interest in running nodes over time,

the proof-of-work difficulty is determined by a moving average targeting an average number of

blocks per hour. If they're generated too fast, the difficulty increases.

5. Network

The steps to run the network are as follows:

1) New transactions are broadcast to all nodes.

2) Each node collects new transactions into a block.

3) Each node works on finding a difficult proof-of-work for its block.

4) When a node finds a proof-of-work, it broadcasts the block to all nodes.

5) Nodes accept the block only if all transactions in it are valid and not already spent.

6) Nodes express their acceptance of the block by working on creating the next block in the

chain, using the hash of the accepted block as the previous hash.

Nodes always consider the longest chain to be the correct one and will keep working on

extending it. If two nodes broadcast different versions of the next block simultaneously, some

nodes may receive one or the other first. In that case, they work on the first one they received,

but save the other branch in case it becomes longer. The tie will be broken when the next proof￾of-work is found and one branch becomes longer; the nodes that were working on the other

branch will then switch to the longer one.

3

Block

Prev Hash Nonce

Tx Tx ...

Block

Prev Hash Nonce

Tx Tx ...

A-3