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The Season for Believing
 Recent cryptocurrency educational event at the Federal Reserve Bank of Dallas.

Recent cryptocurrency educational event at the Federal Reserve Bank of Dallas.

It goes without saying I am a believer in the subject.  You can join or you cannot, but clients can’t be ignored and crypto won’t be ignored.  Cryptocurrencies and blockchain are unique subject matters and are also very complicated.  The basic ownership of a cryptocurrency is complicated, let alone the advising or management of it.

Firms do not need to be experts on the blockchain nor need to have an allocation to crypto. Yet. But they do need to know enough to 1- have a basic conversation about the matter and 2- know what is on the horizon to decide how to pursue in the future.

Unless you are retiring at year-end (congrats!), you can’t dodge this one.  Here is why:

Opportunity. A cryptocurrency can give us features we never knew were possible.  Transparency, cheap and easy transactions, immediate and unrestricted access, liquidity, privacy… what other asset gives us this? These features may cause this asset to be popular and cryptocurrencies can have a limited supply.  (do math here…)  

Charts. Clients like making money and they like charts that move towards the top right (Bitcoin is up 800% from its mark 2 years ago today).  Also, their friends are doing it and it makes great cocktail chatter.  No one likes talking about mutual funds.  At parties or in general. 

Your client’s neighbor. Remember when everyone’s neighbor had a startup or fund that your client wanted you to take a look at?  Those waters were navigable to anyone in the business- talk exit strategy, risk management, overall asset allocation, liquidity.  Fast forward to pre-2019, everyone’s-neighbor’s-now-millionaire-kid has been mining Bitcoin since 2012.  Oh and crypto is one thing, blockchain is another.  Not only is it fueling startups, blockchain is also changing the way startups are raising, holding and transferring equity. (sidenote: this will eventually affect the way public stocks are held and transferred… yes, that means you, Berkshire.)

Estate planning. I speak more to CPA’s than any other profession. Do I need another reason to validate this going mainstream? They are excited about the change in the world of auditing, the prospect of triple entry accounting and the transparency.  They are worried about tax planning, the pseudo anonymity and estate planning.  If a crypto owner dies and leaves no mention of her crypto, the crypto dies with her. If she communicates it to someone else, how are she and her assets protected?  This an entire new level of planning and strategy.

Your Code of Ethics. The SEC is all over it. If you are an RIA, you (should) have a policy in place to review employees’ personal ownership of any securities, which may/may not/probably includes ICO’s and tokens.  

The firms that I serve have clients who look to them for guidance, general oversight and care of their finances.  You don’t need to know the depths of technology, support the technology or believe in crypto to offer your client objective advice. You do need to know enough to gather the info you need to give good advice.  If you’ve read to this point, I hope I’ve convinced you to ditch the FUD. If you are “here for it,” I recommend these things:

Stock Market, Do You Love Me?

Blockchain and its main squeezes, immutability and distributed ledgers promise to revolutionize the stock market.  Recap- when you buy a stock, there are about 10 parties involved in the sale and subsequent purchase.  Add more for the regulators.  Add even more if you are so fancy and want to leverage that asset. And remember we are dealing with a 2 day settlement period.  Meaning- you buy on Tuesday, you own on Thursday.  If on Wednesdays, we proxy vote, you aren't sitting with us.  Or are you? 

Enter TZero, one of the "startups" out there starting to break down and solve this problem.  Launched by the CEO of Overstock, Patrick Bryne, the startup's plans include:

  • allowing you to buy that couch with crypto at O.co (done),
  • build front end system (meaning- something easy and pretty for a real life person to use) to manage stock inventory to short-sell (a way to bet the stock will go down over a certain time period) or loan the stock.  Currently this process is done mostly through non-automated systems and sometimes by hand, which means incorrect pricing, inconsistent ownership and "naked short selling" (is this what they were doing in Wolf of Wall Street?) to occur.
  • issuing stock on the blockchain (done), and
  • building a robo advisor (a new way of getting investment advice through algorithms instead of going old school) and including cryptocurrencies in that advising.  

What does this mean for you?  It is a start to removing those 10 intermediaries, and their price, between you and your Berkshire.  Easy to digest timeline article here. Dear blockchain, stock market wants you, needs you.

Finkle is Einhorn

And lawyers are the new web developers.  Yeah, the world is nuts and most of the lawyers I know may have a serious Jim Carrey reaction even thinking about writing code. 

Most of the applications of blockchain use what are called "smart contracts." Smart contracts are simply "if/then" statements stored on the blockchain.  What SC's allow us to do as attorneys is take a traditional contract, sprinkle a little code behind it and now our traditional contract can talk the talk and walk the walk.  The smart contract lays out the terms of our agreement and performs the agreement based on these "if/then" statements.  Note- not all smart contracts are legal (offer, acceptance, consideration- I did pass the bar and I know a little bit) contracts.  

So, who gets the honor of "sprinkling a little code" on the legal contract to make it a smart contract?  Let's start at who can draft a legal contract.  

Texas law states that a person may not practice law in this state unless she is a member of the state bar (Sec. 81.102).  "Practice of law" means representing someone in court and "the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined" (Sec. 81.101). Excluded from "practice of law" is the design, publication or sale of materials, books, forms, or computer software. Seemingly unknown practice of law infractions here.

Is the code behind a legal smart contract part of the contract?  I argue yes, as the code allows the contract to do the thing it was put on the blockchain to do.  Many parties are involved in the actual practice of drafting a document, but in the end the lawyer is always left holding the bag.  Aka, they are responsible. How much will an attorney need to understand the code behind the contract to take responsibility for it? My thought is that a responsible attorney will understand a great deal of the code, if not write it herself. 

Some questions I have:

  • Ethically- How can you legally bind your client to a contract if you cannot fully comprehend how the contract works?  How can you understand how the contract works if you cannot read the code executing the contract?  This is an especially grave situation given the powers that code has.  
  • Practical business- Is it responsible for an attorney as a business to say "the developer wrote the code" and leave it at that? Sounds like a client PR nightmare.
  • Malpractice- What will malpractice coverage look like for this type of service?  Will insurers require technical proficiency by attorneys?
  • State Bar- Will the state bar will leave the drafting of legal smart contracts in the hands of non-licensed developers? 

There are some great programs being developed to ease the burden from natural language (a kind word for the way attorneys write, herewith, hereof, hereunder) to code. The good attorneys I know are thorough and obsessed with detail. As such, I expect they will require of themselves a thorough understanding of the code behind the contract.  This will inevitably include the ability to read and write a bit of code. Where the balance is, TBD. When will then be now?  Soon.

 

 

lacey shrum
Isn't it Ironic, Don't You Think?

Lets take a trip to October 2008, shall we? Personally, I am 10 months out of undergrad, 9 months into a job at a (still surviving) wealth management firm and turning 24 years old.  As a government major, I've spent the last 9 months looking at performance reports for clients wondering "not sure how these people make any money, but whatevs..." and thankful that my headhunter did not secure me a job at Lehman Brothers.  My baby skin is flawless and I've been 100% committed to my eye cream routine for almost 2 years now.

Outside of my bubble, the world is in the middle of the worst financial crisis since the Great Depression.  The current bear market would take the S & P 500 down 50% in a 17 month duration.  On October 3, 2008 the United States approves the bailout, more formally known as the Emergency Economic Stabilization Act of 2008a law authorizing the US to spend up to $700 billion to supply cash to banks and purchase distressed assets, especially mortgage-backed securities.

Why the spending spree?  There are lots of reasons, but if you've read or watched The Big Short, the short of it is that banks were lending wayyyyyy too much cash to highly unqualified borrowers who were defaulting on their mortgages and collateral (an asset you "put up" to someone who gives you a loan- if you default, they can take the asset as a form of payment) was highly over leveraged (same asset used multiple times for multiple different loans).  The system is designed to maintain some of this activity, but cannot maintain at the levels that were occurring.  

Also in October 2008?  Satoshi Nakamoto mic drops a white paper detailing the problem with today's payment system.  The problem- Because two people who want to transact do not trust each other, they employ a system/business/person between the two of them that will be the trust agent.  Think, a credit card company. This agent takes on the risk of either of the two parties faulting on their deliverable.  The agent gets a small fee and the two parties get trust.  If the product is not delivered, the buyer can complain to the agent.  If the cash is not delivered, the seller can do the same. Like any business, the agent has risk.  What if too many parties skip out on their bill?  How much can the agent bear to payout?  What if the agent is an irreplaceable party who is holding up the entire economy of the United States, if not the world? 

Satoshi says this need for trust has spread and created an inefficient (Given our October 2008 status above, "inefficient" is kind) market. He says you oughta know that with cryptographic proof, any two parties can transact with each other sans the trust agent.   Dun dun DUNNNNNNN... 2008, preventing another subprime mortgage crisis and my crow's feet. It was a good year after all, yeah, I really do think.

It's a Hard Block Life

Along with all the promises of blockchain changing life as we know it, there are still some roadblocks to full implementation.

  • Scalability.  The blockchain repeats information each time it writes a new block.  Every computer on the network has a copy of the blockchain.  This is a lot of repetitive information which slows, slows, slows down the network.  Some options to put the petal to the metal: executing computations off of the blockchain (see Truebit, fellow NTBA member), "sharding" (the name of this alone should give marketing people hope that there is room for them in blockchain), and DAG's, which convert a chain into a non-loopable "tangle."
  • Expense.  Walmart and IBM put an entire supply chain from seed to shelf on the blockchain.  Building, coordinating and implementing something of this size is incredibly expensive and time consuming. Most businesses do not have the capabilities to take on this type of project.  
  • New technology.  Blockchain is a new unexplored frontier and most systems are not fully developed or perfected.  For example, the development language Solidity, which is used to write smart contracts on the Ethereum blockchain was proposed in 2014, it is still in massive development, and a new version is released about every 2 weeks. In contrast, JavaScript, one of the most widely used and recognized language on the internet has been around since 1995.  
  • Privacy.  Blockchain provide "pseudonymity" or are "pseudo anonymous" meaning that transactions are linked to private keys, which are made up of letters and numbers.  So long as your private key stays private, you should remain anonymous.  However, web trackers and cookies make it incredibly easy to connect a person or business to their key. Remember what is on the chain is on forever, so once your key is identified, you can't keep anyone up out your biznass.
  • Education.  Most decision makers and company leaders are still not aware of blockchain or its capabilities in relation to their business.
  • FUD.  Fear, Uncertainty, Doubt.  I get this in every presentation I do about blockchain- someone wants to tell me this is all a fraud and we should go home. It goes without saying that I disagree. Simply, blockchain solves too many real world problems to be ignored and I don't see how it can be eliminated from existence at this point. 

Rollout!

lacey shrum