Lawtoshi (@lawtoshi) • Hey
Gregory Schneider IRL. ⌐🆇-🆇
Deputy General Counsel at Hedera.com.
Founder of #crypto law treatise theCod3x.com
Views my own. Not your lawyer.
Publications
- After finally working on sending out Christmas cards this year, I now understand why people do it.
What an amazing way to reflect on all the wonderful people in your life and have an excuse to connect with them, however briefly.
Time is short. Send some love. ❤️🔥
- New here, so want to share the project I've been working on for the better part of the past year: a crypto law treatise with objective information about the state of crypto law. Unlike a lot of the persuasive/policy-type pieces, this resource is meant to be purely informational — a legal treatise (i.e., an encyclopedia) about what the law is.
With the recent transition to GitBook, anyone can now propose edits to the treatise through a pull request on GitHub. Quality is ensured through actual lawyers making and approving edits. Check it out!
https://www.thecod3x.com
- gm gm. any other crypto lawyers around these parts?
- i think forums like Twitter are still important to public discussion. until web3-native apps like Lens gain traction, they still remain an important way for us to engage with audiences outside of our "bubble"
BUT it's pretty clear now that crypto/web3 apps cannot rely on services like Twitter to stay engaged with their users. we need to promote the use of native platforms for official presences and announcements at a minimum (especially given poor security model of Twitter accounts vs private keys)
- Trying out all the different apps available for viewing/posting through lens but still keeping my login/profile/network is just amazing. 🤌❤️🔥
- not your keys not your post 🔑
- The issue with Elon's latest actions is that this time, they are not partisan thoughtcrimes that primarily deeply offend wokes or anything like that. Rather, they go against cross-tribal principles that are a commonly understood bedrock of fair competition. This crosses a new line.
- **on the infinite commons**
why are lawyers here in web3 / crypto? what is our purpose? do we matter, in this murky twilight of legal uncertainty? are we just vampires feasting in the night? This is my framework for how to think about being a lawyer in this field.
This is not perfect, but I think it is a mostly useful way to think about what is the purpose of law and the people who practice it in this developing space. It expands on this comment I made in response to a16z asking for a definition of web3.
https://twitter.com/lawtoshi/status/1585851762275123202
The long history of the law has been, largely, the story of protecting property rights because owning things is hugely important. A lot of those "things" originate from something the law calls a commons -- the forest, the sea, etc.
We have an elaborate system of rules that governs how physical commons can be used. Without regulation, more and more people show up to use the commons, and the more depleted it becomes.
This concept is known as the Tragedy of the Commons, and has been explored in the law and environmental sciences for a long time. Functionally, the law's purpose is to keep most people *out* of a physical commons.
https://en.wikipedia.org/wiki/Tragedy_of_the_commons
The digital world has, in many ways, flipped this relationship on its head. Instead of a commons becoming *less* valuable the more people show up and use it (and thus drain it’s resources), on the internet common spaces become *more* valuable when there are more people.
Technologists use words like "critical mass" of users and "network effects" to describe hitting the point where a common resource (say, Twitter, mobile phones, internet users, online games) becomes highly valuable.
The law's purpose here, then, should be exactly the opposite as well: to encourage people to be *in* a digital commons — by making it easy and making the rules clear.
Lawyers had a role in shaping a lot of what we take for granted in the digital world by inventing a legal framework called Open Source that permits a high degree of composability. You write some code; I can take your code and build on it, without your permission.
This legal invention has turned a lot of code into an infinite commons. No matter how many people come to that well, there's always water. And the more people who use it, the more valuable it is to people generally!
It also means coders only have to solve the coding problem once, because the solution is freely available. This means new efforts get focused on new problems, instead of duplicating the effort of solving the old problem for a new person.
But the problem with the digital commons created under existing legal frameworks is that they are owned by huge centralized companies because the costs of starting a new commons type enterprise are massive.
You have to pay for lots of developers and administrative staff and executives and marketing to lure people into the new commons you've created so you can hit that critical mass and start getting network effects fast enough to pay for all this upfront investment.
As a result, these companies have a massive incentive to make sure you *stay* in the one commons they have created and that it is extremely difficult to move what you've created/done in one system to another.
All your tweets? They're staying on Twitter. Same for Facebook and Instagram posts. Play an MMORPG video game, spend countless hours developing a character and get items in game? They're staying in that game.
Whatever platform you pick, what you create is stuck on that platform.
So the value being created when a web2 digital commons hits a critical mass accrues only to a company and its owners who control basically everything, not the mass of people using that commons to create the valuable things (that in turn bring more people!).
Enter crypto and web3. Crypto enables genuine digital scarcity and proof of ownership of a digital "object" — whether that be fungible coins or non-fungible tokens. These objects can move seamlessly between different digital worlds.
This Nakamoto Freedom NFT is the same whether I look at it on Open Sea, Looks Rare, x2y2, or Blur, or any other marketplace or NFT viewing platform, even if it hasn’t been built yet.
https://opensea.io/assets/ethereum/0x33fd426905f149f8376e227d0c9d3340aad17af1/4
By being built on an open and decentralized chain, this NFT is truly transportable to ANY other application that is also built on the chain. (And sometimes, across chains!)
You really can't overstate the significance of this innovation: we now have a method of creating a multiplicity of infinite commons (apps, and the networks they are built on) that still respect individual property rights (tokens).
You really can't overstate the significance of this innovation: we now have a method of creating a multiplicity of infinite commons (apps, and the networks they are built on) that still respect individual property rights (tokens).
This means that the competition among enterprises/platforms/smart contracts will become more intense because users/creators will have genuine portability — if the system doesn’t work, people can just leave—and take their content with them.
Put another way, this is an Open Metaverse, and it is a goal worth bringing hundreds of millions of people into as soon as possible.
https://twitter.com/punk6529/status/1448399827054833668
It is the most pro-consumer, pro-competition, pro-free-market innovation in generations.
The legal work now is to allow the creation of a multiplicity of these digital commons that can be used by all with value accruing permissionlessly to those who contribute value by showing up and creating.
What do I mean by creating?
- In DeFi, it means providing liquidity
- in social media, it’s creating posts
- in gaming, it’s building communities and playing
- in NFT marketplaces, it’s making the NFTs that people want to buy and sell
But how do you allow these commons to spring up and incentivize people to work on them in a decentralized way?
The answer so far in crypto has been that you create a fungible token unique to the commons you’re building and you allow people who show up early to get big amounts that become more valuable as the critical mass of users arrive and network effects take hold.
As @lex_node puts it (commenting on the recent LBRY ruling), this is an incredibly powerful incentive alignment system: https://twitter.com/lex_node/status/1589830901982076928
The legal problem is how do you fit this brand new incentive alignment tool into existing legal structures?
The tokens almost never represent equity (ownership) of a company; come with no voting rights for leadership of a company; have no right to dividends or profits; and once released, are not controlled by any central entity.
They exist in the same way that gold bars or sneakers do, ownable by anyone and may be used or traded however the owner sees fit.
But! They are also a means of value exchange on the platform they come from — ie, you must pay the platform’s native tokens to access it — and their value is of course related to the demand for that ecosystem and the supply of tokens.
Yet to evaluate how to classify these assets, and test if they are securities, we use the Howey test from 1946:
An investment contract (and thus a security) is ...
(1) an investment of money
(2) in a common enterprise
(3) with a reasonable expectation of profits
(4) based solely on the entrepreneurial or managerial efforts of others
So, on the one hand, you have something that doesn’t look like a security in any traditional sense; but on the other you have something with value that rises and falls based on the efforts of many disparate contributors in a platform’s ecosystem.
This is where crypto's chicken and egg problem of existing law comes in: if digital assets can only be ‘not securities’ if they are as decentralized as bitcoin or maybe Ethereum (the SEC’s implicit position) what is the legal path to get to sufficient decentralization as founders make these new and incredibly valuable commons? ("Come in and talk to us" is not a good enough answer, sorry. Write it down.)
Or, if the SEC is wrong in its theory (as basically the entire industry contends), what is the necessary legal framework that enables powerful incentive alignment, permissionless participation, and creation of new assets, all outside the context of owning a company?
Going back to the beginning, and stating it another way: how can we make the law incentivize people to be *in* a digital commons?
This is our work as crypto lawyers in the US. We must build frameworks that attempt to answer these presently intractable questions.
It’s not enough to just show up and bash regulators and say “NO CLARITY !!” We have to propose SOLUTIONS. What could that look like? Here are a few ideas…
- build analytical frameworks for courts that help them understand why most tokens don’t fit within Howey, and what characteristics separate them, and why they are different functionally and practically in the context of web3 (@NYcryptolawyer and his team have already taken a giant leap in doing this work right here, just released yesterday! https://twitter.com/NYcryptolawyer/status/1590850797583372288)
- draft legislation that makes sense from a crypto native perspective and provides for robust disclosure, defining characteristics of tokens, how those characteristics funnel oversight to different regulators, and a clear way for founders to pick a regulatory path
- draft legislation based on different enterprises using crypto. Starting an L1/L2 is different than an exchange which is different than an NFT art/music project which is different than building a stablecoin
- propose amendments to existing regulations and law that will enforce financial privacy for crypto users (where's the proposal to amend the Right to Financial Privacy Act, the Bank Secrecy Act, and the PATRIOT Act???)
- establish a framework that balances the competing desire for on-chain privacy with the need to combat financial crime and fraud
- meet with, educate, and lobby lawmakers to enact the frameworks we devise above that will provide clarity to the industry and the market. (You may not be a lobbyist, but I'll bet you have local members of congress you can call!)
There are many lawyers working on doing the above, but we need more horsepower in this solutions engine!
We the crypto-native lawyers need to do all of this and more because it is abundantly clear that existing lawmakers and regulators are struggling to come up with solutions. And in the absence of solutions, their only option is more regulation by enforcement.
These are some of the solutions that will enable the brilliant technical minds in crypto to build the infinite commons ... a digital place where incentives between system builders and users are aligned, the public gets incredible, freely available tools and everyone has complete portability of their assets.
If you followed this all the way to the end, we might have something in common. Give me a follow, retweet the beginning of this thread, or check out the digital commons I'm working on building for other lawyers at https://www.thecod3x.com.
And finally, a special thank you to a good fren for sharing his humor always and specific thoughts and suggestions on this thread in advance, @exlawyernft
*(originally posted to Twitter on November 11, 2022)*
- gm