Authority Node Legal Q&A

Secured
#1
Below is a copy of the post on Discord explaining this thread:

Greeting Fellow Operators,

In our application and forum Q&A, our team (NX Capital) pledged to share our legal resources with the community. As part of that pledge, we set aside 25% of our factoids to put into an internal community fund to solve outstanding legal questions that impact NX Capital and all our partners. Even though we won’t see any revenue until promotion into the Authority Set (June/July), we feel it would be prudent to tackle potential legal issues right away because they will become huge roadblocks for all operators.

For example, some of the guides brought up concerns regarding how the community grant fund will be structured. Different solutions mean different legal liabilities and tax ramifications (And SEC!). This impacts all grant applicants and can stifle innovative ideas. Similarly, how will a centralized escrow account for a decentralized community grant be created? It is both a technical and legal question. At a more individual level, an operator might have questions about employer/employee or contractor relationship and tax implication.

In light of these concerns, NX Capital have created a thread on Factomize forum to field questions from all operators. Our attorney, Shuang (@SL), will be there to comb through the posts and put them on a master spreadsheet. Once answered, both question and legal guidance will be posted at a master repository for the benefit for Factom community.

This setup achieves couple things:
  • Fielding questions at one place allows our legal counsel to see common concerns and answer them at once instead of in piecemeal.
  • Simple legal concerns can be answered by Shuang while more complicated concerns will be directed to outside counsel.
  • It is a slow process to reach out to different attorneys who specialize in different subject matters. Fielding questions and translate them to legalese allow a timely response from different parties.
  • Difficult legal questions can impact multiple jurisdictions (not just different states but different countries) which means dealing with different security and tax agencies. This process allows Shuang to be the point of contact to coordinate effectively with outside counsels.
  • NX Capital will pick up the cost out of that 25% internal community fund. However, depending on the number and type of questions, the legal expense can easily blow through the 25% we committed. Creating a master list allows the community to see the cost in a transparent manner. It also helps with projection of future legal cost. This allows us to make more effective decision when it is time to utilizing community fund instead of NX Capital fund in the future.
  • Creating central repository for legal guidance will reduce operating cost for all current operators and future operators.
Let me know if you have any further suggestions. And our team looks forward to work alongside all of you!

Regards,
Xavier
 
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Secured
#6
Thanks Xavier and NX Capital, this is excellent.

A question I have is if there are any legal concerns with being a third-party seller of Entry Credits. Say an Authority Node helps a new client get started using the Factom protocol, but this client does not want to deal with Factoids and wants a subscription model for purchasing Entry Credits. The Authority Node then allocates some portion of its earned Factoids each month to burn and create Entry Credits for the client in exchange for USD. Is there any way this could cause the operator to be classified as a Money Transmitter or run afoul of any of the regulations regarding Money Service Businesses?
 
Secured
#7
I cannot speak for the whole Canada but from what I understood after 1 hour talk with "L'autorité des marchés financier" here in Quebec is that coins like BTC/LTC are clearly commodities. Factoids will be mined the same way so they should be considered the same. If you sell directly or convert the FCTs to ECs both should be considered commodities just like Gold or Baseball cards. As such you can buy and sell them to an other party within the law.

The problem they have is if you are the third party facilitating the transaction and charging a fee for that. If you were to have a Factoid ATM and taking a cut. If you built a derived product around Factoids. Basically anytime you act as the middleman in a transaction or that you are selling a derivative contract using Factoids.

I would assume their views on these issues reflect the views of the others similar authorities here in Canada but as I said I didn't contact all of them. Luap should know better for the other parts of Canada.
 
Secured
#8
Sorry, I should have clarified: we're operating out of the US. However, I suspect what you said for Canada rings true for the US as well. I have an appointment next week with a local attorney and the following week with a tax accountant but don't know how experienced they are with cryptocurrencies. I also have a contact for someone who specializes in this field and may contact them as well. I'll post anything definitive I find out. Thanks for the response!
 
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Secured
#10
Also if any operators want to look into insurance then PM me as I am working across a few brokers looking at bespoke products - Cryber coverage as they are calling it - as well as traditional coverage for general corporate activity etc
 
Secured
#11
Hi All,

Canonical Ledgers has a question for anyone with experience with Money Service Business and Money Service Transmitter requirements in the US. Now that our servers are set up and ready for future onboarding we're working to finish up the Discord tipbot project we started prior to our campaign. The tipbot is designed to allow instant Factoid tips between members on the Factom Discord channel by creating user accounts in a central database and only handling deposits and withdrawals on chain. Because it's a centralized service it's only designed to be used for small amounts but we've become concerned that we will be liable to being classified as a Money Transmitter Service via the definition here: https://goo.gl/1pR3Ji. See: (ff) Money Services Business (5) Money Transmitter.

We'd like to run the software but are wary of taking on a risk like this, especially as ANO public profiles will likely grow in the coming months and years.

Any advice, suggestions or thoughts on this topic is appreciated, thanks!
 
Secured
#12
Hi All,

Canonical Ledgers has a question for anyone with experience with Money Service Business and Money Service Transmitter requirements in the US. Now that our servers are set up and ready for future onboarding we're working to finish up the Discord tipbot project we started prior to our campaign. The tipbot is designed to allow instant Factoid tips between members on the Factom Discord channel by creating user accounts in a central database and only handling deposits and withdrawals on chain. Because it's a centralized service it's only designed to be used for small amounts but we've become concerned that we will be liable to being classified as a Money Transmitter Service via the definition here: https://goo.gl/1pR3Ji. See: (ff) Money Services Business (5) Money Transmitter.

We'd like to run the software but are wary of taking on a risk like this, especially as ANO public profiles will likely grow in the coming months and years.

Any advice, suggestions or thoughts on this topic is appreciated, thanks!
Hi SamuelVanderwaal, few states have published their positions that cryptocurrencies are not considered money and a person engaging in the transmission of solely cryptocurrencies is not required to obtain a money transmitter license from the state. Here are some of the links:
Texas - http://www.dob.texas.gov/public/uploads/files/consumer-information/sm1037.pdf
Kansas - http://www.osbckansas.org/mt/guidance/mt2014_01_virtual_currency.pdf

However, not all states are clear on their positions. Here is a regulatory tracker created by coin center: https://coincenter.org/page/state-digital-currency-regulatory-tracker. (I did not go through all the information on the website and cannot guarantee it's accurate.)

At the federal level, here are the resources from the Financial Crimes Enforcement Network ("FinCEN") that may provide some guidance for you:
(i) https://www.fincen.gov/resources/st...ion-fincens-regulations-persons-administering
(ii) https://www.fincen.gov/sites/default/files/shared/FIN-2014-R002.pdf
 
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Secured
#13
Hi All,

.... The tipbot is designed to allow instant Factoid tips between members on the Factom Discord channel by creating user accounts in a central database and only handling deposits and withdrawals on chain. Because it's a centralized service it's only designed to be used for small amounts but we've become concerned that we will be liable to being classified as a Money Transmitter Service via the definition here: https://goo.gl/1pR3Ji. See: (ff) Money Services Business (5) Money Transmitter.
Samuel,

I am curious as to what you decided and uncovered regarding Tipbots? I ask because I started building a tipbot (for a different coin) and was going to start a staking pool. I started looking at MSBs and came across this thread.

Reading the definition (of an Administrator) on a link a person posted here it says...

"This guidance refers to the participants in generic virtual currency arrangements, using the terms "user," "exchanger," and "administrator." A user is a person that obtains virtual currency to purchase goods or services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds, or other virtual currency. An administrator is a person engaged as a business in issuing (putting into circulation) a virtual currency, and who has the authority to redeem (to withdraw from circulation) such virtual currency.Users of Virtual Currency"

Based on the above a tipbot is not putting into circulation (on an existing coin) aka Exchanger. A tipbot is not an "Administrator" since it is not exchanging that crypto for another crypto. Not sure those how the term "funds" applies here.

I would appreciate your feedback.
 
Secured
#14
In our reading of the relevant laws it was murky enough that, without paying a lawyer to give us proper guidance, we did not feel it was worth the risk given our standing in the community and investments into our company. Obviously, this is not legal advice. I am not a lawyer and cannot tell you what you should or shouldn't do in this regard. I can only say that we chose not to host the tipbot without getting a lawyer to tell us it was ok, and at the time we did not feel it was worth the cost of hiring an attorney to review the situation for us.