Category: Crypto Currency

The future of investment dispute settlement

The original article was published in Family Office Magazine and can be found here.

Entrepreneurs engaging in international investments face several issues when they are accused of a breach of contract. When the investment agreement does not provide solid provisions for dispute settlement, endless legal discussions and expensive court cases in unfamiliar jurisdictions can be the result. This article provides simple solutions for both investor and beneficiary to avoid such issues. 

The solution to avoid endless legal battles is to insert an arbitration clause in the investment agreement (out of court legislation). Arbitration has numerous advantages.

  1. Unlike in court, parties can select an arbitrator with an appropriate degree of practical experience. For example, a Court of Arbitration has a list of arbitrators who are experts in the field of digital commerce.
  2. Arbitration is faster than litigation in court, and a time limit can be placed on the length of the process.
  3. Arbitration is cheaper and more flexible, more commercial and less formal than court.
  4. Unlike court rulings, arbitration proceedings and arbitral awards are confidential.
  5. Unlike in court, there are very limited avenues for appeal of an arbitral award, which limits the duration of the dispute and any associated liability.
  6. Due to the provisions of the New York Convention 1958, arbitral awards are far easier to enforce in other nations than court judgments.

From an international perspective, there are several courts of arbitration that offer an effective way to solve investment disputes. Below are examples (in alphabetical order).

Astana International Financial Court (AIFC Court)

The AIFC Court in Kazakhstan provides a common law court system that operates to the highest international standards to resolve civil and commercial disputes in the Astana International Financial Centre.  It adjudicates exclusively all claims arising out of the AIFC and its operations and other claims in which all parties to the dispute agree in writing to the jurisdiction of the AIFC Court.  

The AIFC Court has its own court of final appeal, its own procedural rules, and a special fast track for small claims. Its Chief Justice and judges are among the most experienced and distinguished judges from the common law world with global reputations for independence, impartiality, integrity, unconditional application of the rule of law, and incorruptibility. The judges, procedures, practices and standards at the AIFC Court will be familiar to businesses currently operating in major financial centres around the world.

Website: http://aifc-court.kz

Dubai International Financial Courts (DIFC Courts)

The laws establishing the DIFC Courts were designed to ensure the highest international standards of legal procedure, thus ensuring that the DIFC Courts provide the certainty, flexibility and efficiency expected by the global institutions operating in, with and from Dubai and the UAE. The laws enacted provide for a court system capable of resolving all civil and commercial disputes, ranging from sophisticated, international financial transactions to debt collection and employment disputes.

The DIFC Courts deal exclusively with all cases and claims arising out of the DIFC and its operations and any other claims where all parties agree in writing to use the DIFC Courts. The DIFC Courts carry out their functions in an independent manner, in accordance with the provisions of the DIFC laws and regulations.

Website: https://www.difccourts.ae

Court of Arbitration of the European Chamber of Digital Commerce (ECDC Court)

As an activity of its parent organization, the Swiss Chamber of Commerce in The Netherlands, founded in 1933, the Court of Arbitration of the European Chamber of Digital Commerce plays a crucial role in today’s digital world. Issues specific to digital technology include fintech, blockchain, cybersecurity, digital currencies, and intellectual property. Fairness has always been a business tradition observed in Europe, making the region so prominent as an arbitration location. The Court of Arbitration is conveniently located at Schiphol International Airport in The Netherlands.

The Court of Arbitration applies the UNCITRAL Arbitration Rules of the United Nations Commission on International Trade Law which meet international legal standards. The rules are concise and easy to understand, comply with current national and international legal developments, and are published in several languages.

Unless parties do not agree otherwise, the Court will apply the neutral UNIDROIT Principles of International Commercial Contracts to judge the dispute.

Website: https://europeanchamberofdigitalcommerce.com

London Court of International Arbitration (LCIA)

The LCIA is one of the world’s leading international institutions for commercial dispute resolution. The LCIA provides efficient, flexible and impartial administration of arbitration and other ADR proceedings, regardless of location, and under any system of law. The international nature of the LCIA’s services is reflected in the fact that typically over 80% of parties in pending LCIA cases are not of English nationality. 

The LCIA has access to the most eminent and experienced arbitrators, mediators and experts from many jurisdictions with the widest range of expertise. The LCIA’s dispute resolution services are available to all contracting parties without any membership requirements.

Website: https://www.lcia.org

Arbitration Institute of the Stockholm Chamber of Commerce (SCC)

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC) has developed into one of the world’s leading forums for dispute resolution. The SCC was established in 1917 and is part of, but independent from, the Stockholm Chamber of Commerce. The SCC consists of a Board and a Secretariat and provides efficient dispute resolution services for both Swedish and international parties. The SCC was recognized in the 1970’s by the United States and the Soviet Union as a neutral centre for the resolution of East West trade disputes. Also China recognized the SCC as a forum for resolving international disputes around the same time. The SCC has since expanded its services in international commercial arbitration and emerged as one of the most important and frequently used arbitration institutions worldwide.

Website: https://sccinstitute.com

Conclusions

When you want to avoid legal dramas unfolding from an investment agreement, check the websites above and copy the relevant clause into the agreement before signing. Another option is to persuade the counterparty to allow an already arisen case be settled by one of these arbitration institutions.

About the author: Bob Juchter van Bergen Quast, LLM, FSS, is the President of the Court of Arbitration of the European Chamber of Digital Commerce. Juchter van Bergen Quast has the right of audience before the AIFC. He is Chief Executive Officer of the Swiss Chamber of Commerce in The Netherlands and the European Chamber of Digital Commerce.

Intermediary commission percentages to raise money from investors

Investment banks and other consultants can plan and execute a fundraising campaign for startups and for companies in the growth phase. A reputable fundraising intermediary will likely speed up the process, reduce the legal risks, and negotiate a better deals. Most brokers will take a monthly retainer plus 5 percent to 15 percent of the investment. That may sound like a lot, but taking into account the time and risks, hiring an experienced expert can be very budget friendly.

Commission guidelines

The Lehman formula is a compensation formula developed by Lehman Brothers to determine the commission on investment banking or other business brokering services. Lehman Brothers developed the Lehman Formula, also known as the Lehman Scale Formula, in the 1970’s while raising capital for corporate clients.

The original structure of the Lehman Formula is a 5-4-3-2-1 ladder, as follows (accumulated amounts):

  • 5% of the first million EURO involved in the transaction
  • 4% of the second million
  • 3% of the third million
  • 2% of the fourth million
  • 1% of everything thereafter (above EUR 4 million)
Today, financial experts often seek some multiple of the original Lehman Formula, such as the double Lehman Formula (or the triple Lehman) (accumulated amounts):
  • 10% of the first million EURO involved in the transaction
  • 8% of the second million
  • 6% of the third million
  • 4% of the fourth million
  • 2% of everything thereafter (above EUR 4 million)
A more common variant used by mid-market M&A specialists and business brokers is the Double Percentage Lehman (“Modern Lehman”). Under this variation both the percentages and the scale are adjusted, instead of the percentages only. In addition, the percentage is held constant at 3% above EUR 8 million (accumulated amounts):
  • 10% of the first  million EURO
  • 9% of the second  million
  • 8% of the third million
  • 7% of the fourth million
  • 6% of the fifth million
  • 5% of the sixth million
  • 4% of the seventh million
  • 3% of everything thereafter (above EUR 7 million)

Source: Investopedia

How Chambers of Commerce Help Family Offices and Wealth Management Firms

A Chamber of Commerce has traditionally furthered the interests of businesses in a particular geography or market sector by way of representation, business services, and networking opportunities. Multilateral Chambers of Commerce can link the business environments of two or more countries, such as the Swiss Chamber of Commerce in The Netherlands.

International Chambers of Commerce, such as the European Chamber of Digital Commerce, aim to boost companies’ reputation and growth in a particular business sector, such as Digital Technology. Some are governmental, nonprofit, or private organisations.

This article, written by Bob Juchter van Bergen Quast and published in Family Office Magazine, presents some unique benefits that Chambers of Commerce can offer businesses in an independent, impartial manner.

Read the full article here

Official opening of the Court of Astana International Financial Center (AIFC)

The official opening of the Court of Astana International Financial Center (AIFC) took place in Nur-Sultan.

Since January last year, civil and commercial disputes have been solved in accordance with the best international practices and based on English law. The first case went to AIFC court in February of this year. The case is now available in English and Russian on the court’s website.
At similar international financial courts in Dubai and Qatar the first case was considered much later. “We managed to get enforced through the enforcement agency in Kazakhstan almost immediately and that is a world first, that never happens in new international financial centers,” said Registrar of AIFC Court, Christopher Campbell-Holt.
The AIFC Court is an independent institution as part of the financial center. According to the registrar of the Court, Christopher Campbell-Holt, the presence of this court in Kazakhstan is an additional factor to investment attractiveness of not only the country, but also the Eurasian region. “No one can tell our judges what to do. That is written in the constitution in law, court and arbitration center. It is very important to protect international investors, to show them, to give them perception,” Campbell-Holt also said. He added that the AIFC court and the International Arbitration Center will enable investors from all over the world to invest safely in Kazakhstan.

The legal status of Security Tokens in Europe

This article describes the legal context in seven European countries regarding Security Token Offerings. Such offerings differ from Initial Coin Offerings (ICO’s). An Initial Coin Offering (ICO) is the cryptocurrency equivalent to an Initial Public Offering (offering shares of a private cooperation to the public for the first time, also known as IPO) in the traditional investment world.

ICO’s act as fundraisers. For example, a company looking to create a new coin or a new software application launches an ICO. Next, interested investors buy in to the offering, either with fiat currency or with preexisting digital tokens like Bitcoin. In exchange for their support, investors receive a new cryptocurrency token specific to the ICO. Investors hope that the cryptocurrency will perform very well into the future, providing them with a high return on investment. ICO’s are often used by startups to bypass the regulated capital-raising process required by venture capitalists or banks.

Unlike an ICO, a security token is essentially an investment contract into an underlying asset. It has all the attributes of a security in that it is a fungible, negotiable financial instrument that represents actual monetary value. STO’s are backed by real assets.

It is interesting to see to what extent Security Token Offerings are considered traditional security offerings from an international financial law perspective. In the table below, the most important legal characteristics are listed.

Country Are Security Token Offerings considered a security, from a legal perspective? Prospectus needed?
Austria Determined on a case-by-case basis. Yes, unless: > 100.000 EUR < 150 investors < 2 Mio. EUR total investment qualified investors
Belgium Yes, when they look and feel like securities. Yes, unless: > 100.000 EUR < 150 investors < 500.000 EUR total offer profesional investors
France Yes. Yes, unless: > 100.000 EUR < 150 investors < 8 Mio. EUR total investment qualified investors
Germany Yes, when they look and feel like securities. Yes, unless: > 100.000 < 150 investors < 8 Mio. EUR total investment qualified investors
Switzerland Yes, called “asset token”. No.
The Netherlands Yes, when they look and feel like securities. Yes, unless: > 100.000 EUR < 150 investors < 5 Mio. EUR total investment qualified investors
United Kingdom Yes, see Guidance on Cryptoassets Consultation Paper. Yes, unless: > 100.000 EUR < 150 investors < 8 Mio. GBP total investment qualified investors

Advice

Crypto law differs among jurisdictions and certain countries offer more possibilities than others. Running into legal issues is easy, considering the complexity of the new digital laws. Properly drafted and constructed documents are an important part of running a business or structuring any offering. It is crucial to have a specialised lawyer provide you with the documents you need for business operations and fundraising. This includes documents like a private placement memorandum, token sales documents, and miscellaneous offering documents. These documents help not only to ensure compliance with any cryptocurrency law and governmental regulations, but to instill credibility in your project and confidence that your investors are protected.

Important link

The danger of using the term ‘crypto currency’

It is not hard to see why the authorities are concerned about digital currencies. Any bearer instrument tradable for monetary value has the potential to be used for criminal purposes. Late 2013, after the North American Bitcoin conference earlier in the year, a task force involving the Miami Police Department and the US Secret Service began investigating bitcoin trading activity in the area. At random, investigators chose a young Bitcoin trader, called Michel Espinoza, to focus their investigations on.

Espinoza was contacted by Detective Ricardo Arias and Special Agent Gregory Ponzi via bitcoin marketplace LocalBitcoins. They arranged several meetings between January and February 2014. It was during those meetings that undercover agents indicated that they intended to purchase stolen credit card numbers with the digital currency. In February 2014, Espinoza was arrested in a Miami Beach motel for agreeing to sell USD 30,000 worth of Bitcoin and subsequently selling USD 1,500 of Bitcoin to an undercover police officer he had met on an exchange site called LocalBitcoins.com (source: interview with mr Michel Espinoza).

Prosecutors charged that Espinoza violated Florida law on money laundering and for operating an unlicensed money transmitting business. Espinoza defense lawyer however, argued that these laws do not apply to Espinoza’s case, because he was not selling currency, but so-called crypto currency.

The status of crypto currencies

United States federal regulators are divided about whether or not crypto currencies should be seen as money/currency or not. The Internal Revenue Service regards it as property, but the Treasury Department’s Financial Crimes Enforcement Network regulates it as a currency.

In 2016, a Miami court judge ruled that Bitcoin is not the same as what normally is seen as money. The extremely interesting ruling states that:

Bitcoin may have some attributes in common with what we commonly refer to as money but differ in many important aspects. White Bitcoin can be exchanged for items of value, they are not commonly used means of exchange. They are accepted by some but not by all merchants and service providers. The value of Bitcoin fluctuates widely and has been estimated to be eighteen times greater than the U.S. Dollar. Their high volatility is explained by scholars as due to their insufficient liquidity, the uncertainty of future value, and the lack of a stabilization mechanism. With such volatility they have a limited ability to act as a store of value, another important attribute of money.

Bitcoin is a decentralized system. It does not have any central authority, such as a central reserve, and Bitcoins are not backed by anything. They are certainly not tangible wealth and cannot be hidden under a mattress like cash and gold bars.

Conclusions

I fully agree with the Miami judgement. So-called crypto currencies and money are totally different, although the original idea was to replace money (Nakamoto, 2008):

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.

I consider the term crypto currency misleading. The electronically coded information, commonly called ‘crypto currency’ is not a coin nor a currency. They can be exchanged for money, goods and services (because there is a demand for ‘crypto currency‘), and therefore should be called crypto medium of exchange (abbreviation: ‘CME’) or something similar.This does not mean that these “bits of data” play a less important role in the economy than money. In my opinion, the CME will revolutionize the economy in a positive way. However, it has extremely high bubble-potential if it is not characterized in a correct manner; meaning a manner that does not mislead the public.

The documents in the Espinoza-case can be downloaded here and here.

Further reading

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