While cryptocurrency valuations may currently be in a state of decline, confidence around them being a long term prospect seems to be increasing, and more people in the legal industry are taking note. At Obelisk Support, we follow this topic with interest as our clients get on the cryptocurrency bandwagon. Investment fund lawyer John Lore advises clients on cryptocurrencies and investments as part of his firm Capital Fund Law Group, and places great importance on educating the wider industry on the implications of cryptocurrency investment and blockchain technology. He took some time out of his increasingly busy schedule to talk to us about the pressing issues and how lawyers are responding.
What is your legal background and when did you decide to create the Capital Fund Law Group?
I was previously with Akin Gump Strauss Hauer & Feld LLP, where I worked within their Hedge Fund and Private Equity practice. Then in 2010, I launched my own firm to focus exclusively on the investment fund sector and fund manager sector. To begin with, most of our clients were in the United States and it took a few years to build a global clientele.
How did you first come to deal with cryptocurrencies? What were the perceptions and predictions for cryptocurrencies like then, and how have they evolved since?
We started getting some phone calls about cryptocurrencies around 2013. We initially held off were as we were not ready to jump into the asset class, until 2016 when we launched our first cryptocurrency fund. [In those years] we invested effort in getting up to speed on regulations and drafting some of the initial disclaimer language. It was still very new so getting comfortable from a regulatory perspective took some time.
In terms of wider perceptions – honestly, I didn’t see much perception at all from legal community early on, pretty much nothing was being discussed back then. The shift in perceptions really happened recently in Spring 2017 where there was an explosion of activity in cryptocurrency due to the initial major surge in price of Bitcoin.
Though perceptions around cryptocurrency are rapidly developing, it’s still a very new area. How do you support and advise clients who are interested yet inexperienced?
We emphasise a solid experience in finance. From 2017, we ended up receiving hundreds of phone calls for individuals who wanted to start cryptocurrency funds. We were, and still are, very cautious about representing fund managers who have experience with crypto but don’t have a background in the finance sector. We are more on the side of tempering the swift formation of a cryptocurrency fund and teaching emerging managers how to create the proper structure for a fund. There are a lot of people we deal with who are very savvy with technology and are startup focused, so we advise them to partner with career finance people to create a more diversified skillset.
How have lawyers had to adjust their learning and experience to cryptocurrencies and the blockchain?
There is much more interest now than there was, particularly in recognising that certain aspect of blockchain technology will change the future of a number of industries. From the investment side, we’ve seen a lot more education pop up – there have been some real strong early adopters on the legal side, who lack seasoned experience in finance, that we end up turning away but that gap is now getting filled by others. In general, there is a continued interest in the legal community in understanding the space and serving it. We, of course, only see a small slice of that in an investment context but in terms of the blockchain universe e.g. smart contracts, coin offering token offerings etc. there is a tremendous need for legal counsel in all those fields.
I think we’re right in the middle of the shift between curiosity and significant resources being allocated to the area. Again, I can only speak for the investment side, but a lot will depend on emergence of institutional investment and Wall Street involvement. I anticipate along with the rest of the cryptocurrency community that there will be major transitioning to a greater focus from these areas.
What impact are cryptocurrencies and the blockchain having now?
There’s a plethora of opportunities that can be matched with technology across many sectors. On the investment side, there are major opportunities for cryptocurrencies as a stored value, and blockchain is already proving to be a very important aspect of the industry going forward.
What is the future looking like? Will certain cryptocurrencies eventually become a way of life for more institutions and individuals?
There’s the question of whether it will gain mainstream acceptance and whether it will continue as a convenient form of exchanging value. My predictions are: as an investment vehicle, yes, for next few years it will be limited to hedge funds and to high net worth individuals as a major trading instrument, but that can change as soon as there are infrastructures capability such as custodies and exchanges allowing for exchange traded funds (ETFs) – that would provide a strong avenue for retail level participation. Regarding seeing cryptocurrency as a replacement currency for our existing financial structures, that is more of an academic question at this point.
What developments and changes are still required to ensure longevity?
That’s exactly the question I like to be asked! Right now, the question most people have in mind is when and how the problem of custody will be resolved. That is both a technological problem and a legal problem. Getting the technology to a place where we can satisfy the custody requirement to meet financial crime compliance and to satisfy the regulatory requirement of jurisdictions around the world is a big challenge. So, we announced in July at our Cryptocurrency Custody workshop the creation of a working group, an international council of self-regulatory organisations that is going to be co-sponsored by the Stanford Law Blockchain Law and Policy Journal, and the Global Center for Investment Fund Studies, our non-profit research centre. There is a real need for international dialogue. There has been a tremendous interest in London, Dubai, and parts of Asia, and everyone is looking to the U.S. on this – a lot of dialogue is needed on how regulations will be shaped how self-regulatory bodies will play a part in that.
John Lore is a member of the New York State Bar and the Utah State Bar. Mr. Lore represents fund managers and securities issuers throughout the United States. Capital Fund Law Group advises emerging and established hedge fund managers, with a strong focus on cryptocurrency funds on all aspects of fund formation and ongoing operations.