Blockchain, cryptocurrency and ICO have become familiar words in all areas of business. Even though Bitcoin does not have legal status in Ukraine, lawyers are trying to investigate the market and international standards to help businesses "not to burn out" using crypto. We had the chance to learn more about the legal nuances of working with cryptocurrencies during an interview with Dmytro Honcharenko, the founding partner of the Ukrainian law firm Brightman, which specializes in cryptocurrency investments.
Dmytro, what did you do before you switched to the blockchain technology?
I've been working with blockchain and crypto for the last 2.5 years. From the beginning, I was the head of the legal department in fintech company that developed the blockchain-based secure payment solution and was engaged in crypto trading. Then my partner Krystyna and I opened Brightman Law Firm. Before that, I headed several departments in the "big law", where I accompanied M&A deals in IT and telecom, assisted in obtaining licenses, corporate structuring, taxes, venture capital investments in startups, IP rights, and more. Before that, I received a grant from the Soros Foundation and travelled to the LL.M program in International Business Law. In addition to jurisprudence and crypto, I was still involved in human rights and political education of youth, was a member of the European Youth Parliament.
What prompted you to focus on the crypto market?
Hype, a healthy interest in crypto anarchists, and, of course, the need of lawyers who understand the technology and business processes, and were able to help clients avoid various types of legal "collisions" if one could call in this way a lack of regulations in most countries.
Tell about your own challenges on the way of understanding blockchain tech.
The main challenge was that, when analysing most of the business models of blockchain projects, we understood that they didn't need blockchain at all. The word "blockchain" is now used when you want to attract the attention of a potential client (even in the election campaigns of some candidates). As a lawyer, I am responsible for the legal rather than the technical part of the project, so the main difficulty was to adapt and simplify the business model without burdening yourself with extra technical tasks without which the business can efficiently function.
Have some funny situations happened?
The irony is that, although we work with crypto business and digital tokens, we have never invested in either the cryptocurrencies or the ICO / STO. Someone may think that we do not believe in what we do, but in reality, the reason is purely legal. We advise many businesses, including alternative investment funds and STO. Therefore, we want to remain unbiased, neutral and avoid a possible conflict of interest. The only benefit we pursue is to make the client's project function within the framework of the law and fully transparent. Therefore, avoiding our own investments, we do not seek our financial interest.
Tell about Brightman: who are you, why ...?
Brightman is quite famous among the crypto and fintech enthusiasts law firm. We opened in 2017 as a legal fintech-boutique, which was engaged in
- crypto trading and ICO support,
- taxation of crypto operations,
- protection of personal data (GDPR, CAN-SPAM Act, etc.),
- compliance with AML / KYC procedures,
- opening bank accounts,
- creation of payment systems and investment funds.
Within a year and a half of Brightman existence, we were nominated for the prestigious award "Law Firm — Opening of the Year 2018", accompanied about 17 crypto projects with an average investment check of $10-15 million, and opened a network of associated offices in Kyiv, Odesa (Ukraine), New York (USA) and Zigu (Switzerland). Now, during the so-called "crypto winter", we have expanded the portfolio of practices and industries. Now, besides those mentioned above, we are also engaged in the venture and start-up investment, asset management, STO, tokenisation of real estate, case management of IT companies, telecom and retail industry, agrarians, asset management and real estate companies.
Impressive... How do you deal with that? Do you have a workforce or you just coordinate this network?
Now we have some bizarre for the Ukrainian market model for organising the team. We have closed the physical office of the company in Kyiv and coordinate the work of lawyers online. The team is divided into two groups: 1) outsource lawyers and 2) freelance lawyers. The first ones always work "on the client" and are located in the office of a specific customer. In this case, the client receives day-to-day legal support. At the same time, he has not only one in-house lawyer but a coordinated team of our law firm with a specific representative on the site, who leads to complete communication.
The second group—so-called "freelance lawyers"—work in the usual mode for law firms, serving several clients at once. However, at the same time, we coordinate only the volume of work performed and its quality, and the time and place of the "performance" lawyers choose themselves. This gives them the freedom to choose the location, time and style of work. The first ones work for the salary, and the second ones receive the percentage of "customer value". For us, it is a possibility not only to save on logistics and office costs (about $4,500 per month) but also to have access to a large pool of lawyers (up to 60 people) with unique expertise without territorial and other restrictions, despite the company's boutique format.
Tell us about your cases (if not under NDA)? Mentioning names is not necessary, but we are happy to talk about the products you work on if you want.
Something interesting and not under NDA. For example, we were the first in Ukraine to develop a unique legal scheme that allows the real sector of the economy to accept payment for goods and services in cryptocurrencies. If you've ever paid with crypto, for example, in Kyiv restaurants or on Besarabsky Market, then most likely, it was possible thanks to our legal solution for the Paytomat project.
There was another "couple" of ICOs and STOs in the sphere of retail, crypto keys, payment systems, robotics, civil aviation, acquiring online advertising, building pools of cloud mining.
Speaking about unusual, we did tokenisation of forests and agricultural lands, accompanied the crypto fundraising for the construction of factories and mining of minerals. We are now beginning to assist the tokenisation procedure of the business centre in Kyiv and lead several STOs in the USA and Switzerland.
Interesting experience. Let's dwell on the tokenisation of real estate. Perhaps this is what will bring an average Ukrainian to a dream of housing?
For the last few years, tokenisation has become the new popular method of participation in real estate operations. It gives property rights to real estate through virtual assets — tokens that exist on the blockchain. The technology of issuing such tokens is identical to the release of cryptocurrency but is adapted to comply with the laws on securities issue. Tokenisation makes acquisition, ownership and sale of real estate accessible and accelerates these processes. Tokenisation also increases the liquidity and transparency of such transactions, and the blockchain increases their security and simplifies the management of such assets.
Tokenisation of an apartment or business centre, for example, allows the developer to expand the global investment pool and reduces the cost of entering the investment for any interested person. The code underlying the token enables you to split it into blocks, and therefore sell such a fractional token at lower prices. In this way small investors get an opportunity to take part in the purchase of a part of the real estate — apartments in a housing complex, parts of office premises in the business centre, etc., investing only a small share for the project.
At the same time, many of these holders of tokens further transfer the property to management and receive their share of profit. You can lease it and get a passive income, or trade tokens on the stock exchange, as they become a kind of stable coins, because of their binding to the cost of a square meter of real estate. From a legal point of view, a token that is tied to real estate can be expressed in such forms as:
- ownership of real estate through possession of a stake in a specially created legal entity (SPV). This SPV can own a whole pool of apartments or office space. The token holder will then receive income from the real estate pool, for example, in the form of a dividend payment from the net profit of the received SPV;
- share ownership in real estate funds or share ownership of the immovable property itself;
- investment and/or loan for projects in development. The developer of a particular real estate object can tokenise future construction projects to attract investment funds from small and medium-sized investors without being tied to the country of construction;
- tokenised REITs (Real Estate Investment Trust, a company that owns and in most cases, manages profitable real estate). REIT owns many types of commercial real estate: from office and residential buildings to warehouses, hospitals, shopping malls, hotels and woodlands. Some REITs are involved in real estate financing).
What is market demand now?
Fortunately, we are not limited to the geography of Ukraine, so we can not only observe new trends in the market but also drive them. We were among the first in Ukraine and the CIS, who offered clients the opportunity to conduct STO and tokenisation of assets even during the ICO hype.
The demand for such services is increasing every year. Customers are also looking for lawyers who can adequately structure a business, while not pulling a client into "sanction" offshore, where it's almost unreal to open bank accounts. Such services have become popular after the introduction of BEPS (Base erosion and profit shifting — tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations — editorial note) and the updated blacklist of offshores, and it will gain further momentum in 2019. Also, work on the protection of personal data and compliance with AML/KYC procedures is very important today.
Do you explain clients everything from scratch, or are they already tech-savvy?
This is a work for both sides. To some clients, we explain how the market works and what needs to be done, while others explain to us what the essence of technology is and how we can help. There are no template decisions from the legal or business point of view, so every time we learn something new with the client. Of course, we already have ready-made solutions that we sell to customers who want to create a business from scratch, but it is difficult to call them templates. There is always a model adaptation for a particular project, its owners, the geography of activities, etc.
What would you wish to prospective clients?
Ignore your emotions: alternative investing, digital and new technologies are pretty shaky, or, they say, volatile. So keep a warm heart and a fresh mind. Do not rely on fast results — no matter how progressive your idea is, quality legal cannot be quick. But I promise: the result will be worth your expectations.
WTFBit Media writes about blockchain and emerging technologies in a simple way, with humour. We also work with diverse clients helping them effectively deliver the message to their audience.