Blockchain technology allows professionals around the world to work together on intangible token projects, create new cryptocurrencies, build decentralized crypto-exchanges, or DEX, and participate in other aspects of the Web3.
However, business deals in the crypto space often lack formal arrangements such as written contracts or corporate formation, so parties can expose themselves to unnecessary costs, liability risks, and even negative tax consequences.
Although having a written contract is not a panacea, a recent case illustrates how one party’s litigation position can be strengthened.
in Bendtrand Global Services SA v. SilversIn a case in the Northern District of Illinois, DX’s founder and developer entered into a software handshake agreement. After the founder paid all the agreed-upon costs, the developer failed to deliver the software.
Due to the lack of written agreements, the founder may face lengthy and expensive litigation and the inability to recover the costs of delays or lost opportunities.
Potential liability exposures
Traditional legal protections that limit liability exposure are useful when dealing with business venture partners in the cryptocurrency industry.
such as Bentrand The absence of a written agreement can deny plaintiffs traditional cost-saving measures such as limitations of liability, choice of law and venue, representations and warranties, liquidated damages and other clauses.
Absent these terms, the parties’ interest must be interpreted by evaluating emails and messaging platforms, all of which increase the cost of litigation.
In addition, parties may find themselves in inconvenient forums or have to prove their financial costs before they can recover any damages.
Too many written agreements do not have the input of lawyers and the parties compile sample agreements or specific clauses through a search engine. Such creations are often full of internal inconsistencies and complicated terms, and the enforceability of these agreements is in question.
Considering that authentication and verification is a significant benefit of blockchain, the absence of a written agreement seems counterintuitive.
In addition, in the absence of corporate formation and following corporate practice, the partners of a business partnership may be treated as a general partnership, which, under most statutory laws, exposes them to joint and several liability for debts, fines or judgments. .
Decentralized autonomous organizations, a new organizational structure gaining popularity in the blockchain community, can have thousands of members on different continents, with no central leadership and no common corporate form that protects against accountability.
A member of this type of partnership may face personal liability for the wrongdoings of the DAO and other members (perhaps located abroad) for acts of which they had no knowledge.
Tax implications
Generally, when participants sell or trade virtual currencies, since 2014 the IRS has classified virtual currencies as assets, so they pay any capital gains tax on the transaction.
Blockchain companies excited by the bull market were forced to give up up to 40% of their short-term profits. Firms without tax allocation agreements will find it difficult to accurately calculate the tax owed. Additionally, due to the transparent nature of blockchain, the IRS can track transactions and perform accounting.
The regulations surrounding cryptocurrencies lag behind evolving market practices, and in the absence of a written agreement on how taxes will be handled, the wallet owner will be responsible for the wallet’s taxes.
Unfortunately, for many blockchain projects there is no written agreement on how the wallet is linked to the founder and how taxes are allocated.
For an industry that thrives on smart contracts and values transparency, the absence of written agreements is surprising. Many in the blockchain industry are willing to trust anonymous strangers based on social media or messaging apps.
Until laws are developed that take into account the market realities of the crypto space, the lack of proper agreements will cost founders, investors and trading parties time, money and stress.
This article does not necessarily reflect the views of the Office of National Affairs, Bloomberg Law and Bloomberg Tax, publisher or its owners.
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John Cahill He is an associate in Wilson Elser’s White Plains, NY office. His practice focuses on cryptocurrencies, NFTs, and analyzes current trends to ensure clients are in compliance with any current and evolving legal restrictions.
Jana S. Farmer He is a partner in the White Plains office of Wilson Elser. She chairs the firm’s intellectual property law practice, and is a member of the firm’s intellectual property and technology practice. She focuses on intellectual property development, acquisition, licensing and exploitation, including transactions involving NFTs.
