Background : Use of blockchain has legal implications. In lieu of listing fees, reputable exchanges conduct compliance reviews. In particular, Bittrex requires legal memorandum or opinion from its U.S.-qualified external legal counsel certifying that (a) the Candidate Token is not a security under applicable securities laws, and (b) that trades of the Candidate Tokens would not be subject to regulation under any applicable laws applicable to trading of commodities.
Compliance reviews are simplified for coins that already exist, such as Nyzo. Thus, the cost to conduct them is much lower than that of coin or equity-based offerings that have no working product (i.e. “whitepaper-only” projects).
As of 2020-07-27, transfers to the cycle account (0000000000000000-0000000000000000-0000000000000000-0000000000000002) have been completed (Building a sustainable blockchain, part 2. https://nyzo.co/buildingNyzo2.). As per the recent memorandum, the existing dev fund has been entirely transferred to this account, leaving the development team with less than 0.6% of the total supply in existence and less than 0.6% of the verifiers remaining in the mesh. Both the development team as well as the primary exchange which trades Nyzo, qTrade, are primarily U.S. entities. Few changes to this structure are anticipated, and several transactions have been successfully completed from the cycle fund. Thus, this would be an ideal time to obtain a legal opinion of the network in order to clarify Nyzo’s compliance with U.S. security law.
Proposal : Conduct legal review of the Nyzo blockchain and produce an official legal memorandum under compliant with U.S. security laws. Payment would be due only upon successfully completing the requested work. Turnaround time is expected to be 30 business days.
Estimated cost of proposal: $5000
VWMA 30-day: 0.00001521 BTC/nyzo
Average 30-day Coindesk price: $9354/1 BTC
Slippage (estimated based on 1 BTC liquidity on QTrade):
1 BTC walls at 1745 and 1212 sats
(1745-1212)/((1745+1212)/2) = 0.36
Cost = (USD Cost)/(BTC per USD) / (BTC per nyzo) * (1 + slippage)
5000/9354 / 0.00001521 * 1.36 = 47797 nyzo ~ 48000 nyzo
The conversion rate for Nyzo will be set by the 30-day average trading price (VWMA) of Nyzo on QTrade.io prior to the approval date of this proposal (pending details on how this figure is calculated). The conversion price for bitcoin to U.S. dollars will be set by the 30-day average Coindesk Bitcoin Index (https://www.coindesk.com/price/bitcoin). The slippage is estimated by taking the current difference of the 1 BTC volume walls on QTrade, divided by the midpoint price.
To avoid manipulation, the slippage factor will not be adjusted prior to the signing of this transaction.
Optionally, an Agent can be appointed for receipt of the funds (Please see NCFP 2.1 for additional details on how this would work).
Competitive analysis: The cost for obtaining legal memoranda such as the proposed is approximately $5000 ( In discussion of Ubiq/GEOcoin (personal communication, July 2019)). Obtaining legal representation from firms not specializing in cryptocurrency poses further knowledge gaps, and costs are estimated to be in the tens of thousands, if not more. Thus, a cost in line with previous cryptocurrency-focused legal memoranda was judged to be reasonable.
Due to exogenous market factors, if costs substantially exceed the amount unlocked by the cycle fund, the proposal will be rejected and the Agent instructed to return funds to the cycle-controlled account, 0000…0002. A subproposal will be generated based on the new costs and a new cycle transaction will be generated.
Chief risks and mitigation:
Security status – Various factors could cause Nyzo to pass the Howey Test and therefore be deemed a security. In this case, the legal memorandum produced would still be useful to clarify Nyzo’s security status, but not directly useful for exchange inquiries.
In this case, efforts would be redirected to focus on producing a SEC letter of no action. As cryptocurrency is an emerging field, obtaining clarity from a regulatory agency such as the SEC would be beneficial to avoid unknowingly conducting activities that fall within the jurisdiction of these agencies. An example is included (Re: TurnKey Jet, Inc. https://www.sec.gov/divisions/corpfin/cf-noaction/2019/turnkey-jet-040219-2a1-incoming.pdf).
Deliverability - Much less likely, Firm A could fail to delivery timely legal memoranda. Arbitration would likely be pursued in this case.
Payment would be due only upon successfully completing the requested work. Turnaround time is expected to be 60 business days.
Due to confidentiality requirements, legal memoranda, nor details of the firm, cannot be published or disseminated publicly, except to cryptocurrency exchanges that require them. @nyzo will certify that the memorandum is objective and has been completed to the satisfaction of the team.
Exchange risk – The price of bitcoin or nyzo could fluctuate significantly during the time that the review is being conducted
Half of the funds would be converted to USD upon receipt and held offline. The date and terms of said conversion will be announced. Over-the-counter trading will be considered to minimize market disruption. The slippage term above is expected to encompass expected price volatility associated with fulfilling the terms of said conversion. The author of the proposal is willing and able to assume remaining market risk to satisfy deliverability of the project.
Excess funds – Any funds in excess of that which is required to satisfactorily deliver this proposal (due to, example, favorable exchange rates) will be deposited back into the cycle-controlled account, 0000…0002.
Certification – This document is signed and dated on 7/27/2020 6:57 PM. The SHA-256 hash of a copy of this proposal will be generated, appended to the file name, and digitally signed in the Nyzo blockchain at a later date, and this transaction will be announced.