'Crypto Regulation Is Crucial' - Utah Web3 Attorney Jonathan Bench on Sanitizing the Crypto Industry

Jonathan Bench is an international business and Web3 attorney at Harris Bricken Sliwoski.  Jonathan heads the firm’s corporate practice group and manages its Salt Lake City office, where he helps entrepreneurs, companies, and venture capital and private equity funds with international and domestic business transactions.

I recently sat down with Jonathan to discuss his foray into Web3 and the state of the crypto industry. Enjoy the conversation!

Mr. Bench, can you tell us briefly about yourself?

I'm an international business attorney with about ten years of experience, mostly centered around cross-border transactions between the US and China, as well as foreign companies establishing their presence in the US for the first time. I have an MBA, so I come to business deals with a little different perspective than a traditional lawyer and even a traditional transactional lawyer.

What's your route to Web3 and blockchain technology?

About 18 months ago, I did not have a single Web3 or blockchain client, But I started getting inquiries from existing clients who wanted to understand the space. They wanted to know how smart contracts, NFTs, coins, tokens, and DAOs could impact their existing business operations across borders.

I have always been intrigued by technology, so I decided to take the opportunity to jump in the rabbit hole. Several months later, I started to feel like I had a good understanding of how my existing international business practice would fit nicely into the international blockchain space. Today, about 50% of my practice consists of blockchain-related projects.

What, in your view, is the toughest legal challenge in Web3?

I think there are two things primarily at play. First, the US has not taken a prominent role in the regulatory conversation. Second, the fundamentally international nature of blockchain technology and participation means that we need a coordinated worldwide effort from lawmakers, policymakers, entrenched interests in the financial industry, and blockchain developers and founders.

We need both of these, but I am not optimistic that either of these can occur in the current environment. At a micro level, I believe that individual groups of founders struggle to understand where to put their project and who can and should be involved from a structuring standpoint. Most of my conversations with blockchain entrepreneurs center around these issues.

Since a court in the UK legalized the service of proceedings by NFT in 2022, the interest in crypto-related litigation has grown rapidly. Do you see a new field emerging?

I do. I think that litigation-focused attorneys who are tracking this space and who have entrepreneurial or creative minds will enjoy learning more about the blockchain field.

Many lawyers are creative problem solvers, and any technology that can be utilized to help solve problems will always be embraced, especially this type of technology where so many interactions occur on-chain and can be tracked. But they will need good software solutions to help make efficient use of their time. We will certainly see law firms emerge as specialists in on-chain-related litigation.

Should the crypto industry be heavily regulated?

No, I do not feel that will benefit the industry. However, I agree with many in the crypto industry that some crypto regulation is crucial.

Many legitimate blockchain-related ventures are struggling to attract capital, find competent lawyers and accountants, and find regulators who are willing to listen.

Embracing some regulation is the only way forward for blockchain companies, especially those in the financial space, to be able to make peace with legacy operators like banks. Disruption is good as long as the threat of disruption does not make enemies of the existing players and regulators.

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How would you describe the current state of the industry?

We currently have a lot of misunderstanding, finger-pointing, and hand-wringing all around. From my perspective, many of the problem areas are not new or surprising. But we do have some key issues that regulators have not addressed, especially around decentralization in the securities context.

One of the key elements of the Howey test (for US securities law purposes) centers around who is putting work into the venture.

If everyone puts in capital and effort, rather than a traditional investment scenario where investors provide funds in a more passive relationship, then that crucial factor of the Howey test has not been satisfied. But we do not know how big that circle of collaborators can be or how much involvement is required so that the venture benefits from the work of many rather than the work of a few.

When the SEC or a court provides guidance on this issue, then we will have significantly more clarity around how big a founding team can be, which fundamentally gives us a definition of how decentralized a project needs to be in order to be truly decentralized. In the meantime, countries implementing fair and balanced VASP (virtual asset service provider) regulatory regimes to focus on for-profit ventures will win out. These include especially the Cayman Islands, Bahamas, and Hong Kong.

How can one explore the intersection of Web3 and law?

This intersection is currently being played out on the world stage every day in the news. The hardest part for legal practitioners is to decide which corner of this major intersection to focus on. For a corporate generalist like me, I have to keep up with many aspects.

For my colleagues who focus more on finance law, banking law, intellectual property law, patent or trademark law, or international structuring, they can dive deeper into the nuances of their particular areas. However, even the legal experts can and do disagree, and we need more industry participants and other experts to weigh in to continue the discussion. I have not come across anyone who has all of the answers.

What do you understand by “not financial advice” (NFA) as used in crypto?

I have an acquaintance who was kicked off of LinkedIn for providing financial advice on a crypto company he had invested in. He was not an investment advisor and did not hold any licenses. In the US, we have strict regulations about promotions, especially in the investment context.

Just because a project is not accepting Fiat currency or is issuing a creatively named token rather than securities does not mean that there is a free-for-all on what can be done.

Using NFA as a disclaimer in a social media post or as part of a white paper, especially if that information is disseminated to the public, will not provide much of a shield.

Any parting words?

Even though we are many years past Satoshi's white paper and bitcoin’s emergence, we are still very early in a nascent tech industry that spans the globe. We are in the midst of a fundamental restructuring of technology, assets, finances, and governance models.

This is not a small undertaking, and we should not expect that any of these will be easily restructured, reformed, or solved. The silver lining for me is found when I encounter promising founder teams with good ideas who continue to build. Sometimes that means they can do so with their heads up, and other times, like during this crypto winter, they prefer to keep their heads down while the storm rages on.

Clarifying an lowering the barriers to entry, including from the regulatory end, will benefit everyone