Jorge Pesok

Managing Associate

Washington, D.C.


Read full biography at www.orrick.com

Jorge Pesok is a managing associate in the Washington, D.C., office. He focuses his practice on blockchain and cryptocurrency, government investigations, white collar litigation and compliance matters.

Jorge represents technology companies, digital asset trading platforms, financial institutions, and individuals, in a variety of regulatory, compliance, and litigation matters. His work includes representing clients in enforcement and litigation matters before the Securities and Exchange Commission, Department of Justice, Commodity Futures Trading Commission, and Chicago Mercantile Exchange. He also counsels blockchain and cryptocurrency clients on the application of federal and state securities, commodities, and money transmission laws.

A decorated veteran, Jorge served on active duty in support of Operation Iraqi Freedom, where he was awarded the Army Commendation Medal. Jorge retired from the United States Army National Guard in 2014 after serving eight years in the Judge Advocate General Corps and obtaining the rank of sergeant.

While in law school, Jorge was a member of the Maynard Pirsig Moot Court. Jorge also served as a judicial extern for the Honorable Richard H. Kyle of the United States District Court in St. Paul, Minnesota.

Posts by: Jorge Pesok

The CFTC Wants to Know More About Ether: Your Feedback Could Impact Ether Futures in 2019

The CFTC is giving the public an opportunity to influence its views as they relate to Ethereum, Ether or similar virtual currencies or projects. On December 11, 2018 the CFTC issued a Request for Information (the “Request”) seeking public comments and feedback on Ether and the Ethereum Network. The Request “seeks to understand similarities and distinctions between certain virtual currencies, including Ether and Bitcoin, as well as Ether-specific opportunities, challenges, and risks,” according to the accompanying press release. The version of the Request published in the Federal Register states that public comments must be received on or before February 15, 2019.

Individuals and companies involved in cryptocurrency, especially if related to the Ethereum Network or one of its competitors, should consider making a submission. The Request states that information submitted to the CFTC will be used to inform the work of LabCFTC (a dedicated function of the CFTC, launched in 2017 to “make the CFTC more accessible to FinTech innovators”) and the CFTC as a whole. It appears likely that the CFTC will look to the submissions to assist it in deciding whether to green light Ether futures trading.

Of the over 2,000 cryptocurrencies currently in circulation, Bitcoin is the only one for which futures contracts are traded on regulated futures exchanges. Bitcoin is also the only cryptocurrency which the SEC (through Chairman Clayton’s testimony) has officially deemed not to be a security. As mentioned in the Request, a certain SEC senior official recently stated that offers and sales of Ether, in its current state, are not securities transactions. The SEC’s stance on Ether likely paves the way for the CFTC to green-light regulated futures exchanges, such as the Chicago Board Options Exchange, to offer Ether futures contracts.

The cryptocurrency market is desperate for some good news to pull it out of the prolonged bear market it is currently enduring. Many had hoped that the announcement of Ether futures would be the catalyst that turns the market around. It appears possible that the CFTC will authorize Ether futures contracts, once it has reviewed the comments submitted in response to this request.

 

A Foreboding View of Smart Contract Developer Liability

At least one regulator is attempting to provide clarity regarding the potential liability of actors who violate regulations through the use of smart contracts. On October 16, 2018, Commissioner Brian Quintenz of the Commodity Futures Trading Commission explained his belief that smart contract developers can be held liable for aiding and abetting CFTC rule violations if it was reasonably foreseeable that U.S. persons could use the smart contract they created to violate CFTC rules. As is typical, the Commissioner spoke for himself, but it seems likely that his views reflect the CFTC’s philosophy.

Generally speaking, smart contracts are code-based, self-executing contractual provisions. Smart contracts that run on top of blockchain protocols, like ethereum, are increasingly being used by companies in a wide variety of businesses to create autonomous, decentralized applications. Some of these applications might run afoul of CFTC regulations if they have the features of swaps, futures, options, or other CFTC-regulated products, but do not comply with the requisite regulatory requirements. The fact that smart contracts support disintermediated markets – a departure from the market intermediaries traditionally regulated by the CFTC – does not change the CFTC’s ability to extend its jurisdiction to them.

To identify where culpability might lie, Commissioner Quintenz identified the parties he believes to be essential to the functioning of the smart contract blockchain ecosystem:

  1. the core developers of the blockchain software;
  2. the miners that validate transactions;
  3. the developers of the smart contract applications; and
  4. users of the smart contracts.

Commissioner Quintenz dismissed the core developers and the miners as potential culpable parties by reasoning that while they both play a vital role in creating or administering the underlying blockchain code, they have no involvement in creating the smart contracts. He also limited the possibility of the CFTC pursuing enforcement against individual users because, as he explained, although individual users are culpable for their actions, “going after users may be an unsatisfactory, ineffective course of action.”

That leaves the developers of the smart contract code. Commissioner Quintenz stated that to ascertain the culpability of the smart contract code developers, the “appropriate question is whether these code developers could reasonably foresee, at the time they created the code, that it would likely be used by U.S. persons in a manner violative of CFTC regulations.” If such a use is foreseeable, Commissioner Quintenz believes that a “strong case could be made that the code developers aided and abetted violations of CFTC regulations.”

Commissioner Quintenz expressed that he would much rather pursue engagement than enforcement, “but in the absence of engagement, enforcement is the only option.” The Commissioner recommended that smart contract developers engage and collaborate with the CFTC prior to releasing their code to ensure that the code will be compliant with the law. The Commissioner even suggested that the CFTC is willing to rethink its existing regulations or provide regulatory relief, depending on the technology in question.

As blockchain and smart contract technology matures, we expect decentralized and disintermediated applications to come to market in increasing volumes. In his speech, Commissioner Quintenz provided valuable insight into how one regulator is thinking about applying existing laws to this new market. His remarks will be especially valuable if they influence other regulators, such as the Securities and Exchange Commission or the Financial Crimes Enforcement Network, to take a similar approach.

EtherDelta Founder’s Settlement with the SEC Has Grim Implications for Smart Contract Developers

The SEC recently brought its first enforcement action against the creator of a “decentralized” digital token trading platform for operating as an unregistered national securities exchange, and in doing so joined the CFTC in putting a scare into smart contract developers.

On November 8, 2018, the SEC issued a cease-and-desist order settling charges against Zachary Coburn, the creator of EtherDelta, an online “decentralized” digital token trading platform running on the Ethereum blockchain. The SEC charged only Coburn, the individual who founded EtherDelta, but no longer owns or operates it. Note that the SEC press release states that the investigation is continuing.

The SEC announced its action against Coburn a month after a CFTC Commissioner stated in a speech that smart contract developers could be found liable for aiding and abetting violations of commodity futures laws. Both agencies appear to be putting smart contract developers on notice that by releasing code into the ether, they are inviting potential liability for any rule violations, even if they sever their connections with the code.

The SEC found that EtherDelta provides a marketplace to bring together buyers and sellers of digital tokens. The platform facilitates these transactions through the use of a smart contract, which carries out the responsibilities generally assumed by an intermediary: the smart contract validates the order messages, confirms the terms and conditions of orders, executes paired orders, and directs the distributed ledger to be updated to reflect a trade. The SEC employed a “functional test” to determine whether EtherDelta constitutes an exchange and to hold Coburn, who “wrote and deployed the EtherDelta smart contract . . . and exercised complete and sole control over EtherDelta’s operations,” responsible. As the Chief of the SEC’s cyber unit stated in the press release, “[w]hether it’s decentralized or not, whether it’s on smart contract or not, what matters is it’s an exchange.”

EtherDelta is one example of the innovation that smart contracts can facilitate. Innovation, however, is not a substitute for compliance. Indeed, in the SEC’s press release announcing the settlement, Co-Director of Enforcement Steven Peiken acknowledged that blockchain technology is ushering in significant innovation to the securities markets, but cautioned that “to protect investors, this innovation necessitates the SEC’s thoughtful oversight of digital markets and enforcement of existing laws.”

Significantly, the SEC found that certain transactions on the platform involved digital tokens that constitute securities, but declined to identify those tokens. Senior SEC officials have previously stated that ether is not a security, but this case shows that the SEC has not reached the same determination for all tokens issued on the Ethereum blockchain.

Just Another Week on the Blockchain: September 10-16, 2018

The week of September 10th was particularly eventful and saw a rather large number of recent enforcement and regulatory developments, even by blockchain industry standards. Notable actions seen during the week included the first time the SEC has issued an order against a cryptocurrency company for operating an unregistered broker-dealer; the first time the SEC has brought and settled charges against a hedge fund manager that invested in cryptocurrencies while operating as an unregistered investment company; the first FINRA disciplinary action involving cryptocurrencies; a decision by EDNY Judge Raymond Dearie in U.S. v. Zaslavskiy; the authorization of two stablecoin cryptocurrencies pegged to the U.S. dollar by the New York Department of Financial Services; and the release of Chairman Clayton’s “Statement Regarding SEC Staff Views.”

For summaries of these developments, read our recent Blockchain and Cryptocurrency Alert.

The NFA Enhances Reporting Requirements for Intermediaries Who Trade Virtual Currencies and Related Derivatives

Derivatives regulations have continued to evolve with the explosive growth of cryptocurrency in recent years. One of these earlier shifts transpired in late 2017, when the National Futures Association (NFA) issued three Notices to Members expanding the notifications and reporting requirements for financial derivatives intermediaries, citing similar actions by the CFTC along with the volatility in the underlying virtual currency markets.

Learn more about these regulatory shifts as well as perspectives on other derivatives regulators in this overview by our Securities Litigation team.