Articles Posted in Risk Evaluation and Management

By David Ma and Robert Braun

The Securities and Exchange Commission (SEC) could be on target to make 2018 the year of cryptocurrency regulation—or at least the start of it.

In January, Jay Clayton, chair of the Securities and Exchange Commission, and J. Christopher Giancarlo, chair of the Commodity Futures Trading Commission, published an op-ed in which they declared distributed ledger technology (DLT) in need of regulation. They wrote:

“History … has proved that transparency, investor protection and market integrity are critical to ensuring that innovation continues. But today we are seeing substantial DLT-related market activity that shows little or no regard to our proven regulatory approach. This concerns us.”

There’s a fair bit to be concerned about. That month, the global cryptocurrency market, which is highly volatile, surpassed a market value of $700 billion. And the SEC is late to the game. It was only last year that its Enforcement Division created a cyber unit.

Playing catch-up, the SEC followed up this interest with subpoenas in March to more than 80 cryptocurrency companies, including a $100 million fund started by TechCrunch’s founder Michael Arrington, in an effort to gather information on how these cryptofunds operate.

There is growing concern of fraud in the market. Some startups are using cryptocurrency to raise funds, and regulators fear that some Initial Coin Offerings (ICOs) are launched for companies that don’t even exist. Some investors eager for quick profits are likely not investigating the associated risks.

It’s unclear whether securities laws apply to digital coins. The SEC has indicated the regulations do apply, but has not formally laid out how issuers and traders should comply. The SEC has repeatedly said that the vast majority of ICOs should be registered with the agency, in part because the coins trade on secondary markets like other securities that the SEC regulates. Continue reading

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FinCEN, the Financial Crimes Enforcement Network, has indicated that cryptocurrencies will not get an enforcement “pass.”

By David Ma and Robert Braun

The Treasury Department has outlined its efforts to police electronic currencies in a letter to Sen. Ron Wyden after the lawmaker asked what the department was doing to ensure that Bitcoin and other cryptocurrencies are not being used by criminals to evade banking regulations.

Wyden, D-OR, is the ranking member of the Senate Finance Committee. He communicated his concern to the Treasury Department that cryptocurrencies could, among other uses, allow foreign governments to circumvent U.S. economic sanctions.

In its February 13, 2018 letter to Wyden, which surfaced in March, the Treasury Department reiterated its stance that cryptocurrency companies and trading organizations must comply with laws designed to combat money laundering and the financing of terrorism. To comply, these companies and organizations must investigate customers and report suspicious transactions to authorities.

While the letter does not go into further detail about what this would mean for established cryptocurrencies or Initial Coin Offerings (ICOs), some observers fear that this could mean that ICOs would be required to perform the same “Know Your Customer” (KYC) due diligence that banks do when customers open bank accounts. It also implies that cryptocurrency companies and organizations may have some obligation to monitor transactions made with their cryptocurrency.

But given the anonymous nature of cryptocurrencies, it would be difficult, from a practical perspective, for an ICO to perform the same “know your customer” diligence that a bank does. Continue reading

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Welcome to the third article in our series of blogs about blockchain technology and its impact on business practices, corporate governance and cybersecurity.

 

 

In Robert Braun’s article, Blockchain: The good, the bad, and how to tell the difference published by FinTech Weekly, he explores two issues about blockchain that trouble many in the business community: “How secure is blockchain, really?” and “Is it too good for criminals”? He also explains the connection between blockchain and climate change, and offers up some guidelines for adopting blockchain (or investing in its technology). He writes:

“Blockchain has been touted as a disruptive technology that can be used to benefit virtually any transaction, ranging from money transmission to supply chain management, to restaurant reservations.  With its promise of highly secure, private and instantaneous transactions, blockchain would seem to enhance any transfer or transaction. But while blockchain technology has caught the imagination of the public, it is based on an extension of existing technologies, not on something truly new.  It is disruptive, but not in the sense that the creation of mortgage-backed securities or the Internet was disruptive.  Those changes created entirely new opportunities and markets; blockchain is a technique that allows for new ways of doing the same thing.  At the same time, cryptocurrencies – by far, the most popular of blockchain applications – has shown the shortcomings in the technology or, at least, in how it has been adopted.”

To read the full article, see Blockchain: The good, the bad, and how to tell the difference

To read the first article in this series, see So, What is This Blockchain Thing?
To read the second article in this series, see The Four Horsemen of Cryptocurrencies: Volatility, criminal activity, security issues and human error

 

Robert E. Braun is the co-chair of the Cybersecurity and Privacy Law Group at Jeffer Mangels Butler & Mitchell LLP. Bob helps clients to develop and implement privacy and information security policies, negotiate agreements for technologies and data management services, and comply with legal and regulatory requirements. He helps clients to develop and implement data breach response plans, and he and his team respond quickly to clients’ needs when a data breach occurs. Contact Bob at RBraun@jmbm.com or +1 310.785.5331.

JMBM’s Cybersecurity and Privacy Group counsels clients in a wide variety of industries, including accounting firms, law firms, business management firms and family offices, in matters ranging from development of cybersecurity strategies, creation of data security and privacy policies, responding to data breaches and regulatory inquiries and investigations, and crisis management. The Cybersecurity and Privacy Group uses a focused intake methodology that permits clients to get a reliable sense of their cybersecurity readiness and to determine optimal, client-specific approaches to cybersecurity.

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Welcome to the second article in our series of blogs about blockchain technology and its impact on business practices, corporate governance and cybersecurity.

 

 

In Robert Braun’s article, Cryptocurrencies – Does the Next Big Thing have Staying Power?, published by FinTech Weekly, he describes four challenges that arise in the use of cryptocurrencies, and potentially in other blockchain applications: volatility, criminal activity, security issues, and human error.  He writes:

“Cryptocurrencies – not just bitcoin, but any of the hundreds of different currencies that have been created using blockchain technology – have caught the imagination of the public.  There are, seemingly, daily articles that predict either the demise of all traditional currencies in favor of cryptocurrencies, and just as many articles predicting the demise of cryptocurrencies.  While cryptocurrencies are just one of the many uses of blockchain technology, the challenges cryptocurrencies face may reflect hurdles for other uses of bitcoin. With that in mind, four challenges arise in the use of cryptocurrencies, and potentially in other blockchain applications.”

To read the full article, see Cryptocurrencies – Does the Next Big Thing have Staying Power?

To read the first blog in this series on blockchain technology, see So, What is This Blockchain Thing?

 

Robert E. Braun is the co-chair of the Cybersecurity and Privacy Law Group at Jeffer Mangels Butler & Mitchell LLP. Bob helps clients to develop and implement privacy and information security policies, negotiate agreements for technologies and data management services, and comply with legal and regulatory requirements. He helps clients to develop and implement data breach response plans, and he and his team respond quickly to clients’ needs when a data breach occurs. Contact Bob at RBraun@jmbm.com or +1 310.785.5331.

JMBM’s Cybersecurity and Privacy Group counsels clients in a wide variety of industries, including accounting firms, law firms, business management firms and family offices, in matters ranging from development of cybersecurity strategies, creation of data security and privacy policies, responding to data breaches and regulatory inquiries and investigations, and crisis management. The Cybersecurity and Privacy Group uses a focused intake methodology that permits clients to get a reliable sense of their cybersecurity readiness and to determine optimal, client-specific approaches to cybersecurity.

This article was originally published by Hotel Business Review and is reprinted with permission from www.hotelexecutive.com.

Almost as soon as there were data breaches, hotels became a prime target of hackers, and the hospitality industry has consistently been one of the most commonly targeted businesses. Since 2010, hotel properties ranging from major multinational corporations to single location hotels have been impacted.

The recent report that Hyatt Hotels was a victim for the second time in as many years has raised more concerns about the industry’s ability to address cybersecurity. While consumers are so used to receiving breach notices that “breach fatigue” has set in, the second successful attack on Hyatt is sure to raise the eyebrows of regulators, plaintiffs’ lawyers, and guests. The data breach will affect the loyalty, trust and consumer perception of all Hyatt Hotels guests. So how can hotels prove to guests that they are safe and trustworthy?

“While the company claims that it has implemented additional security measures to strengthen the security of its systems, no explanation was given as to why these additional measures were not implemented after the first attack,” said Robert Cattanach of Dorsey & Whitney. “Estimates of actual harm have yet to be provided, which is typically the weak spot of any attempted class action, but the liability exposure seems problematic regardless.”

Hyatt is in no way alone. On November 2, 2017, the BBC reported that Hilton was fined $700,000 for “mishandling” two data breaches in 2014 and 2015. The attorneys general of New York and Vermont said Hilton took too long to inform their guests about the breaches and the hotels “lacked adequate security measures.” Hilton discovered the first of the two breaches in February 2015 and the second in July 2015, according to the article, but the company only went public with the breaches in November 2015. The company has said there is no evidence any of the data accessed was stolen, but the attorneys general said the tools used in the data breaches made it impossible to determine what was done. Continue reading

 

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First in a series of blogs about blockchain technology and
its impact on business practices, corporate governance and cybersecurity

It’s hard to avoid articles, white papers, blog pieces and presentations that promote the almost magical use of blockchain – it seems that blockchain, a form of distributed ledger technology, can be applied to virtually any situation, and best of all, it is entirely secure.  As Don and Alex Tapscott wrote in Blockchain Revolution, “The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”

One aspect of blockchain technology has become highly debated – whether it is as secure as its proponents claim.  Since it seems inevitable that blockchain technology will be used to drive a variety of transactions, and not simply cryptocurrency, the JMBM Cybersecurity and Privacy Group has examined the technology and its impact on data security and corporate governance.

But before we can discuss the benefits and pitfalls of the technology, we have to answer a threshold question: what is a blockchain? Continue reading

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It’s ironic: when global threats are in the news every day, their ubiquity makes them easy to ignore. Whether they be political threats, climate threats, or data security threats, we can become numb to ever-present risk. Add in the chorus of advice from the growing number of providers, and even those who want to act become paralyzed by choice and complexity.  Cybersecurity is no exception – the daily deluge of breach notices and press reports of massive attacks has made us less, not more, sensitive to the threat.

Crisis fatigue can be compounded with defeatist thinking, believing that no matter what you do, you will still be hacked and have your data compromised.  So it is no surprise that while companies know data security should be a top priority, in reality, it’s easy to focus on more urgent – but less essential – items.

Cybersecurity faces additional hurdles that make it even challenging to address.  By identifying those hurdles, however, firms may be able to overcome these barriers and move forward on the path to minimizing one of the greatest risks your company faces.

Data Security Is Expensive – But Not as Expensive as the Alternative

Implementing a cybersecure environment requires a commitment in technology, training, and adapting to the constant rate of change and upgrading processes. The extra steps needed for the simplest of tasks, such as logging in, add to the daily cost of doing business.

Gartner estimates that worldwide spending on data security this year will hit $90 billion. It’s understandable that a CEO would see that as money lost from corporate value. But these expenditures should be seen  as an investment to preserve corporate value. Breaches are much more expensive and disruptive than the budgeted, planned improvements to systems, which can be controlled and implemented over time.

Intelligent and consistent technology upgrades, combined with regular training for all employees, are, in the end, better for a company’s bottom line than crisis management and costly technology remediation after the fact. Creative corporate leaders reframe the expense question and find budget for what’s vital.

Data Security Seems Really Complicated

For most of us, data security is complicated. We aren’t IT professionals, and venturing into the cybersecurity world is a challenge. Those who suffer any amount of technophobia may assume that they don’t know it and, more dangerously, that they can’t learn it. The technology community can reinforce this fear by speaking a foreign language and using unfamiliar terminology, all of which creates another barrier for non-technical executives and managers who need to understand the issues sufficiently enough to make intelligent decisions. Non-technical company management often feel that they are at the mercy of the IT experts. Even those who master important concepts in data and cybersecurity may doubt that knowledge, as there can be a tendency on the tech side to stress just how complicated things really are, reinforcing the need for their expertise. Continue reading

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Ever since California adopted the nation’s first breach notification law in 2002, companies that have suffered a data breach have focused on whether and how to notify their customers, employees and others of the nature and extent of the breach.  California’s law has been amended multiple times, and has been followed by breach notification laws in almost every state, as well as the notification requirements under the Health Insurance Portability and Accountability Act (“HIPPA”).  As these laws developed, a tandem requirement has emerged:  the obligation to take reasonable steps to protect data, and companies are, increasingly focused on taking steps to ensure the security of their data.

Recent breaches, however, have made it clear that these efforts do not address what might be the most pressing problem facing businesses:  how to recover from a malicious attack.  As data security attacks have evolved, firms must recognize an entirely different set of risks.

In the past, most hackers have focused on obtaining financial or personal information for profit.  Thus, the most publicized data breaches – Wyndham and Target, as examples – were directed at obtaining credit card information which could be sold on the dark web.  While these incidents can be expensive, they rarely threaten the existence of a firm; indeed, most consumers are so inured to the likelihood that their credit card information may be stolen that they take a blasé attitude and assume, correctly, that their personal losses will be small, typically limited to the inconvenience of getting a new credit or debit card.  Similarly, as more and more companies recognize the likelihood of a loss and, in response, adopt breach notification policies backed by cybersecurity insurance, the impact has become incorporated into the cost of doing business.

This attitude began to change with the increased incidence of ransomware.  Rather than seek financial or personal data, ransomware exploits technical or, more often, human vulnerabilities to encrypt data and hold it hostage in return for payment of ransom.  There have been highly publicized incidents, including hospitals, hotels, law enforcement agencies and other entities, that paid ransom in return for access to their data.  While paying ransom has been almost universally criticized, many firms felt they had no choice; they did not have adequate backups, and the only possible means of continuing business was to pay a relatively modest payment.

With the recent Petya virus attacks, however, that calculus has changed.  It has become more and more apparent that this virus, while claiming to be ransomware, was actually much more destructive; researchers increasingly believe that the malware was “wiperware” with the objective of permanently destroying data, and the perpetrators of the virus had no intention of freeing the data.  The researchers analyzing Petya (sometimes called PetyaWrap, NotPetya, and ExPetr) have speculated the ransom note left behind in the attack was a hoax intended to capitalize on media interest sparked by the May Wannacry ransomware attack. Continue reading

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Middle-market companies have cultures, goals and business needs that are distinct from larger firms, and nowhere is that more true than with cybersecurity.

Fortune 500 companies and brands with household names are much more likely to recover their reputations following a data breach.  While breaches are costly in financial terms to all companies, the damage to the brand of a middle-market company may not be survivable.  Large companies can weather the storm of negative publicity and loss of reputation, but mid-markets often cannot:  60% of middle-market companies that are hacked are out of business within one year.

This presents a near-paralyzing scenario to middle-market managers – the mere spectre of a data breach presents business risks that are difficult for them to fathom.

In our work with middle-market companies, we’ve developed effective strategies to help companies respond to the risk and protect their vital digital assets.  In fact, when the process is managed well, middle-market companies can respond to cybersecurity threats more quickly and effectively than larger businesses. Continue reading

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You spent valuable time and resources crafting a cybersecurity breach action plan. You’ve assembled a multidisciplinary response team. You’ve identified who is responsible for what, and what decision-tree will go into effect. The plan has been circulated. You’ve even engaged a separate law firm that will be on call in the event of a breach. You’ve done the same with a PR firm, a private investigator and data breach hit squad.

But if the action plan stays put on a shelf, it isn’t really of much value. Smart companies run a tabletop exercise, where first responders sit at a conference table and run through what will happen in the event of a breach. But really smart companies do something more – they take their efforts out of the conference room and into the real world. Breaches involve stress, panic and urgency. It’s not the time to be opening a binder and flipping through tabs for instructions. All those with responsibility for securing the breach need to be battle tested.

Just as fire drills are mandated safety requirements, breach drills should be mandatory training for your team. These exercises bring to light the weaknesses, if any, inherent in your breach response plan. These drills take a good plan and refine it into a great plan.

The key to testing the plan is making your drill as realistic as possible. Notify responders there will be a drill, but not when it will happen. Then, perhaps on a weekend, unleash a hypothetical and set things in motion. Designate several observers to follow the drill to see how closely actions hew to the plan. Document what went right and what went wrong so adjustments can be made later. Continue reading