Podcast: How Does DeFi Impact Insurance, Employment, And Litigation? – Fin Tech – United States


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You may have heard things about cryptocurrencies and
decentralized finance. How are these developments going to impact
areas that range from insurance to employment to
litigation?


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Aaron Kouhoupt: My name is Aaron Kouhoupt,
and I’m a Member in our Consumer Finance practice group. I work
out of the Cleveland office of McGlinchey Stafford. I am excited to
bring you the next episode of our Deep Dive series into DeFi, and
I’m joined by colleagues from across the firm to discuss how
DeFi may interplay with areas like insurance, employment, and,
while we hope you don’t find yourself there, litigation.
I’m going to start with my partner Lauren Ybarra, who is an
insurance regulatory attorney working out of Austin, Texas.
She’s going to talk a little bit today about DeFi in the
insurance space.

Lauren Ybarra: Thanks, Aaron.

Aaron Kouhoupt:  Thank you for being with
us today, Lauren. We’ve been talking a lot about how DeFi works
in the financial services industry. Really what you hear about,
primarily, is crypto coins and all of these other things. What
we’re interested in today is how does that impact insurance.
And is there a future where this is in the insurance realm?

Lauren Ybarra: So when people think of
DeFi insurance, they can refer to either blockchain-based insurance
as a replacement or traditional insurance as we know it, or it
could be insurance that covers DeFi-related activity. For
decentralized insurance, it is a new area of “parametric”
or what we’re calling “smart insurance,” which
completely eliminates all claims. It’s interesting because this
insurance is not yet regulated in the traditional sense of stock
insurance companies as we know it. It’s more in the surplus
lines areas. So for decentralized insurance to happen, there has to
be a specified event that happens within a parameter of specified
risk. And if anything were to happen within that parameter, a claim
is paid automatically. And it thereby eliminates any kind of claim
filing, claim adjustment. It’s speed-to-market, and you get
paid immediately upon the specified event happening. It’s gone
so far in the parametric realm that it can be done automatically
through computers, detecting how fast winds happen, where tornados
touch down. It also happens in the realm of flight delay insurance,
a hurricane, or other natural perils. So that’s one really
interesting area where DeFi insurance is happening.

For decentralized insurance, there has to be a specified event
that happens within a parameter of specified risk. And if anything
were to happen within that parameter, a claim is paid
automatically. It can be done automatically through computers,
detecting how fast winds happen, where tornados touch down.


Another interesting area is insurance that covers DeFi or crypto
losses. The FTC estimated last year about $1 billion in losses. So,
unstable parameters around DeFi regulation have created a lot of
bad actors out there. So we’re going to be seeing a big move in
the insurance industry market covering these kinds of DeFi
activities. So in totality, while I think there are DeFi risks that
are already here, it’s going to take some time for state
regulators to create laws around this area. For the United States,
insurance laws are adopted on a state-by-state basis, and as you
can imagine, it’s an extremely slow process. So while DeFi is
here and the technology is moving fast, the insurance industry is
going to have to catch up quickly in order to not be left
behind.

Aaron Kouhoupt: Thanks, Lauren. So if
I’m hearing you correctly, there are two different ways to
think about this. One is whether or not you ever see the insurance
industry move into a decentralized model, and the other is just to
what extent does traditional insurance cover losses that might come
out of working with cryptocurrencies or decentralized finance.

Lauren Ybarra:  That’s exactly
correct. Yeah, there are definitely different options out there,
but those are the two that I see as prominent happening as quickly
as now.

For the United States, insurance laws are adopted on a
state-by-state basis and as you can imagine, it’s an extremely
slow process. So while DeFi is here and the technology is moving
fast, the insurance industry is going to have to catch up quickly
in order to not be left behind.

Aaron Kouhoupt: Thanks Lauren. So one
thing that you just talked about that I don’t think has gotten
as much attention that I find really interesting. Ignoring for a
second how insurance can move into a decentralized space, which
could be very, very complicated to do. You talked a little bit
about protecting yourselves and whether or not you can get
insurance to cover losses that you might experience because
you’re involved with it, you’re holding crypto or anything
like that. I think that’s really interesting. Could you just
talk about that a little bit more?

Lauren Ybarra: Yeah, sure thing. So while
I haven’t seen an actual DeFi insurance company or an insurance
company that’s providing DeFi, what I have seen, interestingly
enough, are technology-driven companies that are offering some kind
of crypto or blockchain services. And they’re offering a type
of mutual risk pool arrangement, whereby they would pool together
people that are providing the services and getting the services
from this tech company, and pooling together their risk. What’s
interesting is that they are classifying themselves as a mutual,
which is a type of risk-bearing insurance-related entity. They are
not, in fact, from what I found, licensed as any kind of
risk-bearing entity, which is alarming for state regulators.
It’s alarming in the realm of litigation. It goes on and on.
And these, you know, risk pool “mutuals” are saying that
they are using community voting to determine whether claims should
be paid. And they have expert investigators that will determine
whether claims should be paid. So I think there’s a lot to be
done in this space. Again, the word alarming comes to mind. But we
will see globally decentralized protocols when it comes to this
insurance, but we are just not there yet.

If you’re subject to the FLSA, your employees must be paid
at least the federal minimum wage for all hours worked, and
overtime pay that is not less than one half the regular pay for all
hours worked over 40 hours in a given work week.

Aaron Kouhoupt: Thank you, Lauren, that
was really helpful. I appreciate it. We are also joined today by
Chase Stoecker, who is Of Counsel in our Fort Lauderdale office.
Chase does a variety of different things for the firm, but one of
the things he does a lot of is employment law, in particular when
it interplays with the financial services industry. Excited for you
to be here with us today, Chase. And what I’d like to know is,
it’s kind of fun, and I think we all chuckle a little bit when
we see things about athletes and celebrities that are choosing
their salaries to be paid in cryptocurrency as opposed to just sort
of a traditional salary. And without getting into how that impacts
a salary cap, I’m curious as to whether or not this is feasible
on a wide scale. Should we start seeing employees asking to be,
negotiating their employment contracts to be paid in crypto?

Chase Stoecker: Aaron, that’s a good
question. Just from a 10,000 foot view, employers can violate
federal and state law by paying their employees with what we call
non-fiat or non-government issued currency, which would be this
decentralized cryptocurrency. Now, there’s an overarching law
that governs payment of wages. It’s called the Fair Labor
Standards Act, the FLSA for short, and the FLSA governs minimum
wage, overtime pay, and other wage-related issues for private and
public sectors. Now the specific language in the FLSA states
“required payments of prescribed wages including minimum wage
and overtime compensation in cash or negotiable instruments payable
at par.” And this language is precise for a reason.

Now the first thing is not every employee is subject to the
FLSA. So if you’re fortunate enough to be an athlete or a
celebrity, like your question posed, then you’re likely not
going to be subject to this law because your job duties and your
salaries kind of take you outside of the FLSA. But employers,
especially in the financial industry, really need to be concerned
about the FLSA because a majority of employees are subject to this
law. That means that if you’re subject to the FLSA, your
employees must be paid at least the federal minimum wage for all
hours worked and overtime pay that is not less than one half the
regular pay for all hours worked over 40 hours in a given work
week. Again, that’s most employees. Most employees are not your
athletes or your celebrities, or your highly-paid individuals who
would fall outside this law. So with that in mind, there are
serious concerns regarding the payment of cryptocurrency for wages
to an FLSA non-exempt employee.

If the value of the currency is less on the day the employee
worked a regular shift versus overtime, let’s say, a
recalculation would be required. And then you’re going to have
to multiply this by dozens, hundreds, or maybe even thousands of
employees across the workspace.

I’ll just give you an example. The value of cryptocurrency
fluctuates hour by hour, sometimes minute by minute. It’s
market-driven, right? So how does that translate then into hourly
pay rate, overtime calculations, and calculating paid time off? If
the of value the currency is less on the day the employee worked a
regular shift versus overtime, let’s say, a recalculation would
be required. And then you’re going to have to multiply this by
dozens, hundreds, or maybe even thousands of employees across the
workspace. Not only can these scenarios easily result in an
inadvertent FLSA violation, which, if that’s the case, comes
with severe financial penalties. But even if you could get around
the potential FLSA minefield, you have an administrative nightmare
on your hands trying to comply with the law because you’re
trying to apply non-fiat currency payment to hundreds or thousands
of employees.

Another big concern that we have is access to your wages. And
then you have another issue. What about transaction fees? Because
buying or selling, or exchanging cryptocurrency, there are
transaction fees many times involved with that. And states require
that wages be paid without a discount. So those fees couldn’t
be roped into the payment to the employee. That would have to be
something the employer would have to take out of their end.

At the end of the day, compounding all this is states have their
own wage-and-hour laws that complement and go further than the
FLSA, so you just can’t look at the FLSA. You have to look at
the state-by-state analysis and say, okay, even if we could kind of
slot this so that we’re complying with the FLSA, what does the
state that we’re operating [in], do they have additional
regulations or constraints that would apply to a decentralized
currency? This does not mean an employer can never turn to
cryptocurrencies as a form of payment, it just can’t be used as
a base payment. So the FLSA’s “cash negotiable
instrument” language only applies to the portions of
compensation that are required under the statute or the base wage.
If an employer decides to pay its employees amounts in addition to
what the FLSA requires, and I’ll give you an example, like a
year-end bonus or some sort of incentive payment for performance,
that “cash or negotiable instrument” rule under the FLSA
would not apply. So, in a nutshell, bonuses can be paid in
cryptocurrency, but I wouldn’t recommend you pay wages in
cryptocurrency.

If an employer decides to pay its employees amounts in addition
to what the FLSA requires, and I’ll give you an example, like a
year-end bonus or some sort of incentive payment for performance,
that “cash or negotiable instrument” rule under the FLSA
would not apply.

Aaron Kouhoupt: Thanks Chase. So it sounds
to me like what you said at the end is key. It’s possible, but
probably like all other areas of DeFi and crypto, it’s really
going to take some federal or state interference to really make it
feasible on a wide-scale basis.

Chase Stoecker: That’s correct. At the
Department of Labor, which enforces the FLSA rules, I don’t see
an appetite for coming in to regulate this at this time just
because the FLSA is such a tightly regulated law and it’s very
specific. Maybe once there’s been more widespread adoption of
cryptocurrency, maybe they’ll come and step in and start
publishing scenarios, examples, and statements as they do from time
to time. But at this point, I don’t see that happening anytime
soon.

Aaron Kouhoupt: Thank you, I appreciate
it. We’re going to turn at the end to Gregg Stevens, who’s
a partner in our Dallas office. Gregg does a lot of financial
services litigation. I think what is interesting here, Gregg, is
every time that you have a space that there’s not a lot of
regulation in it, there are some question marks around what’s
going to happen. There’s this tendency to think of it as the
wild west a little bit. And you know, no regulation. There are
overarching laws that we’ve talked about, but they’re so
unclear right now. Do you think it’s wise to sort of see this
in that manner, or is the litigation aspect of all of this really
the same as anything else that you’re doing?

Gregg Stevens: Thanks, Aaron. I think, at
the end of the day, litigation is litigation. So it’s very
similar to other litigation that I’m doing, including financial
services litigation. For example, you need to make sure that you
keep good records. You need to make sure that you have good
customer service. If you have good customer service, you might be
able to avoid litigation. But the reality is if you’re running
a business, you are going to end up in litigation. That’s just
a fact of life in 21st-century America, and it was probably a fact
of life in 20th-century America. So, for example, if you get sued
by a consumer, whether it’s for breach of contract or
you’re trying to collect from a consumer, you need to make sure
that you’re complying with all state and federal laws in the
collection context. For example, it may be under the FDCPA,
although that usually does not apply if you’re trying to
collect your own debt, various state laws apply, like the Texas
Debt Collection Act.

If you’re running a business, you are going to end up in
litigation. If you get sued by a consumer, whether it’s for
breach of contract or you’re trying to collect from a consumer,
you need to make sure that you’re complying with all state and
federal laws in the collection context.

In addition, you need to make sure you have good policies and
procedures in place because that’s usually the first thing the
plaintiffs ask for. They want to know what policies and procedures
you had in place that could have prevented the problem. In
addition, I would assume, and hopefully, that’s not a mistake,
that when a consumer or somebody calls you to make a complaint, you
have a strong and robust customer service department and that
you’re recording the calls. In addition, you need to have a
procedure in place for litigation, whereas if you receive a
litigation hold letter, what do you do? It’s like any other
piece of litigation that you have. You need to notify all the lines
of business to preserve the emails, preserve telephone calls,
preserve notes.

So I think in that context, the litigation is pretty much the
same. In addition, you’re going to want to take contemporaneous
notes of what you did and memorialize the conversation because over
time, usually, if an issue arises, it doesn’t end up in
litigation right away. It takes some time before it gets to
litigation. So unless you take contemporaneous notes of what you
did and what you tried to do to resolve the issue, you may have a
higher level of litigation risk if you try to reconstruct previous
conversations. So, you know, make sure your records are
contemporaneous. Make sure your policies and procedures are strong.
Make sure that if a litigation hold letter is received, you comply
with the hold letter.

That’s usually the first thing the plaintiffs ask for. They
want to know what policies and procedures you had in place that
could have prevented the problem.

In addition, you may end up receiving a subpoena. What do you do
when you receive the subpoena? The same tenets apply. Make sure it
gets routed to the proper department. Make sure that a thorough
investigation is done to comply with the subpoena or retain outside
counsel or in-house counsel to lodge whatever the appropriate
objections are. So the reality is, although the subject matter may
be a little different, litigation is litigation, and the same basic
principles apply across the board.

Aaron Kouhoupt: Thanks Gregg. So I think
what we’ve really heard today and listened to is that this is a
space that everybody’s excited about and trying to figure out
exactly where to navigate the seas here. And whether it’s
trying to figure out how to protect yourself from losses via
insurance or employees that suddenly come to you and start asking
to be paid in crypto, these things are out there. They’re
things to be cognizant of, and there are some roadblocks that you
need to think about so that you don’t find yourself in the
litigation context. And like everything else, just understanding
that litigation is part of it and being prepared for what that
looks like, no matter what you do. But trying to really understand
the parameters and structuring something appropriately is the
key.

Make sure your records are contemporaneous. Make sure your
policies and procedures are strong. Make sure that if a litigation
hold letter is received, you comply with the hold letter.

Gregg Stevens: At the end of the day,
litigation is litigation. And I’ve never heard of a company yet
that likes to hear from the litigation department or a line of
business that likes to hear from the litigation department because
it’s usually not something that is good. However, by being
proactive and having good procedures in place, you can minimize the
risk. You can’t eliminate it, but you can minimize it.

Chase Stoecker: Gregg raised a good point,
and it kind of seeps into the employment side of things too. If you
are intent on paying an employee in cryptocurrency, and you’ve
decided that they fall outside of the FLSA: written policies. Write
everything, memorialize everything. Make sure that there’s an
understanding between you and the employee that captures that
relationship because you want to be proactive, and you don’t
want something like this to lead the litigation further down the
line.

Aaron Kouhoupt: Thank you. This has all
been great. I really appreciate everybody taking the time to be
with us today. And as always, if anybody has any questions, you can
reach out to any one of us. Thank you!

Gregg Stevens:  Thanks, Aaron.

Chase Stoecker: Thanks a lot, Aaron.

Lauren Ybarra: Thanks, Aaron.

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