Amazon Shrugs Off Largest Privacy Fine Ever

July 30, 2021 Paul E. Paray

On July 29, 2021, Amazon disclosed in a regulatory filing that it sustained what is the largest privacy-related fine ever issued for violating EU privacy rules – a massive €746 million ($886 million) fine. Amazon barely mentions the fine in its latest quarterly report: “On July 16, 2021, the Luxembourg National Commission for Data Protection (the “CNPD”) issued a decision against Amazon Europe Core S.à r.l. claiming that Amazon’s processing of personal data did not comply with the EU General Data Protection Regulation. The decision imposes a fine of €746 million and corresponding practice revisions. We believe the CNPD’s decision to be without merit and intend to defend ourselves vigorously in this matter.”

This disclosure is actually related to a 2018 action brought against Amazon due to its targeted ad efforts – hardly a new action where talk of pursuing a defense makes any sense. Simply put, it is unclear why the filing references a vigorous defense – that time has long passed. Amazon must now appeal what it previously defended and lost – which may end up working out for the company given in recent appeals courts have overturned GDPR privacy fines. Still, the CNPD ruling was lauded by the privacy group that brought suit given it dwarfs the previous record EU privacy fine of €50 million handed down to Google.

Notwithstanding Amazon’s possibly misplaced hubris, until this action runs its full appellate course, there is not much solace that plaintiffs should derive from the fine – especially given that Amazon has had three $100 billion quarters in a row and this significant fine can easily be shrugged off from a materiality perspective.

Digital Assets, Network Security, Privacy, Risk Management, Small Business

Exchanges May Crack Down on Ransomware OFAC Risk

April 25, 2021 Paul E. Paray

On April 22, 2021, Chainalysis published its findings on the OFAC sanctions violation risk tied to ransomware payments. According to Chainalysis, 15% of ransomware payments paid in 2020 were at risk of OFAC sanctions. Even though lower than the measured risk from 2016 – 2018, last year’s numbers remain an uptick from 2019.

Chainalysis discovered ransomware victims paid out in 2020 more than $50 million worth of cryptocurrency to addresses that carried sanctions – with mainstream exchanges receiving “more than $32 million from ransomware strains associated with sanctions risks.” Given the public market embrace of crypto exchanges, it is very likely those exchanges seeking greater regulatory scrutiny will eventually implement curbs to address the OFAC October 2020 advisory – eventually making it more difficult for smaller businesses to satisfy ransomware demands.

Electronic Health Records, IT Consultants, Network Security, Privacy, Risk Management

Ransomware Payments Should be Self-Insured

March 22, 2021 Paul E. Paray

According to Chainalysis, payments to ransomware gangs using cryptocurrency more than quadrupled in 2020, with less than 200 cryptocurrency wallets receiving 80% of funds. And, Palo Alto Networks – which claims to use data from ransomware investigations, data-leak sites, and the Dark Web, reports that the average ransom paid by companies in 2020 jumped 171% to more than $312,000. Despite being around for many years, the rise of ransomware has largely coincided with the diminished value derived from compromised personal data.

The REvil ransomware-as-a-service operation now picks up the phone to add a threatening personal touch to its exploits: “Calling gives a very good result. We call each target as well as their partners and journalists—the pressure increases significantly.” According to a published March 16, 2021 interview with a representative of REvil – also known as Sodinokibi, the group has “big plans for 2021.”

Probably the more interesting point made by this REvil representative was the answer to the following question: “Do your operators target organizations that have cyber insurance?” The answer is not much of a surprise: “Yes, this is one of the tastiest morsels. Especially to hack the insurers first—to get their customer base and work in a targeted way from there. And after you go through the list, then hit the insurer themselves.” This is the first confirmation from an actual ransomware gang that they target cyber insurance policyholders.

Articles from the Associated Press and ProPublica years earlier suggest that cyber insurers were inadvertently driving up ransomware attacks but neither outlet provided any hard facts to back up their supposition. Indeed, a leading broker took the natural counterpoint: “[A]lthough no one wants to support cyber criminals, organizations are forced to weigh the option of paying ransoms against the risk of operational disruptions that could last weeks or months and cost far more.”

It was never hard to imagine, however, that buying cyber insurance actually places a target on those companies who buy it and do not likely have the security resources necessary to stop ransomware gangs – especially given carriers may be inadvertently providing a roadmap to their house. Indeed, last year one major cyber insurer was purportedly targeted by the Maze ransomware gang. And, as of March 2021, there were at least two ongoing investigations involving attacks on major cyber insurers. Unless things change, it will only get worse for insurers and brokers given they are the new holders of the crown jewels.

One tactic that can impede the current claims challenge facing the industry is building on what was recently begun by AIG – a thought leader in this space for over two decades. In January 2021, AIG became the first lead cyber insurer to require ransomware co-insurance across the board – mandating that insureds share in paying a ransom payment. Following this lead, the larger markets began hardening on price and their underwriting requirements. Other markets immediately began to take advantage – only temporarily repairing the holes in the dike. As pointed out by Inside P&C: “The retrenchment of capacity and continued upward pricing pressure also continues a reordering of the market in which some of the largest names in US cyber insurance cede market share to upstart InsurTechs.”

Despite the fact cyber insurer MGAs are heavily funded and are now grabbing as much market share as they can, they still use paper backed by the largest reinsurers in the world – who frankly probably care more about their own profits rather than the market growth strategies of unrelated companies. In other words, any retrenchment may also eventually hit the MGAs when treaties get renegotiated.

Retrenchment is a good idea but will not be enough to fully address the problem. The best way to solve this problem is to do exactly what the FBI has said for years – do not pay the ransom. An October 2020 OFAC Advisory buttresses this “do not pay” advice by warning insurers against making ransomware payments to those on the OFAC list. In other words, law enforcement would prefer that ransomware payments not be made and it may ultimately be in everyone’s best interest if such payments are self-insured – making it much less likely they will actually be paid.

This is not K&R coverage where lives are typically at stake. Once the ransomware gangs recalibrate knowing there is no available insurance payment, the incidents will resemble earlier times, namely demands that are less frequent and for lower amounts. These threat actors want to go in and out as fast as possible given they know that the data itself likely has very little real value on the Dark Web – it’s the urgent threat of release that has exploitive value. If there is no expeditious insurance payment, the actual value of the target diminishes.

Insurance dollars are actually better spent helping insureds bolster their security rather than the coffers of criminals – especially because even with a payment there is no guarantee that data would be properly decrypted or that a Dark Web release or sale would not take place. There is much that can be done to assist insureds improve their risk profile and better avoid ransomware exploits. Some very basic steps include developing trusted partner relationships with vendors and law enforcement before an incident takes place; retaining a security expert to evaluate the current readiness profile; providing consistent education and training of staff; and developing or updating a Business Continuity Plan.

On a more technical level, full and incremental backups should be consistently performed like your company’s life depended on it; weak passwords of service accounts should be removed; system logs should be maintained and monitored; employee access to sensitive data and information limited; operating systems and applications timely patched; users with admin privileges evaluated to ensure passwords are strong and secure; system safeguards such as Windows Defender Credential Guard deployed; port connections monitored and unnecessary ones removed, etc., etc., etc. The relevant protocols all have a common goal – harden security sufficiently so that the bear decides to run after the slower runner. If everyone ends up becoming a fast runner, the hungry bear will eventually tire of the chase and just eat something else for food.

With a robust cyber insurance policy in place, most every resource necessary to assist a ransomware victim is already available to an insured. By focusing on these other valuable first-party coverages, improving an insured’s risk management profile, and curtailing ever increasing payouts to criminals, the industry will continue with its meteoric rise.

UPDATE: March 25, 2021

On March 24, 2021, CNA publicly disclosed that it sustained a cybersecurity attack. As of March 25, 2021, the following is the only information found on its website:

UPDATE: May 10, 2021

The day before the Colonial Pipeline ransomware attack went public, global insurer AXA announced it would cease writing cyber-insurance policies in France that reimburse policyholders for ransomware extortion payments. This is hopefully the start of a much larger trend.

UPDATE: May 12, 2021

On May 12, 2021, security experts labeled as “absolute stupidity” comments regarding the payment of ransomware that were emanating from the White House. A few days prior, the White House’s Deputy National Security Adviser for Cyber, Anne Neuberger, had given the private sector a complete free pass regarding the payment of ransoms: “And they have to just balance off, in the cost-benefit, when they have no choice with regard to paying a ransom.” Unfortunately, this position directly contradicts the long-standing position of the FBI and numerous other government agencies.

Behavioral Advertising, Social Media

Facebook’s Dominance in India May End in 2021

March 13, 2021 Paul E. Paray

On April 19, 2021, arguments will be heard in a 2019 New Delhi action brought by World Phone Internet Services Private Limited, against Facebook, WhatsApp, the Government of India, and the regulator tasked with enforcing Internet telephony regulations in India. World Phone is a licensed Indian provider of Internet telephony services.

India currently holds the honor of having the most Facebook and WhatsApp users worldwide. Specifically, Facebook reached near 400 million users in India several months ago – which accounts for 28.4% of the entire country’s population. And, WhatsApp is well beyond 400 million users given it last publicly disclosed that number three years ago. Indeed, according to the Ministry of Electronics and Information Technology, WhatsApp now has 530 million users in the country.

World Phone’s 2019 Petition alleges that Facebook messenger and WhatsApp are illegal services given they provide Indians with VoIP services without having the requisite underlying licenses or paying the required license fees and service taxes. According to the Petition, licensed providers “have to adhere to various statutory regulations such as Quality of Service Regulations, Tariff Regulations and Consumer Protection Regulations. They also need to ensure emergency services, confidentiality of customer, privacy of communication, undergo regular audits and ensure proper lawful monitoring and interception.” Facebook and WhatsApp comply with none of these regulatory requirements despite providing regulated services.

Moreover, the Petition references the pertinent regulations that provide for “an amount of up to Rs. 50 Crore as penalty for any security breach caused due to any inadvertent inadequacy in the precautions taken by the licensee. If the security breach is caused as a result of a deliberate fault on the part of the licensee, then the penalty is an amount of Rs. 50 Crores for each breach. Besides penalty, criminal proceedings may also be initiated against the licensee. These measures keep the TSPs on their toes and ensure they adhere to the security and privacy requirements while providing Internet Telephony.” Despite breaches that would have triggered these provisions, Facebook and WhatsApp have seen no regulatory enforcement actions filed against them.

World Phone previously filed a similar legal action against Microsoft given its Skype product – India’s then dominant unlicensed VoIP service, caused World Phone harm by improperly competing without a license. That action, however, was filed in the United States. In a decision by Chief Judge Freda Wolfson of the District Court of New Jersey, the action was dismissed in May 2014 with World Phone explicitly directed to seek relief in India. TI Investment Services, LLC, and World Phone Internet Services, Pvt. Ltd v. Microsoft Corporation, 23 F. Supp. 3d 451, 472 (D. N.J. 2014) (“If Plaintiffs wish to renew their suit, they should do so in the jurisdiction where they are alleged to have competed with Defendant, to have complied with regulatory laws, and to have suffered injury, and that is India.”).

World Phone never needed to file suit in India given the subsequent appeal was settled between the parties. Thereafter, Microsoft voluntarily chose to withdrew its unlicensed Skype services in India. See NeoWin (October 6, 2014) (“Skype is either changing, or being forced to change, its strategy in India. The Microsoft service will no longer offer landline and mobile calls for Indian residents starting November 10th. This change came pretty much out of the blue and was announced by Skype on one of their support channels. . . Neither Microsoft nor Skype has offered any reason for this weird change but the company has offered to refund users who will be affected by this announcement.”); PC World (October 6, 2014) (“Skype appears to bow to Indian rules, ends in-country calls to local networks”); SIP Trunking Report (October 6, 2014) (“Some might argue the change has something to do with regulations that actually prohibit the use of VoIP services such as Skype to make calls on phones using the Internet. . . . Since the law does not appear to have changed, some other consideration is at play.”).

In an Affidavit filed on July 20, 2020, there were two arguments made in opposition to World Phone’s application. The first argument was that the Petition could not be decided because it was transferred to the Indian Supreme Court with other petitions involving Facebook and WhatsApp. On its face, this argument made no sense given that the Transfer Order attached to the Affidavit did not list the World Phone Petition so the action was clearly not transferred. Also, the transferred actions solely involve privacy issues. Despite the fact those other matters also demonstrate the “digital colonialism” of Facebook and WhatsApp given they show how Indian users are treated differently from Europeans, they remain inapplicable to the World Phone Petition.

The second argument relied on a 2017 affidavit previously filed that claims the current regulatory body is “currently examining” over-the-top (OTT) services. First, the services subject to the World Phone Petition are Internet telephony services and not mere OTT services. And, despite it now being 2021, the agency still failed to address even the OTT services issues raised. In fact, taking advantage of this longstanding lack of enforcement, WhatsApp is now moving aggressively to take advantage of its Indian market dominance in Internet telephony by moving into the desktop market.

To defend against the World Phone Petition, Facebook and WhatApp hired two of the top attorneys in India – Mukul Rohatgi and Kapil Sibal. Mukul Rohatgi – who is Facebook’s counsel, was in 2010 considered one of India’s top 10 lawyers. He was also the 14th Attorney General for India. Kapil Sibal – who represents WhatsApp, formerly served as the head of various ministries over the years – beginning with the Ministry of Science & Technology, then the Ministry of Human Resource Development followed by the Ministry of Communications & IT, and the Ministry of Law & Justice. To date, neither attorney has formally filed any papers with the Court.

No matter what is eventually filed by Facebook or WhatsApp, World Phone’s argument could not be simpler – there are no “checks and balances” available to protect Indian citizens from the digital colonization of Facebook and WhatsApp so its Petition is likely all that stands between Facebook and WhatsApp executing on its apparent digital colonialization plan and ultimate “data oligarch” control of the Indian population.

If successful, World Phone would cause the cessation of unlicensed Facebook messenger and WhatsApp services in India as well as the imposition of penalties for prior non-compliance. To the extent Facebook chooses not to play regulatory ball, it may end up doing what it has done in China since 2009, namely just go dark.

UPDATE: April 22, 2021

On April 22, 2021, Justice Navin Chawla – the Justice who previously was hearing the World Phone case, ruled against Facebook and WhatsApp and dismissed their pleas challenging an Order from the Competition Commission of India (CCI) directing a probe into WhatsApp’s new privacy policy. Justice Chawla previously reserved judgment on the case.

A new Justice in the World Phone case – Justice Prathiba M. Singh, ruled on April 19, 2021 that Facebook and WhatsApp were required to provide a responsive affidavit within six weeks and World Phone had four weeks thereafter to respond. Moreover, a new hearing date of August 26, 2021 was set by the Court. For the very first time, Facebook and WhatsApp will now be required to articulate a defense to a case that on its face is indefensible.

Accounting Firm, Electronic Health Records, Litigation Management, Network Security, Risk Management, Technology Law

B2 – B1 < (P x H)1 – (P x H)2

February 22, 2021 Paul E. Paray

On February 16, 2021, The Sedona Conference (TSC) – a nonpartisan, nonprofit research and educational institute “dedicated to the advanced study of law and policy in the areas of antitrust law, complex litigation and intellectual property rights”, released its final “Commentary on a Reasonable Security Test“. TSC is well known for previously helping Courts around the country determine the proper contours of e-discovery.

Recognizing that cybersecurity reasonableness crosses both legal and technology domains, TSC sought a reasonableness test that would help bridge that divide. Accordingly, the proposed test for reasonable security was designed to be consistent with “models for determining reasonableness that have been used in various other contexts by courts, in legislative and regulatory oversight, and in information security control frameworks.” The Sedona Conference, Commentary on a Reasonable Security Test, 22 SEDONA CONF. J. 345, 358 (forthcoming 2021). To that end, this test is ultimately based on the landmark Learned Hand negligence test in United States v. Carroll Towing Co., 159 F.2d 169, 173 (2nd Cir. 1947).

The Sedona Conference Reasonable Security Test consists of “B2 – B1 < (P x H)1 – (P x H)2” where B represents the burden, P represents the probability of harm, H represents the magnitude of harm, subscript 1 represents the controls (or lack thereof) at the time the information steward allegedly had unreasonable security in place, and subscript 2 represents the alternative or supplementary control. 22 SEDONA CONF. J. at 360.

TSC’s Commentary should be carefully studied for numerous reasons, including the fact TSC applies it to actual recent enforcement actions and provides solid arguments for its judicial application. No different than its highly cited e-discovery initiatives, this new TSC approach may very well be relied on by courts tackling the important question of what constitutes reasonable security in the context of a data breach litigation or enforcement action.

Behavioral Advertising, Media, Network Security, Privacy, Risk Management, Social Media

Data Privacy Day 2021

January 28, 2021 Paul E. Paray

On January 28, 2021, the National Cybersecurity Alliance encouraged individuals this Data Privacy Day to “Own Your Privacy” by “holding organizations responsible for keeping individuals’ personal information safe from unauthorized access and ensuring fair, relevant and legitimate data collection and processing.” Indeed, the NCSA recognizes “[p]ersonal information, such as your purchase history, IP address, or location, has tremendous value to businesses – just like money.”

The NCSA “data as money” perspective is not a new concept. In fact, it was hoped that Data Privacy Day 2016 would usher in a system for consumers to easily monetize their private data – a hope that has yet to materialize five years later. Still, in the same way a bank protects money, there can be no adequate privacy without adequate security.

Richard Clarke – a security advisor to four U.S. presidents, properly recognized in 2014: “Privacy and security are two sides of the same coin.” The ransomware epidemic of 2020 should inform everyone why Data Privacy Day 2021 solidly places privacy and security on the same level. There can be little respect for the privacy rights of consumers – whether monetized or not, without an adequate effort at securing such data. Some companies such as Microsoft – last year’s champion of Data Privacy Day, recognize the need to continually push the security envelope in order to properly protect consumer privacy rights. Accordingly, these companies go the extra distance and often work hand-in-hand with law enforcement to take down online criminal enterprises such as Emotet.

Going forward in 2021, companies safeguarding consumer data must recognize that the lines have blurred between nation state APT attacks – focused on the slow espionage of large companies, and criminal enterprises looking for quick financial hits. For example, the lateral movement hallmarks of an APT attack are now routinely used during Ryuk ransomware exploits. Moreover, the recent SolarWinds Orion Platform exploit highlights the need to focus on supply chains when protecting consumer data.

Focused security efforts would quickly stop being left on corporate “to do” lists if there was an applicable federal law in place for companies nationwide – not just the hybrid privacy/security state laws now applicable to only some companies. Unfortunately, despite high hopes in 2019, there was little bipartisan push for a federal privacy law these past few years. That dynamic might change in 2021.

Former California Attorney General Kamala Harris’s 2012 annual privacy report opens with the words: “California has the strongest consumer privacy laws in the country.” During her tenure, California enjoyed “a constitutionally guaranteed right to privacy, over seventy privacy-related laws on the books, and multiple regulatory agencies set up to enforce these laws.” As the new year progresses, the current Vice President may very well prod Congress for the sort of California “privacy pride” she once enjoyed on a state level. Given the current one-party rule, there is certainly no longer any excuse available to politicians looking to continue kicking the “federal privacy law can” around Capital Hill.

Blockchain, Digital Assets, DLT, Intellectual Property, Technology Law

The DeFi End Game

January 5, 2021 Paul E. Paray

A skilled chess player will tell you the best way to study chess at a high level is to first study endgames and truly learn the power of each piece. Memorizing book openings generally comes last. If one wants to learn about the insurance industry, first take a job in the claims department. In a similar way, students of disruptive technologies benefit from first learning their “end game”.

Blockchain is one disruptive technology that still has not fully discovered its business sea legs. The purported proxy for blockchain – Bitcoin, recently hit all-time highs so naturally on January 3, 2021 a forecaster placed a ten-year target of $1 million on this speculative asset. Every good bubble requires inflating and the very speculative Bitcoin bubble currently being massively inflated by hedge fund money is no different.

Bitcoin’s bubble ascension does not mean, however, the seismic blockchain and distributed ledger technology (DLT) shifts taking place over the past five years in the financial industry have been illusory or should be ignored. As previously recognized, “acceptance of blockchain technology by the financial industry will be indelible proof those mistakes of 1995 made by retail sales and marketing companies will not be repeated by the financial industry.”

Over the past several years, financial titans have reluctantly come out swinging in favor of convertible virtual currency (CVC) transactions. For example, most US PayPal customers now have the ability to buy, sell and hold four different cryptocurrencies – BTC, ETH, LTC, and BCH, and use them as a funding source with the company’s 26 million merchants. Presently, PayPal’s maximum dollar amount for weekly CVC purchases is $20,000 but even that relatively high consumer amount will likely change upwards as Paypal moves up the financial transaction food chain – with Paypal’s Venmo next in line.

The largest bank in the United States – J.P. Morgan Chase, launched its JPM Coin in 2019, and in October 2020 set up an entirely new business, Onyx, as an umbrella for its blockchain and CVC initiatives – including JPM Coin. According to Jamie Dimon, Chairman and CEO of J.P. Morgan: “Onyx is at the forefront of a major shift in the financial services industry. This new business unit reflects J.P. Morgan’s commitment to innovation as we continue to build cutting-edge technology that delivers a better, faster and more inclusive financial system.” On December 10, 2020, J.P. Morgan announced it completed a live, blockchain-based intraday repo transaction using JPM Coin. And, Visa has filed a patent application for what may seem perfunctory, namely recording digital currencies on a blockchain.

Apart from these blockchain-based efforts, there is a whole category of blockchain initiatives that will forever fundamentally alter the broader financial sector – to the likely chagrin of PayPal, J.P. Morgan, and Visa. The banner name for these new blockchain and DLT initiatives is “DeFi”, or decentralized finance.

In December 2019, the entire Total Value Locked (TVL) in the DeFi market was worth less than $700 million, by the end of December 2020 it grew to $14 billion, and as of January 5, 2021 the total TVL in DeFi was at over $19 billion and growing – representing a staggering growth trajectory. The TVL in the DeFi market represents all DeFi projects but is largely driven by the lending platform MakerDAO – a decentralized credit platform supporting Dai, a stablecoin pegged to the US dollar. Decentralized exchanges (DEXes) such as Uniswap largely make up the remaining bulk of projects. DEXes enforce trading rules and execute trades without charging the high fees normally associated with alternative investment trades.

A commitment of $19 billion to DeFi initiatives may seem miniscule compared to, for example, the over $6 trillion in foreign exchange trades conducted each day. On the other hand, each DeFi transaction potentially empowers individuals while at the same time weakening the grip over the monetary system currently held by central banks and finance intermediaries – a true game changer by any measure.

Generally relying on the public Ethereum blockchain platform, most DeFi projects deploy smart contracts to automate what previously required human intervention – obviating the need for central authorities such as banks or intermediaries. DeFi Pulse nicely showcases the benefits of DeFi by describing it as “money Legos” and giving the following example:

Compound is a money market or, in other words, a lending service on Ethereum. When you supply DAI to Compound, you receive cDAI tokens which represent both your DAI in Compound and any interest you’ve earned from lending. Since cDAI is a token, you can send, receive, or even use cDAI in other smart contracts. Money Legos in action: ETH into MakerDAO to mint DAI tokens, DAI being supplied to Compound, cDAI tokens can be used in other DApps. For example, you can swap ETH for cDAI on a DEX and instantly start earning interest for just holding cDAI. And because you choose how you interact with smart contracts on the blockchain, you can use a DEX aggregator like DEX.AG to compare and trade at the best prices across all the popular DEXes, all within seconds.

In 2021, crowdfunding will help fund some of the DeFi startups looking to eventually disintermediate the more traditional financial firms these startups would otherwise approach for financing. As of November 2020, online platforms can raise up to $5 million in seed capital in a State-preempted manner – with previous platforms raising hundreds of millions of dollars using the prior SEC Regulation Crowdfunding cap of $1.07 million. Even though a typical crowdfunding online platform itself breaks away from traditional centralized banking platforms its success is not relevant for purposes of the DeFi initiatives potentially opened up by Regulation Crowdfunding. What may be more relevant are the new ideas coming to market without the latent influence of legacy financing.

Before widespread adoption of any DeFi product is even feasible, however, regulatory scrutiny will be needed to protect consumers onboarding these new DeFi applications. Given that a CVC wallet is the exit ramp for many DeFi initiatives, it is no surprise that has been an area of regulatory interest. For example, the US Treasury’s Financial Crimes Enforcement Network (‘‘FinCEN’’) recently proposed a rule that would require banks and money service businesses to file a report with FinCEN containing information related to a customer, their CVC transaction, and counterparty (including name and physical address) “if a counterparty to the transaction is using an unhosted or otherwise covered wallet and the transaction is greater than $10,000.” FinCEN is issuing regulations on transactions using digital currency wallets because the growth of individual CVC transactions will continue unabated.

While providing a suggested Token Safe Harbor Proposal, SEC Commissioner Hester M. Peirce offered an excellent analysis of the “regulatory Catch 22” faced by decentralized networks looking to comport with SEC regulatory law. In addition to Commissioner Peirce’s forward thinking, the SEC also recently set free its FinHub as a separate office to assist blockchain and DLT innovators.

Despite these technology-forward initiatives, the SEC continues placing an exclamation point on its regulatory reach. For example, the SEC last month shook the Ripple world by claiming in a lawsuit Ripple’s XRP token – used by financial institutions around the globe, was an unregistered security. It also ended the year by filing a Cease and Desist Order against ShipChain on similar grounds. These sort of efforts convey US regulators still corralling the blockchain stallion – albeit primarily through the Howey door. Disruptive DeFi initiatives should remain undeterred.

More urgent concerns for the DeFi community are coding bugs, double-spend exploits, traditional hacks, and any number of faulty implemented software functions caused when smart contracts fail to undergo adequate audits. Despite only losing $50 million in 2020, malicious actors will certainly begin seeing a larger target over DeFi’s head as its growth continues. Moreover, given most DeFi projects run on Ethereum, there are future threats not even widely discussed – such as those potentially arising from miners who map out transactions on a blockchain for a fee and who are no longer satisfied with just receiving their fees.

All of these potential risks – whether regulatory, technological, malicious, or competitive, however, remain dwarfed by the potential upside found in a successful, widely-adopted DeFi application or protocol. One likely key to success is to replicate what companies such as PayPal chose to do – take a widely used existing tool and deploy into it a profitable new way that allows for flexibility with actual autonomy and consumer self-determination. DeFi will ultimately go nowhere if it only brings into the fold insiders stuck in Moore’s early adopter phase.

Moreover, no open-source project can ascend until a large enough market believes the tradeoffs between ease of use, financial benefits, and utility ring strongly in its favor. For example, despite having a strong web server market position, a Linux desktop will never really threaten Microsoft’s foothold until the relevant commercial and consumer markets believe a Linux desktop truly meets all of their needs.

Similarly, DeFi will never gain a foothold reaching above the “PayPalJPMVisa” mountain peak until at least one DeFi application checks all the relevant boxes for a sizable enough market. It may be a decade before a DeFi project reaches that vantage point – with the classic Amazon vs. Sears endgame likely being studied along the way.

Behavioral Advertising, Media, Privacy, Social Media

Apple’s Consumer Data Aspirations

November 23, 2020 Paul E. Paray

In a November 19, 2020 letter to various non-profit groups, Apple reaffirmed its commitment to the App Tracking Transparency (ATT) permission feature first announced in June 2020: “We developed ATT for a single reason: because we share your concerns about users being tracked without their consent and the bundling and reselling of data by advertising networks and data brokers.” Slated for release in 2021, the ATT feature requires permission before certain data is accessed by advertisers, namely the identifier for advertisers (IDFA). Using the ATT feature, consumers will allow or reject tracking on an app-by-app basis.

The IDFA groups different users by similar search or browsing activity in an effort to limit advertisers from reverse engineering personally identifiable information. As described by Apple: “We create segments, which are groups of people who share similar characteristics, and use these groups for delivering targeted ads. Information about you may be used to determine which segments you’re assigned to, and thus, which ads you receive. To protect your privacy, targeted ads are delivered only if more than 5,000 people meet the targeting criteria.”

When touting its alleged “privacy forward” ATT feature, Apple threw down yet another privacy gauntlet against Facebook: “Facebook executives have made clear their intent is to collect as much data as possible across both first and third party products to develop and monetize detailed profiles of their users, and this disregard for user privacy continues to expand to include more of their products.” Letter, dated November 19, 2020.

in a November 20, 2020 statement sent to Business Insider, Facebook counterpunched: “The truth is Apple has expanded its business into advertising and through its upcoming iOS 14 changes is trying to move the free internet into paid apps and services where they profit. . . They claim it’s about privacy, but it’s about profit. . . This is all part of a transformation of Apple’s business away from innovative hardware products to data-driven software and media.”

In other words, Facebook suggested that Apple plans on using its dominant market position to prioritize its own data collection efforts while making it difficult for competitors to use the same data. Two months earlier, Facebook informed its business partners that it would “not collect the identifier for advertisers (IDFA) on our own apps on iOS 14 devices. . . . We may revisit this decision as Apple offers more guidance.”

Surprisingly, Facebook may actually have a point or two regarding Apple’s aspirations. On November 16, 2020, a group led by privacy activist Max Schrems filed complaints in Germany and Spain over Apple’s online tracking tool claiming a breach of the EU’s e-Privacy Directive.

According to the German Complaint:

Apple defines the IDFA as “an alphanumeric string unique to each device, that you [the third party app developer] only use for advertising. Specific uses are for frequency capping, attribution, conversion events, estimating the number of unique users, advertising fraud detection, and debugging”. [This IDFA] is “is very similar to a cookie: Apple and third parties (e.g. applications providers) can access this piece of information stored on the users’ device to track their behaviour, elaborate consumption preferences and provide relevant advertising. . . In practice, the IDFA is like a “digital license plate”. Every action of the user can be linked to the “license plate” and used to build a rich profile about the user. Such profile can later be used to target personalised advertisements, in-app purchases, promotions etc. When compared to traditional internet tracking IDs, the IDFA is simply a “tracking ID in a mobile phone” instead of a tracking ID in a browser cookie.

According to Reuters, Apple immediately disputed these claims, stating they were “factually inaccurate”. Apple curiously also said to Reuters that it “does not access or use the IDFA on a user’s device for any purpose”. Such a statement is curious only because on its face it means nothing when one considers the fact Apple allows “segmented” use and access to this “license plate” data. By creating an “identifier for advertisers” form of digital “license plate”, Apple most certainly uses the IDFA by proxy every time one of its ad partners uses it.

Moreover, days before its public Facebook spat, Apple was called out by a cybersecurity expert for perceived privacy shortcomings in Gatekeeper – the Apple system used for managing third-party application security. Pointing to flaws in how Gatekeeper relays and stores unencrypted information, Jeffrey Paul concluded: “Apple knows when you’re at home. When you’re at work. What apps you open there, and how often. . . . This data amounts to a tremendous trove of data about your life and habits, and allows someone possessing all of it to identify your movement and activity patterns.”

According to a November 15, 2020 editorial in Apple Insider, these perceived risks were illusory. According to the editorial, “there’s not really much utility in knowing just what app is being launched, realistically speaking.” And to boot, “ISPs could have that data if they wanted to without the limited info that Apple’s Gatekeeper may provide.”

By claiming others could gather even more data and that the data in question does not have “much utility”, the editorial did not provide any real refutation of Jeffrey Paul’s basic concerns. Instead, the writer for Apple Insider hopes for the best: “There’s not even the prospect of Apple pulling a Google and using this data, as Apple has been a voracious defender of user privacy for many years, and it is unlikely to make such a move.” In other words, just trust Apple to do the right thing.

The very next day Apple actually did do the right thing and stopped collecting IP addresses related to Gatekeeper’s developer checks – likely in difference to Jeffrey Paul’s research. The Apple Support Update released on November 16, 2020 states: “To further protect privacy, we have stopped logging IP addresses associated with Developer ID certificate checks, and we will ensure that any collected IP addresses are removed from logs. In addition, over the the [sic] next year we will introduce several changes to our security checks: A new encrypted protocol for Developer ID certificate revocation checks; Strong protections against server failure; [and] A new preference for users to opt out of these security protections.” These new safeguards address the exact issues raised by Jeffrey Paul in his blog.

Apple’s aspirations regarding consumer data control will likely cause it to continue butting heads with social media platforms guarding their data oligarchies and privacy advocates protecting consumers. As the world’s largest market cap company, however, Apple may be uniquely positioned to take on such challenges. Unfortunately, governmental intervention may be the only viable check on Apple should the company ever fully stray from its prior data privacy commitments. Given the current dysfunctional political environment, Apple likely has a long runway should regulators ever come knocking.

Electronic Health Records, Network Security, Privacy, Risk Management, Technology Law

Ransomware Groups Declare War on US Hospitals

October 31, 2020 Paul E. Paray

A recent phase of the ongoing two-pronged cyber war between Russia/Iran/North Korea and China against the United States has taken an ugly turn. The Russian faction has launched various sophisticated ransomware attacks against healthcare providers and hospital systems across the United States.

As stated in an October 28, 2020 Alert from the Cybersecurity & Infrastructure Security Agency (CISA), there is “credible information of an increased and imminent cybercrime threat to U.S. hospitals and healthcare providers.” In addition to the CISA Alert, cybersecurity firms battling this latest threat have shared how these latest attacks are perpetrated.

Our current healthcare cyber battle is further complicated given an October 1, 2020 Advisory from U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) reminding ransomware victims against conducting business with those on the OFAC list – including specific ransomware groups such as the Russia-based group behind the Dridex malware. The OFAC advisory is likely driven by the FBI – which has long advocated against victims making ransomware payments. No matter what the motivation, however, OFAC has exacerbated the current crisis given the OFAC Advisory warns the primary civil combatants against making violative ransomware payments, namely companies “providing cyber insurance, digital forensics and incident response, and financial services that may involve processing ransom payments (including depository institutions and money services businesses).”

Over the past several years, the cybersecurity community has seen a tremendous uptick in the deployment of ransomware – even leading to board level scrutiny. No different from SQL injection exploits that were commonly warned against so many years ago yet still remain an exposure for so many websites, ransomware will not go away anytime soon. The necessary cyber defensive skillset is far from fully disbursed to potential victims. For example, indicators of compromise (IOCs) shared with the cybersecurity community would likely be ignored by most IT staff given they do not even have the means of searching internally for IOCs within their network.

Taking into consideration the old adage: “If you fail to plan, you plan to fail,” healthcare providers and hospital systems should immediately seek out specialized cybersecurity experts who are currently fighting this battle before it is too late.

Legal and Business Advocacy