Cover Story (#09 September 2017)

Talk about Tomorrow

Electronics, social media, Internet 2.0 despite all of these innovations old-school lawyers are still wearing double-breasted suits and offering boilerplate services rooted in the industrial era. Big data, IoT, robots, artificial intelligence, uberization, the sharing economy and many other still unknown trends signal the post-industrial world. Axon Partners is often considered to be the strangest law firm on the Ukrainian market, partly because they work with technology businesses the guys who are taking the Ukrainian economy into the next era. Denys Beregovyi and Dima Gadomsky talked to us about fintech, legaltech and other tech-related issues of business and law.

How do you see Ukraine on the global map? Is it turning to a product-based paradigm?

Dima Gadomsky: I am sure, that if this was easy, then Ukraine would definitely switch from outsourcing to product. But this is like switching from being an emerging country to a first world one. Outsourcing is the easiest business model: you get the engagement and just do the work. You do not bear the risks of the product owner, you do not care about marketing the product or the competitors. You just do your very straightforward job write the code.

Changing this paradigm means, in particular, a willingness to accept much greater business risks.

Denys Beregovyi: One can say that running a product business in Ukraine is a crazy idea due to dozens of obstacles total corruption, semi-legal searches conducted by police and the SBU, raiders in key areas of business, unhealthy political environment, war in the East and an annexed peninsula. This should be enough for the average foreign investor to step back and look elsewhere. However, I still agree with Dima peoples mindset also matters. If most of the nation accepts that somebodys loans made in USD should be covered either by the state budget or by commercial banks it means people are not yet ready to bear risks on their own.

UJBL: Can you name any success stories of Ukrainian technology businesses?

D. G.: At the end of the day, outsourcing is successful. Otherwise, Ukrainian IT outsourcing wouldnt have made USD 3 billion in revenues and George Soros wouldnt have invested in Ciklum. Success stories of product businesses are much more exciting. There are a lot of (not a few, but really a lot of) Ukraine-based world-wide emerging companies. Startup has a bit of a negative connotation so we prefer emerging companies to name Invisible and Terrasoft pioneers of Ukrainian product business (they started a decade ago), Viewdle (acquired by Google in 2012) and jooble, Readdle, DepositPhotos, Jelastic they are not unicorns, but they are definitely a good start for Ukrainian IT entrepreneurship.

D. B.: I would also add Grammarly to Dimas list. It saved me during my Masters program. Of course, we may call the new generation of startups pretty successful Petcube, Ecoisme are well-known around the globe. Looksery became well-known when it was acquired by Snap Inc (Snapchat).

Still, my favorites are Coppertino with their Vox Player, MacPaw (maybe because I am an Apple-biased person) and startups like Hideez and Gravitec both found their own way to enter the Ukrainian market (a rare thing for the average Ukrainian startup) and be quite successful.

Ukraine does not have its own Wargaming or Skype yet, but we are on the right track.

European Union antitrust authorities are investigating Google, FB, Amazon for the use of data for competitive advantages of their own products. In view of Ukraine being on the path towards building a product-based paradigm, when do you expect such antitrust investigations in Ukraine?

D. G.: The worlds most valuable resource is no longer oil, but data I saw this quote from The Economist in April 2017. Since then, I think about it each time I make a route on Google Maps, add a new friend in Facebook or watch Netflix. Just imagine, how much information these guys (Google, Facebook, Netflix) know about me. I think a thousand times more than the SBU knows about any Ukrainian politician.

D. B.: Yes, lawmakers will probably never keep pace with technological development. Even the most recent legislative attempts in different countries demonstrate the lag between the current level of technology and ideas behind legislation. No wonder that even the EUs newly adopted GDPR has no way of regulating artificial intelligence properly (at least, when we talk about independent AI). However, it doesnt mean ignorance is a proper reaction to legislation.

For instance, there is a set of legal issues which right now is underestimated by Ukrainian tech clients, namely antitrust compliance, personal data protection and even consumer rights protection (and that is without mentioning things like Compliance in general or CSR issues). It clearly demonstrates that the Ukrainian market is far from being developed.

Considering Ukraine is still about to harmonize its legislation with EU standards, we will definitely see more attention from state authorities to the tech business. I wont tell the exact date but my bet is that the Ukrainian IT industry will fall under the spotlight of the Antimonopoly Committee of Ukraine. At least, the AMCU seems to be the most capable of regulating the market. Moreover, its early results in developing methodologies and regulating other markets (Telecoms, for instance) look quite optimistic tech businesses may face sensible treatment from the AMCU.

As for data protection the game changer is and will be the EU. GDPR is yet to comer into force but EU-based clients of Ukrainian tech businesses keep asking for compliance policies, data protection agreements, etc. I expect some kind of domino effect here once larger Ukrainian companies adopt GDPR rules, there will be no way to avoid them for their local counterparties. Thus, the awareness of the issue will be good and when Ukraine changes its legislation on data protection (and it should happen sooner or later) the tech industry will be quite ready, I guess.

There are rumors that identification will be required for the use of mobile services. How does this correspond with personal data protection and digital freedoms?

D. G.: Denys believes, that this idea is good. I think its not. Officials say that identification will help to investigate cybercrimes and prevent terrorist attacks. I close my eyes and see how top-rated hackers and terrorists obediently stand in line with their real passports to buy SIM cards. When pigs fly, as they say. All such initiatives are senseless and stupid.

D. B.: Actually, Im not a proponent of this initiative. Though, I see some scenarios in which identification of mobile service users could be valuable, like introducing a mobile number portability (MNP) service. My feelings about it are mixed there are good use cases for identification, while the main argument of some legislators state security fails when we look at the experience of other countries.

As usual, instead of providing state authorities with legal, uncracked software, closing tons of backdoors in our States electronic systems and simply deleting mail accounts from Russian web services, our legislators and the SBU fight terrorism in their own fashion.

Emerging companies have very small time-to-market timeframes. Does this affect their corporate structure, contracts, intellectual property management?

D. G.: Nobody knows exactly how the sharing economy works, and what artificial intelligence will look like in five years. So there are millions of businesses, who make prototypes and test them on potential customers. If they are succeeding, they get financing, and become bigger. I hardly imagine a corporation with budgeting, hierarchy, obligatory career plans and internal feuds between departments, playing in this lean canvas. So, companies are flexible, which does not mean just to say so on the website, they really are. For example, one of our clients a well known e-commerce project in pharma has an office with one man in it. Himself. All functions are outsourced and hence, he is not obliged to manage a payroll and he can always terminate contracts with developers or sales guys once the market changes.

The approach to intellectual property management is also different. It would be better for them to invest in one or two developers so as to be one or two steps ahead of the competitors, instead of patenting.

D. B.: For more than two hundred years, intellectual property rights have existed to encourage authors and inventors and to empower them to create. However, in the last decade IP is more of an instrument to slow down innovations and privatize knowledge. We do not deny IP as it is, we just do not believe that it is effective enough in our digitized world.

D. G.: Denys, this is what it says on our website.

D. B.: I know, because that was my idea.

But if classical corporations cannot compete with smaller players, will they just die, or are there other options?

D.G.: Those not ready for changes will die. Just look at Dell and EMC the dinosaurs of the servers market: they got merged and turned from public companies to private companies. Just because they lost the fight against the cloud-based businesses of Microsoft and Amazon. The big corporations hardly believe they can change themselves, but they can use their infrastructures for brand new businesses. For that reason they make spinoffs, create corporate accelerators and venture funds. Just look at Radar Tech a corporate startup accelerator set up by Kyivstar on the base of Unit.City. They invest their time and money in a number of teams, teach them and help to make a minimal viable product (a prototype). After a few months they implement the best technology in their business or acquire the best team. That is what big telecom corporations do around the globe.

D. B.: Definitely, telecom companies dont want to be dumb pipes they are switching to services. Kyivstars example also demonstrates our prior idea sometimes corporations dont even need to do their own R&D they could outsource R&D from such startup acceleration and incubation programs. To me it seems quite an indicator that large corporations change their business models, it just might not be visible for the general public.

Still, those eager to ride horses will ride them. But it wont be mainstream at all.

You wanted to talk about about financial markets. How come this is a topic for IT lawyers?

D.G.: PayPal changed the way people use the Internet it turned from being a communication platform to a platform for millions of commercial businesses. Nowadays, blockchain-based cryptocurrencies are changing the way people use money. One of our clients raised USD 18 million (in BTC and ETH) in less than one month by a so-called initial token offering. This means that classical investment instruments are disrupted dramatically by technology blockchain. That is why financial services are becoming fintech nowadays, and thus the reason why you are talking about the financial market with IT lawyers.

Dont you feel that the current situation with initial coin/token offerings is similar to the history of Wall Street?

D. G.: Very similar to what happened two centuries ago in the US: entrepreneurs were setting up entities (which later became called companies) and trading something (which later became stocks). Industry, and railways in particular were growing dramatically, so the stock market kept up. The SEC was not that strict, so one day Black Tuesday happened. This is the worst case scenario for the Bitcoin and Crypto Tokens business. But this scenario is unlikely to happen, since the SEC learned its lesson and already actively regulates the crypto market.

D. B.: Wall Street is an optimistic example. Many people compare ICOs with Ponzi schemes and successfully find some similarities. Blockchain itself is a groundbreaking technology which one might use with some fraudulent intent. The main legal challenge here will be preventing technology from getting banned due to fraud (which will happen, unfortunately), while still developing secure (but not too bureaucratic) frameworks for easier fundraising and investment.

Facebook recently shut down its AI project, since the neuronet invented its own language. You position Axon Partners as an IT law firm. Arent you afraid of being part of some technology-driven apocalypse?

D. G.: H. G. Wells predicted the apocalypse a long time ago, and it did not happen to the best of my knowledge. So I see no reason why it must happen today or tomorrow. I trust that people are smart enough to stop the creation of an Alien. Like Facebook did.

D. B.: Id rather be disturbed by people getting stuck in virtual reality it is way too easy to control them (not mentioning silly headsets and nausea as an adverse effect).

There are countries, which try to regulate robotics. What about Ukraine?

D. G.: Not many. Nobody has decided how to do that. Everyone knows about the key laws of robotics and it is not a big deal to put these laws into Laws. In Axon Partners we had a number of internal hackathons about the way robotics must be regulated. We are still not sure whether the services provided by robots have to be tax exempt, we are not sure who shall be responsible for damages caused by the robot (the robot itself, similar to legal entities, or the owner of the robot), and how humane it is to switch off the robot. But we keep brainstorming on this.

Some lawyers dislike you for trolling their suits and legalese. Is this just your marketing strategy or do your clients really not accept the old school approach to the provision of legal services?

D. G.: A young lawyer has to play by the rules of the law firm for which he works, and the law firm has to play by the rules of the legal market, and the legal market follows the clients. This circle is nothing new, except for two things: clients are different and people are different. We work with so-called techies innovative, smart, young people with no need to buy a golden toilet bowl to show off their wealth for all the world to see. People who were born with smartphones in their hands are different from those who remember real floppy disks. We do not know yet what the difference is, but for sure these people are not ready to play by the conservative rules of the legal market. That is why I like to troll myself as I worked more than 10 years as office plankton as well as other lawyers who have still not switched to the post-industrial world. Den was also office plankton, but he doesnt like to talk about that experience.

D. B.: Honestly, I love wearing suits. Still, I think that the legal profession is not about suits but rather people. Thus, lawyers should act and talk like people and thats something which is missing when law graduates start their careers at suit-and-tie law firms.

The most inspiring thing about being a different (or even an odd) law firm is the feedback I get from colleagues of my generation they humbly wait for other firms to move with the times.

There is big hype about bots and the use of AI for legal services. You like to talk at conferences about the downfall of lawyers. Is this really so and when can we expect, as you often repeat, the complete death of the legal market?

D. G.: We were among those who started this hype a few years ago. Some could say that so far there hasnt been a bot which could replace a lawyer. But there is one bot which most of us use at least this year OpenDataBot. This guy changed the way we search for information about legal entities: instead of looking in the official registrars website, we just put the keywords in our Facebook Messenger or Telegram. Each month, the developers add something new to their functionality: the possibility to get notifications on the changes in the registry, advertising opportunities, search for beneficial owners. This means that in a couple of months we can see a simple AI in it, the more people that use the bot, the more sophisticated AI will become. So, such new technologies like bots will be replacing lawyers very slowly. But lawyers wont die, they will become legal engineers.

Axon Partners Key facts

  • Year of establishment:
  • 2016

  • Number of lawyers/partners:
  • 9/11

  • Core practice areas
  • Technology

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