09 Jul 2021
Despite congenital popularity on the financial fringe, bitcoin – the most prevalent variant of cryptocurrency – has just recently begun to enter the realm previously occupied solely by traditional forms of currency. In mid-2021, the country of El Salvador became a world-first as they opted to officially accept bitcoin as legal tender, capping of an impressive 6 year run during which bitcoin had gone from obscurity to being equaled to physical currencies by a member of the UN – achieving status as a tradable commodity, getting VAT-exempt status across the EU, and becoming a pop cultural icon on SNL in the process. But although bitcoin has built much of its repour as an alternative means of investment through lackluster regulation and loose connection with banks and other national institutions, its increased popularity has brought in major stakeholders to the crypto game. In coming to terms with the inherent volatility of all-digital currencies, some are now calling for protection from losses on investment. Has bitcoin finally met its regulatory Waterloo?
What is the Problem?
The latest development in what has become a series of clampdowns by the British authorities is an FCA ruling banning Binance, the world’s largest cryptocurrency exchange, from conducting regulated activity in the UK. Although the FCA does not regulate cryptocurrencies directly, they do require exchanges to register with them, a demand that links well with the current global pushback against cryptocurrency platforms by national authorities.
As Bitcoin and its users has become increasingly mainstream, the problematic matter of centrally regulating something that was designed to be decentralized and unregulatable has likewise become obvious. Internal maintenance of anti-money laundering and counter-terrorism financing rules are lackluster in many British cryptocurrency firms, according to the FCA.
The line that the FCA now draws in the sand suggest two alternative outcomes to the Bitcoin boom: either the British cryptocurrency industry goes underground, or it becomes a regulated commodity trade. In any case, the time for understanding the raison d’etre of cryptocurrency is in the past – what lies ahead now is evaluating its regulation and compliance with existing market structures and legal statutes.
What should Lawyers do?
Cryptocurrency, and especially Bitcoin, going mainstream will mean new challenges for the legal world. It will mean continuous education and the implementation of new practices for in-house counsels and commercial lawyers, who are either directly or indirectly affected by the volatility or legal ambiguity of crypto assets, as well as for compliance experts and financial regulators, who will bear the brunt of the responsibility for creating best practices and guidance for the investment in, and trading of, cryptocurrency.
In an attempt to remain pro-active and ahead of the curve, legal professionals – and ADR lawyers especially – may want to have the following in mind:
1. Contractual and Jurisdictional Issues
So-called smart contracts has become increasingly popular among end-users and are a result of the technology that also powers cryptocurrencies – the blockchain. Smart contracts rejects the traditional structure of offer, acceptance, consideration, consent, and execution in favor of a code-based and automated format that may be executed automatically and instantly.
In lieu of BTAs and other transnational agreements that can set out the framework for international contractual relations, contract law is usually enforced under national law. However, blockchain technology is not – in the traditional sense – located in any one geographical location. This gives rise to both contractual and jurisdictional problems that may spell trouble for national regulators as well as disputing parties.
2. Fraud, Privacy, and Taxation Issues
The large portion of perceived anonymity afforded those trading in Bitcoin via blockchain technology has led to concerns that cryptocurrencies may be the default method of payment for those with illicit or illegal intent. Major security flaws in the Ethereum blockchain, for example, were discovered all the way back in 2017 by a Cornell researcher and believed to have put millions of dollars at risk of theft.
The aforementioned notion of relative anonymity on the blockchain also have many believe that their identity as users are end-to-end protected. This anonymity, however, has been proven to oftentimes be greatly overstated.
In the EU, Bitcoin was given VAT-exempt status and crypto assets qualified as financial instruments, whilst it in the U.S. – who lacks federal VAT on goods and services – was classified as property. The disparity in legislation is thus a hotbed of potential disputes related to perceived wrongful taxation.
3. Intellectual Property
Cryptocurrencies in IP-intensive industries has increasingly raised concerns about ownership and authorship. The rise of NFTs added additional friction between artists and investors in relation to distribution of IP, registered or otherwise. Establishing, controlling, and in the last instance also enforcing IP licensing agreements or exclusive distribution rights may very likely become a breeding ground for complex disputes.
Although the risks of using crypto assets for trading, payment, or savings are many, it does not seem to be enough of a deterrent for those already won over by the allure of blockchain-based currencies. Spurred on by this technological advancement, offshoot technologies, such as smart contracts, represents further challenges to the lex lata that does need to be addressed by both lawyers and lawmakers.