We share some considerations for drafting future blockchain laws.
By now you would have realized that Blockchain is not going away. It is here to stay. More and more, businesses and governments are now moving to the Blockchain.
Here, we identify some things governments should consider, when drafting future Blockchain laws.
Responses by Governments to the Blockchain have fallen into one of several categories.
They can be distinguished between those in response solely to cryptocurrencies, and those in response to Blockchain technology.
Future Blockchain Laws: Government Responses to Cryptocurrencies
In this space, there are several categories of responses.
First, to legalize cryptocurrencies and trading in cryptocurrencies. For example, to create a class of businesses which are allowed to trade cryptocurrencies. An example of this is the BitLicense given by the New York State Department of Financial Services. New York’s laws requires that virtual currency businesses hold both BitLicenses and money transmission licenses. Another example is the recognition of cryptocurrencies as legal tender, such as Japan.
Second, to restrict trading in cryptocurrencies, or cryptocurrency-related activities. An example is the ban in China of all ICO’s. Chinese banks were also restricted from converting fiat to cryptocurrency, and vice versa. However, in China, it seems cryptocurrency users are not forbidden from converting between different types of cryptocurrencies.
Third, to declare that cryptocurrencies are unregulated, that cryptocurrencies are not legal tender, and that the public should exercise caution when dealing with cryptocurrencies. This has been the response of many nations, including, most recently, India, Brunei, and Singapore. Malaysia’s central bank has followed this path.
Fourth, to declare that trading in cryptocurrencies are not restricted. An example of this is the Second Finance Minister of Malaysia, who recently declared that there is no ban on cryptocurrency trading. This is not quite the same as saying that trading in cryptocurrencies is recognised as legal tender. It merely means that cryptocurrency is unregulated, and without regulation, there is no penalization.
Fifth, to try and create national-type Cryptocurrencies. An example is Estonia, which wanted to create its own national Estonian cryptocurrency.
Future Blockchain laws: Government Responses to Blockchain Technologies
Note: Since there are many types of Blockchain protocols today, it would be helpful to refer to Blockchains as Blockchain technologies, rather than just Blockchain technology.
First, to implement licensing of organizations dealing with Blockchain, or cryptocurrencies in particular. The BitLicense example from New York referred to earlier is applicable. In Japan, crypto exchanges have to be licensed by the Government.
Second, to study and further the role of Blockchain as legal evidence. An example is the state of Vermont which, in 2017, passed a bill to require the Center for Legal Innovation at Vermont Law School to deliver a report on the Blockchain, which it described as “financial technology”. It was to explore the use of Blockchain records as evidence.
It would cover:
- findings and recommendations on opportunities and risks presented by financial technology;
- suggestions for an overall policy direction and proposals for legislative and regulatory action to implement that policy direction; and
- measurable goals and outcomes to indicate success in the implementation of such policy.
It is not clear whether the report led to any new law being enacted. (Please leave a message if you have an update.) Earlier, a 2016 report by Vermont’s Secretary of State said the cost of maintaining a Blockchain is too costly and outweighs its benefit.
Third, legal recognition of Blockchain, and its technologies, in fulfilling functions similar to existing technologies or norms. For example, in 2017, the US state of Arizona passed law:
– to recognise Blockchain technology as “distributed ledger technology”
– to deem signatures secured with Blockchain technology as electronic signatures
– to recognise the legality and enforceability of smart contracts
The Arizona bill excludes the creation and execution of wills, codicils and testamentary trusts.
The definitions used in the Arizona bill quite useful.
- “blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored truth.
- “smart contract” means an event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and instruct transfer of assets on that ledger.
Fourth, to implement Blockchain technologies in parts of government processes. An example is the state of Illinois in the USA, which uses Blockchain for registration of births and deaths. Another example is the country of Dubai, which uses Blockchain for immigration records.
Fifth, to use Blockchain for registration of company shares. This is currently awaiting approval in Delaware. If approved and successful, the proposal would be implemented using three components:
- Smart records, which are records on a public Blockchain using distributed ledger to comply with document retention laws;
- Smart UCC filings, which are electronic filings using the Blockchain, to replace existing paper-based filings;
- Distributed ledger shares are shares issued on the Blockchain, or tokenized on the Blockchain.
Here are some suggestions for drafting future Blockchain laws
First, differentiate between Blockchain technologies, and cryptocurrencies. All cryptocurrencies involving a Blockchain are tokens — native tokens or asset-backed tokens.
Because of increasing demand for cryptocurrencies, the price of cryptocurrencies has been shooting up. Focusing on the price is a mistake.
Instead, it is better to focus on the uses of the token itself. What can the token do, and what are its intended uses?
It is better to recognise and categorize the various uses of native tokens. Some of them may include store of value (currencies), access to platforms, voting rights, share of profits, etc.
So, if a Government is not banning the use of cryptocurrencies, it should maintain a register of crypocurrencies operating in its borders. It is better to either maintain a watchful eye or allow cryptocurrencies altogether.
At a later stage, Governments might recognise certain cryptocurrencies as legal tender, while disclaiming all others as legal tender. This might even lead to a national cryptocurrency which is issued by and backed by a Government.
Second, require that Blockchain service providers maintain at least a few nodes to keep the Blockchain in continuous existence. Part of the promise of Blockchains is that records are immutable and indelible. However, if all the nodes in the network are shut off, the Blockchain itself will cease to exist.
For that reason, an originator or inventor or even fork-er of a Blockchain who induces others to use the Blockchain, owes a responsibility to the users of the Blockchain. That person should be responsible for keeping the Blockchain continuously in operations.
Because one of the promises of the Blockchain is that every node in the network is an exact copy of the next one. The Blockchain would do well in case of any attacks, provided that there is sufficient redundancy.
Depending on the algorithm of the Blockchain, there is also a need to provide a certain number of nodes, to prevent a Sybil attack or a 51% attack on a public Blockchain. So in a Proof of Work Blockchain with a great number of nodes, such as Bitcoin, an attacker would find it difficult to attack. However, in a Proof of Work Blockchain with a small number of nodes, an attacker might be successful.
NEM’s Proof of Importance attempts to get around this by requiring that rewards be “harvested” according to the importance of the node. It is a modified Proof of Stake, which also requires the staking of a certain number of tokens for a certain period of time.
But that’s all aside from the point. The point is that the Blockchain is a promise. And it must be kept functioning for the benefit of its users.
Third, to the extent that the parties using Blockchain platforms agree to be contractually bound, recognise and legalize such aspects, such as smart contracts. The existence of this new mode of automatic, self-executing instructions, deserves to be looked at by Governments. Smart contracts on the Blockchain can be examined and taken apart by the casual examiner.
The rise of new technologies which will make use of smart contracts will all be rendered useless, or threatened, if governments do not recognise the binding nature of the smart contracts and the contractual obligations entered into.
When Paypal was first launched, it was revolutionary and there was nothing like it. Suddenly, people could send money overnight from one email to another. But it did not fall into any recognised category of regulated instruments.
Today Paypal is recognised. There is a whole category of online money remittance licences which can be called by different names : e-money licences, online wallet licences, and such. Paypal had to be recognised by governments, because there was a demand for it.
Governments need to recognise the demand for features of the Blockchain, and study how they can be categorized into some kind of ontology. From there, it would be easier to regulate future Blockchain laws. After all, you have to know the nature of the beast before you can tame it.
Fourth, malicious use of the Blockchain should be made offences. Arguably there are already existing laws to do this. Laws already exist to prevent abuse of technology for nefarious purposes, to prevent money laundering, etc. However, it is arguable that the promulgation of new laws, specific to Blockchain, would help to further the legal landscape for Blockchain technologies, while at the same time allowing players in the Blockchain industry a chance to comply with the Government’s requirements.
An example is a prediction by one computer scientist who said, there will be a malicious smart contract written one day, which will have the same goal as computer viruses : To hack, to steal information, to corrupt information, and even to make profit for its writers.
What’s there to stop someone from writing a malicious smart contract? This can be easily addressed if the authorities think about what should not go into a smart contract. Killing someone should not be part of a smart contract. Anything affecting life and livelihood of anyone should not be part of a smart contract. Imagine if one day, a mad scientist were to build an army of bots which are powered by smart contracts. “Go,” he tells his robots, “Kill all those who do not have xxxxx.”
What do you think would happen? Smart contracts are immutable. They are communicated once and are executed when the conditions are fulfilled. There is hardly room for error. No margin to say, “Oops, I did it again.” Smart contracts, like diamonds, are forever.
This is just an attempt to suggest points that drafters of future Blockchain laws may want to consider. Our team of lawyers are very much enamoured by the technology, but we also realise that Governments around the world are approaching this new technology with fear.
To you, we say, fear not the future blockchain laws.
We are here and we will be happy to offer our advice to you.