The SEC generally has regulatory authority over the issuance or resale of tokens or other digital assets that make up a security. Under U.S. law, a title includes “an investment treaty” defined by the U.S. Supreme Court as an investment of money in a joint venture with a reasonable expectation of profits from the business or management efforts of others. SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946). There is no fixed “blockchain law”, so we interpret existing legal and regulatory concepts in light of this new technology.
As the scope of use cases increases, legal certainty will also increase, but this will take time. For any project, integrate regulatory compliance into the design from the outset. Perhaps the most interesting aspect of the report and the need for a second edition so soon are the changes we have already seen in terms of crypto asset regulation and the growth of NFTs since the first edition. Crypto assets remain the main use case of blockchain at this point. There are more than 100 mentions of NFT in the new report. NFT madness is certainly a bubble at this point, but the question is, as with the ICO bubble, what remains when the initial hype disappears. If ICOs are a guide, the answer is that there will be a clear market for crypto assets (including NFTs) that is unlikely to disappear, especially as big brands, companies, and influencers continue to increase the adoption and spread of mainstream awareness. It will be important for lawyers to continue to apply regulations in this area. In addition to developments from financial regulators, we have seen that the ASA has issued a crackdown on crypto ads, and the Legal Commission plans to release a consultation paper on NFTs and crypto tokens in the summer of 2022. When building and scaling the blockchain network and establishing governance, which are discussed in the Ecosystem, Consortium Formation, and Consortium Governance modules, it is important to understand the important legal considerations. This and the following areas of interest address the most common legal concerns when building and managing a blockchain network. As mentioned in the Jurisdiction subsection of the Focus section Common legal and regulatory issues related to the use of blockchain for this module, in a decentralized environment, it can be difficult to identify the appropriate jurisdiction requirements that apply to a particular blockchain platform.
Since nodes can be located anywhere in the world on a decentralized platform, networks often cross jurisdictional boundaries. A report containing legal and regulatory advice on distributed ledger technology (DLT) has been published by the Law Society in collaboration with Tech London Advocates` Blockchain Legal and Regulatory Group. The report follows the legal opinion on the state of cryptoassets and smart contracts published by the UK Jurisdiction Working Group in November 2019. It offers best practices for lawyers working on transactions with cryptoassets, smart contracts and other DLT applications, and addresses key legal and regulatory issues related to these technologies, including the interaction between intellectual property and cryptoassets, cryptoasset regulation, dispute resolution mechanisms and data protection and data governance in DLT systems. However, some smart contracts themselves are structured as legal contracts and therefore have full legal force. In such cases, it is necessary to understand how they meet the requirements for the conclusion of the contract in different jurisdictions and how they are interpreted and interpreted by a court or arbitration commission in the event of a dispute. Further information on these issues can be found in the focus area Understanding network responsibilities in this module, where this is discussed in more detail. The checklist is not intended to be an exhaustive list of legal and regulatory issues and does not replace specific legal advice. The latter must be sought on a case-by-case basis for each project, as the legal and regulatory requirements will always be specific to the project. However, this checklist is meant to help formulate the key questions, and it should be useful as a starting point for the process of engaging with legal counsel for any blockchain project in the supply chain space. Note that this consideration does not only apply to blockchain, but applies to all digital contracts, including smart contracts.
As mentioned earlier, clear legal documentation on all aspects of the blockchain network, such as legal structure, accountability, and governance, is essential for clarity. In addition, it is important to ensure that the following are taken into account and covered as part of the legal documentation of a blockchain network. Since the publication of the first edition of this guide, the hype around blockchain technologies has continued, with ideas such as “metaverse,” “decentralized finance (DeFi),” and “non-fungible tokens (NFT)” attracting significant attention. But it is becoming increasingly clear that the economy is catching up; The ecosystem has changed. Venture capitalists are increasingly comfortable investing in technology, as evidenced by the huge cryptocurrency-focused fund created by Andreessen Horowitz`s venture capital firm ($2.2 billion), blockchain-focused software companies like ConsenSys have rapidly grown to evolve and beyond, and real-world use cases are now being used by clients in various industries. All this shows that technology is more than just a fad. It`s clear that lawyers are starting to become familiar with DLT and other emerging technologies such as smart legal contracts and cryptoassets. Another point of tension for anti-money laundering laws is the advent of decentralized finance (“DeFi”). DeFi is the unauthorized decentralization version of various traditional financial instruments focused on asset swaps, loans and borrowings, as well as the creation of synthetic assets. For example, Uniswap is a decentralized exchange in the form of two smart contracts hosted on the Ethereum blockchain, as well as a public open source front-end client. This ultimately allows anyone with an internet connection to exchange many of Ethereum`s native tokens with other users of the app. Uniswap does not have a verification process for customer identification due to its open source nature, and in fact, circumvention of AML laws is touted as one of Uniswap`s core values in the cryptocurrency community.
As of August 2021, more than $40 billion in transactions have taken place using the Uniswap protocol. In September 2021, it was reported that the SEC had launched an investigation into Uniswap Labs and its Uniswap protocol. Data protection and cybersecurity must be carefully considered when designing a blockchain solution. Important questions to ask in this area include: Essentially, the dual challenge facing blockchain network participants at the moment is to ensure that they comply with applicable regulations while mitigating as much as possible the business risks associated with possible changes in the regulatory environment. There are specific legal and regulatory regimes that apply to different types of transactions, and the legal and regulatory requirements, as well as the suite of documents associated with these types of transactions, can differ significantly (both within the same jurisdiction and across borders). For transactions made no later than December 31, 2017, the IRS has not issued guidance on whether different cryptocurrencies are “property of the same type” that would be eligible for non-recognition of earnings under Section 1031(a). In general, exchanges between different cryptocurrencies are usually done either (i) through a simultaneous exchange of one cryptocurrency for another, or (ii) a deferred exchange where one cryptocurrency is sold in cash, followed by a cash purchase from another cryptocurrency. Under the Banking Secrecy Act (the “BSA”), FinCEN regulates MSBs. On March 18, 2013, FinCEN issued guidelines stating that the following would be considered MSBs: (i) a virtual currency exchange; and (ii) an administrator of a virtual currency trade repository who has the authority to issue and exchange the virtual currency. FinCEN has issued guidelines that read as follows: “An administrator or exchanger who (1) accepts and transfers convertible virtual currency, or (2) buys or sells convertible virtual currency for any reason, is a transmitter of money under FinCEN regulations, unless a restriction or exemption from the definition applies to the person.” See FIN-2013-G001, Application of finCEN Rules to Persons Managing, Trading or Using Virtual Currencies (March 18, 2013).
The blockchain network can be subject to tax in many jurisdictions. Careful analysis should be carried out to ensure that the network understands where it is subject to taxes or other information reports. For more information on tax considerations, see the Tax Impact module. Another consideration for participants at the beginning is who is responsible in an approved network for cases such as data breaches or smart contract errors. This is essential to take this into account in advance to ensure that the network operator/network operator implements appropriate systems and controls to mitigate these risks. There is a wide range of legal considerations regarding this type of “legal” smart contracts: Blockchain technologies can expose the blockchain network operator and/or network participants to legal and regulatory uncertainties, as many governments and regulators are still working to understand blockchain and determine whether certain laws should be updated to adequately address decentralization. There are still significant legal and regulatory uncertainties related to blockchain solutions, especially across the jurisdiction. Network operators and subscribers are responsible for assessing their own regulatory position and ensuring compliance.
