Blockchain Law: A New Frontier

By JamesIrving | Legal Mongrel | 10 Aug 2020


 

Photo: Regierungsviertel, Berlin, by geo pixel

One common feature of legal systems worldwide is that they tend to evolve. Today many countries have laws that make cyber-hacking a criminal activity, but there were always laws against interfering with other people's property. This is an example of the law becoming more specific over time. Blockchain is a relatively new technology. We are now seeing new laws being created in various countries to deal specifically with issues related to blockchain.

NEW BLOCKCHAIN LAWS

Generally speaking, it is better for citizens for their laws to be clear and specific. We have seen a lot of arguments and court cases in the US, for example, about whether digital assets are securities. If so, coin and token issuers must comply with the existing rules that control share issues. Part of the reason for the arguments was that people, including maybe even the American regulators, weren't sure whether a digital asset was a security or not. To take a hypothetical example, if I invented a flying car, would it be classed as a car or a plane or both? Would I also need a pilot's licence? Would I need to register the flying car with both the civil aviation authority and also the car registration authority? New technological developments are disruptive, and when they intersect with the legal system, which is usually inflexible and deals with predefined categories, like "car" and "plane", problems often result.

A couple of examples of the new generation of blockchain laws that are intended to reduce the scope for confusion and difficulty are Malta's Virtual Financial Assets Act  of 2018 and Liechtenstein's Law on Tokens and Trustworthy Technology System Providers of 2020, also called the "Blockchain Act". Both of these laws, and indeed any other law made by any country specifically to regulate applications of blockchain technology, have to do at least two things. The first thing is to set up a sensible system of rules that apply to the subject: the issuing and exchange of digital assets or whatever. The other thing is to integrate those rules with the existing legal system, including the existing set of rules that govern the issuing of securities, financial products, the licensing and regulation of investment advisers, and so on. And, because Malta is a member country of the European Union (EU), and Liechtenstein is in the EEA (European Economic Area), these two laws must also achieve some level of integration with the wider EU policy framework.

EXAMPLE: MALTA'S VFA ACT

I recently attended an online presentation called Malta: A Vibrant Economy for Sustainable Business  given by Malta Enterprise for the International Business Council. Malta is an example of a smaller country which has a pro-business policy and is making an effort to be an attractive destination for business investors who will create new jobs and otherwise boost the Maltese economy. Part of this approach includes being an early adopter of laws in emerging areas, including blockchain applications, and the VFA Act is one of the world's first laws purpose-built to govern digital assets.  

To give a quick overview of this law, it:

  • adopts a definition of DLT (distributed ledger technology);
  • applies this definition to some new concepts, including "DLT asset", which includes a virtual token and electronic money, and a "DLT exchange", which is a platform or facility for trading and exchanging DLT assets;
  • defines the concept of a "VFA service" which includes a range of services connected with DLT assets;
  • sets up a licensing regime for "VFA agents" to allow them to provide "VFA services", such as portfolio management, custodian services, and investment advice; and
  • sets up rules for the minimum contents of whitepapers.

Photo: Piano at dusk, by Didi8600

The law is 59 pages long, and the above is an extremely simple summary. To find out more, have a look at the FAQs published by the MFSA (Maltese Financial Services Authority) or the law itself. The law also interlinks with a number of other Maltese laws and EU directives. It borrows definitions from existing laws, and complies with EU directives, for example by allowing the Maltese regulator to exchange information with EU authorities.

One interesting feature - especially in light of the expensive, time-consuming and prolific litigation that is currently taking place in the US in relation to digital assets - is the detailed menu of items to be included in whitepapers, which is set out in the First Schedule (pages 52-57) of the VFA Act. Malta is actively developing its legal system to encourage blockchain-based business. It is currently developing a specific set of rules for STOs (security token offerings), which has just passed the industry consultation stage: see the MFSA's summary of the feedback it received during this consultation.

Malta may be a relatively small country on the world stage, but it is providing a great example of the importance of creating a purpose-built legal regime that will encourage players in the blockchain industry to do business there with legal certainty and without fear of being prosecuted by regulators and sued by customers. The video presentation linked above includes comments by the owners of international technology companies that have set up operations in Malta. The Maltese have also established up an innovation hub on the island of Gozo. All of these things fit together into an intelligent approach towards encouraging blockchain-based businesses. One blockchain developer I know often says that uncertainty over "red tape" consumes a lot of energy and stifles innovation. The creation of new blockchain laws like Malta's VFA Act should reduce this stress.

[Photo credits: Regierungsviertel - BERLIN (2013) by geo pixel CC BY-SA 2.5 and Piano at dusk (2017) by Didi8600 CC BY-SA 4.0, both courtesy of Wikimedia Commons. This post is a basic level, educational and informational discussion of legal concepts. It does not constitute legal advice for any person, nor does it create a lawyer/client relationship with any person. Although care has been taken to ensure that the law is described correctly at the time of publication, no guarantee of accuracy is provided. The author is a lawyer involved in blockchain projects. You can visit his website at https://irvinglaw.com.au ]

 

 

 

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JamesIrving
JamesIrving

I'm interested in new technology, especially blockchain. I'm a lawyer for some blockchain projects.


Legal Mongrel
Legal Mongrel

Commentary and analysis - legal and other.

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