Are there any other key issues concerning blockchain technology in your jurisdiction that legal practitioners should be aware of?
Entities offering solutions that incorporate blockchain technology (as well as their legal advisers) should be aware of the regulations that may apply to the broader context in which the solution is offered. This particularly relates to the extent to which the general public may not accurately understand how the blockchain components operate, and how they fit within the overall solution.
The ACL provides various consumer protections in relation to goods and services sold to Australian consumers (irrespective of where the business is located). These protections include prohibitions against:
- misleading and deceptive conduct;
- false or misleading representations;
- unfair contract terms; and
- unconscionable conduct.
Where the blockchain solution forms part of a financial services offering, the Australian Securities and Investments Act 2001 (Cth) will apply, and sets out identical consumer protections as the ACL.
Therefore, where an offering incorporates blockchain technology, entities must ensure that consumers have the necessary information to understand how the solution works, the purpose and use of the blockchain components and what that means from an end-user perspective.
We believe that most of the current key issues are addressed or mentioned above.
The usage of Blockchain technology itself is not subject to authorisation, due to the fact that Blockchain technology is only a technology. Depending on the business-model, an authorisation by BaFin is required, though. Another problem that might occur is that Blockchain generally works without regard for national borders, especially in public Blockchain scenarios, which creates the possibility of two parties being located in two different jurisdictions. This might cause an issue over the applicable law.
Another problem might be the irreversibility of each transaction and the long duration of the confirmation regarding the correctness of transactions.
This area is one that is evolving quickly and receiving a lot of attention from international regulators and legislators. Unlike other small countries in the EU which have been quick to introduce blockchain-specific legislation at national level to address the current lacunae under EU law, any major reforms in Ireland in this context are much more likely to be driven by and in line with its requirements under any future EU-level reform.
The increased transparency of blockchains could lead to competition law infringement. Indeed, using a blockchain often entails sharing commercial information in a context open to competitors; thus, blockchain technology could be used in such a way that facilitates – or even constitutes – collusive conduct.
Moreover, when a blockchain platform is used, management of the platform from an IT and IP standpoint needs to be arranged. Thus, attention must be given to the allocation of IP rights on the platform, especially if the blockchain’s development requires particular effort from IT providers given that most blockchain platforms in their basic form are licensed free of charge (e.g., Corda and Hyperledger).
Software patentability is generally excluded under Italian law because software cannot be considered an invention per se (Art. 45 of the Italian Industrial Property Code). However, Italian law does envisage software safeguards through copyright protection (Art. 64-bis of Italian copyright law), which is granted if the software meets the creative requirements set out in the copyright law.
Furthermore, business knowledge can be protected as a business secret. This protection ensures that no-one can use secret information developed for business purposes. The fact that the information is secret ensures protection is granted.
As noted under Q13, an ERTR is required to be “represented by proprietary value transferrable by means of an electronic data processing system (but limited only to proprietary values recorded in electronic devices or otherwise by electronic means).” As this language is consistent with the definition of Crypto Assets, Crypto Assets that are transferrable on blockchain (as is the case with bitcoins) may constitute ERTRs.
Incidentally, as stated above, ERTRs are expected to consist mainly of CISIs of some kind. It should be noted, however, that CISIs as exemplified in Article 2, Paragraph 2, Item 5 of the FIFA (other than for membership interests in incorporated associations) are stipulated as contractual rights under applicable laws and regulations. To transfer contractual status, the consent of the counterparty to the contract is required . For example, where ERTRs represent the status of silent partners (tokumei kumiai-in) under silent partnership agreements (tokumei kumiai keiyaku) as set forth in the Commercial Code, then even if such ERTRs are recorded on blockchain as being transferred from the assignor to the assignee, the status of the silent partners would not be deemed to have been transferred as a matter of course to the assignee if the consent of the operator (eigyo-sha), who is the counterparty to the contract, has not been obtained. This issue needs to be resolved. A possible solution is to provide in the relevant silent partnership agreement that the operator will be deemed to have provided its consent to a transfer of contractual status, if a silent partner transfers its contractual status on blockchain.
The main blockchain specific initiative in Liechtenstein is the aforementioned Liechtenstein Blockchain Act. Seeing that upon passage this will instate certain registration requirements, basic information requirements, and governmental oversight in the realm of blockchain; this becomes the main initiative that legal practitioners should be aware of.
Depending on the sector (for example, healthcare, pensions, logistics), different rules and regulations apply, which can lead to severe fines and penalties in the case of non-compliance. Therefore, obtaining national legal advice tailored to a particular use of blockchain is highly recommended.
It is worth saying that there is no legal definition of the concept “blockchain” in Russian legislation. Furthermore, there is no separate law that would regulate the sphere of blockchain.
The next issue is related to the concept “invalidity” of a transaction made through the blockchain recording system. The system is constructed in such way that the invariability of the information entered is guaranteed with a high degree. In these conditions remains unclear how can restitution be implemented in this system and how consequences of an invalid transaction can be applied.
Another problem highlighted by the Russian lawyers is the anonymity when blockchain technology is used. If a transaction made on blockchain is challenged on some grounds, the questions of responsibility may arise. This issue remains unregulated as well.
Although there are no explicit border restrictions or obligations to declare cryptocurrency holdings, the Foreign Exchange Transaction Act (“FETA”) and the Foreign Exchange Transactions Regulations (“FETR”) regulate the remittance of funds out of Korea to overseas accounts for fiat currencies. The FETA prescribes certain procedures and documents for each type of transaction listed in the FETA for both the remitter of funds and the banks handling the remittance. Each type of transaction has different procedures and requirements to remit funds overseas. Neither the FETA nor the FETR have guidelines regarding cryptocurrencies, but in practice Korean banks generally decline to process foreign exchange transactions related to cryptocurrency trading, even if the amount of such transactions is below the monetary limits that would trigger the reporting requirements under the FETA.
Legal practitioners should be aware of the fact that Swedish law has generally not been adapted for this rather new technology.
It should also be noted that there are still uncertainties under Swedish law as to how virtual currency should be classified. The SFSA currently says that bitcoin and other similar currencies should be seen as “means of payment”, but the classification may not necessarily be the same for all and there may be further legal development in this regard.
To ensure legal and regulatory compliance, the legal qualification of commercial applications of blockchain technology, tokens and activities relating thereto must be assessed in the individual case prior to implementation. This has to be considered in the project management from the very beginning.
This technology raises massive issues that legal practitioners need to be aware of that the law has not yet begun to address. Here are a few examples: at the Cryptocurrency and the Law workshop mentioned earlier in this piece, the central bank disclosed that internal discussions are underway on the establishment of a Central Bank Digital Currency. If the launch of Facebook’s Libra is to succeed, this will have major implications on how we understand the financial sector, questions of remittance (which are a major part of Uganda’s financial sector), and digital identity will all come to the fore. CryptoSavannah has already developed a stable coin whose value is pegged to the Uganda shilling. Such products will impact on both banking and mobile money remittance and transfers in Uganda. Every lawyer advising the central bank, a financial institution or telecoms in Uganda will need to know how this will impact their clients. They must understand blockchain technology.
The impact on blockchain on our understanding of privacy in the Ugandan legal framework, national security, asset registration and its impact on the representation of value and ownership – this is especially important as it will impact on how certain traditional questions such as proving fraud and malicious intent are handled by the courts. A lot of legal work in Uganda is related to these questions and lawyers need to be aware of this new frontier.
Corporate law, Insolvency practitioners and all inhouse counsel at regulatory institutions or any external counsel advising such regulators need to consider questions such as registration, governance and resolution of decentralized autonomous organizations both in the way that such organizations operate and in the context of insolvency. Such considerations for example would relate to whether a DAO should be eligible to bid for a service the way any other company would bid. With the issuance of a free zone license for the establishment of a blockchain free zone, these developments are not far-fetched.
The impact of blockchain on digital identity, particularly given that under the Registration of Persons Act of 2015, identity is tied to possession of a National Identification Number (NIN). Voting in both presidential and parliamentary elections is now tied to possession of a NIN, as is the possession of a sim card and phone number. Given that UCC is now developing a blockchain for sim card registration, and URSB intends to build a blockchain for registration of documents, it is not an exaggeration to stipulate that blockchain will go mainstream in Uganda in the short to midterm. Legal practitioners need to consider whether the laws relating to these fields of practice will remain relevant when this mainstreaming happens in Uganda’s public sector.
Legal practitioners should also be alive to the impact that blockchain is having on the movement of value, as the technology is essentially rewriting the rules on possession and movement of value. Blockchain is set to have a massive impact on traditional Intellectual Property rights. Questions such as proof of injury caused by infringement, the distribution of royalties, and digital rights management are all points that legal practitioners should be alive to.
All the above key issues, as non-exhaustive as the list is, influence the nature of contracts and services rendered to clients in ways that legal practitioners need to be aware of in order to advise their clients meaningfully. Given that the UN and some government agencies are moving beyond what the law currently provides for, the impact on what advice lawyers will be required to provide to their clients in the short to midterm cannot be overestimated.
As suggested at question 1 above, Brexit may galvanise the UK into positioning itself as a more blockchain friendly jurisdiction. At this early stage, however, this remains purely speculative. It can be said, however, that any divergences between the UK and EU legal and regulatory regimes that develop over time could well impact the domestic legal and regulatory framework for blockchain applications.
With the lack of an established blockchain framework at a federal level, the US has seen the growth of broad and somewhat divergent approaches to blockchain at the state level. This double-layered complexity is not unknown in other areas and until federal law pre-empts state law, as proposed by the Token Taxonomy Act, it is something to be mindful of in this jurisdiction when transacting in the US.
Given that blockchain technology is still a relatively novel construct, with policy continuing to evolve over the regulation of blockchain technology, and laws and regulations not being tailored for regulation, or being of application to the use of such technology, practitioners should be mindful of the possibility of existing laws and regulations being applicable to blockchain technology even though the legislative intent might not have been to extend application of such laws and regulations to blockchain technology. Practitioners should analyse each blockchain technology and consider all characteristics of such blockchain technology with reference to the existing laws and regulations for a holistic assessment to determine applicability.
As explained in BCBS Statement published on 13 March 2019 and referred to in the HKMA Cryptoasset Keynote Speech (discussed in the response to question 8 above), the BCBS is of the view that the continued growth of cryptoasset trading platforms and new financial products related to cryptoassets has the potential to raise financial stability concerns and increase risks faced by banks, to the extent that the BCBS felt it necessary to set out its prudential expectations regarding banks’ exposures to cryptoassets and related services in jurisdictions where banks are involved in such business activities – including Hong Kong.