Blockchain technology is no longer the next big thing, it is already here.
While blockchain developers have been creating cryptocurrencies, smart contracts and enhancing transparency, the law is only just starting to catch up and understand the technology’s implications in financial and tech industries.
In a first for OsgoodePD, and among the first for the Canadian legal industry, the Critical and Emerging Issues in Blockchain Law program (held March 20, 2017) provided delegates a deeper understanding of the emerging issues in this intersecting area of the law. Here are some of the day’s key takeaways:
Takeaway: Opportunities for collateral-free futures and contagion risks.
The first three panelists of the day started the program with three very different angles on the role of blockchain in the settlement system
> Anne Butler (Vice President, Payments Canada) discussed the top-down approach of blockchain experiment Project Jasper (run jointly by the Bank of Canada, Payments Canada, banking consortium R3 (R3CEV LLC), and several Canadian banks). Project Jasper aims to determine how the Large Value Transfer System (LVTS) could be transitioned to a blockchain system.
> Ana Badour (partner, McCarthy Tetrault) detailed Canadian payments regulation through an examination of potential impacts to regulated entities, and a review of the international principles for payments systems. Ms. Badour did warn that with the integration of blockchain technologies, financial systems greaten their susceptibility to contagion risk if institutions fail to take proper measures for prevention.
> Bitcoin core developer and consultant Peter Todd discussed how the engagement of blockchain in the settlement system provides opportunities for a collateral-free future. Mr Todd highlighted that the use case for blockchain lies in risk reduction: there must be (legitimate) trust in the system, along with effective auditing mechanisms.
Takeaway: A Descriptive vs. Prescriptive approach to Initial Coin Offerings
Initial Coin Offerings (ICOs) provide an innovative mechanism for companies to raise money by selling new cryptocurrency into the blockchain. ICOs have become a popular method of funding/raising awareness about early stage companies in the blockchain space. In addition, the basics of securities law form an effective starting point for analyzing the substance (rather than the form of issuance) of ICOs.
> Currently, many ICOs are in danger of falling afoul of securities laws. Panelists Kathleen Ritchie (partner, Gowling WLG, Canada, LLP) & Marco Santori
(partner, Cooley LLP) pointed out that there has been no case law on ICOs in either Canada or the United States. This provides a bright line test to determine when ICOs may require greater disclosure. However, they did identify the mandate of regulators to protect the public.
> There have been developments in US corporate law with the establishment of the Delaware Blockchain Initiative (Mr. Santori is the Legal Ambassador for the Delaware Blockchain Initiative), that aim to enable and encourage expanded use of blockchains for share registries.
Takeaway: Smart Contracts are a significant growth area
Smart Contracts are a topic that many people talk about but few understand. Smart contracts help parties exchange money, shares or their item of value with blockchain technology.
> Technologist & former lawyer Josh Stark reminded us that we need to look back at the history of smart contracts & the innovations credited to Nick Szabo before we breakdown the systems being deployed today.
> Mat Cybula (CEO, Cryptiv) highlighted the comparisons between today’s smart contract/blockchain developments (with systems like Golem, MelonPort and Augur) to the early days of the Internet: the base structure and infrastructure are there, but there is still much development to be actioned particularly when it comes to exchanges and smart contracts.
> Commercial litigator, Pulat Yunusov provided a litigator’s perspective; lawyers, regulators and business owners need to keep in mind the differing and sometimes clashing viewpoints of technology people (programmers, entrepreneurs) and legal people (regulators, judges, etc.).
> Mr Yunusov also reminded delegates that the legal system is not necessary for smart contracts to thrive; market products will arise that will mitigate risk technologically – eliminating the need to involve lawyers.
Takeaway: “…the challenge lies in bridging the real and digital worlds”
> Bitcoin/blockchain lawyer, Addison Cameron-Huff, detailed the importance of analyzing transactions carefully to understand the legal implications of diverse blockchain business models. For insurance, compensation funds and contracts in particular, the challenge currently lies in bridging the real and digital worlds. In the immediate future, there will be specific laws that lawyers continually encounter when advising or dealing with blockchain.
> In the financial industry, there is an emerging and important need for regulators and technologists to cooperate and work together. In his ground-level summary of what’s happening in the financial industry, Soumak Chatterjee (Deloitte Canada) identified that innovation without regulator support is nothing more than a “science experiment.”
It is an exciting and innovating time for lawyers and professionals who work across blockchain. Flexibility in approach and keeping informed on and abreast of current trends will prove the vital for working effectively with this constantly evolving area of law.
Missed the program? Head to OsgoodePD’s website to purchase the Critical and Emerging Issues in Blockchain Law program On Demand.