Blockchain Technology and the Law Are Allies, Not Enemies


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It’s hard to deny the promise of  blockchain technology. The Ethereum protocol gave us the toolkit necessary to begin reinventing the way we interact with each other as peers, as well as the way we interact with businesses in commercial relationships. It seems like every day, I wake up and read about a novel use case or decentralized application seeking to blaze a new path forward or innovate off a legacy system.

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As a lawyer for ConsenSys , and bystander to the blistering pace of development across the industry, I engage in daily grappling between the promise and greatness of our collective ideas and the way these ideas might come to life in a world governed by laws written long before Satoshi Nakamoto constructed the genesis block of the Bitcoin blockchain and set the wheels of decentralization firmly on their path.

It is simply incorrect to say decentralized applications, or use cases of the blockchain, are incompatible with legacy legal constructs. Instead, I simply view there to be friction between the new and the old that more often than not accompanies the introduction of promising new technologies. As Dax Hansen of Perkins Coie, a leading practitioner in the space, recently told me, the goal is to figure out what areas of the law you are likely to “bump up against.” It just so happens that one of the industry’s most promising and intriguing use cases, tokens, bumps firmly into nearly a century of securities law and regulation; in particular, a 70-year-old case involving some orange trees in Florida and its progeny.

How we progress and mature as a technology and industry will in no small part depend on how we react when we bump up against laws that may not be easy to apply.

That’s why ConsenSys is proud to be a contributor to Coinbase’s recently released Blockchain Token Securities Law Framework. The Framework is the product of deep thinking by some of the industry’s brightest legal minds trying to analyze the friction between the nearly three-quarter century-old Florida orange grove precedent (SEC v. Howey Co.) and token launches. The Framework is a must-read for all industry participants.

Is the Framework perfect or absolute? It would be incredible hubris to think so. Instead, the Framework exhibits excellent execution of the aforementioned mental grappling over how we apply legacy legal constructs to a new phenomenon. The document is exemplary and demonstrates the best qualities of our industry, specifically the persistent search for answers and comfort in a legal system where final answers are almost exclusively handed down by the judiciary.

For nearly every occasion blockchain technology bumps into law, the technology provides the law an equivalent boost. Take for example the Know Your Customer and Anti-Money Laundering laws. Exorbitant amounts are spent every year by institutions attempting to comply with these robust and challenging requirements. Current KYC/AML systems add tremendous friction to commerce and jeopardize sensitive personal information. It’s for this reason that I am excited about uPort, a blockchain based identity platform that will offer us a crucial access point to the emerging decentralized Web 3.0.

Enron gave us Sarbanes-Oxley, the greater than 30,000-word regulatory framework designed to prevent crippling accounting fraud by trusted corporations. Balanc3 will give us a seamless triple-entry accounting system designed to prevent such fraud from occurring in far fewer than 30,000 words of code. When a business’s transactions are non-repudiable and logged in a global shared ledger, it makes it impossible to improperly manipulate the past.

When you wake up with an idea, it’s important to take a moment to ask the question: What areas of the law might this bump into or boost? If you don’t know the answer to the former, take time to consult a legal professional.

The most popular (but not exhaustive) areas of law I often see blockchain systems bump into are securities, commodities, data privacy, money transmission, and gaming. If you are designing an ecosystem that features a token, the Framework is a wealth of information to help guide you in your architecture. I will probably never convince all of you that lawyers can be an accelerant, but I promise you that’s not just self-promotion. Thinking about the legal issues early on in your development, be it for a token ecosystem or decentralized application, will enable you to get products to market quickly while minimizing personal, corporate, and ecosystem risks.

I am certain that decentralized applications and their features are no less compatible with existing legal constructs than prior revolutionary technologies were. However, compatibility may require thinking long and hard about how laws written before the dawn of decentralization can harmonize with such a powerful disruptive force.

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This article was written by Matt Corva, the in-house legal counsel at ConsenSys.

Disclaimer: The views expressed by the author above do not necessarily represent the views of Consensus Systems LLC DBA Consensys. ConsenSys is a decentralized community with ConsenSys Media being a platform for members to freely express their diverse ideas and perspectives. To learn more about ConsenSys and Ethereum, please visit our website.

Originally published on Medium 

 

matt corva

matt corva

Legal at Consensys
Matt Corva is responsible for overseeing legal at ConsenSys while empowering the organization to build and deliver more revolutionary products to the ecosystem. He is keenly focused on how blockchain technology will disrupt, supplement, or replace traditional systems and the resulting impact on legal constructs.
matt corva

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    The biggest issue I see is that the lawmakers are extremely slow updating the laws to reflect the modern reality. Do you see this ever improving?
    I do but change is particularly difficult in the United States. In defense of the regulators and law makers, part of the delay is likely caused by the breadth of this technology and the resulting difficulty in defining scope. If we look at the IRS, the CFTC, the DOJ, and the SEC, they’ve all taken a different interpretation of what a cryptocurrency is. Due to our regulatory structure, jurisdiction is carefully carved out between the bodies. The CFTC is active where cryptocurrencies look like commodities or futures. The SEC is quick to get involved in facts that implicate securities law (SatoshiDICE and some of the cloud mining cases for example).

    So at the regulatory layer, there are issues with jurisdiction and definition. At the law and policy-making level, change needs to grind through the wheels of federal government, an inherently slow process.

    Where we do see updates to law fairly quickly is at the state level. Two examples of this are the BitLicense in NY and the work being done in Delaware with the blockchain initiative.

    From a biased perspective, I would rather see carefully timed and crafted legislation than something rushed out the door. The lack of specific guidance and frameworks causes uncertainty, but that’s why I think working on efforts like this Token Framework is important.

    Of course, things are incredibly different overseas and we’ve seen clear directives on cryptocurrencies in many countries (Australia, UK, Switzerland to name a few). The sandbox approach remains a popular one.

    Edited on December 10, 2016
    This right here 🙂 @mattcorva

    Well said…

    “From a biased perspective, I would rather see carefully timed and crafted legislation than something rushed out the door. The lack of specific guidance and frameworks causes uncertainty, but that’s why I think working on efforts like this Token Framework is important.”

    Begging your pardon, but this is all very much ‘thinking out-of-the-box’, and a US-box at that.
    And therefore so are the perceived problems.

    Without quoting Einstein, why not take an ‘Outside-the-Box-view’?
    Should I wish to send some Satoshi from The Netherlands in order to support a pop-up store in Mali, what is it to the FED’s?