Coin Perspective #5 — Thomas Nägele
“Crypto and the technology behind is not something to be banned”
Thomas Nägele is one of the world’s top “crypto” lawyers. He is a Managing Partner at Nägele Attorneys at Law LLC, and his services are used by many of the most prominent cryptocurrency projects and he is also co-author of the Blockchain Act in Liechtenstein that got recently a lot of traction because of its friendly attitude towards cryptocurrencies and blockchain technology. We met with Thomas at Aeternity Universe One Conference in Prague to talk about his views on various legal aspects of the cryptocurrency world. You can follow Thomas on LinkedIn, or Twitter.
Let’s start with your story. How did you get into the crypto-space? And when was it, when you first started to be interested in it?
As I always was interested in IT, programming and coding myself, I really can’t remember when I first touched crypto. It must have been during my time studying law at the University of Vienna.
I think, I first read about virtual currencies in a computer magazine, and then a little later ending up mining. It was just for fun and interest, and how to get to know the technology worked.
Later on, I wanted to combine my legal knowledge with Blockchain technology and finance despite the advice of my former mentors to stick to traditional lawyering. Now, a couple of years later, I’m glad about my decision to stick with crypto.
I guess now people call you the crypto-lawyer, right? Many people in the space think crypto doesn’t need regulations and laws — what’s your take on this? In which areas of the crypto-currency space is the law necessary?
I think, there’s no need for regulation just for the sake of regulation. Regulation and rules always have to be justified by adequate reason and with the application of appropriate means.
That was actually one of the reasons I studied law, to understand the basic rules of our society and how to protect them- that’s what it’s all about.
Crypto-technology, it’s an automated rule-set based on technology, but it’s a rule-set as well.
With the existing legal frameworks, laws and court systems, we have existing rule-sets, who are already working well.
And yes, now we have this new, innovative approach providing similar aspects. We have to just try to combine the useful means of both worlds. There will still be things that the existing legal framework is needed for, but there will be some changes to it also, in order to create more efficient solutions.
And at this intersection, that’s exactly where I find myself.
When it comes to specific applications, I believe there are technical solutions, which could make specific regulations obsolete. I could imagine, that the need for certain services provided by regulated financial intermediaries will decrease with the usage of more efficient and more secure technology.
Having analyzed the EU financial market law framework, there are for example intermediaries defined, which could become obsolete in terms of the services of clearing and settlement. That function, from a technological point of view, would be easy to implement.
Would you specify, if you can, which areas within the crypto-space you think should be regulated and in what way?
To answer that question, I would like to refer to the genesis of the Liechtenstein Blockchain Act, which provides a good example.
Being involved in the process of creation we started in 2016 asking ourselves: Do we really need any kind of regulation?
Comparing the situation at that time regarding the rise of the Blockchain technology with the emergence of the internet the past decade — which in fact wasn’t subdued to regulation in the US — we concluded that one of the keystones of success was the lack of regulation.
Though the capability of the blockchain-technology to exchange, and the capability of token to represent, besides information, as well physical assets or respective rights, such as ownership, to foster innovation legal certainty, in this case, was crucial as well.
Then we analyzed the Liechtenstein legal framework for its capability of providing legal security for the interaction of blockchain transfers and the non-virtual physical world regarding the topics of formation, transferring and enforcement of these rights.
Although the existing legal framework provided some suitable approaches or a basic platform, it wasn’t capable of guaranteeing to be the growing medium for the oncoming developments to the extent needed.
As we asked ourselves: What do we have to do to make the most out of this opportunity we got given? We just decided, to take the chance and to put the effort in to form a new concept, known as the TTL or Blockchain Act.
And I think that is a good approach, I mean, it’s way beyond any other regulation of I saw so far, but it’s still very a balanced and moderate approach with lot s of room for free growth and innovation.
Coming back to your question, which areas should be regulated, I think there should be minimum standards if you offer tokens to the public.
And there should be minimum standards quality-wise — it should be clear who is liable, it should be clear what happens if you lose your token, etc. And there, I think, you need some rules to find the right balance between the interests of participants.
If you look at other jurisdictions — yes, they have to do the same work, analyze their framework and see what they have to amend, if they really want to make this token economy work.
What would you say was, or in general, you perceive to be, the biggest legal challenge when it comes to the crypto and blockchain space?
The legal challenge, in general, is actually to understand the technology and find the right legal provision or rules to apply.
And that’s a big challenge for the legal world to understand new concepts, new patterns and their unambiguous correlation to the existing legal framework; or to think of other, new ways of solving problems.
From your perspective, what would you say was the biggest innovation that came off cryptocurrencies in general?
The biggest innovation, in my opinion, was the underlying technology. Especially remarkable is the Blockchain/DLT- technology, with its capability of Transfer and Exchange between Parties without these parties having to trust each other. And there are unlimited possibilities for the practical use of that mechanism.
The other biggest innovation is the innate capability of crypto for innovation itself. The potential is limitless and there will be hopefully a ton of other solutions/applications based on this technology, which in my opinion, will influence our world a lot more and in a very broad way.
In your opinion, which kinds of assets does it actually make sense to have in blockchain? Do you think in the future we’ll have all kinds of assets, like commodities, stocks and others on blockchain?
Stocks already can be represented on blockchain, if you do an STO (Security Token Offering), for example, and that’s perfectly sensible application.
I think that’s what actually the use case we had in our mind when we started to think about regulation.
Furthermore, you will have a wide variety of valuable assets, such as gold or real estate with the ability being represented by tokens on a blockchain system.
That’s actually the remarkable aspect of Blockchain technology. It provides possibility for innovation in an efficient and cost-effective manner, making assets tradeable, and paving the way to a market for participants, who have been until now excluded.
You mentioned Liechtenstein is quite advanced in terms of crypto jurisdiction — which other jurisdictions in the world, or maybe just Europe, you consider to be the most advanced in terms of crypto?
It’s amazing what happens in Switzerland. As I’m regularly in Zug, I personally experience that Switzerland is quite advanced and that they were early in respect of regulation, analyzing the problems and issuing guidelines.
There are other jurisdictions as well who are quite developed in terms of a specific legal framework, such as Japan, as an example for a non-European Country. And I assume, in the end, every jurisdiction is paying more attention and catching up quickly.
I think, that fact, that Switzerland was wakened up, or encouraged to pursue the started development, is partly due to Liechtenstein having developed the Blockchain Act.
You are a member of the working group of the government of Liechtenstein developing the Blockchain Act — can you describe it a little bit, the whole process, how did it come alive, where did you get inspiration from?
We started as a workgroup in early 2016 and as I already explained, we started with the fundamental question: ‘Do we need regulation?’.
Affirming that fact to set the minimum standards and foundations for a working token economy and after concluding that the existing framework wasn’t apt enough, we had to think of creating something new.
As Liechtenstein is part of the European Economic Area, but not part of the EU, it tough provides the possibility of access to the single European market.
Therefore, if you have a licensed product in Liechtenstein, you can — under circumstances — market that within the EU (aka “passporting”). On the other hand, the Liechtenstein financial market laws are applicable, so the space to maneuver to have a comprehensive — and at the same time- specific law is actually quite narrow.
As a further aspect we wanted technology to be the center of attention of the new law. We invited the crypto industry, asked for their needs and opinions on legal certainty and built up a lot of knowledge.
It was March 18th of 2018 when the first draft was set and our PM announced publicly that we will have our own, dedicated blockchain act in Liechtenstein.
The final version, the final consultation report was published a few months later. After that, we had the public consultation period, and everybody was invited to comment on our ideas.
We analyzed the comments and replies we got; we did a second version, which was passed to the government. The government issued it to the parliament and our parliament, some time ago in June 2019, had the first hearing. The hearing went remarkably well, and after the second hearing the Act was enforced in 1.1.2020.
Could you sum up the key principles from the Blockchain Act and what it is that makes it so unique?
The key principle is that the Blockchain Act is technologically neutral. The blockchain technology per se, is not mentioned. The broader term which covers also, but not exclusively the blockchain technology is called “trusted technology”. The Act itself is therefore officially called Law on Tokens and TT Service Providers (Token and TT service Provider Act; TVTG).
It expresses that there is a technology that features the functions of intermediaries.
Furthermore, it is defined in legal terms what is a token, and for example what is an identifier (a.k.a. public key) and what is a private key.
All of the crucial terms are defined in legal terms, but in a descriptive non-exclusive manner.
A token, for example, doesn’t have to, but can represent whatever right which exists within our legal framework. That definition provides extreme flexibility which is needed for the future.
So, we’re not just talking about the tokenization of shares or physical things. A token can contain or represent ownership rights, usage rights, etc.
As mentioned before, it’s a remarkable aspect, that, if you transfer a token from party A to party B, the respective right is also transferred. As well you have to guarantee by enforceability that the respective right is transferred. And that aspect is new.
So actually, to come back to your question, why do we need regulation — we need regulation to adapt the legal system of what the developing technology needs. That’s a very comprehensive, very flexible approach and I’ve never seen such regulation draft in any other jurisdiction.
Ok, so you’ve been working on this act with a bunch of other people and you probably had to make some compromises. Is there anything, from your personal view, that you’d make differently or improve?
The Blockchain Act is very comprehensive and tries to include future developments. Therefore, there are provisions, that describe functions, that probably will exist in future, which comes with the responsibility to be adapted if the future development proves otherwise.
For example, new types of service providers are mentioned. We thought, for example, of a physical validator, which would actually build the bridge between the real world and the token world. So, there might be a validator validating rights, like intellectual property. We’ll see.
We have to learn and experience these concepts in action, and then to adjust it, if needed.
I am very satisfied, to be honest, with the outcome. It is a balanced approach. And the process included the needs, wishes, opinions and thoughts of the industry and participants affected the Blockchain Act.
As mentioned before, we asked them during the process if they are comfortable with this kind of regulation and their opinion on the adequacy to foster innovation, and as well which aspects or provisions are a hindrance for development.
The main goal is and always was to foster innovation, to actually support the entrepreneurs, to make their visions happen.
Entrepreneurs are now able, based on that regulation, to provide their services on a solid basis. It’s like LEGO, you can build and develop.
There are also a few countries that have quite negative stances on crypto. Do you think it makes sense to ban it on the local level?
In my personal opinion, it makes no sense to ban things without reason.
Crypto and the technology behind is not something to be banned. If there’s a need for example for restrictions like compliance, then there’s no hindrance to define compliance rules. If investor protection is needed, the legal framework can be adapted.
So to speak, there’s no justification or reason for a ban on crypto or crypto-related activities because legal protection can be provided and societies recognized values can be safeguarded by using the right legal tools.
Regarding the EU, would you advise it to have a common strategy in terms of legislation when it comes to cryptocurrencies?
That’s an absolute yes. What we’ve done in Liechtenstein is interesting, it’s a very innovative approach, but nevertheless it’s restricted to Liechtenstein.
The beauty of being a member of the EEA is that you have access to the single market. But to get access to the single market you have to have a harmonized approach on EU-level. And therefore, I think we, as Europe, should be focusing on making the best possible legal framework for the single market of Europe, to be competitive to bigger economies.
Do you think, if this common EU strategy will eventually happen, that you’ll be equally satisfied with it, as you are with this Liechtenstein Blockchain Act?
Being aware of parts of the procedure of forming of EU regulation, it’s a comparatively politically strenuous process.
That was also the case in Liechtenstein as well, and Liechtenstein is small. At the European level, even more, politics is or will be involved. As well, you have a lot more stakeholders by numbers to involve in the process.
I assume we will not see such a comprehensive approach as the Liechtenstein approach. But I would gladly accept if I will be proven wrong.
Do you think that what we call a smart-contract today, has the potential to substitute legacy legal contracts in the future, or will they always be complemented by legal pros?
Actually, I once held a presentation about smart-contracts in front of 150 lawyers and got interrupted by parts of the audience that I shouldn’t use the term ‘smart-contract’, because it lacks attributes of (legal) contracts. I replied: ‘Get used to it, that’s just the way it is, it’s called a smart-contract’.
Smart-contracts, in my personal analysis as a Liechtenstein lawyer, under circumstances are actually recognized in Liechtenstein. Contracts are characterized by the expression of will and consensus of will. So, if you agree on terms, and in my opinion, smart-contracts are nothing less but terms, then it is permissible to talk about smart contracts.
Nevertheless, there will be some major changes in the legal world. In my opinion, every lawyer would benefit, if he started understanding coding.
Do you think maybe the solution to this problem, to bridge these two worlds, may lay in a new kind of programming language, that would be easily readable to humans, and would be similar to the properties of legal prose? Do you think this kind of thing might be tried?
Understanding the terms, you agree upon is the fundamental element of any kind of (legal) framework.
Key elements for human readability of terms in the sense of smart contracts are vocabulary, grammar and document structure.
Therefore, your suggestion of creating a computer language that combines these requirements is certainly a senseful idea.
In fact, there are already concepts and efforts aiming exactly at that, such as the lexon computer language of Henning Dietrich. His goal is to create legally enforceable smart contracts that anyone can read without prior knowledge about blockchain.
In crypto, a large part of it is about privacy and anonymity. Where do you stand on this issue? Should people be allowed to use strong encryption as a tool to protect their privacy and anonymity, or not?
I strongly believe in our right to protect our privacy.
Privacy is a key topic. I see a lot of potential where encryption technology can stop potential abuse by authorities and lawmakers, without infringing justified and legitimate purposes.
It is as well inevitable to implement proper compliance solutions, and I, as an individual, am more than happy that -for example- every one of my financial transactions is screened in a way, that money laundering is avoided, or financing of terrorism is avoided.
Current technology has the ability to provide solutions, where compliance can be fulfilled without breaching my privacy.
There are possibilities to find a way to combine these two worlds and safeguarding their interests as well. Privacy is and always will be a very big issue.
What other project did you personally find particularly interesting? Is there anything you are excited about?
What I am very excited about, and what I think is crucial, is identity.
There has to be a very good identity solution on a very broad — at the best — at a global scale.
For example, if you have one proof of identity, and this is applicable or recognized all over the planet, you need to get on-boarded only once.
Identity comes hand in hand with privacy. It is necessary to be able to provide the minimum information to legitimize oneself in order to participate in transactions without revealing additional sensitive privacy-related data.
As an example, for purchasing alcohol it is mandatory to prove to the seller to be at least 18 years of age.
It used to be that one’s ID had to be shown to the seller, and he had the possibility to see all of one’s personal details, such as birth date, address, name, and even back in the old days also marital status. All the information revealed were not necessary to prove the entitlement for a transaction.
There are multiple projects working on digital identity, do you have some that you think might be successful in the future?
I do follow some of them, even from a regulatory point of view. And in Liechtenstein, there will be also a project regarding a privacy-compliant identity solution.
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