Cryptocurrency and Blockchain | Thoughts for the Future

By Jason Lee NEM, James Waugh BLUE BLOCK and Alex Sims UNIVERSITY OF AUCKLAND

Key points

• Tokenisation of assets and cryptocurrency regulation will be explored deeply by the public and private sector.
• Contractual obligations and payments in cryptocurrency will start to be more common.
• Value transfer and due diligence work will be more seamless through the use of blockchain to create more transparency and certainty for business.
• “Middlemen” may become uncommon.

Introduction

Blockchain, for a relatively new technology, has certainly sparked many conversations. The concept was developed by Satoshi Nakamoto, an anonymous person or group of people, to create a digital cash — Bitcoin — that could be transferred peer-to-peer without the need for an intermediary. It is a clever interweaving of software engineering, cryptography science and game theory which led to the concept of distributed ledger technology (DLT).

William Mougayar, author of the book ‘The Business Blockchain’ views blockchain in three ways:

• Technical — back end database that maintains a distributed ledger that is open and visible to all
• Business — exchange network for moving value between peers
• Legal — a transaction validation mechanism, not requiring intermediary assistance. Research by the International Data Corporation reported that US$1.5 billion expected spending on blockchain adoption in 2018, with total spend projections of $11.7 billion in 2022. This article will explore thoughts on the future of cryptocurrency and blockchain from the perspective of practitioners and an academic in bite- sized versions of a number of areas.

The Future of Tokenisation of Assets

The concept of sending money without an intermediary has grown in scope to other forms of “value transfer” like titles, licences, financial instruments and essentially any form of digital asset so much, that many refer to the blockchain as the internet of value akin to a railroad for trains to use to transfer goods. However, blockchain is not limited simply to transferring value, this transfer of value can be applied to business logic, trust and reputation and a series of many other important applications.

It is likely for headway to be made into the securities space — tokenisation has a strong argument for disrupting stock markets around the world. Thus, lawyers who specialise in initial public offerings (IPOs) will need to pivot quickly to a focus on tokenisation and security tokens.

From an application perspective, the Australian Securities Exchange (ASX) is taking leadership by adopting and implementing blockchain technology for its stock exchange. In New Zealand, Alibaba, NZ Post and Fonterra are working on implementing supply chain solutions using blockchain to move information including customer orders. Legal aspects of how tokenisation will affect ownership rights of digital assets or information is a salient point to consider.

The Future of Cryptocurrency Regulation

In a world where we are moving towards a cashless society, the question arises — where does cryptocurrency fit?

While most central banks are exploring utilising cryptocurrencies, and some have trialled introducing their own central bank issued cryptocurrencies, the Australian and New Zealand central banks have decided against developing their own cryptocurrencies, citing it at not a high priority. The UK Treasury recently assessed cryptocurrencies as being low-risk for money laundering and the financing of terror, in contrast to the traditional banking system which the Treasury assessed at high risk of such criminal activity.

Australia has recently passed legislation requiring digital currency exchanges to monitor and report suspicious and large transactions. The legislation was passed specifically to cover digital currency exchanges. Digital currency exchanges are required to verify the customers’ identities, raise suspicious activities with AUSTRAC (Australian Transaction Reports and Analysis Centre) and keep records relating to transactions.

The legislative moves are a sign that the Australian Government is looking to accommodate cryptocurrencies as an accepted part of the fabric of society which can be viewed as a positive step. A joint research project by Accenture with ADCA (Australian Digital Commerce Association) on a survey with major digital currency exchanges in Australia showed that $3.9 billion in cryptocurrencies were traded last year, totalling to over 300,000 users over 2.7 million individual transactions. Lawyers need to note that there will be regulatory implications for clients who are individuals and companies who are involved in digital currency transactions.

The Future of Contractual Obligations

The ability to transfer value on the blockchain has evolved to the idea of “programmable money” or what we know as smart contracts via business logic. Smart contracts, which are simply computer programs, operate on the concept of “if this, then that” where value transfers from one party to another party. For example, a payment can be held within a smart contract (in escrow) and released automatically once goods are landed in a foreign port — all without human intervention.

What does this mean for the legal fraternity? Do lawyers need to learn about blockchain and adopt blockchain in their practices? Smart contracts allow for a set of transaction terms to be specified in digital form and transactions are performed automatically when a specified event occurs. So long as the standard requirements of offer, acceptance and consideration are in place a contract can be formed. The Electronic Transactions Act 1999 (Cth) (ETA) allows for valid contracts to occur even though they are made through a form of electronic communication.

The Future of Payments in Cryptocurrency

Section 323 of the Fair Work Act 2009 (Cth) states that “an employer must pay an employee amounts payable to the employee in relation to the performance of work” in “money by one, or a combination, of the methods” such as cash, cheque, money order or the use of electronic funds transfer system. Money is not defined in the Act but it can be in Australian dollars or, potentially, a foreign fiat currency such as the US dollar.

A sign of greater adoption of cryptocurrencies would be when workers are paid all or some of their wages in cryptocurrency. Something that a number of workers would prefer, especially those who send money offshore to family members.

Current examples are “Get Paid in Bitcoin” where employees can take a portion of their regular pay to exchange for Bitcoin and Living Room of Satoshi, a platform which allow users to pay any Australian bill in cryptocurrency.

Many escrow services and payments can be replaced by smart contracts and multi-signature wallets. While blockchain will certainly not replace all lawyers, as with rapid developments in artificial intelligence, lawyers’ roles will change and it is vital for lawyers to have some understanding of blockchain so they can prepare for the technological shift.

The Future of Value Transfer

Transacting through centralised intermediaries, as is done currently, requires a pre-agreed value denominated in a fiat currency, for example, Australian dollars, before a transaction can take place. Blockchain can remove this limitation and would allow people to exchange things of value. Company shares will be tokenised and could be used as currency just as we now use fiat currencies. Exchanges will be developed that determine the value of each token automatically and will enable instant real time transactions.

Blockchain can be used by both the public and private sector, such as facilitating distributed (and therefore more reliable) electricity grids and supply chains as well as by businesses to fully harness the transparency and overhead reduction the blockchain provides. Anything of value can be tokenised, for example, a car or land. In a utopian future, there could be a possibility where a car or a home can be exchanged for a company’s shares, or a combination of shares of other companies. The ability to swap between anything that has value to something is a very interesting development in the sharing economy and will lead to a fundamental shift in how value is viewed and interacts with legal frameworks.

The future of Due Diligence

Blockchain’s perfect audit trail is a great asset. Due diligence is considerably easier and will affect lawyers who perform due diligence. Business transactions will be more certain. For example, if a person (Z) is shown as the owner of a patent, that person may have assigned that patent to a third party (B) without recording the assignment. If another person (Y) paid and was granted a licence by Z, that licence would be worthless and Y could be sued because B was the true owner. Tokenising patents and using a blockchain would mean that determining the patent’s owner would be easy.

Start-ups like CopyrightBank is innovating in this space. CopyrightBank facilitates the registration and verification of digital works on the NEM blockchain which would also allow for transfer of ownership, provide options for multiple-ownership control, checking of ownership history — essentially turning an asset into a “smart asset” on the blockchain.

In a world where access to information comes at one’s fingertips, access to platforms and information of ownership will become common and the legal rights of such innovative projects are yet to be tested. It will be interesting to see how the courts respond to due diligence and the protection of ownership rights on the blockchain.

The Future of Middlemen

Digital assets are a rapidly emerging asset class and getting ahead of the curve provides opportunity as well as uncertainty. Take cross-border transactions as an example. Currently there is a sea of documentation (often still paper-based) which is used when trying to move hundreds of millions of dollars around the world, not to mention the capital controls of many countries. With cryptocurrencies and smart contracts, movement of value can be done in a seamless, virtually instantaneous and trusted way. Blockchain can reduce, if not remove, friction in the transacting process.

What becomes of the middleman? As much as it is concerning that multiple disciplines and business models will become redundant with blockchain technology, the idea of a fee-less business structure without middlemen makes for a much more streamlined economy.

Wills serve as a good example of blockchain removing the need for middlemen, which include the courts. Currently when a person dies, probate must be sought from the court and part of the documentation required is a death certificate. Blockchain can change who, how and when assets are distributed, essentially dramatically reducing the cost and time involved. Once all assets are tokenised and all money is in cryptocurrencies, the will can be written as a smart contract. Once the death certificate is issued the assets can be distributed automatically without the need of human intervention. The death certificate serves as an oracle — a source of truth. (Albeit in practice, a grace period should be built in to allow challenges to the will.) And, of course, legislation would need to be changed to accommodate such a practice. Start-up NEMWill is in the early stages of developing such a will-writing platform.

Conclusion

Blockchain creates some legal uncertainty and will change some of the roles that lawyers play, however, the transformative benefits it offers are compelling and cannot be dismissed. Blockchain is not simply a technology limited to cryptocurrencies, it is a foundational technology that will impact every industry and profession and will force changes in the law. A key difference between the internet and blockchain is that the internet developed relatively slowly, the blockchain’s pace of change and adoption is exponentially faster.

Another feature of blockchain is that, as some people have rightly observed, some solutions can be achieved through other technology, thus using blockchain may not always be necessary. However, while this is sometimes true, the new solution was only thought about because of blockchain’s presence. Blockchain allows for a new way of thinking which is uncomfortable for many but exhilarating for those who understand blockchain’s profound implications for society.

Blockchain does create a number of legal issues and regulatory considerations, especially in cross-border transactions, which are of particular importance and concern. However, if nations do not embrace blockchain they risk losing out in the next industrial revolution. For example, Russia worked on a system that would have been the first internet, but Russian bureaucrats destroyed it. The US filled the void, creating the ARPANET (Advanced Research Projects Agency Network) that was the precursor to the internet and reaped the benefits. If a nation accepts blockchain and utilises it to its capacity that nation will receive large amounts of capital and expertise and the ability to innovate. That being said, blockchain has the potential to be as, or even more, transformative than the internet has been. What the internet has done for communications, the blockchain will do for the transfer of value.

People forget how quickly technology is viewed with suspicion and then adopted and seen as nothing remark- able. In 1996, when Richard Susskind predicted that lawyers would primarily communicate with their clients via email he was soundly reprimanded by the Law Society of England and Wales in 1996 and was told that he did not understand confidentiality and should not be promoting his alarming views in public. Similarly, cloud computing was viewed with suspicion and fear, but now cloud computing is a normal part of business activity.

What does the future hold for cryptocurrencies and blockchain? A world with possibilities.

Originally published on LexisNexis Internet Law Bulletin (volume 21 number 6).

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