Chairs:
Alex Harbin, Trainee Solicitor, Fieldfisher
Rachael Gibbons, Associate, IT/Commercial, Baker McKenzie
Panellists:
Tim Bird, Corporate Partner, Fieldfisher
Sue McLean, Partner, IT/Commercial, Baker McKenzie
Richard Folsom, Managing Associate, Kemp Little
Gideon Shirazi, Barrister, 4 Pump Court
Michele Curtoni, Strategy, Office of Architecture/Digitisation, State Street
Adrian Shedden, Consultant Solicitor, Keystone Law
George Hilton, Barrister, 2 Temple Gardens
Introduction
The talk began with an explanation of how the blockchain technology works, and in particular how a decentralised ledger system generates certainty for its users. After this approximately ten minute explanation, the panel Q&A began.
1st question – “The Legal Risks”
The main legal risks involved with initial coin offerings were noted as follows:
• tax implications;
• data privacy;
• forum/choice of law;
• money laundering regulations compliance;
• a litigation perspective, including the prospect of freezing orders;
• secondary markets and the particular risks they bring; and
• whether the offering takes place in a regulated or unregulated market.
Acknowledgement was made that there are no legal risks generally applicable to every ICO, save for general tax issues to consider. The panel was in agreement that each case has to be examined with regard to its particular circumstances, as the legal risks vary wildly depending on a number of factors. For example, the particular jurisdiction may benefit from precedent or even regulation particularly applicable to ICOs, perhaps because the funds are being used for particular purposes or because of the risk of fraudulent activity.
Gideon and George, as the barristers sitting, were in agreement that 99% of offerings (at least in the US) involved some element of fraud against the investors.
2nd question – “Applying the Law to Cryptocurrencies”
The particular areas of law applicable to cryptocurrencies were discussed as follows, where jurisdiction was again cited as particularly relevant but also that the particular use-case to which the cryptocurrency is used for often determines the legal issues present.
Generally, the discussion was very illuminating in the sense that each of the panel members brought along their own particular perspective on the application of law to an ICO. In particular, the litigators on the panel were quick to note the often fraudulent nature of the industry, and it was clear that players in the market, both investors and issuers, will take wildly different degrees of legal advice between them.
For the 1% of credible ICO activity, the panel was in agreement that there was “money to be made”. Nevertheless, anecdotal evidence was given of particular uninformed investors and issuers simply being caught up in what might seem to be an investment craze/hysteria, (‘bubble’ was mentioned) without having taken account of alternative means of raising finance or alternative investments. Sue McLean, in particular, reported that certain of her clients were adamant that an ICO had to be part of the package of finance they were proposing in order to attract a particular set of investors. Whether or not the ICO finance option was commercially necessary, in many cases, had not been entirely thought through by clients.
Under the question’s header, much exposition was made of hypothetical legal questions. For example, one question (from an employee of the Bank of England who happened to be sitting in the audience) enquired as to the possibility of cryptocurrencies replacing the official currencies issued by sovereign governments (or their central banks). A thorough discussion then began as to the many possibilities for the future of cryptocurrencies with much attention paid as to what (e.g. money or asset; cash or gold etc.) a cryptocurrency is, use being made of Adam Smith’s definition of money as a i) unit of account; ii) store of value and iii) medium of exchange.
The other prominent discussion was on what ICOs and cryptocurrencies, as part of a much larger accelerating technological set of advancements, might represent for the present legal framework. One panellist was clear that we are simply sitting in another increment of historical movement, whilst other panellists were rather more excited and were clear that the law may need to catch-up in an increasingly large unregulated space.
Smart contracts, by way of example, were cited, and in-depth discussion was made into whether the increasing preponderance of algorithmic/wholly-automated decision-making, in the context of the satisfaction of contractual obligations, represented future issues for all contract lawyers, e.g. property lawyers. With no clear precedents set by legislators or courts, the panel had differing views as to whether, for example, the machine code standing behind the algorithm is itself part of a contract where an automatic compensatory payment is made to one party on late satisfaction by the other party of a condition, with Richard Folsom fleshing out the different approaches to machine code by different jurisdictions. A discussion on smart contracts, in the context of the legal definition of what counts as part of the agreement, was therefore discussed.
Reporter’s conclusion
Clarity by policymakers is clearly necessary, to the extent that fraud is commonplace in the ‘wild west’ of cryptocurrency finance. Whether there is sufficient capability, willpower or resources is a different question. At the moment, the industry remains confined to players who are in the main aware of its risks, but if consumers increase their use of cryptocurrencies then a case for specified regulation may grow. The challenge is the prospect of a continuous march/advance of increasingly complex technologies which threaten to perpetually remain one step ahead of legislators.
Gerald Brent is a trainee solicitor with Fladgate LLP
