The legal aspects of crypto currencies and blockchain
What are some of the basic legal challenges facing those law makers, lawyers, businesses and consumers increasingly bombarded with opportunities to jump on the topical crypto currency train? Jim Truscott, partner and head of our corporate team, explains some of the confusing terminology.
Much of the job of the solicitor is to negotiate, record and deal with enforcement of rights between parties who have reached an agreement to buy or sell some product or service. Whether consumer transactions or business-to-business interactions, the fundamental essence of our job generally involves some question of how to record the transaction between the two parties, and to examine what happens if things go wrong: the product or service is not delivered (whether accidentally or deliberately) and what can be done about this in terms of recovery of losses.
These basic principles inform much of what the business lawyer is engaged with in any respect, and across all areas of business interaction.
Crypto currencies and blockchain
The world of crypto currencies and blockchain (terms often confusingly used in an interchangeable way) creates a completely new medium by which parties can transact with each other. Some aspects of this new technology and the opportunities it opens up are extremely exciting, and are beginning to enter mainstream business-to-business and bustiness-to-consumer dealings. Large retail corporations now routinely use blockchain technology to manage their supply chain. Property development is increasingly the subject of blockchain technology which is used as a means of enabling investors to take stakes in property development opportunities in an agile and effective way. Trading in crypto currencies has become hugely fashionable and is undertaken by many consumers, despite a relative lack of understanding of the underlying blockchain technology.
It is therefore key one understands that using the blockchain to record transactions between parties creates a relationship between them, one which is fundamentally different from that entered into by two parties on a more traditional footing.
When two parties wish to undertake a transaction, said transaction usually takes some form of written contract or agreement between the parties, setting out the nature of the arrangements agreed, the payment for the product or service to be provided, details of the product or service in question, and the various provisions in relation to what remedies lie for a party who has been wronged if the contract is not delivered properly by the other party. All are underpinned by a wide body of law detailing rights and remedies available to parties in the event of a breach of a legal obligation. These laws are broken into written statutes, and “common law” which has been established by a series of cases which have passed through the courts over a very long period of time.
Currently there are no crypto-specific laws written into statute at this stage, although final cases are beginning to go through the courts in relation to matters of dispute arising as a result of a crypto-related issue. Regulation of the world of crypto is slow, and there are no clear guidelines in relation to the conduct of several types of dispute which can arise in the context of a crypto transaction.
Public distributed ledger
One fundamental challenge is the “public distributed ledger”, created by the use of blockchain technology and which has some fundamental attributes, including that it creates a database of transaction which can be viewed publicly, verified, and cannot be tampered with. However, it creates a decentralised and anonymous environment, so two parties undertaking a transaction using blockchain technology, or indeed two parties buying and selling crypto currencies do not necessarily know with whom they are transacting. Real world examples of problems arising from this challenge have begun to emerge. Cases have been decided at an interim level (not yet progressed to final hearing) in the past year, under which parties, having been defrauded of funds in connection with transactions in crypto currencies, have had difficulty in seeking enforcement and recovery of their losses in an environment where the identity and location of the relevant parties has been impossible to ascertain. Some very important and fundamental principles have emerged from cases such as these – one such principle being that crypto currencies are accepted by the courts as amounting to intangible property, meaning that they are an asset in respect of which rights attach and rights of recovery can be granted – but the fundamental nature of the decentralised and anonymous environment remains a challenge for law makers and lawyers.
Against this backdrop concerns have been voiced about the opportunity for this crypto world to be exploited by those seeking to defraud, steal or scam parties in previously unavailable ways.
Navigating this brave new world
For parties engaged in crypto or blockchain-driven transactions, ways are evolving to regulate their dealings, protect themselves against the unexpected, and recover losses in the event of problems. Many of these considerations are as applicable to transactions undertaken in the blockchain world as they are in “traditional” commerce. Those starting new businesses in the world of crypto currency face similar challenges to those of the traditional business environment. What makes this interesting for lawyers is that this new environment involves the application of commercial and creative thinking in such a way that enables the benefits of blockchain and crypto currency to be engaged without unduly exposing the parties to transactions to unnecessary risk.
It will be interesting to see how the law makers catch up in creating a formal legal regime which properly captures the requirements of the parties dealing in crypto. In the meantime, we would advise any business, business owner or consumer engaged in this world to seek legal advice early in the process to ensure their rights and obligations are properly recorded and create a right of recovery in the event of the unforeseen.