Smart Contracts

The main purpose of this chapter is to sketch two principal ways in which lawyers are likely to engage with new transactional technologies (such as smart contract applications of blockchain technologies), each form of engagement being characterized by its own questions and conversations. Whereas one form of engagement, ‘coherentism’, focuses on the fit between particular new technologies and the covering law of contract, the other, ‘regulatory-instrumentalism’, focuses on whether the law (relative to particular new technologies) is fit for regulatory purpose. The sketch is refined by drawing further distinctions between ‘transactionalist’ and ‘relationalist’ variants of ‘coherentism’ and ‘rule-based’ and ‘technocratic’ variants of regulatory-instrumentalism. With a view to decoding legal debates about emerging transactional technologies, this sketch is then applied to questions concerning smart contracts in, respectively, business-to-consumer, business-to-business, and peer-to-peer transactions.

Regulation of Blockchain Token Sales in the United States

This chapter provides an overview of how US securities regulation applies to the sale of cryptographic tokens using a distributed ledger, so-called initial coin offerings. Token sale transactions that meet the definition of ‘investment contract’ qualify as regulated securities transactions following the seminal 1946 court decision in the Securities Exchange Commission’s lawsuit against the W. J. Howey company. Currently, there exists substantial legal uncertainty regarding the regulatory classification of token sales involving utility tokens that provide their holders with non-financial, software-based functionality. As implied in a June 2018 speech by a high-ranking SEC official, sales of tokens may initially qualify as regulated securities transactions, yet later fail to qualify as regulated investment contracts if the tokens’ underlying network becomes sufficiently decentralized. Distributed ledger technology is disrupting the nature and operation of early-stage fundraising and access to software services and enabling the sale of digital tokens that operate as a cryptocurrency or provide access to a software service through the use of a blockchain or distributed ledger. The sale of such tokens, so-called initial coin offerings (‘ICOs’), is often in exchange for cryptocurrencies, such as Ethereum or Bitcoin (however, tokens could be sold in exchange for fiat currency). From January to May 2018, globally US$13.7 billion in tokens were sold by 537 companies or projects, an amount greater than all previous time periods combined. This chapter discusses under what circumstances US securities law applies to the sale of such tokens.

Regulating Blockchain

This introductory chapter provides an overview of the main legal and policy implications of blockchain technology. It proceeds in four steps. First, the chapter traces the technical and legal evolution of blockchain applications since the early days of Bitcoin, highlighting in particular the political ambitions and tensions that have marked many of these projects from the start. Second, it shows how blockchain applications have created new calculative spaces of financial markets that seek to challenge existing forms of money. Third, it discusses the core points of friction with incumbent legal systems, with a particular focus on the regulability of decentralized systems in general and data protection concerns in particular. Fourth, the chapter provides an outline to the contributions to the volume, which span a wide array of topics at the intersection of blockchain, law, and politics.

Blockchain-Based Insurance

To date, the insurance industry’s interest in the blockchain has focused largely on the possibility of recording insurance entitlements in a transparent way. While the blockchain may produce significant efficiencies of this sort, it has considerably greater transformative potential. Smart contracts could serve as a substitute for insurance companies, conventionally conceived. Such contracts could perform the function of deciding whether claims should be paid, without the need for or possibility of judicial intervention. The blockchain and smart contracts are difficult to regulate, because ownership and decision making can be decentralized. Blockchain-based insurance may successfully provide a means of avoiding expensive regulation and could have a competitive advantage over regulated insurance. This chapter discusses how blockchain-based insurance might work and identifies some technical challenges and other obstacles that it may face.

Banking in a Digital Fiat Currency Regime

This chapter explores the future of banking in a digital fiat currency (‘DFC’) regime, defined as a monetary regime in which retail and wholesale consumers have direct access to public digital checking and payments services, independent of the existing bank-centric depository system. I argue that in such a regime, existing banks will continue to perform the valuable social function of underwriting loans and evaluating collateral, even as their checking and payments processing functions will be rendered obsolete. Such a system would improve payments system resiliency, while addressing the safe asset shortage issues associated with insurance caps on bank deposit accounts. At the same time, a DFC regime would necessarily clarify the public nature of the existing credit system, wherein commercial banks are (inherently) entrusted to underwrite loans and subjectively evaluate collateral. Thus, digital fiat currency technology represents more than a mere improvement in payment system efficiency—it has the potential to transform the banking industry, simplify financial regulation, and recast our collective understanding of how money and banking work in the modern economy.

Blockchain Competition

Taking a dynamic and reflexive perspective on the interaction between technology, law, and economics, this chapter focuses on the role of competition in shaping the economic, and regulatory, ecosystem in which blockchain technology becomes embedded. There is the promise that the technology and the social space it will foster will give rise to more competitive structures in the organization of economic activity in the digital economy, in comparison to the current, highly centralized paradigm of digital platforms. The narrative of disruption has indeed been important in promoting the greater use of blockchain technology and has also framed the socio-technical ‘agencements’ that have so far guided regulatory action in this area. However, this narrative of disruption has also led to some hasty conclusions made in the literature as to the impotence of competition law to deal with an emergent digital space dominated by blockchain technology, predicting its eventual demise … The chapter critically engages with this rhetoric and explains why it does not stand serious scrutiny and relies on a superficial analysis of blockchain competition, as it does not consider the various ways in which the competitive strategies of economic actors shape the rules of the competitive game, the broader ‘industry architectures’ that structure competitive interactions. It unveils how blockchain can contribute to competitive advantage, and thus shape the distribution of surplus value in various industries. It then draws lessons for the work of regulators, in particular competition law enforcers. Finally, it provides a detailed analysis of competition law implications of blockchain technology.

Conflicts of Laws and Codes

Blockchain technology promises to perform tasks that have traditionally been assigned to the law and the realm of legal institutions. Smart contracts create agreements that are both automatable by computers and enforceable via the tamper-proof execution of computer codes. Based on such smart contracts, some providers of blockchain technologies offer ‘to act as a digital jurisdiction’. The promise seems to be that law of the relevant jurisdiction is entirely substituted by the rules codified in the blockchain. However, even if it has often been argued that the ‘Code Is Law’, the law is not—and arguably never will be—entirely redundant. Therefore, the challenge is to identify the boundaries of such digital jurisdictions by clarifying the relationship between law and code and to develop new principles for conflicts of laws or rather principles for the conflict of laws and codes.

Blockchain and Payment Systems

Bitcoin—the first virtual currency based on blockchain technology—was born out of an anarcho-libertarian dream to create a monetary system that—by relying on ‘trustless trust’—would be completely independent of the state and established financial institutions. Today, there is no doubt that blockchain technology will transform payments, the financial industry, and many other areas. However, this chapter argues that in regard to payments, this transformation will be far from the libertarian ideal. Rather, blockchain (1) will enable the rise of new powerful intermediaries and (2) it will be embraced by established payment services providers, who will use blockchain to modernize their services. As a result, decentralized virtual currencies like Bitcoin will remain on the periphery of the mainstream payments landscape. Blockchain has focused too narrowly on providing a technological solution to the issue of scarcity and solving the double-spending problem. Yet, problems involved in monetary and payment systems are broader. In particular, payment systems provide for a broad range of mechanisms supporting circulation of money which, for the scale and complexity of a modern economy must be backed by the state. Money is a hybrid public–private institution and it seems naïve to think that technology alone could render the role of state institutions in monetary and payment systems obsolete.

The Crypto-Security

This chapter analyses the interplay between initial coin offerings (‘ICOs’) and securities regulation, with a particular focus on EU law. ICOs have come to dwarf traditional venture capital funding in the blockchain space. However, the US Securities and Exchange Commission (‘SEC’) has determined that a number of token types constitute securities under US law, with potentially far-reaching consequences for initiators in terms of liability. Under EU law, explicit regulatory or court guidance is lacking at the moment. Against this background, this chapter develops a taxonomy of tokens by differentiating between investment, utility, and currency tokens. It shows that only investment tokens typically qualify as securities under EU law. Currency tokens are exempted because of their proximity to payment services regulation; and utility tokens will, for the most part, fall under EU consumer law, not securities regulation. These results derive from a functional analysis of EU securities regulation and arguably amount to a comparative advantage of EU law vis-à-vis US law in terms of the regulatory burden for token developers.

Global Currencies and Domestic Regulation

This chapter identifies cryptocurrencies and other virtual currencies as global currencies that could have a major impact on national jurisdictions. Regulation concerning cryptocurrencies can be described in the terms of the ‘double movement’ that Karl Polanyi identified for the expansion of the market society in the nineteenth and twentieth centuries. Cryptocurrencies have been developed by anti-establishment individuals and groups, and other opponents of the global financial system that—in Polanyi’s terms—belong to a collectivist counter-movement. The effect they have produced, though, is rather to expand global markets and the market system. This has spurred a counter-movement to the counter-movement, or what could be called the ‘anti-countermovement’. The response of the anti-countermovement to the expansion and influence of the global currencies is paradoxical, if not schizophrenic. The anti-countermovement treats global currencies both as currencies and as a technology. This has led to various regulatory measures in different jurisdictions. When viewed as currency, cryptocurrencies are regulated both as money and commodities, leading to an indifferent approach to their regulation or a command-and-control approach or various intermediate approaches. When viewed as a technology, different jurisdictions have taken an enabling approach to the regulation of cryptocurrencies by establishing ‘innovation hubs’ and ‘regulatory sandboxes’ for FinTech companies. This chapter concludes by discussing the dangers of embedding cryptocurrencies through enabling them, namely the problem of more finance, and possibly an internal clash of domestic agencies. The way to mitigate the dangers of embedding through enabling is by regulating the new cryptocurrency intermediaries.