INTRODUCTION Contributed by: James Burnie, gunnercooke llp
Blockchain: The Underlying Technology The law and regulation of blockchain is complexity borne of simplicity. At its heart, a blockchain is simply a new way of storing data in a way that is more secure, immutable and always accessible. That data can be whatever you want it to be – for example, with bitcoin, the data essentially simply referred to the existence of a crypto-asset. The issues here for jurisdictions have been twofold. • How does the immutability of data interact with data protection legislation? This has been a core issue in the EU, where blockchain conflicts with the concepts of the right to forget. • How to reconcile the fact that users treat bitcoin as if it is property whereas in fact it is data, leading to confusion of how to apply concepts like “theft”, which assume physical property, to the data that is bitcoin? The UK Law Commission has done some work on this, recognising digital assets as being potentially property, however it is unclear how that will operate in practice. On top of this, a different technology, smart contracts, allow for functionality to be automated. This has resulted in new industries, such as DeFI, and raised serious questions regarding whether developers are liable for code that they release but can no longer control. Different jurisdictions have taken very different approaches here, for example the developer of Tor- nado Cash was prosecuted by the US Department of Treasury for code he no longer controlled. By contrast, in the UK, case law suggests that developers may not always be responsible, for example if the model is so decentralised there is no effective control ( Tulip Trad- ing Ltd v Van der Laan & Ors [2023] EWCA Civ 83). Crypto-Assets The most contentious aspect of blockchain for reg- ulators has been crypto-assets. As the nature of a crypto-asset, in very broad terms, is determined by the characteristics that users of a blockchain decide to give to information on the blockchain, a crypto- asset can effectively have any feature which its users decide to attribute to it.
Broadly speaking, the starting point taken by regu- lators has been firstly to distinguish between those crypto-assets which have the indicia of being a secu- rity and other crypto-assets. At a high level, the USA in this respect has traditionally been one of the more aggressive jurisdictions in terms of determining that crypto-assets are a security, under the notorious How- ey Test, which generally resulted in any crypto-assets designed to increase in value being considered secu- rities – and inadvertently spawned the meme token industry, a token designed to be intrinsically value- less. The EU and the UK have taken a more restrictive approach, with defined definitions of what is consid- ered a security (or “financial instrument”), and any- thing not on that list being considered not a security. Even in this respect, it is worth noting that there are subtle nuances in this approach, with the concept of the collective investment scheme having a more all- encompassing definition than its EU equivalent, the collective investment undertaking. Other jurisdictions have generally landed along the spectrum, depending on their traditional influences – and so, for example, Singapore has tended to align with (whilst not being quite the same as) the approach adopted by the UK. For crypto-assets which are not securities, the posi- tion has been changing globally, and in this respect the global position can broadly be split into those jurisdictions where crypto-assets are sold from and those where crypto-assets are sold into. The selling jurisdictions (offshore) For certain jurisdictions, sometimes referred to as “off- shore”, crypto-assets represent a potential new busi- ness line that brings wealth into the jurisdiction. These jurisdictions include Switzerland, Cayman, BVI and Panama. The focus of these jurisdictions has gener- ally been on facilitating business set-ups, and indeed a network of services providers have been devel- oped which can, for example, assist with providing local directors to help with issues such as substance requirements. A common feature of these jurisdictions is that the local population does not tend to constitute a large market of potential buyers of crypto-assets, and so firms that set up tend to need to sell cross- border into other jurisdictions in order to run a viable business.
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