Blockchain 2020 features 20 jurisdictions. The first edition of this guide covers cryptocurrencies, stablecoins, initial coin offerings, non-fungible tokens, tax regimes, data privacy and protection, mining and staking, and decentralised financial platforms.
Last Updated: June 17, 2020
DLx Law is pleased to be able to introduce the first-ever Chambers Guide to Blockchain and Cryptocurrency Law and Regulation. This survey comes at a particularly opportune time. The global blockchain sector in 2020 is in a state of significant transition. Over the past several years, numerous jurisdictions have started to recognise the importance of creating a “blockchain friendly” regulatory environment. As the Guide demonstrates, those efforts are now starting to bear fruit. We see important developments this year in France, Japan, Malaysia, Portugal and the United Kingdom and an increasingly settled environment in jurisdictions including Gibraltar, Mexico, Singapore and Switzerland, the latter two of which are consolidating their positions as the “hubs” for blockchain activity in Asia and Europe, respectively. With an important statement from the UK Jurisdiction Taskforce in late 2019, followed by the completion of the Brexit process in early 2020, the UK is poised to take a leadership role in setting standards for creating a steady and transparent regulatory environment for blockchain, while the Cayman Islands are taking steps to extend their well-established position as the leading Western Hemisphere offshore jurisdiction into the blockchain space. Finally, 2020 may be the year when the legal and regulatory environment in the United States finally starts to coalesce.
Although blockchain technology is remarkably flexible, the best-known examples, the Bitcoin and Ethereum networks, are inherently global in nature. Legal practitioners, from today’s leading experts to up-and-coming lawyers just starting their journeys into the practice area, will benefit from the multi-jurisdictional insights contained in this guide. Examples of blockchain-based networks can be found in nearly every country – the lists of developers contributing to Github code repositories for major blockchain projects typically read like the attendees at a United Nations General Assembly meeting. Now more than ever, lawyers assisting clients with blockchain projects need to have a global perspective.
A review of the Chambers Guide yields numerous valuable insights. In terms of business models across the jurisdictions surveyed, we see a vertiginous diversity. Japan was an early leader in establishing a regulatory framework for digital assets, and as a result, blockchain technology is now being increasingly adopted in the Japanese financial industry. Hong Kong, a long-standing fintech hub, is nurturing a vital entrepreneurial community with at least 169 registered blockchain start-ups.
Unsurprisingly, given the Cayman Islands’ longstanding leadership in the funds space, tokenised funds harnessing the benefits of blockchain technology have been one of the early successes. We see a similar focus in Luxembourg, with leadership on the use of blockchain in the European funds industry. Jurisdictions like Belgium and France have developed a stable and growing group of local start-ups that see most of their activity in domestic markets but have yet to break out at the European or international levels. An exception is the French hardware wallet manufacturer Ledger, which has established a global market-leading position. We also see considerable take-up of blockchain among major French industrial and financial groups as businesses race to explore money-saving uses for primarily permissioned blockchain networks.
The nation-state of Singapore punches well above its weight as a result of a long-term strategy to invest in the development of companies in the blockchain sector. Singapore has a thriving cryptocurrency-trading, custody and investment market, with exchanges, venture capital funds, crypto hedge funds, and decentralised finance projects all contributing to an active market with clients and users across Asia and around the world. More traditional businesses in Singapore have taken to blockchain as well, a great example being Singapore Airlines’ blockchain-based loyalty digital wallet, KrisPay. In Malaysia, financial institutions and companies in the energy sector have been particularly receptive to using blockchain technology. Until recently, China’s blockchain market had been dominated by private companies and start-ups operating a variety of public and private blockchain services. However, the PRC government, along with private sector partners, launched a nationwide blockchain service network, known as BSN, in April 2020.
The UK continues to be a hotbed of innovation, with particular promise shown in the area of convergence between blockchain and other cutting-edge technologies, such as artificial intelligence and the “Internet of Things” (also known as IoT). In addition, companies in the UK with a broad range of other business models are applying blockchain technology, including in the areas of payment solutions, digital asset buying and selling, reinsurance, digital asset wallets, the tracking of freight and other shipments (such as pharmaceuticals and food) and the digitising patient records.
Finally, we see companies in the United States continuing to be true global market leaders. Crypto exchanges like Coinbase and Gemini are generally thought of as best-in-class, while the USA is also home to leading permissioned ledger projects like Symbiont, Hyperledger and R3’s Corda.
In terms of implementing new legislation to provide certainty and clarity to companies implementing blockchain-based solutions, France is clearly leading the way with the passage of the Action Plan for the Growth and Transformation of Companies (known in France as the PACTE Act) in May 2019. The PACTE Act creates a comprehensive regulatory regime for both initial coin offerings (ICOs) and intermediaries dealing with digital assets, which are referred to as digital assets service providers or DASPs. The passage of the PACTE Act was then followed by the adoption of implementing regulations and both the ICO and the DASP regimes are now fully operational in France, making it a highly promising jurisdiction for European entrepreneurs looking to start a blockchain-based business.
Singapore has gone in the opposite direction, taking a technology-agnostic approach, with a focus on regulating the underlying activity, rather than on blockchain as the enabling technology. In contrast to the PACTE Act in France, there is no specific single piece of legislation governing the use of blockchain technologies in Singapore. Instead, existing legislation and regulations have been expanded or clarified to address blockchain-related issues. This can be comforting for businesses concerned about how newly adopted legislation may be interpreted in the future. In the Cayman Islands, we see steps being taken to develop a broad-based legislative framework. Under development for some time, the Cayman Islands Virtual Asset Service Providers Law (known as the VASP Law), when adopted, is expected to provide a flexible foundation to promote the use of new technology and innovative business models in the Cayman Islands while at the same time complying with newly adopted international standards set by the Financial Action Task Force. The new legislation would provide for the supervision of persons and entities facilitating virtual asset activities as a business.
Some countries have adopted measures directed toward the blockchain sector, but further work is still needed to flesh out what these regimes mean for businesses using blockchain technology. For example, the Administrative Measures on Blockchain Information Service (Blockchain Measures), issued by the Cyberspace Administration of China in January 2019 established a regulatory framework for blockchain technology and cryptocurrencies in the PRC. However, the Blockchain Measures do not go into great detail on the implementation of blockchain technology and notable uncertainties remain with respect to implementation.
With its multitude of federal and state-level regulators and regulatory schemes, sweeping blockchain legislation, of the type adopted in France and under consideration in the Cayman Islands, is simply a non-starter in the USA Unfortunately for the blockchain industry in the USA, there also remain significant uncertainties on how existing regulations apply to activities involving the use of blockchain technology. The result has been a patchwork of enforcement actions by regulators and law enforcement agencies. Leading examples have been the pursuit of Kik Interactive and Telegram Group by the SEC and the action brought against Bitfinex and related entities by the New York State’s Office of the Attorney General. The SEC was successful in obtaining a permanent injunction against Telegram’s proposed release of GRAM tokens to a group of accredited investors, but it remains to be seen how the other cases will play out. A number of high-profile private lawsuits have also been commenced in the USA, including cases against Ripple Labs and, more recently, class actions against a group of 11 cryptocurrency issuers and crypto exchanges claiming that these defendants sold billions of dollars of unregistered securities in violation of US securities law. A variety of specific blockchain-oriented bills were introduced in Congress in 2019, but the chance of passage of any of these is generally considered very low.
A similar situation can be found in Brazil, where there is no specific regulation regarding blockchain technology. Moreover, in the absence of a comprehensive regulatory framework, several different government entities have been attempting to regulate uses of blockchain technology, causing fragmentation and an inconsistent regulatory landscape.
Illustrating the challenge of regulating such a fast-moving technology, none of the surveyed jurisdictions have developed a framework specifically to address some of the hottest trends in the blockchain space – decentralised autonomous organisations (DAOs), decentralised finance (DeFi) and stablecoins. DAOs in particular exemplify the global nature of blockchain. By establishing a code-based framework, individuals around the world can create a DAO and engage in collective schemes without ever forming a legal entity in any jurisdiction or otherwise taking any of the steps traditionally thought of as necessary to start a new business (whether this is a good idea or not is a separate question). Similarly, DeFi platforms like decentralised crypto exchanges (known as DEXs) can be accessed by anyone with a computer and an internet connection, allowing a wide range of financial transactions to occur without the costs (or protections) of a central intermediary. So-called “stablecoins” (cryptographic tokens whose value is directly or indirectly pegged to a designated fiat currency) existed before 2019 but with the announcement of Facebook’s “Libra” project, they quickly became the cause celebre of the crypto industry.
One area in which there is significant conformance among the surveyed jurisdictions is the enforceability of commercial undertakings created in part with blockchain-based automation, frequently referred to as “smart contracts”. Although there are no laws, regulations or judicial decisions in the Cayman Islands addressing the enforceability of smart contracts, where the defining features of a contract are present – offer, acceptance, the intention to be legally bound and consideration – it is expected that undertakings implemented in whole or impart using smart contracts would be enforced by the courts. In addition, the Cayman Islands Electronic Transactions Law puts electronic signatures on an equal footing with "wet ink" signatures. Likewise, no regulation or judicial precedent specifically applies to the enforceability of smart contracts in France. Nevertheless, a valid agreement under the traditional rules of French contract law, which uses a blockchain-based computer code to guarantee the automatic execution of certain of its obligations, should be enforceable.
Another good example of this position can be found in Russia. Russian law allows parties significant flexibility in establishing their contractual relationships, and there are provisions that appear to be aimed at smart contracts for digital rights. However, these provisions are general in nature and there is no specific rule providing for the legal enforceability of smart contracts. Under general Russian contract law, it is possible for private parties to agree to contractual arrangements through various types of digital means, arguably including the use of a blockchain-based network, so long as the basics of contract formation are met. These basic requirements include identification of the parties, the subject, rights and obligations of the contract and assent to the contract.
In Singapore, the situation is even more clear. In the widely reported case of Quoine Pte Ltd v B2C2 Ltd the court applied existing Singapore laws on contract to cryptocurrencies. The court analysed the terms and conditions of an agreement between users of a digital token exchange and the digital token exchange operating entity and recognised that a contractual relationship between buyers and sellers existed when a trade was executed on the digital token exchange even though that contractual relationship was formed through the use of a smart contract. A key conclusion of the court was that even though the agreements between the buyer and seller were created and performed using blockchain technology, ordinary Singaporean contract principles still applied.
The UK has also made important strides in this area. In November 2019, the UK Jurisdiction Taskforce published a Legal Statement on the Status of Cryptoassets and Smart Contracts (Legal Statement) covering topics including recognition of digital assets as property under the law and enforceability of smart contracts. Subsequently, there were a number of cases applying legal analysis around crypto-assets into English case law which constitute an important feature for certainty. These recent developments make the UK a promising jurisdiction for companies looking to experiment with the use of smart contracts in a more traditional commercial setting
The year 2020 will likely be remembered primarily for the global COVID-19 pandemic and the worldwide civil unrest ignited by several high-profile cases of troubling police actions in the United States, this survey, however, shows how, even in the face of the most trying of circumstances, participants in the blockchain sector continue to innovate and governments continue to respond through new laws, regulatory initiatives, court decisions and enforcement actions. As we look ahead towards 2021, we can all hope for a more stable global environment as we anticipate the ongoing growth in the use of blockchain technology and cryptocurrencies.