After the spectacular runup in the price of bitcoin at the end of 2017, cryptocurrencies and the associated blockchain technology are gaining enough traction that the legal profession must address them.
Cryptocurrency exchanges, which facilitate value transfers between the digital units and fiat money issued by governments, have proliferated, but it’s not clear whether electronic money is ever going to account for a significant share of the world’s payment systems. Blockchain, on the other hand, appears to be a technology that will find many uses.
Legal practitioners are faced with advising clients whose business interests may include working with cryptocurrency payments or developing a project based on blockchain technology, according to Bloomberg Law.
For payments made with digital currency, regulatory issues may involve statutes combating money laundering, state money transmitter laws, and federal and state consumer protection legislation. It’s also important to note that the use of digital currencies — the three most widely used are bitcoin, Etherium, and Ripple’s XRP — may not be acceptable to potential third parties in specific transactions.
Attorneys also may be asked to evaluate a myriad of projects that could incorporate a distributed ledger system. The possible use cases in which blockchain has been forecast to play a role include supply chain management, payment systems distributing funds to multiple parties, authentication of property or loan documents, and file or document sharing.
It was in the payments area that cryptocurrencies and distributed ledger technology were touted as offering the greatest promise, based on the anonymity and efficiency they offered. But the reality of how financial systems are regulated is looking like a significant impediment.
Transparency is essential to the credibility that has to be the basis of any effective payment system. The Financial Action Task Force, a multi-government effort whose recommendations to prevent money laundering and terrorist finance are followed by about 200 countries, will issue guidance this month that will force cryptocurrency exchanges to meet the same requirements that are placed on fiat currency transfers.
Those rules typically include identifying both the sender and the counterparty, as well as the details underlying any transaction. Besides the impact that such disclosure would have on anonymity, industry experts suggest it could require great expense and several years for the exchanges to build the systems needed for compliance. It may be possible to structure something that would preserve anonymity with a backdoor access feature for law enforcement, but that’s another complicating factor.
The Securities and Exchange Commission also could figure into the regulatory picture, according to Bloomberg Law. Digital assets in the form of tokens have in practice been exempt from the FATF disclosure requirements because the SEC has deemed them securities rather than a store of value. But there’s been no specific ruling, and how they’re treated in separate jurisdictions could lead to a different interpretation.
Legal practitioners will need to stay on top of the emerging regulatory framework that will define the future for cryptocurrency and blockchain tech applications.