National Blockchain Laws Are a Threat to Capital Markets Integration

Since its creation in 2008, the blockchain has seemed incompatible with legal constraint. Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, hailed the blockchain’s “unstructured simplicity.” Even now, apostles of distributed ledger technology (DLT) strongly resist the idea that it needs regulation, arguing that it was designed precisely to avoid centralized control.

This did not, however, stop courts and legislators around the world from becoming increasingly concerned about DLT. They are no longer focusing only on the dangers cryptocurrencies might pose to the public, such as its potential use in money-laundering, the financing of terrorism, or tax avoidance. More recently, they have created laws affecting the private aspects of the blockchain, such as protections for property in crypto assets, requirements for valid transfers, and rules establishing the rights of parties in the event of the insolvency of an intermediary such as a wallet provider or a crypto exchange.

In Europe, France has allowed companies to issue over-the-counter (OTC) traded financial instruments on the blockchain (dubbed ‘dispositifs d’enregistrement électronique partagé’, or ‘DEEP’). Liechtenstein has adopted the Act on Trustworthy Technologies (Vertrauenswürdige Technologien Gesetz). Most recently, Switzerland has amended its Code of Obligations to accommodate crypto assets. in the U.S., the Uniform Law Commission has published a Uniform Regulation of Virtual-Currency Businesses Act (URVCBA). However, not all states are following this model. Wyoming, for example, has been at the forefront of adopting its own approach.

In a recent article, I compare these approaches and identify in detail their many differences. The result of this analysis is cause for concern. It shows that we are on the verge of legal fragmentation in a new area of law; much like what we have already seen in other areas, such as the law of intermediated securities. While the blockchain was created to transcend national frontiers and to work beyond the limits of any legal system, it risks being transformed into different versions for different nations. This will hinder its efficiency, raise information and transaction costs, and create issues of whether different versions can operate with each other. Above all, it will undermine the function of the blockchain as a global transfer mechanism.

My conclusion is that we need more harmonization of the protections for assets recorded on the blockchain. UNIDROIT and UNCITRAL are already working on this issue, while the Hague Conference on Private International Law is observing current developments. My article identifies key areas to be harmonised. Among them are the standards for when a transfer is valid and final; the definition of  bona fide purchases; protections on insolvency; and the creation of securities rights over crypto assets. I am less pessimistic about the case for harmonization in this area than in the area of intermediated securities, where efforts towards global uniform standards (in particular the UNIDROIT Securities Convention) have largely failed. The reason is that blockchain law is a relatively recent development, and most legal systems have yet to deal with it. My plea is to harmonize the law of crypto assets before it is too late.

This post comes to us from Professor Matthias Lehmann at the University of Vienna. It is based on his recent article, “National Blockchain Laws as a Threat to Capital Markets Integration,” available here. A version has appeared on the Oxford Business Law Blog.

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