Every year the tech group at the law firm Lowenstein and Sandler invites a carefully selected group of tech industry leaders and senior execs, along with VC, growth equity, PE and angel investors to engage in a series of topical discussions impacting the tech community. This year, Uslawfornordics.com participated in the roundtable discussions about Blockchain, Crypto and Initial Coin Offerings (ICO) to get a glimpse of some of the legal issues this new (?) technology brings as well as pick the VCs brains on the issue.
Some might say that we are witnessing a new digital revolution, a paradigm shift in the way society operates thanks to blockchain, cryptocurrencies, and ICOs. It probably doesn’t come to anyone’s surprise that the legislator has not kept up with the pace of technology and that legislation lags behind the development. We have previously written about how export laws fail to follow today´s disruptive technical development, and the blockchain area probably suffers even more from the specialized knowledge needed for the legislators empowered by the governments. What complicates this, even more, is that the whole idea behind cryptocurrency was born as a reaction to the existing and traditional financial markets, with an idea of a currency without borders. So, with a stateless currency comes the natural issues of who has the authority to regulate over it? As we learned over the course of the afternoon with a room full of VCs and regulators and others with extensive knowledge in this area – this is spot on the main issue the sector is facing.
In short, we learned that the issue is stuck between many regulators trying to have their hand in the pot and one of the core issues is that regulators, agencies, and financial institutions can’t agree on how to categorize digital currency. In the U.S., like in the EU, there is no overarching regulation on a national level. In the U.S., the 50 states are applying laws differently to money transfers, so the U.S. has no coherent direction on its cryptocurrency.
The Securities and Exchange Commission in the U.S. has indicated it views digital currency as a security. The Commodity Futures Trading Commission says bitcoin is a commodity. The IRS says cryptocurrency is not actually a currency but a property should be taxed as such. To complicate further, some financial institutions claim it is a money service business and should be treated as such. A lot of the agencies don’t agree with what others are saying. It’s such a new area and agencies face what can be described as a perfect storm of challenges and are searching for solutions to put their mark on it. The underlying agenda is the regulators are interested in protecting U.S. investors and not foreign investors. With many companies operating globally, compliance teams must deal with a broad range of international regulations so just looking at it from a purely national perspective might not be the best option.
The VCs in the room pointed out, that due to the legal chaos there is no continuity, which in turn prevents growth and innovations. More and more business are leaving the U.S due to fear of the unknown. The volume of trading is more significant outside of the U.S. and the chaotic regulatory component makes some investors hesitant to invest in businesses that deal with cryptocurrency. From an investment perspective, some VCs said they will want to wait until we see a 2.0 or 3.0 version of the digital currency.
The regulatory discussions also led to the questions about how to solve the custody issue and the fact that the custody for cryptos has to be improved in order to grow the business. The participants of the roundtable discussions expressed their concerns about their ability to hold their digital assets in a manner that is both secure and compliant. This is perhaps even something that prevents VC to invest money into the industry because of fear of, among other issues, hackers. And if you are company raising money in crypto-money for an ICO, custody is an even bigger issue.
The roundtable discussion today focused mainly on blockchain technology being used for transactions involving digital currencies. However, as one participant pointed out, there are many other applications of blockchain. The blockchain mechanism provides a compelling security, which is going to affect transport, banking/finance, corporations, insurance, healthcare, payments, legal/compliance, cyber-security, digital identities, governments, energy and the Internet of Things.
There is definitely a lot more to be said about blockchain and crypto, and it will be interesting to see the future development in this area. From a legal perspective, it´s fuzzy, to say the least.
