Edukamu: First Notes on Blockchain

As we touched upon in the last Chapter, there is a large number of lawyers working on the legislation concerning blockchains, e.g., concerning smart contracts. Jurisdiction in different countries varies greatly while writing this course (November 2020) and in this Chapter we take a closer look on the actual laws that govern blockchains. The Chapter is based on an article by Gibraltar Law, which can be found in its entirety from the Section “Further reading” below.

Video 4: Interview of a US Lawyer

As the interviewed lawyer says in the clip above, government wants to get involved in blockchains because they want to regulate the darker aspects of blockchains: money laundry and funding terrorism, to name a few. As blockchains are gaining popularity in finance, legislation is needed to protect the needs and interests of already existing institutions.

One of the greatest setbacks for blockchains was the hacking of the Ethereum in 2016, and this opened the eyes for many regular users on the risks involved in blockchains and cryptocurrencies. Consequently, there has been legislative measures in many countries to shield against similar events, but they have not been very successful because blockchain transactions cannot really be shielded against malfunctions of the blockchain system itself.

For example, in the US, there is still need to define exactly what a cryptocurrency legally refers to. Internal Revenue Service (IRS) have defined cryptocurrency as property, which would mean that all the cryptocurrency transactions are under the same legislation than let us say selling a car. However, all the different property have different legislation governing them and it is still unclear, even in US, what type of laws should be put to place to govern cryptocurrencies. Most legislative bodies would like to view them as securities. However, this still leaves open the question, what happens when one mines cryptocurrency online.

Although we are making progress in understanding blockchains, both on this course and as a society, blockchain-related businesses are still largely unregulated in most countries. To be on a safe side, many financial actors would like to see regulation in place before they start to use cryptocurrencies, as e.g., Bitcoin has been accused of promoting criminal behavior because of its (semi-)anonymous user accounts and unregulated transactions. Therefore, there is a real push for regulation of cryptocurrencies, and other blockchain derivatives, inside the society.

We will now go through some of the countries that have jurisdiction in place. This information is from 2018, so some of it might have changed, but it gives an overview of how countries try to put in place blockchain and cryptocurrency regulation.

Even what was said of the US regulation above, it seems that it is the most advanced country in adopting cryptocurrencies. Many stores accept cryptocurrencies and there are even cryptocurrency ATMs. There is also cryptocurrency regulation, on both federal and state level. Financial intelligence unit (FinCEN) has stated that there is no real difference between real currencies and cryptocurrencies as far as regulation goes. Therefore, cryptocurrency businesses have had to register as Money Service Businesses, have a compliance officer, to have public internal policies, procedures and controls and perform trainings and audits. The above-mentioned IRS defines cryptocurrency as property for tax purposes, and US Commodity Futures Trading Commission views cryptocurrencies as commodities and so under its jurisdiction. Excluding the federal government, many states are in process of developing cryptocurrency-related business regulation (e.g., New York, Florida, Tennessee and Utah).

In Mexico there is a push to regulate cryptocurrency exchanges. There are laws to regulate cryptocurrency exchanges, but they have not yet been implemented. The basic view of Mexican government is that cryptocurrencies are not illegal and while the laws are implemented the sector can self-regulate transactions, although they have warned private investors on the risks related to cryptocurrencies.

In Australia, there is governmental body called AUSTRAC implementing laws on businesses handling cryptocurrencies. Digital currencies must be registered with AUSTRAC and fulfill the regulations they impose. They are very much the same as in US, but they also deem necessary customer verification and identification procedures, which are in place to help gain access to anonymous cryptocurrency actors. AUSTRAC also prohibits actors outside Australia of functions under them, the cryptocurrency business needs an Australian resident or physical office in Australia to fall under their legislation.

Cayman Islands gained unwanted media attention on its hedge funds holdings, and for a reason or another, also cryptocurrencies are very popular there. It might be because Cayman Islands have no regulation on cryptocurrencies at all. There are some plans to impose regulation, but at the same time the cryptocurrency businesses are given free hand in their functions.

Japan has established itself as cryptocurrency friendly nation, possible because the blockchain technology was allegedly invented in Japan by the pseudonym Satoshi Nakamoto. There was a successful hack of Coincheck cryptocurrency in Japan in 2018, which resulted in theft of $500 million worth of cryptocurrency. After that Japan has taken measures to regulate cryptocurrency more closely. They are concentrating on security, identification, management of customer assets, prohibition of more suspicious cryptocurrencies and corporate governance. Every cryptocurrency needs to be registered as currency exchange service to function in Japan.

Singapore is marketing its functions or cryptocurrency exchange services, trying to provide a stable and secure environment for business functions. Cryptocurrency trading and payments are legal in Singapore and there is no legislative framework (2018).

In Luxembourg, cryptocurrency exchange is governed by the state body CSSF, and are given the position of electronic money institutions. Therefore, all cryptocurrency exchanges in Luxembourg must function under Luxembourg’s e-money regulations. There is a difference between cryptocurrencies and e-money, however, which makes Luxembourg a global exception.

In Finland, the regulation is much like in other countries, meaning that the blockchain and cryptocurrency technologies are seen as assets and threats. Assets in the sense that their deployment can grant benefits and threats because the unforeseen consequences of using e.g., cryptocurrencies nationally. There is jurisdiction concerning cryptocurrencies, having them to register to a Finnish governmental function and making them comply to the same rules as other currency exchange businesses. There are plans on tighter regulation (e.g., taxation), but these plans are still under consideration.

Just by these few examples one can see the differences between the countries but also their similarities. Most of the jurisdiction is concerned about financial transaction done through blockchain, i.e. cryptocurrencies. At the same time, most of the other functionalities available through blockchain technologies are not an issue of concern, at least not yet. There are also attempts to regulate cryptocurrencies on EU level, but these regulations are very much in line with the rest of the global governance, viewed upon above.

Jurisdiction on blockchains in general, and cryptocurrencies in particular, is a very much conversed topic globally. There is a growing need to make blockchain technologies secure for private actors, but at the same time limiting them too much might make developing blockchain technologies harder in a given country.

Video 5. University Lecture in the US

The description on the laws and jurisdiction given here is just to remind ourselves that blockchain technologies cannot exist without jurisdiction governing their use, even if it is just a law defining them legal, as in Cayman Islands. At the same time, we can see that jurisdiction while trying to keep up with technological development is more or less following the latest technological breakthroughs, which is a very interesting point: blockchain technology is defining new needs for jurisdiction and not vice versa.