Bitcoin & Blockchain Law
Is it Bitcoin or Blockchain?
In our analysis it appears that blockchain is overhyped or at least mishyped on many occasions. It is not a database structure (a chain of blocks) that renders data immutable and transactions trustless and censorship free, but the large number and de-centralised nature of different stakeholders participating in the network. Blockchain serves as a data storage and distribution structure for a de-centralised network. Bitcoin seems to be currently the clear leader in this regard.
Corporate blockchains, or distributed ledgers are in practice all dependent on a group of stakeholders, or even just one stakeholder. In such a scenario it is useful to question whether a blockchain is the right database solution, or should a more traditional distributed database approach be chosen. E.g. supply chain management efforts may lead to huge benefits, and cryptography can be applied to increase transparency and trust, but choosing a blockchain or a ledger technology may cripple the effort needlessly.
On the other hand, if truly a trustless, immutable and censorship free data storage solution is required, it can become a prohibitively expensive requirement, if built from scratch. In such scenarios consider leveraging the security of an existing solution. Bitcoin, and in the future Bitcoin sidechains, may likely be the best choice. Ethereum currently struggles with its scaling, which threatens its de-centralisation. The effect of Ethereum’s proposed scaling solutions remains to be seen. Many newer competitors exist, but it is not realistic to base projects on nascent networks, too many of which have scam-like funding rounds behind them.
Our law firm has a significant open technology practice, and we have advised many stakeholders in open source and open innovation ecosystems. This makes us well placed to understand the control mechanisms and de-centralisation aspects of different blockchain initiatives. Also, we always strive to see through the hype and understand the real value generators. We also work with several customers in the field, e.g. LocalBitcoins.
The New Finnish Virtual Currency Service Provider Act
The government published its proposal for a new Virtual Currency Service Provider Act. It regulates the business of cryptocurrency exchanges and custodial service offerings. A typical exchange offers a crypto wallet to its users and offers trading of some cryptocurrencies. These service providers will be required to register at the Financial Supervisory Authority (FSA) prior to start of business. The act is planned to offer a 6 month grace period for businesses up and running before the act enters into force.
In addition such businesses will need to know their customers and set up risk management systems. This is not just about verifying the identities of customers, but it is a real KYC-obligation, meaning that the business needs to understand the profiles of their customers and be ready to follow the customer’s activity and react to significant deviations from the established profile.
The cryptocurrency custodianship, as well as storage of fiat funds, will also need to be set up in a trustworthy manner. There are also requirements on service marketing, as well as participating into a new register on payment and bank accounts, to be set up at the Finnish Customs.
While the new act seems to bring regulation that many players in the field have asked for and waited for, there still remains areas which are not very clear. E.g. it is unclear which cryptocurrencies are classified as securities; this is of significance since securities trading is a more regulated area of business. I would consider Bitcoin, Litecoin, Monero, Bitcoin Cash highly likely as not being securities, whereas it is a more difficult question as regards Ethereum.
Technology and digitalization is reforming the businesses of our clients. Our mission is to help our customers in their journey through this technological change. We want to be the best legal partner to help our customers successfully update their competitive advantage and processes due to the changes caused by digitalization. To achieve this we focus on legal matters of technology, intellectual property and transactions. Open technologies and data protection are sub-themes within our technology group.
We have been supporting Mindtrek and Openmind for many, many years. This year our law firm’s theme at Mindtrek is Bitcoin & Blockchain Law. We’ll offer short (10 min) presentations&discussion events around Bitcoin & Blockchain legal questions twice a day, at the end of the lunch pause & at the end of the afternoon coffee pause. Last year our theme was the GDPR; and we are happy to share our knowledge on that area too.
You can find our stand at the entrance to the keynote hall. We wish you a great Mindtrek!