Entangled in Cryptoassets’ Legal Nature and Governance: Searching for Clear Boundaries or Working for Their Removal? Filippo Zatti Economic Law Associate Professor BABEL Scientific Coordinator ELI Individual Fellow ADDE Member ISLE Member
Paper Presentation For the Finance, Innovation & Regulation Working Group EUI Department of Law | Sala del Torrino, Villa Salviati | 2019, October 9 t h
Summary Blochchains’ Lexicon and Cryptoassets’ Taxonomy: Is There A Connection Among Them? Technological and Legal Features Combined What About The Cryptoassets’ Legal Nature? Is Unuseful To Consider It for The Regulator? Does Any Hypothetical Cryptoassets’ Regulatory Framework Fall in The Common Controversy ‘Public Authority vs Private Powers’? Alternatively, Is Blockchain Manageable by Legal Theory? Will Boundaries Between ‘Physical’ and Digital Space Fall? 2019, October 9th
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1. Determining the boundaries of the term ‘cryptoasset’ Source: Cambridge Center for Alternative Finance, Global Cryptoasset Regulatory Landscape Study, 2019
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2. Evolution of the terminology used by regulators (2013-2019) Source: Cambridge Center for Alternative Finance, Global Cryptoasset Regulatory Landscape Study, 2019
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Legal Issues Until now, a lack of clarity emerges in use done by legislators and regulators of the term representing ‘digital things’ Explicable for legislators and regulators perform two distinct public functions but, until now, in the digital ecosystem: The potential scope of legislators are: a)
Repressing illecit behavior (e.g. AML/CFT);
b)
Political economy aims (e.g. business attraction)
The regulators aim to: a)
Protecting retail investors (ICOs; STOs);
b)
Claiming a wider scope of action and regulatory perimeter
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i.
Cryptoassets’ Taxonomy (e.g. FCA in UK)
ii.
‘Sandboxes’
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3. Comparing asset types and the form they can take Source: Cambridge Center for Alternative Finance, Global Cryptoasset Regulatory Landscape Study, 2019
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4. Traditional/FinTech/DeFi comparison for different financial services Source: Zerion Blog, 2018 November 13
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About the Legal Nature It is (questionable) whether the nature of the DL* and BDL** can originate distinct categories of ‘digital things’ Are they transferable or ‘exhausted’ with their use? Do they always have an economic value?
The definition used by rulers of ‘a digital representation of value’ is useful to define ‘digital things’? When lawmakers do not introduce in the legal system a definition of them, we need to verify if the legislation in force is applicable ‘Intangible (abstract) things based on cryptographic operations that act as a contract’ depending on the kind of DL and BDL (permissionless, permissioned or consortium) * Distributed Ledgers **Blockchain Distributed Ledgers 2019, October 9th
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Civil Law Dimension Would be of interest if the transfers of ‘digital things’ would have occurred inside the (DL or) BDL as it were a closed-system? ‘Digital things’ are built in the blocks and take place in the chain with the approval of the nodes and according to a protocol following an algorithm Governance
Cryptography is the tool through which mining new ‘digital things’ and validating the transfers without the need of ‘middlemen’ Trust
PA ‘Digital things’ are strictly linked to the underlying operating protocol which acts substantially as a ‘legal agreement’ Singularity: ‘Digital things’ follow the ‘agreement’ instead of foregoing it 2019, October 9th
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Source: ComplyAdvantage
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Public Law Dimension BDL Autonomy for its typical features Decentralized Extra-order
But consider how consensus is achieved In case of exchange tokens and permissionless BDL, autonomy spits into typical sovereignty areas (especially, monetary sovereignty) sometimes also in the case of a DL (e.g. Libra)
BDL tends to behave as a Teubner’s ‘civil constitution’
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5. The money flower: a taxonomy of money Sources: Adapted from M Bech and R Garratt, ‘Central bank cryptocurrencies’, BIS Quarterly Review, September 2017, 55-70 As seen in ‘Cryptocurrencies: looking beyond the hype’, BIS Annual Economic Report 2018, 94
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Public (Centralized) vs Decentralized Governance Criptolaw (see Reyes) and Lex Cryptographica (see Wright and De Filippi) Code is Law
State-based Law approach (see Fox) Enforcement issues
International Law (see Hacker) Multi-layered approach Polycentric co-regulation 2019, October 9th
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Cases Law In re Tezos Securities Litigation Jurisdiction ‘actual site of the blockchain’s validation nodes at the time that the transaction is recorded on the blockchain’
Exchange platforms Bankruptcy (e.g. Mt.Gox); Risks (poor systems, low price transparency and conflict of interests); Bypassing jurisdictions (e.g. exchange-escrowed peer-to-peer service).
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The Malta VFAA #1 Maltese regulatory framework’s principle-based approach Technology neutrality Promoting innovation (e.g. crypto or token economy)
‘Twin-Peak’ FSMA MDIA
Drafting based on MiFID2 model trying to widen the regulatory perimeter 2019, October 9th
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The Malta VFAA #2 Residual definition not ontological Digital Asset Virtual
Financial Asset
‘a form of digital medium recordation that is used as a medium of exchange, unit of account or store of value’ which is not any of the others DLT classes
How is it identified? The Financial Instrument Test It reminds to the Howey Test
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Total funding raised by blockchain initial coin offerings (ICO) worldwide in 2017 and 2018, by month (in million U.S. dollars) Blockchain ICO projects: funds raised worldwide 2017-2018 3000
2,566 2,422
2500
2,050 Capital raised in billion U.S. dollars
2000
1,890 1,655
1,648
1500
925
1000
820
786 648
585
498
500
866
415
340 200
181
103
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Total value of funds raised by financial services technology start-ups worldwide as of October 2019, by industry (in billion U.S dollars) Value of funds raised by financial technology companies worldwide 2019 180
160
155
Value of funds raised in billion U.S dollars
140
120
100
77
80
60
40
29 17
20
0 Financial technology
2
Note: Worldwide; As of October 10, 2019 Source(s): Venture Scanner
Real estate technology
Insurance technology
Blockchain technology
Source: Security Token Network 2019, October 9th
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Source: Security Token Network 2019, October 9th
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Boundaries Falling? Securities Token Offers (STO) and Exchange Token Offers (ETO) use BDL to tokenize securities/financial instruments EU CMU Crowdfunding Reg AML (5th Directive before January 10, 2020) o ‘providers engaged in exchange services between virtual currencies and fiat currencies’; o ‘custodian wallet providers’
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Could Be The TVTG a Model? At its core, the TVTG is focused on adapting pre-existing laws to foster legal certainty within a token economy; It draws a clear line between what falls civil law versus regulatory and supervisory law; It includes adaptations of the Liechtenstein Persons and Companies Act, Trade Act, Due Diligence Act, and Financial Market Authority Act. 2019, October 9th
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Token’s Legal Nature for TVTG Art. 2, c) and d) “Token”: a piece of information on a TT System which: 1. can represent claims or rights of memberships against a person, rights to property, or other absolute or relative rights; and 2. is assigned to one or more TT Identifiers; d) “Payment Tokens”: Tokens that are accepted to fullfill contractual obligations and therefore replace legal tender in this respect
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But… Do not forget BDL features: chameleon-like; ubiquitous
Crypto-security Convention (Hacker & Tomale) Otherwise, international law standard on the model of the ‘Convention on Cybercrime’
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Contacts
filippo.zatti@unifi.it www.babel.unifi.it Paper’s electronic copy available at: https://ssrn.com/abstract=3335793 THANK YOU FOR COMING! 2019, October 9th
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