Blog Posts

March, 19 2018

It’s a duck!

IMAGE SOURCE: CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=4084391

We attended the Sydney node of the global Computational Law + Blockchain Festival hosted by Sydney Legal Hackers at UTS Hatchery on the weekend. We went because of an increasing awareness that the legal, regulatory and economic issues far outweighed the technical issues in the blockchain. We had no idea how right we were.

We re-learned two fundamental rules: if it looks and swims and quacks like a duck, it’s a duck; and the long arm of the law is VERY long. So what does that mean?

Firstly, it means that fundamentals rarely change. That’s why they’re called fundamentals. And fundamental rules are even more immutable. A bit like the blockchain itself. In fact, one could be forgiven for drawing parallels between legal and regulatory frameworks and the ideals of blockchain Distributed Autonomous Organisations (DAO). Except they aren’t very distributed or automated. And, luckily, they are a little bit mutable. To paraphrase Juan Benet, they have a “halt; fix; resume” capability. Both human and algorithmic.

There are already very well-defined rules governing public financial and share offers. Just because you call them coins or tokens instead of shares or payments/investments, and just because you call them Initial Coin Offers (ICOs) or Token Generating Events (TGEs) instead of public listings or IPOs, doesn’t mean they’re not. And, therefore, that you don’t have to conform to the rules.

And heaven forbid you say you’re going to do something (white paper), collect a lot of the public’s money to do it, and then not do it or do something different. Then you’re going pretty much directly to gaol for fraud. As one of the very entertaining lawyers said, “when your lawyer starts telling you to get your affairs in order and bring a toothbrush to a meeting, that’s not going to be a good day”. And don’t think doing your ICO in some hard to reach and crypto friendly country is going to save you. Pretty much every jurisdiction has Extraterritorial Jurisdiction applications in some form for wrongs against its citizens. Especially financial wrongs!

And that doesn’t even begin to consider the accounting issues. Let’s just say that when the tokens you create/sell in your ICO are deemed utility tokens, and you have to record a very large payment in advance for goods/services, you’re going to end up with a pretty king-sized hole/imbalance in your balance sheet. Forget about any kind of traditional finance after that. And we won’t even talk about the exchange/treasury risk management issues if you have to connect your token economy to the real economy.

That’s not to say there was no-one in the room advocating the benefits of the blockchain and ICOs and arguing for light or changed regulation to capitalise on its potential capacity for massively good outcomes. We’re on record doing that, along with some of the more “forward thinking” lawyers. https://youtu.be/GI2p9412FYA Problem is, the regulator’s job is to protect the “punters” from the charlatans and outright criminals. And there’s no shortage of any of those in the crypto world right now. The moderators were trying to walk that fine and difficult middle ground.

But the most hopeful thing of all was that a bunch of smart and very well intentioned people got in a very hot room over the weekend and had a go at talking about the issues and fixing them. They were “buidlers” all. And they did that all over the world, in true blockchain style. It was incredibly successful. There’s going to be a document pulling it all together. And an inaugural issue of an academic journal on blockchain law & policy, edited by members of the CodeX Stanford Blockchain Group.

That’s how the law and regulation are changed. The blockchain and smart contracts it ain’t. But the ONLY way to change it is “inside the tent pissing out”. Outside the tent pissing in eventually leads to some very, very bad outcomes when the regulators are involved. The good thing is, it can be changed. The degree of difficulty is probably not a lot different from a fork in a major chain. Let’s hope both get a bit easier soon!

Rhett Sampson

This blog originally appeared at http://www.blust.tv/its-a-duck/

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