UK Jurisdiction Taskforce: The LawTech Delivery Panel Legal statement on cryptoassets and smart contracts - November 2019
The UK Jurisdiction Taskforce carried out a consultation earlier this year to identify the key questions that needed to be answered about English law's approach to cryptoassets and smart contracts. Following input from relevant stakeholders, including Allen & Overy, UKJT published its legal statement on the 18th November 2019.
Members of Washington, D.C.’s Financial Services Regulatory and Litigation and Investigations groups recently authored an article on U.S. and global cryptocurrency anti-money laundering risk considerations.
Supported by TheCityUK, A&O’s William Samengo-Turner has published a report on points to consider when launching a FinTech business in the UK. It gives general guidance, as well as covering areas such as, managing employees, protecting intellectual property, regulatory concerns, dealing with pensions and much more.
Blockchain & Cryptocurrency Regulation 2019 | Initial Coin offerings: A comparative overview of securities regulatory environments in the US, UK and Asia Pacific - October 2019
A&O’s Justin Cooke, Jason Denisenko, and Richard Cohen have collaboratively published an article for Global Legal Insights on distributed ledger technology, and the global applications of blockchain across a wide variety of networks. Their article gives an overview of regulations in the US, UK, and Asia Pacific.
The Head of the Financial Crime Department at the UK Financial Conduct Authority (the FCA), Rob Gruppetta, gave a speech on "Using artificial intelligence to keep criminal funds out of the financial system" in December 2017.1 In it, he explored how artificial intelligence (AI) could potentially be used to prevent financial crime, and for anti-money laundering (AML) purposes in particular. Although there were sure to be challenges, he concluded, AI had the "capability to greatly amplify the effectiveness of the machine's human counterparts" in this area. This article highlights four potential risks that a firm's legal advisers may want to consider before AI is incorporated into their institution's financial crime or AML processes.
Delaware Passes Law Permitting Companies to Use Blockchain Technology to Issue and Track Shares - September 2017
On Friday July 21, 2017, Delaware's Governor John Carney signed into law amendments to Delaware's General Corporation Law to account for the use of blockchain technology in corporate record-keeping. The legislation will be implemented beginning August 1, 2017 and represents the culmination of an on going industry consultation and is part of a broader blockchain initiative. The initiative includes a concurrent technology project with partner Symbiont and was originally announced by former Delaware governor Jack Markell in May 2016. The initiative also covers efficiencies in public record keeping and securities filings, which are not within the scope of this article.
As we set out in our first article on fintech investments and M&A strategies, investing in fintech (and particularly those companies with novel technology or that are pre-revenue) demands a particular approach.
Fintech companies, both early stage and more mature, are continuing to attract investment from a wide range of sources including the financial institutions they were set up to disrupt. What does this tell us about future M&A trends in this sector?
"Smart contracts are neither particularly smart nor are they strictly speaking, contracts.” – Monax.io 1
A smart contract is a set of promises, agreed between parties and encoded in software, which, when criteria are met, are performed automatically. The concept of a smart contract is used to cover a spectrum of scenarios – ranging from a contract which is completely encoded (ie the entire contract is contained in the code and there is no separate natural language agreement) to a contract which is encapsulated in natural language form but where performance is digitised. Smart contracts were written about in the 1990s by Nick Szabo, and have received renewed interest recently as a result of the “blockchain revolution” stemming from the technology underlying Bitcoin. Smart contracts do not need a blockchain to work, but they do need an underlying trusted network or mechanism, which blockchains provide conveniently and efficiently.
Financial technology (“fintech”) has exploded in recent years, with innovations like blockchain, artificial intelligence and cloud-based software promising to disrupt every financial service from banking and payments to insurance and asset management. Arguably nowhere is the level of competition and innovation more intense than in Asia Pacific: fintech companies in the region received more than 50% of global investment in the sector in the first quarter of 2016, and in the first seven months of the year fintech investment in Asia Pacific exceeded USD9.6 billion – more than double the total for 2015.
Many people have heard of Blockchain - usually in association with the crypto currency, Bitcoin. But many struggle to define precisely what it is, even though it is a technology that will, we are clear, become central to many aspects of how our lives are organised.In one phrase, Blockchain puts together databases, cryptography and peer- to-peer networking to create a ‘Computationally Efficient Trust Engine’. Historically, wherever society arrived at a need for trust in a transaction or process, an intricate system of checks and balances was established to manage it. That often involved bringing in an intermediary – such as a regulator, a legislator or the law – to provide verification.
Supporting Discovery’s innovative business model is a sophisticated data gathering and analytics capability, a rigorous system of controlling and enhancing its intellectual property (IP) rights and a complex web of product and joint venture partnerships to help it adapt its model to markets as diverse as the U.S., China, Japan, the UK, Germany, Canada, Singapore and France.
A Decentralized Autonomous Organization (DAO) is a computer program, running on a peer-to-peer network, incorporating governance and decision-making rules. DAOs can be programmed to operate autonomously, without human involvement, or the code can provide for direct, real-time control of the DAO and funds controlled by it.1 The earliest DAOs are software controlled community organization experiments which seek to re-implement certain aspects of traditional corporate governance, replacing voluntary compliance with a corporation’s charter with actual compliance with pre-agreed computer code.
’The DAO’ (https://daohub.org/) is the most prominent example of a DAO. It gained significant media attention after it raised the equivalent of USD168 million from individual investors in its initial creation phase, making it the world’s biggest crowdfunding project to date. However, on 17 June 2016, a weakness in The DAO’s code was maliciously exploited and it became materially compromised. It is unlikely to recover.
The DAO was the first significant experiment of this structure. It will serve as a case study for the industry but the design and structural decisions made by the creators of The DAO will not necessarily apply to all future DAOs.
DAOs were made possible by the development of Ethereum, a public blockchain which provides a decentralized virtual machine to execute peer-to-peer contracts using its native cryptocurrency, Ether. The Ethereum network uses Ether as the currency for transaction fees on its blockchain for the purpose of recompensing the computers of the network for providing computing power to validate actions taken on the Ethereum blockchain. Ether is therefore the underlying fuel for all Ethereum transactions.
There are two distinct narratives surrounding virtual currencies. One picks up on countercultural elements – an extreme free market environment beloved by anarchists and criminals. The other describes a technology as revolutionary as the TCP/IP protocol was to the internet, which has the potential to vastly change the financial services environment as well as any other industry which currently involves the use of a trusted third party to facilitate the transfer of value.
The recent suspension of trading on Hong Kong based Bitcoin exchange Bitfinex following the apparent theft of approximately US$60m worth of bitcoins is the latest in a series of Bitcoin thefts. With Bitcoin still in its relative infancy, some jurisdictions have taken steps to integrate Bitcoin into their financial regulatory system, while regulators in Hong Kong have not yet done so. With Bitcoin increasingly having real-world impact on everyday citizens, the question of how Bitcoin regulation should be approached becomes increasingly pressing.
In their engagement to date with the emerging cryptocurrency sector, the United States Commodity Futures Trading Commission (the CFTC), and many other regulatory bodies, have broadly adopted a “wait and see” approach to adapting their regulatory frameworks, seeking where necessary to apply existing regulations to this nascent space in as coherent a manner as possible. This approach has so far been largely successful, with enforcement actions by regulators taken against dangerous Ponzi schemes and unlicensed exchanges.2,3 However, this approach has come under scrutiny, as just two months prior to the August 2, 2016 hack of Bitfinex the CFTC had issued an order, following the conclusion of an investigation into the Hong Kong-based cryptocurrency exchange.
The draft motion of the Committee on Economic and Monetary Affairs (CEMA) for a European Parliament Resolution on virtual currencies (VCs) and distributed ledger technology (DLT)2 calls for “smart regulation fostering innovation and safeguarding integrity, while taking seriously the regulatory challenges that the widespread use of virtual currencies and DLT might pose”. CEMA notes that existing legislation3 is likely to apply in line with the activities carried out, irrespective of the use of underlying technology and recommends:
− including VC exchange platforms in the anti-money laundering directive;4
− reviewing EU legislation on payments (payment services directive and electronic money directive) in light of new technological developments including virtual currencies and DLT;
− creating an EU taskforce to provide the necessary technical and regulatory expertise to support the relevant public actors and, where appropriate, recommending regulatory measures and addressing consumer protection issues and systemic challenges; and
− exploring the need for a legislative proposal as to VCs and other DLT scheme actors.
CEMA’s motion demonstrates that policymakers across the globe are developing a keen interest in the opportunities and risks associated with these new technologies.
Satoshi Nakamoto, the person or persons unknown behind the 2008 paper "Bitcoin: A Peer-to-Peer Electronic Cash System", has given regulators and policymakers something to think about. Since the launch of Bitcoin, the prominent virtual currency, it seems to be the innovation itself, the blockchain, or distributed leger technology, that is likely to have the most impact on the financial sector. The terminology is still evolving but, in essence, a blockchain is a type of database that takes a number of records and puts them in a block. Each block is then chained to the next block, using a cryptographic signature. This allows blockchains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions. The ledger provides a secure, permanent record that cannot be manipulated by a single entity and does not require a central registry.
The technical excellence is a given with a firm of this calibre, but what sets this team apart is its friendly manner, availability and willingness to be flexible. They understand the pace at which a small fintech business likes to work and the pressures this puts on internal counsel to deliver to tight timelines and will always endeavour to support that. They are also willing to take a pragmatic view to get a deal done, rather than labour points.
Legal 500 UK 2021 (Fintech)