The profound impact of distributed ledger technology, specifically blockchain technology, is its ability to generate novel ecosystems in trade, investment and commercial transactions. Blockchain technology applications are increasingly being deployed as innovative tools creating alternative paradigms for financial transactions and forging new conduits for capital.
Blockchain uses cryptography to create a decentralised database, the distributed ledger, which is visible to all participants in the network. Subject to verification by participants, the ledger can record different types of shared data, chronologically recorded in the form of blocks. The distributed ledger units (“DLUs”) containing such data, commonly described as tokens, have functional characteristics determined by the purpose and use of the blockchain.
There is nothing preventing entirely new ecosystems that are external to our current legal orders from emerging. The prevalent characteristics of commercialised uses of blockchain technology, particularly in the sphere of issuing DLUs, indicate how the architects of new DLUs intend them to acquire value in our conventional economies.
Tokenisation, the representation of rights or assets in DLUs, has emerged as the pivotal element defining new blockchain-driven ecosystems. For instance, some DLUs, such as Bitcoin, purport to function as digital currencies, others represent a right to tangible assets or new protocols to create distributed applications, while others serve as debt or equity instruments.
For blockchain technology to realise its full potential and attain the widespread application it promises, the results of transactions on blockchains must become identifiable by the law. National and international legal orders are the only domains within which economic results of trade and transactions acquire value.
The fact that blockchain technology has the capacity to enhance trust in transactions does not, of itself, create legally binding effects in any legal order. The act of transacting, even if trustless, must also result in a change in the status of rights over the asset in the transaction, whether the asset itself is a DLU or the DLU represents a right to an underlying asset. For the value of DLUs to be realised in the real world, they should be recognised as vested with rights in rem under legislated norms.
Different DLUs will require different treatment in law. Whether they be financial instruments, or give rise to contractual rights or entirely new legal constructs, will be determined by their functional and proprietary characteristics. Not all DLUs can be assetised, some will be representations of rights or title to underlying assets.
Assuming therefore that blockchain can thrive in those legal orders which do not restrict it to subjectively pre-selected activity, the salient question becomes whether existing frameworks are sufficiently flexible to accommodate the technology’s potential whilst providing the necessary degree of legal certainty as to its economic effect.
In the EU, as competent authorities have already noted, existing frameworks (such as those regulating financial services, the collective management of investments and the raising of capital) may become applicable to DLU-based transactions.
In our view, existing frameworks are not sufficiently scalable to accommodate the novel characteristics that DLUs bring to the table. Change to such frameworks is critical in order to provide legal certainty to the markets and avoid impeding emerging ecosystems. We are in favour of appropriate new frameworks, devoid of subjective pre-selection of the nature of the activities for which DLUs will be used, but unambiguously recognising different types of DLUs.
Much like blockchain technology itself, new frameworks recognising DLUs must be devoid of centralised pre-determinations, facilitating the emergence of the novel ecosystems that DLUs can unleash. Such new legal frameworks would become catalysts for blockchain applications to be deployed in materialising efficiencies, increasing transparency, facilitating trust, enhancing data protection and generally improving access to the market and capital.