National Blockchain Laws as a Threat to Capital Markets Integration

Since its inception, the blockchain has been surrounded by an anti-legalistic whiff. Satoshi Nakamoto, the pseudonymous inventor of Bitcoin, hailed its ‘unstructured simplicity’. Even to this day, apostles of distributed ledger technology (DLT) strongly resist the idea that the innovation would need regulation, arguing that it was designed precisely to avoid a central deciding authority.

This did however not stop courts and legislators around the world becoming increasingly concerned about DLT. They are no longer just focusing on the evident dangers of cryptocurrencies for public interests, such as the potential risks of money-laundering, the financing of terrorism or tax avoidance. More recently, they have also started to legislate on private law aspects of the blockchain, such as the protection of property in crypto assets, the conditions for valid transfers, or rights in the event of the insolvency of an intermediary such as a wallet provider or a crypto exchange.

In Europe, France has allowed companies to issue OTC financial instruments on the blockchain (dubbed ‘dispositifs d'enregistrement électronique partagé’, or ‘DEEP’). Liechtenstein has adopted the Act on Trustworthy Technologies (Vertrauenswürdige Technologien Gesetz). Most recently, Switzerland has amended its Code of Obligations to accommodate crypto assets. Looking at the US, the Uniform Law Commission has published a Uniform Regulation of Virtual-Currency Businesses Act (URVCBA). However, not all states are following this model. Wyoming, specifically, has been at the forefront of adopting its own, deviating approach.

In a recent article, I compare these approaches and identify the many divergences between them on a detailed level. The result of this analysis gives cause for concern. It shows that we are at the verge of legal fragmentation in a new area of law; much like that which we have already seen in other areas, such as the law of intermediated securities. While the blockchain was created to transcend national frontiers and to work irrespectively of any applicable legal system, it risks being split up in many different national versions. This will hinder its efficiency, raise information and transaction costs, and create issues of interoperability. Above all, it will undermine the function of the blockchain as a global transfer mechanism.

My conclusion is that we need more harmonisation regarding the protection of assets recorded on the blockchain. UNIDROIT and UNCITRAL are already working on this issue, while the Hague Conference on Private International Law is observing current developments. My article identifies key areas that have to be harmonised. Among them are the conditions for a valid transfer, or finality; the question of bona fide purchases; protections on insolvency; and the creation of securities rights over crypto assets. I am less pessimistic about the case for harmonisation in this area than in the area of intermediated securities, where efforts towards global uniform standards (in particular the UNIDROIT Securities Convention) have largely failed. The reason is that blockchain law is a relatively recent matter which most legal systems have yet to deal with. Therefore, my plea is: harmonise the law of crypto assets now before it is too late!

Matthias Lehmann is a professor of law at the University of Vienna.