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Blockchain Technology: How Smart Contracts and ICOs Depend on Law

March 5, 2020


Hi, I’m Dmytro of Biryuk Law Firm in Amsterdam. You likely heard about blockchain technology
and its applications, such as smart contracts, Bitcoin, other cryptocurrencies, and ICOs. So, what is that all about? In a nutshell, the blockchain is a distributed ledger system that exists in the form of decentralized database. In plain language, blockchain is a network
of computers keeping logs of transactions. The goal of blockchain is to execute transactions between the parties directly. This technology cuts out the middlemen, such as banks. The blockchain thus reduces transactional friction and costs. So, what does this technology have to do with law? Shortly speaking, a lot! Firstly, the blockchain becomes regulated in various jurisdictions. For example, the state of Delaware now explicitly
allows companies incorporated in Delaware to use blockchain to track their shareholders and outstanding stock. Additionally, the transactions that blockchain serves are usually regulated. So, the blockchain projects usually depend on the laws governing their subject matter. Now, how much does blockchain depend on law? Let’s consider a few examples. One is a smart contract. That’s a contract that executes automatically under certain conditions. This is where blockchain makes lawyering much more efficient. Smart contracts essentially convert legal
terms turn into a computer code. The terms and code correlate as substance and form. To put this differently, the code is largely a reflection of the terms – just like a photo is of a painting. Notably, the terms answer the questions of 5 Ws, that is who, what, where, when, and why. Importantly, the terms determine a condition for something to happen. That‘s the “if-then” relation. In contrast, the code answers the question of how. The code replaces paper and self-executes. This creates a legal automation. Another example of dependence of blockchain on law is an initial currency offering (ICO). Sale-and-purchase of tokens may easily qualify as an investment contract falling into securities under the U.S. law. As such, offering or sale of tokens may be subject to mandatory registration with the US Securities and Exchange Commission (SEC), unless a valid exemption applies. To this end, all token offerings must pass a legal test. Apart from falling under the securities law, the ICO tokens may eventually encounter a separate regulation. This is, for example, similar to drones, which until recently were subject to general regulations applying to huge airplanes. Lastly, what role would lawyers play in an automated world? Like any business project, the blockchain projects need a legal support, even notwithstanding the fact that all actions happen automatically online. In fact, lawyers play a vital role and can determine whether a blockchain project would succeed or fail. For example, The DAO tokens failed to comply with the US securities law and ultimately collapsed. Lawyers should also act as architects of smart contracts. Designing the systems, the lawyers would be able to make smart contacts legal, valid, and enforceable. To conclude, smart contracts, ICOs, and other blockchain applications should seriously take into account the legal framework. So, let’s look together into the future of blockchain law.

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