- The treatment of competitors on a blockchain can raise questions of anti-competitive conduct that could create liability under US antitrust statutes.
- The use of personal information on a blockchain triggers the application of privacy regulations.
- The regulation of token sales has become a global issue.
- Check out the ACC Blockchain Collection
Blockchain is appealing to businesses because it is often said to be tamper-proof and run by smart contracts, and because it allows for the creation of digital assets without centralized control. However, government oversight is coming.
Blockchain technology is quickly moving from cryptocurrency to the global supply chain, which raises issues about government oversight and competition. Digital assets can be created instantaneously and sent globally, but questions remain, such as whether a digital asset is subject to government oversight, or whether a blockchain can bar competitors.
The list below is mainly based on the ACC webcast “Deconstructing Blockchains: Issues and Opportunities for Enterprise Implementations” by Professor Aaron Wright, Cardozo Law School.
Opportunities with blockchain include:
- Making real time payments;
- Creating smart derivative contracts;
- Tokenizing intellectual property licenses;
- Tokenizing stocks; and
- Streamlining legal entities such as limited liability companies.
Issues with blockchain include:
1. Privacy issues stemming from the European Union’s General Data Protection Regulation (GDPR).
- GDPR requires compliance as soon as personal data is processed by automated means.
- GDPR covers any direct or indirect personal information, including online identifiers.
- Liability can attach in an entire blockchain if anyone on the blockchain is in the EU.
- Any blockchain that stores personal data or assigns a blockchain-based address to anyone in the EU is subject to the GDPR.
- Compliance with the GDPR’s “right to be forgotten” can be accomplished through an agreement with the user, as enterprise applications don’t usually trigger the right.
- In the United States, the enforceability of smart contracts is governed by the federal Electronic Signatures in Global and National Commerce Act (E-Sign Act 15 U.S.C. Chapter 96) and the Uniform Electronic Transactions Act (UETA has been adopted by 49 states and D.C., New York has a similar law). These two laws prevent a party from claiming a contract is unenforceable because it is in electronic form.
- To confirm enforceability of an electronic contract and mitigate risk, the parties can enter into a master agreement.
- When parties work together, it can raise antitrust issues under the US’s Sherman Act §§ 1 and 2.
- The Sherman Act §1 doesn’t allow a blockchain participant to exclude a competitor, and a competitor must be included in a blockchain that becomes important to the industry.
- Several financial institutions are part of a blockchain that is streamlining processes. This could become an antitrust issue in the future.
- Sherman Act §2 violations occur when a monopolist refuses to deal with a competitor, or a monopolist requires customers to use a specific blockchain to complete a transaction and the customer can only comply by abandoning a competitor’s blockchain.
- Forming a consortium could raise antitrust concerns, depending on whether there will be an exchange of pricing information among competitors, which could lead to accusations of price-fixing.
- To limit the risk of antitrust issues when allowing parties on a blockchain may consider setting specific criteria for membership, limiting the exchange of competitive information, and using a consensus mechanism.
4. Securities Laws:
- Securities laws raise issues of whether the tokenization of assets results in the assets being considered securities. For example, if a digital asset has increased in value while on the blockchain, that asset could be considered a security.
- If a digital asset is deemed a security, it must be registered with the US Securities and Exchange Commission (SEC). While there are exemptions from the registration requirements, the exemptions are narrow and don’t apply to most digital assets on a blockchain.
- In SEC v. W.J. Howey Co. (U.S. 1946) the US Supreme Court formulated a test for what constitutes a security. The test is whether the investment is made with the expectation of profit, and if the investment is part of a common enterprise of which the profit is the result of a third party’s efforts. Tokens can be considered securities if they are issued by sale or initial coin offering (ICOs).
- The SEC has developed a Token Framework for ICOs to address some of these issues.
- The regulation of token sales has become a global issue, with Singapore, the EU, Japan, Canada, the UK, Hong Kong, Thailand, Switzerland, Australia, and Gibraltar issuing guidance on tokens.
Read “Ten Things General Counsel Need to Know About Blockchain,” by Bertrand Alexis and Iohann Le Frapper, ACC Docket, 15 December 2020.
Read “Blockchain Technology is Here – Is It Compliant With GDPR?” by Elene Dighmelashvili, Legal Counsel for BitFury Group, Aleko Nanadze, Counsel for BitFury Group, Yuriy Kotliarov, Partner at Asters, and Sergiy Tsyba, Counsel at Asters, ACC Docket, 22 December 2020.
Read “Legal Considerations in the Use of Blockchain Technology and Smart Contracts for Multinational Business,” by Wendy Callaghan, Chief Innovation Legal Officer and Associate General Counsel at AIG, and Rajika Bhasin, Assistant General Counsel, Multinational at AIG, ACC Docket, 1 June 2018.
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