In this video, we'll call on the work of Blockchain Research Institute contributor, Joel Telpner. He's chair of the Fintech and Blockchain practice at the law firm, Sullivan & Worcester. We'll identify the most relevant legal and regulatory questions to ask and develop a framework for Blockchain regulation. When regulators face an industry in a state of high uncertainty, they have three possible responses. They can make new laws, they can just observe, or they can periodically issue reports, guidance, and even threats. The situation may call for some combination of these responses. To determine which approach is best, we need to start with the process of informed questioning. Intervention to protect human life, of course, is always a top priority. But otherwise, regulators should ask some basic questions about Blockchain before they set new regulations and apply existing regulations to something that's very new. The most basic question is whether the Blockchain and/or the various activities that are growing using this technology should be self-regulated, government regulated, or unregulated. Historically, regulation works best when there's a balanced combination of all three approaches. Despite the view of Blockchain anarchist, the internet taught us that the lack of physical boundaries doesn't put technology beyond a regulator's reach. A critical question is this; does this technology raise unique legal issues? If Blockchain technology lets us chase and reach our current objectives in new ways, we may need to consider how we regulate those pursuits. Significant tech advancement can alter how laws and regulations function even when the changes have nothing to do with the affected laws and regulations themselves. Acknowledging this type of impact is a star. Whether the impact raises truly novel, legal issues is a separate question. Another question is what exactly are we trying to regulate? Any discussion must cover the whole Blockchain ecosystem of which Bitcoin and other cryptocurrencies are just a part. It needs to separate regulation of the ecosystem itself from regulation of distributed applications that run on these platforms. There are different concerns and stakeholders at each level. Regulatory efforts must incorporate such differences if they're going to succeed. Cryptocurrencies don't meet the strict definition of legal tender in our view. They aren't backed by the full faith and credit of any government. They don't qualify as a fiat currency, electronic money, or as a payment instrument. The Financial Action Task Force, an inter-governmental body established in 1989, and it defined a virtual currency as "a digital representation of value. It can be digitally traded and functions as a medium of exchange and/or a unit of account, and/or a store of value, " and that's right. If cryptocurrencies function that way in practice, should they be regulated as money or at least in a similar way? Well, in the United States, Bitcoin and its peers are considered commodities under the US Commodities Exchange Act. Lots of ICOs released tokens with features falling outside the definition of a virtual currency. These tokens function more like membership interests, so are frequent flier miles or bits of software that represents some functionality. But those things are usually subject to transfer restrictions while Blockchain tokens typically aren't. So, it's not a simple one-to-one. Alternative tokens that trade on prices based on the perceived value of their platforms and projects sound like a security to some. In this context, purchasing an alternative Blockchain token is less like a currency investment and more like an equity investment. So, the US Securities and Exchange Commission, the SEC, thinks their securities should be regulated by security's rules. Regulators can decide of current laws do or should apply to Blockchain technologies as they assess whether an application is a new medium or a new activity. Problem is regulators don't usually work together to determine when a cryptocurrency is subject to one set of regulatory requirements or another. Just because policymakers can make existing laws work for Blockchain applications doesn't mean they should. We may not be able to answer this question without observing the new technology in action over time. It may be necessary to apply existing laws in the meantime because Blockchain evolves in rapid and unexpected ways. Consider the gray area between currency, commodity, and security. Just because something's called a cryptocurrency or described as a token, doesn't automatically mean that it's not a security, or it is. Four factors called the Howey Test define an investment contract or security as "an investment of money in a common enterprise with an expectation of profits to be derived solely from the efforts of others." The focus should be on economic reality, substance over form. Cryptocurrencies and tokens are unique despite the Security and Exchange Commission's view. They act like a currency, a commodity, a security, or some combination of the three depending on their characteristics, how they're being used, and who's using them at any point in time. So, cryptocurrencies may represent a completely new way of raising capital. We can't always predict what happens when regulators apply existing regimes to new paradigms. Regulatory bodies shouldn't charge head first into Blockchain without coordinating with other regulators who may have legitimate roles to play. Anytime officials proposed new laws and regulations, they ought to conduct a rigorous cost-benefit analysis. Premature rule-making can create confusion for merging industries, particularly when poorly thought out rules result in multiple judicial challenges. So, at the very least, informal processes may be the best approach giving regulators time to conduct helpful cost-benefit analyses prior to new formal rules. Global consensus and coordination among regulators is also critical to address the question of whose law applies. The only way to avoid unintended consequences is to understand the seamless nature of Blockchain applications. Global commerce is no stranger to regulating goods and service disclosures, fraud and canceled transactions. So, moving to a Blockchain ecosystem, relying on smart contracts doesn't change that. Parties and smart contracts had the ability to elect a governing law and to submit voluntarily to a particular country's jurisdiction. The world has rich jurisprudence for dealing with these types of conflicts of law, and nobody can say with certainty what impact Blockchain will have on this, and overall, on society. But regulators can develop scenarios and they can test assumptions.
