Blockchain Legality, Compliance, and Regulation

For any kind of blockchain-related project, whether it is creating a blockchain, using a Blockchain-as-a-Service solution, developing an application, or issuing a token, an evaluation of risks and opportunities has to be conducted by all the stakeholders who are involved.

In fact, there are specific scopes such as profitability, capacity, and cost that have to be adopted by a decision maker, but that would not be enough to secure a project. As the blockchain environment is fast-moving, many jurisdictions fail to frame cryptoassets and blockchains through laws and regulations properly. This chapter focuses on blockchains through the lens of legality, accounting, taxes, compliance, and regulations. We will legally define what a blockchain and a cryptocurrency is in the eyes of the law, and how this new technology and...

Laying the groundwork

As of June 2019, we witnessed several initiatives to regulate, define, and frame tokens and blockchains in terms of laws and tax across the globe at different levels of power in the states. It is important to note that every jurisdiction has its own degree of awareness, its own degree of ambition to control the technology and its assets, its own way to gather information, and its own manner to make a decision about the ecosystem. In this fashion, risks and opportunities regarding a project's perimeter will mainly depend on the territory in which it is implemented.

As a decision maker, there are many questions around a blockchain-based project whose answers will mostly depend on external factors such as the jurisdiction and territory, but also on internal factors such as the sector, business size, and target clients. For instance, there is no universal...

How to legally define a blockchain

A blockchain is a combination of a protocol, a peer-to-peer network, and information flowing through a database in a cryptographic manner. The state of New York defines blockchain as follows:

"It is a distributed ledger technology, which is a mathematically secured, chronological, and decentralized consensus ledger or database, whether maintained via internet interaction, peer-to-peer network, or otherwise used to authenticate, record, share, and synchronize transactions in their respective electronic ledgers or databases, and business entities that develop distributed ledger technology" 
(http://www.ncsl.org/research/financial-services-and-commerce/the-fundamentals-of-risk-management-and-insurance-viewed-through-the-lens-of-emerging-technology-webinar.aspx).

The main question that arises from the core definition of blockchain is...

How to legally define tokens and other cryptoassets

Cryptoassets, cryptocurrencies, tokens, and coins are all terms that often bring confusion within the ecosystem. Some of them mean the same thing, while others are subsets. However, they all have something in common: they have a digital value. Let's try to define these terms in a relevant way to facilitate the applicability of a given regulation and clarify the terminology.

Cryptocurrencies

Cryptocurrencies are either tokens or coins. A cryptocurrency can be defined as an independent digital currency where the issuance, the transaction validation process, the availability of the application, and the governance are totally independent. It is opposed to a digital currency...

Overview of regulation frameworks

Since the hype of ICOs in 2017, many authorities and institutions took action to establish a legal framework and general guidelines. Since the DAO failed to see this (see Chapter 4, ICOs and Tokenized Fundraising Methods), the US SEC undertook efforts to fit the new asset class into US laws.

The case of the DAO is significant because it caused an investigation by the US SEC into defining tokens as financial securities or utilities. The SEC released its report of investigation in July 2017 (one month after the DAO's failures) stating that DAO tokens should have been subject to security laws because they were labeled as such. This was one of the first initiatives toward regulating cryptoassets, at least in the US. The SEC advanced this immense task to a globally agreed perspective on tokens and gave out a starting point for categorizing...

Overview of accounting frameworks

Given the ever-increasing number of ICOs being conducted, some institutions have raised questions regarding how to account tokens in the financial statements of a firm since we were dealing with a new class of assets.

If you are running a one-hundred-year-old firm selling cars and you are willing to issue tokens to allow people to purchase certain kinds of products or services, how would you proceed?

You would launch an ICO where you will sell newly created crypto tokens against, say, dollars. This is a case where you should consider the following questions:

• How would you account for the funds that were raised on your balance sheet?
• How would you account for the remaining tokens in your profit and loss (P&L) statement?

These questions are currently being discussed in several jurisdictions over the world. Switzerland has a very crypto-friendly...

Summary

In this chapter, we started by understanding why, as a decision maker, it is important to take regulatory frameworks into consideration when launching a blockchain project, especially since 2017's hype that aroused public authorities' attention. Legal questions need to be addressed as there is more and more concerns from regulatory bodies towards blockchain. We established legal definitions on blockchain's terminology and neologism in order to fundamentally grasp what cryptoassets, cryptocurrencies, and tokens are in the eyes of the law. We ended this chapter by looking at the different initiatives that have been taken worldwide in terms of legality and accounting. 

Now that you have technical, economic, and legal knowledge about blockchain and cryptoassets, in the next chapter, we'll dive into the business world to discover what applications...