Cryptocurrencies: The Impossible Domestic Law Regime?

Abstract

Whenever a new technology emerges and provides new opportunities for business and potentially new and different solutions for real-world problems, developers of the technology, developers of its business applications, and investors supporting the developers, are looking for guidance from regulators. Ideally, the guidance will be more than a snapshot of what is currently allowed but also include reliable information on what will be allowed, and on what conditions, in the foreseeable future. This is more important if development of marketable applications using the new technology is time-consuming and expensive, and if the technology is not just providing incremental improvements to existing solutions and business models but seems to be promising revolutionary changes that may well upend entire industries and make at least some of the existing solutions and business models—and therefore some of the existing businesses—obsolete. Blockchain or distributed ledger technology (DLT) is an example of such a technology since it promises an upgrade to everything we have been doing on the internet. While we have been able to do financial transactions on our smart phones, such as checking our bank balances, making payments via Paypal or Venmo, and ordering stuff on Amazon and Doordash, those were evolutionary or incremental improvements to existing technologies and business models. They largely did not require new and special regulation. The risks presented by those innovations—occasional fraud on the side of misrepresenting “vendors” and occasional fraud by misrepresenting “buyers”—was largely absorbed within the existing systems of customer protection in the credit card market, i.e., by banks and other centralized institutions acting as trusted intermediaries. The emerging applications of Blockchain and DLT will be very different. The technology is creating a trustless environment, i.e., a financial system without the need for trusted intermediaries. In the brave new world of cryptocurrencies, there is no need for commercial banks to facilitate funds transfers, nor for central banks to issue currency and control interest and exchange rates. There also are currently no authorities with clearly defined supervisory powers, no guarantees by institutions or insurers, and not even rules of the road enacted by legislators or courts. Yet, the equivalent of USD 3 trillion are held by millions of individuals in the form of more than 10,000 new digital currencies in more than 200 million cryptocurrency wallets, completely disconnected from traditional bank accounts and credit cards.1 This sum is more astonishing given the fact that every one of those “virtual currencies”2 was privately created and managed, and none of these wallets is protected by the Federal Deposit Insurance Corporation (FDIC) or any equivalent mechanisms in other countries. Further, other than holding value and transferring value from one wallet to another, there is presently not much that can be done with all the crypto money, since there are not a lot of goods or services that can be bought with crypto, and, more importantly, there are hardly any smart-contract applications3 on the market that could reliably deliver innovative and sophisticated business solutions.4 Last but not least, the entire market is characterized by extreme volatility where a single coin—and to some extent the entire market cap—could jump up or down by 10% or more in a single day.5 Although much of the promise of DLT remains to be demonstrated in practice, and the technology is currently struggling with scaling up,6 what ensures that Blockchain and DLT will not become bubbles that are bound to burst and be forgotten is the sustained investment into actual business solutions via the development of smart applications on a In sustained investment USD in every single the technology its in we may that the investors to more into the development of actual business models and for a what the technology can and and what are with all is is the guidance by the in different The of digital were by a of traditional control and in the world was to of the financial and the just the financial with USD trillion in funds that were money, the existing and, the value of and in the of and currencies are by central banks are are or by and and to and by are by the on of or by mechanisms potentially all those and the currency developers, wallet The of the currency of the of and it to of is one of the of the and the financial is not to up control currencies without a In it did not that a of of were also such as with and not business models with the of by on the by cryptocurrencies, as well as and making financial to and from and This will an of and created for DLT and at the and at the of the in the The provides for a of and to the the in the the have the to on the it not done and it is that will be at the in the foreseeable future. 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