Six years ago, two Papa John’s pizzas were traded for 10,000 bitcoins. Today, those bitcoins are worth approximately $10,000,000 and around $200,000,000 in bitcoin changes hands daily. In 2016, the technology under the hood of Bitcoin, commonly called “blockchain technology” or “Distributed Ledger Technology” is being looked to for applications in insurance, banking, trade, and finance.
Where will blockchain take us in 2020? What legal issues will you be asked to grapple with in 2017 as blockchain continues its transition from the startup community to the financial services industry?
The Bank of Canada, Senate, and Department of Finance have been investigating blockchain. Many expect that the principles of Bitcoin can be applied to the Large Value Transfer System and other settlement systems in Canada to decrease costs and make financial systems more robust. The US Federal Reserve recently released a paper that studies how blockchain technology could be applied to US settlement and clearing systems.
Industry experts expect that 2017-2018 will see deployment of production systems that will begin to tackle settlement and clearing around the world. Major firms such as DTCC and Computershare have announced significant investments and R&D projects.
Securities regulators and their private practice counterparts have been paying close attention to “Initial Coin Offerings” (ICOs), new innovation in capital markets. An ICO is a sale of a digital “token” that can be used on a software system in the same way that bitcoins are the unit of value in the Bitcoin software system. ICOs have raised many questions about the nature of securities and how our long-standing legal rules interact with new decentralized peer-to-peer software systems.
Many of the new peer-to-peer systems being offered as ICOs have been created in order to facilitate “smart contracts”. Smart contracts are a form of computer program that allows actions to be taken in an automated fashion on a decentralized system. Consulting firms like McKinsey and Deloitte have announced that they’re advising their clients on how smart contracts may affect the insurance and financial services industries.
Smart contract innovations lead us to ask: Can crop insurance become an automated system that takes in input from government weather services and outputs money to contracting parties without human involvement? What are the opportunities for companies to expand their reach globally by creating smart contracts out of their traditional offline products?
At the heart of every discussion of blockchain systems and business models is an analysis of the nature of the transactions. Lawyers understand the importance of principles and substance over form. As smart contracts diffuse from fintech startups into the financial system, financial services lawyers will need to carefully consider how our existing system of regulation applies to these innovations.
Addison Cameron-Huff and Donald B. Johnston will be co-charing OsgoodePD’s Critical and Emerging Issues in Blockchain Law, March 20, 2017. Join us for an in-depth discussion with practitioners in the nascent blockchain industry and some of the innovators creating the financial services products of tomorrow.