A leading blockchain-focused law firm believes that law enforcement will soon be introduced into the very blockchain systems on which companies rely.
Zach Fallon was a prominent attorney for the US Securities and Exchange Commission (SEC). He is now the director of the law firm Blakemore Fallon. He is also co-founder of Ketsal Consulting, which provides legal and regulatory advice to external clients.
Fallon is aware of the ‘wild west’ days of cryptocurrency. So he believes the waves of regulation that have come in the last year will help the industry to integrate. It also holds the somewhat popular view that blockchain-based enforcement could be the final push that the commercial world and the public sector need to make the leap to a general adoption of the platform.
Despite recent advances, we have not yet seen that massive adoption of blockchain technology. And this despite the fact that the turning point is still advancing. For example, South Korea, Estonia, Russia, and several other nations are seeking to incorporate “state cryptocurrencies”. So much so that Estonia has moved government records, and even public services and voting to the blockchain. On the other hand, banks, online payment systems and more are looking to incorporate cryptocurrency into their payment systems.
An example of this can be JP Morgan that has even created its own blockchain network to work with some other companies in the financial industry.
It can be said that these countries and these services are the pioneers. However, every year we hear that “next year is the year in which cryptocurrency and blockchain-based businesses are integrated”.
For law enforcement, Fallon believes the answer is simple: “Compliance must be baked in to the spine of the company – the blockchain system that it is built on”. In short, it is the case that systems cannot operate without compliance with local and international regulations and standards.
Perhaps the most important thing last year should be the appreciation of the entire market for the fact that the SEC will not relinquish its regulatory responsibilities in light of recent technological developments. Or at least the investment opportunities they present.
This may mean that the market could now enter a compliance phase where securities laws, issues and other regulatory concerns are incorporated into digital asset business models from the outset, rather than being grafted in subsequently.
For example, it may be that once regulatory issues are addressed, the potential of distributed ledger technology and any related digital assets will finally begin to be realized.
But regulations are changing all the time, at least to accommodate an industry that has not yet realized a fraction of its true potential. The SEC often has to issue complex judgments and issue new guidelines and advice on a regular basis. So much so, that sometimes the crypto community itself feels that the SEC is changing its position very quickly.
This is so now because most of these guidelines are simply new interpretations of existing laws and clarifications of how the basic laws of the securities world apply to the ever-changing cryptocurrency landscape. The SEC recently launched a fake ICO as a trap to show investors how to identify a budding fraud, and has been actively involved in creating a relatively young and aggressive industry.
There have been at least a dozen cases of formal public comment by the SEC, its Chairman, Commissioners and Staff on issues related to digital assets since the release of the DAO Report in July 2017. So to say that these issues have been a regulatory priority for the SEC over the past year would be an understatement, compared to the current year.
However, the vast majority of SEC guidance was in the form of basic reminders about the fundamental scope and application of federal securities laws. Even the recent comments by Bill Hinman, Dir. of CorpFin, reinforced – rather than altered – the most basic concepts of securities law.
The SEC had to distinguish when a cryptocurrency becomes a security, and recently clarified that Bitcoin (BTC) and Ethereum (ETH) simply do not qualify as securities. That was a victory for the industry and it was the true decentralized nature of the coins that meant that they escaped much stricter regulations.
Fallon is confident that we will see more trials and clarifications in the coming months. Or at least that is the position that “society's leviathan” is expected to take on a new, fast-moving industry that is writing the rules as it moves forward.
But as those rules can be set in stone, then they can be built on the foundations of the blockchain of the next generation of companies. So this would be a big step forward when it comes to mass adoption of blockchain technology.