Gauci-Maistre Xynou (Legal | Assurance) | View firm profile
Bitcoin has raised the question of whether
computer code, rather than a central bank, should control the money supply. But
is it desirable for society to allow a digital money system which enables its
users to operate outside the remit of the law, unlike physical cash which is
more regulated.
It is true that at the moment in most jurisdictions around the world
the use of bitcoin, and cryptocurrencies in general, is not adequately regulated.
As a result, a system seems to have been created that runs in parallel to the
traditional fiat currency system. This phenomenon in combination with the
specific characteristics of cryptocurrencies such as the anonymity in the
transactions, the absence of a central authority and its immutability, creates
loopholes in sectors like investment protection, taxation law, database
protection as well as criminal law while risks related to anti-money laundering
and financing of terrorism also need to be tackled.
At the same time, bitcoin and other cryptocurrencies are so widely
used that they have become a reality which could change the way the entire
financial market works. Considering the function of law as the means of
organised societies to control and regulate the actions of their members we
believe that it is crucial for legislators to take action and adapt the
appropriate regulatory measures. Issues such as the legal nature of
cryptocurrencies and their connection to traditional (fiat) currencies, the
legal requirements for the setting up and operation of firms investing or
trading in cryptocurrencies, and the protection of investors and investments in
this field should be adequately addressed. When this happens, the law should
provide the necessary security safeguards so that society can be sure that it
is protected from the negative side effects of any unlawful use of virtual
currencies. The Government of Malta has
consistently shown that it wants to be a leader in this sector and has taken
active steps to regulate the industry, in consultation with industry
stakeholders. Regulators all over the
world are currently playing catch-up, however, credit must be given to both the
Maltese Government, the regulator and the private sector for their initiatives
in ensuring that Malta is at the forefront of this industry.
Unlike bitcoin, which has been running since
2009, use of blockchain in banking remain largely experimental. One vision is
for a single database maintained and accessed by the biggest banks to execute
and settle trades. Do you see this becoming reality? What immediate use can you
envisage for blockchain technology?
The applications of blockchain technology can be numerous.
Although at present the use of blockchain in different industries is indeed at an
experimental stage, it can have significant effect in the way the markets
function and in the way business is conducted. Based on its characteristics blockchain
can provide safety, transparency, efficiency and reduce costs whilst reducing
the time required for executing transactions.
The potential benefits of blockchain in the banking sector are undoubtedly
appealing and it should come as little surprise that huge amounts of resources
are invested by major international organisations. Within the next years we
will likely see blockchain implemented in very much the same way as the
internet pervaded in the nineties.
In this context and taking for granted the impact which a database
unification project for the largest banks may have in terms of cost and labour
savings, although the process is very complex and needs to be implemented with
the cooperation of specialists of many sectors in order to operate smoothly,
sooner or later it will become reality.
Naturally, the investment required is immense as security is of
paramount importance. Vulnerabilities have been discovered and exploited in the
past and was witnessed on a large scale a few years ago with respect to the
Distributed Autonomous Organisation.
Whilst not related to the banking industry, this case did show that
vulnerability in the programming of a smart contract led a hacker to drain the
DAO of its cryptocurrency ‘Ether’.
Nonetheless, in the meantime blockchain can be used by and benefit
banks in several ways. In KYC procedures blockchain can provide more efficiency
and security with respect to the implementation of Anti-Money Laundering legislation
on an international level. It can be
used to reduce intermediaries and make international payments and transfer of
money less expensive, faster and reduce the paperwork needed for the completion
of complex transactions. In addition blockchain and especially smart contracts
can have significant benefits in side sectors of the banking business such as
insurance and the real estate industries.
One of the most radical ideas for blockchain
technology is the notion of digitising law. The industry jargon is “smart
contracts” — code on a shared database that automatically executes a contract
based on the fulfilment of certain real-world conditions, just as a vending
machine obeys rules to provide sweets when money is inserted. But is it
desirable, or even possible, that contracts become inescapable chains?
As lawyers, the development of smart contracts is one of the most
intriguing aspects of blockchain. To
begin with we read with more frequency that the role of a lawyer will diminish
as a result of smart contracts or, that contracts as we know them will soon
become a thing of the past, so naturally this is an area of interest. I am of
the opinion that the term ‘smart contract’ may be a bit misleading and is being
given more importance than it deserves, from a legal aspect.
Smart contracts in essence will be capable of executing certain
instructions based on the criteria in built into the code. This is nothing new
in and of itself and would function no different to an automatic pay-out or
purchase of shares on a pre-determined trading price of the stock. With respect to a smart contract, we see
something similar in relation to the role of an escrow agent in a sale and
purchase. In this case, the escrow function
could indeed be deemed to be ‘smart’.
However, the smart contract should be viewed as a tool that would work in
tandem with a contract, in the more traditional sense of the word.
There are various aspects that need to be given serious thought with
respect to smart contracts but one point in particular is related to that
aspect of Distributed Ledger Technology which is often touted as one of its
biggest advantages, that is, its irreversibility of transactions. However, in reality, we have to contend with
amendments to the law, a change of intention by the contracting parties, the
possibility of a party to a contract acting without authority, etc. Such scenarios require a rectification as the
original instructions are no longer aligned with the law or the contracting
parties’ intentions. In such cases, the
immutability of smart contracts is something that may become a shortcoming
unless tackled adequately.
In the short term I believe that the more straightforward and
standardised transactions would be serviced well by smart contracts. This should undoubtedly be to the satisfaction
of many and have considerable beneficial effects on the market and society in
general. The straightforward execution of contracts based on clear-cut terms
and conditions, the avoidance of long-term disputes, the facilitation of
business, the reduction of cost and time of transactions and even the
elimination of bureaucracy are just some of the benefits which cannot be
dismissed.
However, for the more complex transactions, the industry needs
more time to mature. Humans will be
humans, that is to say, they have opinions and are conditioned by various
factors that will lead to divergent views and disagreement on
interpretation. As long as this is the
case, the legal profession will continue to survive.
Is blockchain suitable for any organisation?
And, if so, how should Maltese organisations think about applying it and what
would this mean organisationally and culturally?
The consultation document on the establishment of the Malta
Digital Innovation Authority and the framework for the Certification of
Distributed Ledger Technology Platforms and Related Service Providers; and a
Virtual Currency Act is indicative of what a cross-sector revolution we are
experiencing. The Government of Malta is
anticipating an overlap between various competent authorities in Malta and the
proposed Media Digital Innovation Authority.
This in itself is a clear indication of how far-reaching the effects of
blockchain are going to be. Whilst I am
a great proponent of less regulation and greater implementation and avoiding
additional layers of bureaucracy I firmly believe that at this stage the
proposed “Joint Co-Ordination Board” will be extremely beneficial. The effective cooperation between the
proposed Media Digital Innovation Authority and the various competent
authorities will be crucial. The key
point is that all of us, from our respective sectors pull on the same rope.
Organisations should approach blockchain technology in a very
similar manner. The personnel concerned in the various departments need to be
made aware of what the technology has to offer and how it would be
adopted. Transmission of the correct
information is key as all too often technology is associated with requiring
less manpower and thus leading to redundancies of current employees, which
makes implementing the changes that much harder. Blockchain has several benefits to offer any
organisation. Transparency, security and integrity of information, high level
of trust and public verifiability constitute a few of the key advantages. In
addition, it could also provide cost and time savings. However this does not mean
that the use of blockchain makes sense for every single organisation no matter
what the specific needs and structure of it are.
Organisations that need to store large amounts of data, particularly
when the information is distributed among multiple parties/entities, stand to
benefit through the use of blockchain.
What would otherwise lead to issues of poor communication or confidentiality
could help organisations dealing with supply chain management, banks,
healthcare units, insurance companies and real estate agencies streamline their
procedures. Even the public sector stands to benefit by the use of blockchain and
smart contracts applications.
What is your firm doing to prepare itself and
its clients for blockchain and its effects?
Ironically enough we have set up a centralised system at our firm
to prepare ourselves for the use of blockchain across the various practices in
which we are active. A core team have been familiarising themselves with
blockchain and virtual currencies and have begun introducing the concepts to
the various departments. Adopting this
approach was a conscious decision.
Blockchain is a culture change that has the potential to sweep across
all sectors of our economy. That means
that we all need to familiarise ourselves with the pros and cons of blockchain
and how it will integrate into our practice.
When we achieve this, it is only then that we can move away from our
centralised system that we have adopted.
A culture change does not happen overnight, cannot be forced (although
it must be given a bit of a nudge) and is not always easily accepted.
Our firm was founded on the principle that we can only provide the
best service possible if professionals from both the legal and accountancy
profession collaborate. Having this at
our core helps us understand that we need to accept other professionals into
the fold, in this case IT professionals.
Their technical knowhow is crucial.
We are naturally keeping abreast of all the developments going on
locally and internationally. It is very
satisfying to hear that many industry players are contributing to the various
consultation papers that are being issued by the Government and the MFSA. This is crucial to the industry and we are
pleased to have contributed to the “Supplementary Conditions applicable to
Professional Investor Funds (‘PIFs’) investing in Virtual Currencies (‘VCs’)”
and the “Discussion Paper on Initial Coin
Offerings, Virtual Currencies and related Service Providers”. We likewise intend to provide our feedback to
the Consultation Document issued by the Parliamentary Secretary for Financial
Services, Digital Economy and Innovation.