Leveneur & Heudebert on Blockchain, Disintermediation, and the Future of the Legal Profession

Claire Leveneur (Université Panthéon-Assas (Paris II)) and Paola Heudebert have posted “Blockchain, Disintermediation and the Future of Legal Professions” (Cardozo International & Comparative Law Review, 2020, vol. 4 (1) 275-319) on SSRN. Here is the abstract:

Will the 2020s herald the death warrant of the legal professions? If we listen to blockchain technology’s most devout advocates, the answer is a resounding yes. Blockchain is often proclaimed as the ultimate tool for allowing unrestrained exchanges between contracting parties with no preexisting relationships, and thus suppressing the need for intermediaries. In other words, blockchain could be a “trust machine,” which could open up the possibility of conducting transactions in full confidence, without the risk of non-performance or misguidance.

However, it is utopian idealism to assume that blockchain technology could enable pure and total disintermediation. All trusted third parties cannot disappear in one fell swoop – especially legal professions.

This Article problematizes blockchain’s apparent objective of disintermediation and argues that, in reality, blockchain leads to a form of reintermediation. Of course, the role of the legal professions in the face of the advance blockchain technology is inextricable to the role of the law in blockchain. While advocates have detailed the diminishing role of law and regulation in the application of blockchain technology, we adopt a comparison of the French and the American jurisdiction’s to blockchain technology, to demonstrate that, in fact, the law cannot be extricated from blockchain’s advance.

This Article explores a new angle on blockchain’s place in the legal professions and offers new perspectives for lawyers to anticipate a future defined by “known unknowns,” and the “unknown unknowns” of blockchain technology.

Sutherland on Tax Treatment of Block Rewards

Abraham Sutherland (University of Virginia School of Law) has posted “Tax Treatment of Block Rewards: A Primer” on SSRN. Here is the (bulleted) abstract:

• An unsettled issue of immense practical and economic importance: how to tax the new “reward tokens” created in public cryptocurrency networks.

• The wrong policy would drive innovation elsewhere. Fortunately, the correct policy is mandated by existing law: these new tokens – like all forms of new property – do not give rise to income until they are sold.

• Informal, seven-year-old IRS guidance – not law – geared to Bitcoin and proof of work suggests reward tokens are immediate income at their fair market value on the date “received.”

• For the newer proof-of-stake technology, this would create a compliance nightmare and punitive overtaxation.

• Ethereum, Tezos, Cosmos, and many other proof-of-stake cryptocurrencies: compliance would be a daunting task – for the IRS as well as taxpayers. New taxable events would occur every few seconds.

• “Income” under such a policy would overstate taxpayers’ actual economic gain – significantly, in many cases – resulting in demonstrable, systematic overtaxation.

• The overtaxation is equivalent to taxing a 21 for 20 stock split by counting the “new” share – that is, 20/21 the value of an old share – as taxable income.

• Like any property, cryptocurrency tokens can indeed be “income” – when received as payment or as compensation.

• But new property – property created or discovered by a taxpayer, not received as payment or compensation from someone else – is never income, and never has been.

• Cattle, corn, gold, widgets, wild truffles, artworks, novels – think of any new property created or discovered by the taxpayer: It’s no one else’s expense, and it’s not income until sold.

• As a factual matter, new reward tokens are indeed created by stakers.

• Understanding how tokens are created is complicated; resorting to flawed financial analogies is easy.

• Block rewards are nothing like “stock dividends.” They are not “compensation for services” – try to imagine taxable “compensation” that doesn’t come from another person.

• Reward tokens cannot be taxed as immediate income under section 61 of the Internal Revenue Code. But not to worry: they’ll be fairly taxed when sold.

• Policy problems remain for cryptocurrency taxation – fortunately, new reward tokens are not among them.

• It’s not too late to clarify this issue before the effects of a wrong or uncertain policy are felt by millions of taxpayers and the IRS alike.

Ooi on Adapting Taxation for the Digital Economy in Singapore

Vincent Ooi (Singapore Management University – School of Law and Centre for AI & Data Governance) has posted “Adapting Taxation for the Digital Economy in Singapore” ((2021) 27(1) Asia-Pacific Tax Bulletin 1-10) on SSRN. Here is the abstract:

The advent of the digital economy has had profound implications for taxation. Tax systems have been forced to adapt as they become increasingly unsuited for the realities of modern commerce. While Singapore has largely followed international developments, particularly in the area of international taxation, it has often made numerous innovative policy decisions in line with its national interests. The various policy decisions which Singapore has made on taxing the digital economy span both international and domestic tax. In the area of domestic tax, the examples have been further divided by subject matter, like e-commerce, digital tokens, automation, and electronic instruments. Other jurisdictions will face similar choices when considering how to adapt their domestic tax systems for the digital economy, and the tax policy decisions made by a small, highly-open economy such as Singapore may provide insights to jurisdictions seeking to adapt their tax systems for the digital economy.