Goforth on Critiquing the SEC’s On-Going Efforts to Regulate Crypto ExchangesGoforth on

Carol R. Goforth (U Arkansas Law) has posted “Critiquing the SEC’s On-Going Efforts to Regulate Crypto Exchanges” (14 William & Mary Business Law Review (Forthcoming 2022)) on SSRN. Here is the abstract:

Despite the so-called “Crypto Winter” in the spring of 2022, which saw a deep plunge in global crypto markets, interest in the appropriate way to develop, use, and regulate cryptoassets and crypto-based businesses continues to be high. In the U.S., a Presidential Executive Order and multiple bills that seek to tackle various issues of crypto regulation are regularly highlighted in the news, suggesting the appropriate treatment of crypto is a growing national priority. Despite these discussions, which tend to focus on finding a balanced way to regulate those within the industry without stifling the technology, the Securities and Exchange Commission (SEC) continues to seek to asset its jurisdiction unilaterally. A pending proposal from the SEC, misleadingly characterized as an attempt to regulate trading in government securities, would broaden the definition of “exchange” with potentially destructive consequences. This Article carefully considers the existing definition of “exchange” under the Securities Exchange Act of 1934 (the ’34 Act), and then examines a proposal from the Commission that would substantially broaden the current interpretation to reach a much larger group of persons involved in trading cryptoassets without adding clarity or a path to compliant operation for such persons. It then evaluates why the proposal creates problems, identifying a number of such issues, before concluding that a better approach would be to allow the legislative process to play out.


Nabilou on Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations

Hossein Nabilou (University of Amsterdam Law School; UNIDROIT) has posted “Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations” on SSRN. Here is the abstract:

The concept of settlement finality sits at the heart of any type of commercial transaction; whether the transaction is in physical or electronic form or is mediated by fiat currencies or cryptocurrencies.
Transaction finality refers to the exact moment in time when proprietary interests in the object or
medium of transaction pass from one party to his counterparty and the obligations of the parties to a transaction are discharged in an unconditional and irrevocable manner, i.e., in a way that cannot be reversed even by the subsequent legal defenses or actions against the counterparty. Given the benefits of finality in terms of legal certainty and its potential systemic implications, legal systems throughout the globe have devised mechanisms to determine the exact moment of the finality of a transaction and settlement of obligations conducted using fiat currencies as a medium of exchange. However, as the transactions involving cryptocurrencies fall beyond the scope of such rules, they introduce new challenges to determining the exact moment of finality in on-chain cryptocurrency transactions. This complexity arises because the finality of the transactions in the cryptocurrencies that rely on proof-of-work (PoW) consensus algorithms is probabilistic. The probabilistic finality makes the determination of the exact moment of operational finality nearly impossible.


After discussing the mechanisms of settlement of contractual obligations in the traditional sale of goods as well as payment and settlement systems – which rather than relying on the concept of operational finality, rely upon the concept of legal finality – the paper argues that even in the traditional payment and settlement systems the determination of operational settlement finality is nearly impossible. This is because no transaction, even a transaction involving a cash payment, cannot be operationally deemed irrevocable as it remains prone to hacks or unwinding by electronic means or mere brute force. The paper suggests that the concept of finality is inherently a legal concept and, as is the case in the conventional finance, the moment of finality in PoW blockchains should also rely on the conceptual separation of operational finality from legal finality. However, given the decentralized nature of cryptocurrencies, defining the moment of finality in PoW blockchains, which may require a minimum level of institutional infrastructures and centralization to support the credibility of the finality, may face insurmountable challenges.

Nabilou on Defining the Perimeters of Crypto-Banking

Hossein Nabilou (University of Amsterdam Law School; UNIDROIT) has posted “The Law and Macroeconomics of Custody and Asset Segregation Rules: Defining the Perimeters of Crypto-Banking” on SSRN. Here is the abstract:

Custody – simply defined as holding securities or funds on behalf of third parties – is one of the key institutions that defines and distinguishes major financial institutions in the financial system. However, custody rules in financial law have traditionally been studied as a microprudential tool for investor protection purposes, while their macroeconomic impact has largely been overlooked. Inspired by the literature on asset custody and its impact on the institutional design of the traditional financial markets, institutions, and infrastructures, this paper studies the potential impact of defining custody rules in the cryptoasset markets on the future developments of the cryptoasset ecosystem. In traditional finance, a survey of relevant regulations applicable to financial institutions shows that the custody rules and client asset (segregation) rules apply to all financial institutions, other than commercial banks’ core business activity (i.e., deposit-taking). The most salient impact of exempting deposit contracts from custody and client asset rules has been the emergence of a business model for banks that treat their clients’ funds as their own and use them for their own accounts. Comingling clients’ funds with that of the bank is a critical defining feature of the banking industry that differentiates it from non-bank financial institutions as well as non-financial firms, and positions banks at the heart of monetary systems. The custody and asset segregation rules can play the same important role in the future developments of the crypto-asset industry. To delineate the scope of crypto-banking and differentiate it from other types of cryptoasset services, such as exchange and custodial services, it is crucial to start from the custody and asset segregation rules. This paper advocates for a presumption of custody when a client does not self-custody his cryptoassets, giving (or sharing) the control of the assets to a third party. It argues that such a presumption not only would serve the objectives of investor protection but also could prevent excessive credit creation in the cryptoasset ecosystem and the potential risk spillovers to the conventional financial markets and the real economy.

Wang on China Meets Digital Currency: E-CNY and Its Implications for Businesses

Heng Wang (UNSW – Faculty of Law) has posted “China Meets Digital Currency: E-CNY and Its Implications for Businesses” (The Law Gazette, November 2021) on SSRN. Here is the abstract:

China is likely to be the first major economy to issue central bank digital currency (CBDC). China’s CBDC, e-CNY, may lead to a new ecosystem that would profoundly affect business, product offerings and business practice. E-CNY is likely to affect both local and international businesses, particularly those with a presence in China or those who commonly transact with Chinese actors. There is also the possibility of e-CNY use outside of China. If China’s CBDC practice and standards affect international practice (such as through standard making), e-CNY has the potential to affect the broader businesses community. This paper discusses the following crucial questions: how to understand e-CNY? What does e-CNY mean for local and international businesses? Businesses need to adequately prepare for a new business landscape with e-CNY that is not only a currency but also generates large amounts of data.

Nabilou on Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations

Hossein Nabilou (University of Amsterdam, Amsterdam Law School; UNIDROIT) has posted “Probabilistic Settlement Finality in Proof-of-Work Blockchains: Legal Considerations” on SSRN. Here is the abstract:

The concept of settlement finality sits at the heart of any type of commercial transaction; whether the transaction is in physical or electronic form or is mediated by fiat currencies or cryptocurrencies. Transaction finality refers to the exact moment in time when proprietary interests in the object or medium of transaction pass from one party to his counterparty and the obligations of the parties to a transaction are discharged in an unconditional and irrevocable manner, i.e., in a way that cannot be reversed even by the subsequent legal defenses or actions against the counterparty. Given the benefits of finality in terms of legal certainty and its potential systemic implications, legal systems throughout the globe have devised mechanisms to determine the exact moment of the finality of a transaction and settlement of obligations conducted using fiat currencies as a medium of exchange. However, as the transactions involving cryptocurrencies fall beyond the scope of such rules, they introduce new challenges to determining the exact moment of finality in on-chain cryptocurrency transactions. This complexity arises because the finality of the transactions in the cryptocurrencies that rely on proof-of- work (PoW) consensus algorithms is probabilistic. The probabilistic finality makes the determination of the exact moment of operational finality nearly impossible.

After discussing the mechanisms of settlement of contractual obligations in the traditional sale of goods as well as payment and settlement systems – which rather than relying on the concept of operational finality, rely upon the concept of legal finality – the paper argues that even in the traditional payment and settlement systems the determination of operational settlement finality is nearly impossible. This is because no transaction, even a transaction involving a cash payment, cannot be operationally deemed irrevocable as it remains prone to hacks or unwinding by electronic means or mere brute force. The paper suggests that the concept of finality is inherently a legal concept and, as is the case in the conventional finance, the moment of finality in PoW blockchains should also rely on the conceptual separation of operational finality from legal finality. However, given the decentralized nature of cryptocurrencies, defining the moment of finality in PoW blockchains, which may require a minimum level of institutional infrastructures and centralization to support the credibility of the finality, may face insurmountable challenges.

Nabben on Decentralised Autonomous Organisations’ as a Blueprint for Participatory Digital Organisation?

Kelsie Nabben (RMIT University – Blockchain Innovation Hub; Digital Ethnography Research Centre; RMIT University – ARC Centre of Excellence for Automated Decision-Making and Society) has posted “Governance of Algorithms, Governance by Algorithms: Are ‘Decentralised Autonomous Organisations’ a Blueprint for Participatory Digital Organisation?” on SSRN. Here is the abstract:

Algorithms are inherently centralised processes, from coding, to training, to deployment and maintenance. Meanwhile, blockchain communities are experimenting with “Decentralised Autonomous Organisations” (DAOs) as a participatory institutional framework for individual autonomy to organise outside organisations. DAOs are an attempt at decentralised organisation to self-govern, using algorithms, for autonomy from third-party mediation. This piece explores if DAOs can teach us anything decentralised approaches to the governance of algorithms. With the rise of algorithmic decision-making systems in public administrative processes, this research seeks to uncover the dynamics of DAOs as participatory ways to organise outside of organisations in the digital age. I explore the case study of “GitcoinDAO” as a decentralised organisation governed by algorithms, whilst simultaneously seeking to collectively govern algorithms to manage a machine learning process to detect fraudulent “sybil” attacks. With algorithms as peers in decentralised organisations, algorithms emerge as new political actors in how people organise outside of traditional organisations in the digital age. DAOs provide this institutional framework in the articulation of shared objectives, codes of conduct, and “constitutions”, to guide algorithmic governance design. This locates humans and algorithms as peers in organising, establishing algorithms as political actors in shaping and determining the outcomes of decentralised organisation and human autonomy. This research provides insights into the social outcomes of algorithmic governance for others seeking to explore participatory digital institutional infrastructures.

Kaal on Reputation as Capital – How DAOs Upgrade Finance

Wulf A. Kaal (University of St. Thomas, Minnesota – School of Law) has posted “Reputation as Capital – How DAOs Upgrade Finance” on SSRN. Here is the abstract:

Decentralized Autonomous Organizations (DAOs) have the potential to upgrade finance. This paper evaluates the design of and system requirements for a decentralized cryptocurrency venture capital investment club that is operating as a DAO (DAOIC). The design of the proposed DAOIC enables investors to substitute capital commitments by way of reputation token staking on proposed portfolio companies. The proposed design has the potential to lower capital requirements and free up liquidity for decentralized smart contract coordinated investment vehicles.

Didenko & Buckley on Central Bank Digital Currencies in the Pacific Island Countries

Anton N. Didenko (University of New South Wales – Faculty of Law) and Ross P. Buckley (same) have posted “Central Bank Digital Currencies as a Potential Response to Some Particularly Pacific Problems” (Asia Pacific Law Review) on SSRN. Here is the abstract:

Despite years of effort, financial inclusion persists as a major challenge in the Pacific Island Countries (PICs), with many in the region still lacking access to financial services. This article argues that central bank digital currencies (CBDCs) offer a potentially highly efficacious solution to (i) the financial inclusion challenges of the PICs and (ii) the problem of high remittance costs that currently serve as a tax on the earnings of Pacific Islanders abroad. We identify the key challenges that may inhibit the rollout of CBDCs in PICs but argue that in time such a rollout is nonetheless highly likely – since the key drivers of CBDC development in the region are likely to be external to PICs themselves. While their potential is very significant, we conclude that now is not the time to issue a CBDC in the region, but it is the time to begin laying the groundwork for this innovation by developing the expertise required within the region’s central banks.

Kaal & Howe on Custody of Digital Assets

Wulf A. Kaal (University of St. Thomas, Minnesota – School of Law) and Hayley Howe (Emerging Technology Association) have posted “Custody of Digital Assets” on SSRN. Here is the abstract:

The custody of digital assets plays an essential role in the evolution of the digital asset industry. Fully compliant legal custody solutions for digital assets increase legal certainty and mainstream investor confidence which, in turn, helps build markets in digital assets. Once digital asset markets evolved, self-custody solutions help increase the decentralization of the digital asset market. This article examines the evolving custody solutions for digital assets.

Brummer on Disclosure, Dapps and DeFi

Chris Brummer (Georgetown University Law Center; Institute of International Economic Law (IIEL)) has posted “Disclosure, Dapps and DeFi” (Stanford Journal of Blockchain Law and Policy, forthcoming) on SSRN. Here is the abstract:

Disclosure in decentralized finance is an area where founders’ and regulators’ interests can overlap in important ways. Market participants need to differentiate their dapps to compete and grow—just as regulators have long demanded transparency in order for people to know what they’re buying. But adapting disclosure frameworks popularized in the 1930s to today’s digital marketplace requires bridging decades of technological evolution and fundamentally alien assumptions about market infrastructure.

This white paper contributes to that work. It observes that DeFi presents novel policy questions for disclosure because much of the material information required to participate in an informed way is already available to technologically sophisticated actors on blockchains. This feature is relevant when contemplating how and for whom a disclosure system for DeFi should be modeled. Securities law, with its focus on institutional actors, calls for voluminous and often technical disclosures designed to be filed with authorities; by contrast, consumer protection frameworks rely on targeted, retail-friendly disclosures meant to be digested by everyday shoppers and end users.

Against this backdrop, this white paper offers a framework transposable to securities law, but given the information already accessible to technologically savvy actors emphasizes the need for shorter, crisper disclosures typically associated with consumer protection law. It makes two key contributions. First, it highlights ambiguities inhabiting legacy disclosure obligations, and offers a conceptual roadmap for assisting developers and regulators seeking to identify relevant disclosure issue areas and principles. Second, it introduces a series of crypto-native tools to modernize disclosure delivery in DeFi systems, among them “Disclosure NFTs,” “Disclosure DAOs,” and “Disclosure DIDs.” If properly developed, the white paper shows how these tools could potentially provide more functionality and security than the SEC’s Edgar database and afford a new generation of developers and engineers a unique opportunity to reorient disclosure towards its original New Deal purpose: to be read.