The “boom” of Bitcoin together with other crypto-currencies over recent months has attracted the attention of most regulators, both at a national and international level. In Spain, a new legal framework on crypto-currencies and blockchain is being considered to face the threats and opportunities they offer.
The economic value of crypto-currencies constantly fluctuates, from its remarkable peak in late 2017, when the “Bitcoin” topped $19k, to their recent generalised fall in value. The great volatility that they entail worries investors and public authorities equally, to the gain of the so-called “big whales” and their powerful moves that echo across the crypto-markets.
We, therefore, cannot help but wonder about the reasons as to why crypto-currencies’ fiat value has plummeted so much lately. At first, we may consider that the main reason could be crypto-currencies potential to render financial intermediaries expendable such as banks and their intervention in the matter –some of them are prohibiting buying crypto-currencies with credit cards– which might broaden such collapse. However, there are actually some banks that are accepting these crypto-currencies –also called “tokens”– as a valid currency and even creating their own crypto-currencies, as they offer better cross-border payments and it is good for overall development and financial inclusion. Another possible factor would be the general momentum at an international level towards regulating these financial assets focusing on the opportunities opened up by them and guarding against illicit activities with a view to protecting investors and preventing possible malicious uses. We must also recall that this hot topic is expected to be discussed at the G-20 summit next March 2018, in order to devise a hypothetical global regulatory framework on crypto-currencies.
In Spain, the legal aspect of crypto-currencies has been considered and a new legal framework on this matter may be defined in the coming months, given that on 7 February 2018 there was a session of the Spanish Senate where this matter was exposed. The regulation initiative would praise the advantages of these crypto-assets (i.e. cross-border transactions), but mistrusts the anonymous character in which they wrap up and their potential criminal usage. According to that stated, there is a general agreement on the need to regulate crypto-currencies but it also seems necessary to regulate the technology that makes crypto-currencies possible, known as blockchain. This initiative goes hand-in-hand with other international initiatives, gambling on the possibilities of blockchain technology and crypto-currencies.
When referring to the regulation of crypto-currencies, it must be clarified as to whether or not an ICO is valid in Spain. For those who have not heard of an Initial Coin Offering (“ICO“), in basic terms it is a newly-developed funding mechanism for early stage companies. Instead of raising a round of venture capital or crowdfunding a project, a company could now sell a “token” to investors who pay in crypto-currency and the company could then use that capital to develop the product and expand the company. The company does not sell shares in the company, but rather sells tokens, often in the form of a crypto-currency created for that company.
Regulators are now turning their attention to the ICO phenomenon to ensure investor safeguards are observed. Currently, in many jurisdictions, these offerings often operate in the “gray market” –an unofficial market where securities are traded– without certainty as to what regulations need to be followed. As for Spain, both the Spanish National Stock Market Commission (“CNMV“) and the Bank of Spain have recently made it clear that, to date, no ICOs have been registered, authorised or verified by any Spanish supervisory authority. The fact that these tokens are not backed by any central bank or any other centralized authority strengthens Spanish supervisory authorities’ view that crypto-currencies may not be established as an alternative to the current legal tenders. The CNMV has stated that a large part of the ICOs operations should be treated as issuance and public offers of marketable securities and, as such, the offered tokens should grant rights or expectations over the potential revaluation or profitability of their business, projects or products. In any event, cases of companies resorting to this type of funding mechanisms are spreading, some are even using international schemes, despite the warning of European authorities of the great risk involved in these operations.
Apart from the features of the crypto-currencies, it would be interesting for the new regulation to also focus on blockchain and the opportunities and threats it comprises. Again, for those not privy to it, blockchain is built up as a digital database (or ledger), distributed across a network of computers. Records are regarded as immutable as they are protected by cryptography and are, therefore, protected against human error, editing and deletion. Blockchain is increasingly seen as a key technology that may revolutionize the world as we know it and has yet to be regulated to offer stability and legal certainty in all of its elements. To attain so, the legal nature of blockchain must be established in order to determine what the jurisdiction and applicable law for this distributed and decentralised ledger technology is as it is not subject to any specific geographic location, as well as the liability regime in case anything goes wrong with the information or transactions occurring on it. No Spanish court would have issued any judgment on any matter related to blockchain. Also, clarifications would be welcomed on the way a citizen should exercise the right to be forgotten –regulated in the General Data Protection Regulation– when the data is stored on blockchain.
Among blockchain applications, two of them may be worth highlighting: the Internet of Things and the Machine to Machine transactions (“M2M“). Neither of them are really news but it would be interesting to see how they benefit from and thrive by using the advantages of blockchain. For instance, among the thousands of projects popping-up, there is one for a self-driving car that pays for its own lease, insurance and gas by giving customers rides. The car would not be owned by a corporation, else it would operate by itself and in its own right. It would be interesting to know how upcoming regulations will face realities like this in order to determine applicable liability regimes. Moreover, not only is the blockchain technology showcasing its applications nowadays but others can be found (e.g. IOTA, a crypto-currency using “tangle” as a structure instead of blockchain and aimed at finding applications in the M2M payments segment).
In conclusion, while the regulators’ initiative is rather focused on the possible malicious use of this new technology and tokens, we would recommend to taking a look at those regulations that also explore all the opportunities that blockchain has to offer.