As Bitcoin Technology Makes Inroads, One Law Firm Launches Multidisciplinary Blockchain
While technology has transformed almost every sector of our lives from publishing to music to transportation, it has only begun to remake financial services, one of the most highly regulated industries. But the arrival of Bitcoin and the technology behind it, often called blockchain, is sure to hasten that change — and that will in turn unleash a tsunami of adaptation across a variety of industries ranging from energy to intellectual property to government affairs to international trade.
To serve the many companies that will be affected by these repercussions, international law firm Steptoe & Johnson Tuesday announces the expansion of its practice helping blockchain companies into a multidisciplinary one that also targets companies who will feel the technology’s impact.
“The blockchain, like the internet, is going to have an impact on just about every existing type of institution in the years ahead — both private sector and government,” says partner Jason Weinstein, who, as a deputy assistant attorney general at the United States Department of Justice, led DOJ’s cybercrime and organized crime efforts, and will co-lead the practice. “So having a multidisciplinary blockchain practice puts the firm in the best possible position to help a wide variety of clients in a wide variety of industries prepare for that transition.”
Alan Cohn, of counsel at Steptoe and the other lead attorney of the blockchain practice, who established and oversaw the cyber policy office at the Department of Homeland Security, says, referring to the multidisciplinary practice, “It’s a recognition that blockchain technology is not a separate thing that exists separate and apart from established industries and businesses.”
(Weinstein and Cohn also discuss the decision in the latest episode of my podcast, Unchained, which focuses on blockchain and fintech. Show notes here, and the podcast can be found on Google Play, iTunes, Stitcher, TuneIn Radio as well as online.)
Steptoe is building on its experience over the past couple years advising investors, entrepreneurs, startups, exchanges, transaction processors and retailers in the blockchain and cryptocurrency space. The firm, which is currently representing companies in investigations by DOJ and the Commodities Futures Trading Commission, is also an advisor to two of the industry’s most active advocacy groups, the Chamber of Digital Commerce and Coin Center. Steptoe also cofounded the Blockchain Alliance, a coalition of 25 blockchain companies and 25 regulatory and law enforcement agencies including Interpol, Europol, the Securities and Exchange Commission and the Federal Bureau of Investigation, as well as even local officials, that works to educate enforcement agencies about digital currencies and the blockchain.
Cohn says that blockchain presents a host of novel legal issues, such as in smart contracts, a new type of software program enabled by blockchain technology that functions like a programmable contract in which the terms can be executed in code.
“There’s a whole range of issues that go into looking at the applications of a smart contract to existing businesses — how terms will be interpreted, the way terms are written, the recourse that’s available to parties that feel a contract was or was not executed consistent with its terms, how smart contracts intersect with established areas of law, like law governing insurance contracts or law governing releases,” says Cohn. “So in just something as simple as applying a smart contract to a research and insurance contract, you basically have to go back through the principles that underlie that area of the industry — how insurance contracts work, how they’re interpreted, what presumptions are used, and really examine them in the way that a smart contract on the blockchain would work.”
Weinstein compares it to the questions that retailers would face when they opened ecommerce sites and were uncertain how to, say, apply sales tax or how they needed to document dealings in case there were legal disputes. Similarly, a financial institution that wants to adopt blockchain technology will face questions about how payments are handled or what constitutes transfer of ownership if it’s used to issue stock or trade shares.
Cohn adds that companies’ technical decisions could also affect how they are regulated. For instance, many posit that a blockchain-based system would be useful for real-time auditing. However, a company installing such a system could spark a cascade of legal questions based on whether it were to use a private or permissioned blockchain (in which the maintainers of the ledgers would be a private group who would need permission to join the network) or a public one such as the Bitcoin blockchain (in which anyone can join and the transactions are publicly broadcast) or a hybrid one using, for instance, so-called side chains in which some transactions or some part of them occur in a private environment, but then are partially or completely broadcast onto a public network. The firm also says it can work with regulators and enforcement agencies as they develop their thinking around these technologies because they are so new and raise such novel legal questions.
Not only are many of the regulations are currently being worked out, but even the jurisdictions that apply are not always clear. “The creators of the DAO believe it exists everywhere and nowhere at the same time,” says Weinstein, of one particular smart contract that was coded to run like a venture fund and raised a whopping $150 million in a cryptocurrency called ether, the largest crowdfunding in history. But the reality is that many companies could find themselves subjected to different laws in different jurisdictions.
“One of the reasons we have included folks from our European and Asian offices is that these are global issues, and often when you’re advising a client about how the law applies, you can’t just focus on the U.S. or one state in the U.S. but how other jurisdictions elsewhere in the world will look at the issue as well,” he says.
As for whether a description applied to smart contracts — “the code is the law” — could someday hold up legally, Cohn says, while that would imply that such a contract wouldn’t give legal status to anything outside of the contract, “we have all sorts of statutory and common law legal regimes that have grown up to both enable other types of transactions and to protect individuals and companies in different types of transactions…. So this is an issue that will have to be played out over time, so how much of the design features of the technology will govern how the law should look at the technology, and in what ways should the law fill in the gaps around the technology to enable greater functionality in order to better protect consumers or counterparties to contracts or victims of theft?”
Weinstein adds, “If a smart contract that dictates how an auto lease or rental car agreement or lease payment on a home is executed, it doesn’t mean that contract law ceases to exist, but just that the execution of the contract has essentially become automated. It doesn’t mean the law ceases to apply to that contract. No matter how well written your code, you have to look at the broader context to understand what other laws apply to that transaction.”
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