The reasons are the rising price of these assets on the so-called crypto currency exchanges, on the one hand, and the better understanding and greater uptake of the blockchain technology that accompanies cryptocurrency development, on the other hand. In this sense, a number of businesses around the world, including start-ups, are gradually turning their attention to virtual assets and staking their development on the blockchain concept that has been gaining strong momentum.
The significance of this development is not limited to the greater participation of an increasing number of institutional investors (investment funds and listed companies such as Tesla, Inc.) in the cryptocurrency market. It has also triggered an increase in the number of traders providing blockchain-based services.
Although in certain countries (such as the USA) cryptocurrencies are beginning to be increasingly regarded as a legitimate investment asset, from a purely legal point of view the road to their mass adoption cannot circumvent legal regulation.
In this regard, initial steps have been taken at EU level through the so-called Fifth Anti-Money Laundering Directive, which has introduced a set of largely uniform rules for the providers of cryptocurrency-related services (trading exchanges, digital asset custody wallets, etc.) in the context of prevention of money laundering. These entail obligations for customer due diligence (conducting detailed checks), money tracing, etc. For their part, some EU Member States have taken independent legislative action and introduced certain regulation in the sector. For example, countries such as Malta, Germany and France have each introduced extensive regulatory measures that are flexible and versatile at the same time.
Growing investor interest in cryptocurrencies, the risks associated with cryptocurrencies and the set of non-uniform legislative solutions at EU level continue to affect the cryptocurrency market, which is still immature, thereby necessitating the proposal for a further level of regulation. In this respect, as part of the European Digital Finance Package, the European Commission has proposed the adoption of a Regulation on markets in crypto-assets (the so-called Market in Crypto-assets Regulation). The planned innovations in this area are expected to be finally adopted within the next one to two years, with the entry into force of the Regulation likely to be postponed until 2024.
This first comprehensive legal framework at EU level in the area of crypto assets envisages the establishment of a licensing regime for all traders operating in the cryptocurrency market and the provision of financial services expressly covered by the Regulation, including but not limited to: crypto assets exchange for fiat currency (i.e. legal tender) or other cryptocurrencies, operating platforms for trading in such assets, custody and management of crypto assets on behalf of third parties, providing related advice, etc. Rules on the issuance of virtual assets (in the framework of so-called Initial Coin Offering (ICO) procedures) are also foreseen. These are expected to establish a system of obligations for the issuers concerned in relation to the disclosure of information and the transparency of their activities.
From a technological perspective, cryptocurrencies are based on the so-called distributed ledger technology (DLT), which is in fact the blockchain technology itself. By virtue of its intrinsic characteristics, DLT is often seen as a technology with the potential for future application in various areas of business, administrative management, process tracking, database building, etc.
Unlike a traditional centralized database where each record of information is validated by a single administrator (one central location), in DLT records are shared across the network. The digital system itself does not exist in one specific location, but all actors and devices that access it and act as its constituent parts (the so-called ‘nodes’) can make and validate records, regardless of their physical location.
In effect, a ledger (practically an accounting register) contains records of transactions concerning different assets. These can be both tangible (movable and immovable property, for example) and intangible – securities, crypto-assets, etc. The advantages of this system are that the participants are able to verify the relevant transactions, removing the need for this process to be mediated by a third party (a single central unit or administrator). Once a transaction has been recorded in the database, it is immutable, and its history can be traced by anyone with access to the system.
The value of such a technology lies in the possibility of its widespread use in various areas, including property registry, registration of deed transactions, cash flow tracking, etc.
DLT also enables the conclusion of the so-called ‘smart contracts’. In summary, these are programming code through which interested parties can set various parameters of their contractual relationship, including price, terms, typed conditions, facts and circumstances, etc. The technological potential of ‘smart contracts’ could go as far as to completely change the future of industries and business areas such as banking and finance, healthcare, insurance, etc.
What differentiates a smart contract from a standard contract is that the clauses in it are set as programming code running through blockchain technology. Initially set as ready-to-execute stipulations, when the contract is entered into (the participants verify the entry into the contract) and when the relevant circumstance occurs (e.g. funds flow into the counterparty’s wallet), the contract’s stipulations are executed automatically.
In a sense, the smart contract resembles a letter of credit in certain characteristics, with the significant difference, of course, that with a letter of credit we have a clear centralization around the person managing the ‘automatic’ process – the bank.
The risks associated with the use and trading of cryptocurrencies and the relative lack of clarity and certainty regarding the utilitarian application of blockchain technology are well known and should be subject to legal regulation.
Asen Apostolov
