This article has been written by Aishwarya Gupta, Amity Law School, Kolkata.
Abstract: This article examines the legal implications of using blockchain technology and cryptocurrencies in corporate transactions. It discusses how blockchain technology can improve transaction processes and increase transparency, and how cryptocurrencies can facilitate fundraising and investment. However, the use of these technologies also raises legal and regulatory challenges, such as the enforceability of smart contracts and the recognition of digital securities under current securities laws. Regulatory authorities are beginning to develop new legal frameworks to govern the use of blockchain technology and cryptocurrencies in securities transactions, but the legal landscape is still evolving. This article concludes that businesses and investors must carefully consider the legal and regulatory implications of using these technologies in corporate transactions, and be prepared to adapt to new legal frameworks as they emerge.
Introduction
Bitcoin’s system is decentralised – no central authority tracks, approves or secures transactions on the Bitcoin network. To achieve security and usability, Bitcoin’s database (the Bitcoin blockchain) utilises cryptography. The Bitcoin blockchain is a publicly viewable ledger that records all transactions, with each network user retaining a copy of the ledger. When a transaction is initiated, it is grouped with other transactions; these groupings (blocks) are added to the ledger. Blocks are distributed to users, and a block’s veracity is confirmed by users’ distributed computing power. Approved transactions are irreversible and only the sender’s authorisation is needed to initiate the process.[1]
Blockchain transactions are regulated by consensus and verification processes that include the blockchain’s participants, eliminating the need for any central authority or third-party intermediary, such as a financial institution or clearinghouse. Every record in the blockchain (called a “block”) has a timestamp and a unique cryptographic code, and it is digitally linked to the immediately preceding block by a unique “hash” code, making the ledger an auditable, immutable record of all transactions that have occurred since the ledger’s inception. This enables users to determine if blockchain data is valid or whether it has been tampered with.[2]
The rise of blockchain technology and cryptocurrencies has disrupted many traditional industries, including finance and banking. These digital technologies have created new opportunities for businesses, investors, and consumers alike. However, they have also raised legal questions and challenges, particularly in the context of corporate transactions. In this article, we will explore the legal implications of cryptocurrency and blockchain technology in corporate transactions, including mergers and acquisitions (M&A), fundraising, securities transactions as well as in intellectual property. We will examine the legal framework governing these transactions, the challenges and risks involved, and the potential benefits of using blockchain technology and cryptocurrencies in corporate transactions.
Mergers and Acquisitions
Mergers and acquisitions (M&A) are complex transactions that involve the transfer of ownership and control of one or more companies. These transactions typically involve large sums of money, as well as various legal and regulatory requirements. The use of blockchain technology and cryptocurrencies can simplify and streamline many aspects of M&A transactions, such as due diligence, contract management, and payment processing.
One of the key advantages of using blockchain technology in M&A transactions is that it can provide a secure and transparent record of ownership and transfer of assets. Blockchain technology uses a decentralized ledger that is distributed across a network of computers, making it virtually impossible to tamper with or alter. This can help prevent fraud, errors, and disputes in M&A transactions.
Another potential benefit of using blockchain technology in M&A transactions is that it can reduce transaction costs and increase efficiency. By using smart contracts, parties can automate many aspects of the transaction process, such as payment processing, escrow, and dispute resolution. This can help reduce the need for intermediaries, such as banks and lawyers, and speed up the transaction process. However, the use of blockchain technology and cryptocurrencies in M&A transactions also raises legal and regulatory challenges. For example, the transfer of ownership of assets using cryptocurrencies may not be recognized under current legal frameworks. Additionally, the use of smart contracts may not be legally enforceable in some jurisdictions. It is important for parties to carefully consider these legal issues before engaging in M&A transactions involving blockchain technology and cryptocurrencies.
Fundraising
Blockchain technology and cryptocurrencies have also created new opportunities for businesses to raise funds, particularly through initial coin offerings (ICOs) and security token offerings (STOs). These fundraising methods involve the issuance and sale of digital tokens or coins that can be used to access a particular product or service or represent an ownership interest in a company.
ICOs and STOs have become popular because they offer a faster and more cost-effective way for businesses to raise capital compared to traditional fundraising methods, such as IPOs or private placements. They also provide investors with more flexibility and access to a wider range of investment opportunities.
However, the legal and regulatory framework governing ICOs and STOs is still evolving, and there is a significant amount of uncertainty and risk involved in these fundraising methods. In many jurisdictions, the legal status of digital tokens and coins is unclear, and there is a risk of regulatory enforcement actions or investor lawsuits. To mitigate these risks, businesses engaging in ICOs and STOs must comply with applicable securities laws and regulations. This may include registering the offering with regulatory authorities, providing investors with accurate and transparent information about the investment opportunity, and complying with anti-fraud and anti-money laundering laws.
Securities Transactions
The use of blockchain technology and cryptocurrencies also has implications for securities transactions, including the issuance and trading of securities. Blockchain technology and smart contracts can provide a more efficient and secure way to issue and trade securities, potentially reducing transaction costs and increasing transparency. For example, blockchain technology can be used to create digital securities that can be traded instantly and securely, without the need for intermediaries such as stock exchanges or clearinghouses. This can reduce transaction costs and increase liquidity for investors. Additionally, blockchain technology can provide a secure and transparent record of ownership and transfer of securities, which can help prevent fraud and errors.
However, the use of blockchain technology and cryptocurrencies in securities transactions also raises legal and regulatory challenges. For example, the transfer of ownership of digital securities may not be recognized under current securities laws and regulations. Additionally, the use of smart contracts in securities transactions may not be legally enforceable in some jurisdictions.
To address these challenges, regulatory authorities are beginning to develop new legal frameworks to govern the use of blockchain technology and cryptocurrencies in securities transactions. For example, the U.S. Securities and Exchange Commission (SEC) has issued guidance on the application of securities laws to digital assets, and other regulatory authorities around the world are taking similar steps.
Property registers and intellectual property
Blockchain technology could also be used to supplement or replace ownership recordation systems. Property titles could be stored and verified via a blockchain, and title transfers could be affected and verified without a centralised third party. Intellectual property (IP) ownership could be similarly recorded via decentralised ledger. Tokens representing individual sticks from the bundle of property rights could be individually transferred. For example, the right to perform a copyrighted work could be sold as a token without affecting other rights. Regulators may be reluctant to decentralise official registries, but adopting new technology may produce blockchain advantages such as higher security, reduced fraud opportunities and decreased transfer cost.[3]
Conclusion
Blockchain technology and cryptocurrencies have the potential to transform many aspects of corporate transactions, including M&A, fundraising, and securities transactions. However, the legal and regulatory framework governing these transactions is still evolving, and there are significant legal and regulatory challenges to consider. To navigate these challenges, businesses and investors must carefully consider the legal and regulatory implications of using blockchain technology and cryptocurrencies in corporate transactions. This may involve seeking legal and regulatory advice, complying with applicable laws and regulations, and being prepared to adapt to new legal frameworks as they emerge. Overall, the use of blockchain technology and cryptocurrencies in corporate transactions represents a significant opportunity for businesses and investors to streamline and optimize transaction processes. However, it is important to approach these transactions with caution and to carefully consider the legal and regulatory implications.
The use of blockchain technology is expected to create novel opportunities for communication and information exchange. Although, these opportunities also raise difficult legal questions, challenging the limits of current laws. As a result, legal frameworks will likely require modification or adaptation to keep up with this rapid innovation.
[1] https://www.financierworldwide.com/legal-implications-of-expanded-use-of-blockchain-technology#.ZCxZ7XZByMo
[2] http://cactuslaw.ca/service/the-legal-implications-of-cryptocurrency-and-blockchain-technology-in-canada/
[3] Ibid.