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Senior executives and general counsel are now frequently hearing consultants and business teams talking about the potential of blockchain and cryptocurrency technologies. This podcast aims to shed light on some of the key areas of interest and concern by exploring blockchain, cryptocurrency and NFTs in turn, outlining how they work, and discussing the risks and challenges involved and how they might develop in the future.
In this episode of our Digital Transformation Podcast Series, hosted by Dino Wilkinson, we focus on unravelling the mysteries around blockchain, cryptocurrencies and NFTs (non-fungible tokens). We also look at some of the associated legal risks in conversation with three subject matter experts: London-based disputes and insurance partner, Lee Bacon, who co-founded Clyde & Co’s smart contracts consultancy offering; Thomas Choo, fintech specialist and Managing Partner of Clyde & Co’s Singapore office; and Alec Christie, head of our Australian digital law practice.
Starting with an introduction to blockchain technology, Bacon explains that while some refer to it as a “glorified spreadsheet” the technology is so much more powerful than that. It operates as a shared, trusted ledger with no requirement for cross-verification. These characteristics are perfectly suited to maintaining records where certainty and safety are vital, such as for tracking and tracing spare parts in the aviation sector or to show the provenance of diamonds.
However, blockchain technology is not without risks, as Bacon goes on to discuss. The fact that they are decentralised can be a challenge in the context of understanding jurisdictional scope and liability. There is also fragmentation of standards which means that different blockchain networks are not always interoperable. Regulation is a challenge as lawmakers struggle to keep up with rapidly evolving technology. However, as Bacon says: “If you’re doing it sensibly and properly, those risks can be managed.”
This section concludes with a look at smart contracts, which Bacon describes as an “automated piece of code, embedded in many of the systems we use on a daily basis”. A smart contract is a self-executing process that initiates upon the occurrence of a particular event. While smart contracts are not the same as legal contracts, they are becoming closely linked: “Most of the areas that we’re looking at involve a mix of a traditional contract wrapper… and an execution level which puts that into effect,” says Bacon. “But as the world becomes increasingly digitalised, we’re beginning to see the traditional wrapper level shrink and more people relying on what’s in the code.”
So-called cryptocurrencies use encryption technology to create an alternative form of payment. This decentralised digital or virtual currency sits on a blockchain, which effectively acts as a ledger of all transactions. In the second part of the episode, Choo digs further into the characteristics of cryptocurrencies and the pros and cons of the different crypto wallets available to store them. These include internet-connected ‘hot wallets’ (including mobile wallets, cloud wallets and cryptocurrency exchanges) and offline ‘cold wallets’ (such as hardware wallets, USBs, and other data storage devices). According to Choo, most crypto owners use a combination of the two, giving them both liquidity and the ability to hold assets long term.
Choo addresses several of the major risks associated with cryptocurrencies, including volatility, security and the potential for fraud. It is acknowledged that, in many cases, there is little regulation to protect holders against these threats. “For the lawyers, because it is so new, the issue is basically how the local courts view digital assets, whether there is an issue in making a claim against untraceable criminals, and whether digital assets are actually considered property,” he says. Choo highlights a recent case in Singapore where injunctive relief was granted against a non-person, setting an important precedent for future crypto cases.
In the final part of the podcast, Christie gives an overview of NFTs – sometimes referred to as ‘digital collectibles’. NFTs can be a representation of a physical asset or a record of ownership to it that sits on the blockchain. The underlying asset may be anything from a painting to a barrel of whisky. The discussion explores the use case for NFTs, including interesting ideas coming out of creative arts space by artists such as Banksy and Damian Hirst, the latter recently selling NFTs representing a series of original art pieces that he subsequently destroyed.
Christie believes the real value of NFTs lies in being “a representation of… a physical tangible asset, a reference and an indicator, to be carried around like cryptocurrency in a cold wallet, that establishes your right to either a piece of or the whole of a particular asset.” However, with the current hype surrounding NFTs as digital artwork, buyers must be aware that owning an NFT will not necessarily give them rights over the physical item. As in any transaction, the terms of sale can vary on a case-by-case basis, so due diligence is vital.
The guests conclude the episode by looking ahead and agree that the value in all this technology comes in moving past the hype and looking towards more fundamental use cases. As with any new bubble, early adopters need to be careful to take suitable precautions to avoid ending up in legal hot water.