5 minute read
Demand continues to grow for web3 and virtual assets legal expertise
Demand continues to grow for web3 and virtual assets legal expertise
Mention blockchain, cryptocurrencies (more technically known as “virtual assets”) and web3 (ie a decentralised and tokenised internet infrastructure) and many will immediately think of Luna, FTX, US regulatory crackdowns, hacks, scams and the current “bear market”, indicated by asset prices far below their all-time highs during late 2021.
In reality, the “crypto winter” extending into 2023 is one of the busiest years for lawyers in this space since the “ICO boom” of 2017, with no signs of slowing down. Projects continue to launch, innovate and thrive. Legal and regulatory developments unfold at a rapid pace. Jurisdictional disposition varies, but savvy countries recognise the inevitability and long-term economic potential of the technology and compete with each other to entice businesses and people. As a result, demand for specialist lawyers with expertise in this field continues to grow, with demand outstripping supply.
Trends include the rapid raise of projects aiming to organise and govern through use of the technology. Eventually, they aim for the technological infrastructure – and associated revenue - to be owned and controlled by a disparate, fluctuating and largely pseudonymous group of tokenholders. These arrangements, with humans at the centre, are typically called “decentralised autonomous organisations” (DAOs) but in practice have more in common with general partnerships. With decentralisation the end goal of a DAO, international corporate structures may be involved, but will typically involve vehicles that do not have members (so that no group of specific individuals control the vehicle, nor must a register of members be updated every time associated tokens are transferred) that exist solely to serve the DAO and are restricted to facilitating project launches, token sales and contracting with third parties. The value of assets held by these arrangements vary, but are estimated to be tens of billions of pounds in aggregate and growing. The nature and risks of these arrangements are attracting significant attention through regulatory actions and civil lawsuits and involve complex questions of law and contract to address common concerns requiring bespoke solutions.
Decentralised finance (commonly called DeFi) has evolved since the “DeFi summer” of 2020 as previous models and market saturation and events generate diminishing returns. Tokenisation of “real world assets” (RWA) - commonly loans secured against corporate receivables, or even government-issued bonds - are the next frontier of DeFi. Not only does tokenisation permit fractional ownership of more traditional (and often illiquid) assets, it also offers investors opportunities to diversify portfolios in novel ways while reducing exposure to the volatility of virtual assets. Demand for access to RWA is on the rise, while the interplay between “decentralisation” and dealing with regulated assets requires careful navigation of the legal and regulatory landscape to ensure potential business models are compliant and viable.
Non-fungible tokens (NFTs), the darlings of 2021, are making a comeback after the market collapse during 2022. The first generation of NFTs often referenced various forms of digital art that were difficult to objectively value amidst extreme hype. The
new generation of NFTs are more considered and evolved in their offering and use, such as the Starbucks’ “Odyssey” program that uses NFTs (called stamps) to translate loyalty to real world experiences. NFTs now often represent a bundle of actionable contractual and intellectual property rights that often have objective, measurable value by reference to underlying assets. The gaming sector is also exploring integration of NFTs into game universes following the frequent criticism that blockchain-based games previously launched were simply not fun to play.
Lawyers practicing in this space are frequently seen as trusted advisors, able to draw on their sector experience (a lot can happen in two years!) to advise and execute on a project’s legal requirements as well as scanning the horizon for imminent market, legal and regulatory changes. This is no easy task, with each project having specific requirements and activities requiring careful consideration of a matrix of laws and regulations, from centuriesold tort law and established securities regulations to relatively new economic substance and virtual asset service provider laws. This is a far cry from 2017, when many argued that either the old laws didn’t apply to a new asset class at all and an entirely new set of laws was needed. As global businesses, these projects must also navigate imminent financial promotion laws aimed specifically at this space, requiring local law advice in much the same way as traditional financial services providers. Sadly, many currently block users in the United States from participating, due to what is currently perceived as a hostile regulatory environment there.
As adoption of the technology increases, more people hold some form of cryptocurrency and projects have increasing interaction with the real world, even lawyers not focused in this space may likely benefit from a basic familiarity with the technology and concepts as they increasingly intertwine with practice areas spanning civil and criminal litigation, private wealth, tax, mergers and acquisitions and financial services generally.
Lawyers interested in learning more about this space and the myriad legal and regulatory issues to navigate are strongly encouraged to read The Law Society’s Blockchain: legal and regulatory guidance report , now in its third year. Work is already underway for the 2024 fourth edition.
