Professor Lars Smith discusses legal issues facing blockchain technology

It’s no secret that innovation in technology moves fast. Apple releases a new version of the iPhone every year, and new social media platforms seem to sprout by the day. 

With each advance in technology comes questions about issues such as regulation, ownership and privacy.

 So how does the law keep up with this fast pace?

It doesn’t, says Lars Smith, associate dean and Samuel J. Stallings Professor of Law at the Brandeis School of Law.

“Law always trails technology,” he says.

This issue is highlighted in Smith’s research in the cryptocurrency Bitcoin and the technology behind it. The technology is called blockchain and functions as a virtual ledger, tracking Bitcoin transactions.

Those transactions can be subject to legal regulation. For example, some tech companies are now offering ICOs — initial coin offerings — in which they create and sell their own cryptocurrencies to raise money. How the companies structure the sale can create very different legal outcomes. If it is just the straight sale of a currency token, this likely would be seen as equivalent to the sale of a product. But if the company creates an ICO that provides a chance for people to participate in the ownership and proficts in the company, such a transaction would be treated as a sale of a security, and subject to SEC regulations, Smith says. 

And because there’s so much variety in cryptocurrencies, government agencies can view the transactions differently — and therefore can regulate them differently. The IRS could see a transaction as the exchange of an asset, not as a currency, while the New York State Department of Financial Services could view it as a money transmittal business.

“Laws don’t regulate dollars, they regulate people,” Smith says.

A second-generation iteration of the blockchain technology behind Bitcoin is called Ethereum. It can do more than exchange currency — it’s a computing system that can run software and allows for a higher level of user engagement. But with that higher engagement comes more opportunities for regulation, Smith says.

“By allowing more than mere currency trading, you run the risk of running afoul of more laws,” he says.

Regulation becomes even more complicated when you consider that Ethereum is global. Different countries can choose to regulate its transactions differently.

“The courts are going to struggle with how to fit this new technology into existing legal structures that were not designed for transactions on the blockchain,” Smith says.