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Blockchain Technology, Crypto-Assets and Legal Advice on them

Posted Friday 8th September 2023

I. Introduction

Blockchain technology has gained prominence in recent years, generating great interest in different institutions and sectors. Its application has driven significant changes in the legal traffic, requiring legislative adjustments to harness its full potential and turn it into a tangible reality.

II. What is blockchain technology and its main features?

Blockchain technology is a type of distributed ledger technology (“DLT”) that enables the creation of cryptographically protected and decentralized databases, which means that intermediaries are eliminated and the control of the process is placed in the hands of users. Data blocks are linked together through hashes (mathematical algorithms that transform a set of data into an alphanumeric code with a fixed length), ensuring the security and integrity of the network.

It should also be noted that the main features of blockchain technology are its decentralization, disintermediation, peer-to-peer participation (a decentralised communication model that establishes a direct connection between computers, without the need for an intermediate service), privacy, consensus (a mechanism for verifying that the aggregated information is valid), irreversibility and immutability of transactions.

III. Crypto-assets and their different types

Blockchain, as well as any other technology that allows the functioning and use of distributed ledgers, enables the electronic transfer and storage of crypto-assets, which are digital representations of a security or a right.

It should also be pointed out that there are different types of crypto-assets, with the main distinction being between cryptocurrencies and tokens. The key difference between the two is that cryptocurrencies are created through consensus mechanisms, while tokens can be issued at will, conferring them a series of characteristics and rights.

Similarly, there are different types of tokens, such as utility tokens, a type of crypto-asset which is intended to provide digital access to a good or service available on DLT, and that is only accepted by the issuer of that token, and security tokens, which are similar to traditional shares and are considered financial instruments as they generally grant a stake in the future income or increase in value of the entity issuing the token or a particular business.

Furthermore, we can also talk about e-money tokens (EMT), which are crypto-assets that, in order to maintain a stable value, are referenced to the value of an official fiat currency that is legal tender, and asset-referenced tokens (ART), which maintain their stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets.

IV. Use cases

Currently, there are numerous applications for this type of technology and the various types of crypto-assets.

In this regard, they are a very useful tool for obtaining financing for any project in a different way to traditional methods, through a public offering of tokens, whether utility or security tokens, which can enable a company to raise substantial amounts of funds within a short period of time.

To provide legal advice and support for these projects, it is necessary to advise clients on financial regulations (in the case of issuing security tokens, i.e., financial instruments), as well as contract law, consumer law, taxation and anti-money laundering and counter-terrorism financing measures, among others. This includes ensuring compliance with relevant regulatory requirements and preparing the necessary documentation to formalize investments in accordance with any applicable laws.

Furthermore, the real estate sector is another area in which tokenization has gained significant importance and its use has intensified in recent times. In this way, it is possible to tokenize real estate assets, meaning the conversion into digital tokens of the yields that can be generated by the sale or lease of a real estate asset. Investors then hold an economic right over the returns generated by the property, which facilitates the liquidity of these investments through the use of blockchain technology.

In summary, blockchain technology is widely used across numerous sectors and for various purposes. For instance, it is widely used in the videogame industry, as well as in decentralized finance (DeFi), which enable access to financial services without intermediaries, such as tokenized loans. Additionally, this technology finds extensive application in the verification of credentials, users, titles, or certificates, where the characteristics of blockchain technology are very useful.

Likewise, it is important to mention Non-Fungible Tokens (NFTs), which represent unique assets registered on the blockchain, whether they are physical or digital, and are non-exchangeable. These NFTs, in addition to being used, for instance, in the gaming industry or to represent artwork through this type of digital asset, are also employed in business models connected to the physical world, where NFTs serve as proof and access credentials. For example, they can be used as event tickets, rights to use a hotel room, access to educational communities, etc.

V. Regulatory framework

The intensified use of this technology has meant that institutions have begun to adopt different laws to regulate the use of blockchain technology and crypto-assets, with which any legal advisor specializing in this area should be fully familiar.

To this end, the recently adopted Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA Regulation), applies to any natural or legal person involved in the issuance, public offering and admission to trading of crypto-assets, as well as to the provision of services related to crypto-assets in the European Union.

It is important to note that security tokens are outside the scope of the MiCA Regulation, as they are financial instruments. Consequently, issuances of this type of tokens follow the rules applicable to securities, which means that the national law of each country will apply. In this respect, national regulatory and supervisory bodies usually publish guides on this type of operations.

Furthermore, the Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022, on a pilot regime for market infrastructures based on distributed ledger technology (Pilot Regulation), holds significant importance. This regulation represents a major disruption in the international regulatory landscape as it enables the creation of tokenized secondary markets for financial instruments through distributed ledgers. In other words, it allows the possibility of tokenizing financial instruments.

Additionally, DORA Regulation, should also be mentioned, which requires all operators of this type of services to comply with certain cybersecurity obligations, as well as the eIDAS 2 Regulation Proposal, regarding digital identity and the exchange of credentials that can be used with a digital wallet and, of course, all the regulations regarding anti-money laundering, which all operators in this sector must comply with.

Lastly, it is important to mention that advertising of crypto-assets has also been regulated in many countries, establishing limits and imposing obligations regarding transparency and user information.

VI. Crypto-asset service providers

At this point, it is important to emphasize that, once the MiCA Regulation is applicable, any company wishing to provide services related to crypto-assets, will be required to apply for an ex ante authorization if they intend to provide the following services related to crypto-assets:

  • Custody and administration of crypto-assets on behalf of clients.
  • Operation of a trading platform for crypto-assets.
  • Exchange of crypto-assets for fiat funds or other crypto-assets.
  • Execution of orders for crypto-assets on behalf of clients.
  • Placing of crypto-assets.
  • Providing advice on crypto-assets.
  • Crypto-asset portfolio management.
  • Providing transfer services for crypto-assets on behalf of clients.

In this regard, as legal advisors, we must have a thorough understanding of the current legislative requirements imposed to entities of this nature, as well as the demands imposed by regulators and supervisors (both national and European).

For example, at present and until MiCA comes into force and, therefore, the aforementioned authorization is mandatory, crypto-asset services providers must apply to their national regulator in order to formally register as a provider of this type of services.

VII. Conclusions

Blockchain technology has led to significant changes in the legal sphere, generating new challenges, transforming transactions and providing new ways of operating, as well as new investment and liquidity opportunities for users.

However, it is essential to bear in mind that regulation and the legal framework surrounding crypto-assets are still undergoing constant evolution. Therefore, this subject matter requires an ongoing study to provide accurate legal advice to our clients.

This article was written by Cristina de Santiago Álvarez, Aledra.

This article is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking or deciding not to take any action.