On 7 March 2024, Howard Elliot (Information Technology Expert and ExpertsDirect Exclusive Expert) presented a webinar open to legal practitioners across APAC. The Webinar, which drew an audience of more than 250, focused on the function and risks of cryptocurrency, especially in relation to the tracing and recovery of funds for Bitcoin exchanges.

Howard’s presentation raised a number of salient issues concerning the viability of cryptocurrency as a regulated and/or central bank currency. Those topics were revisited by audience members in the Q&A segment. Below are some of these questions with Howard’s responses to them. The Webinar and discussions that followed present a picture of a rapidly changing landscape of finance and banking, concomitant with rapidly changing legal frameworks globally that are becoming incrementally friendlier blockchain jurisdictions.

Question 1: If smart contracts are digital assets built on the Ethereum blockchain, is there a risk that Ethereum might be “down” due to some fault or hacking? In that case, what happens to the smart contracts?

HE: Most of the blockchains are under constant cyber threat, especially the majors including Ethereum. The distributed nature of blockchains, including Ethereum, minimises the risk of a total outage. Localised outages can occur but do not affect the overall operation. Each node on the Ethereum blockchain maintains a complete copy of the entire chain, including all transactions which have been processed by Ethereum. Therefore, the risk is very low that a total outage could occur.

Question 2: In your view, what is the best way (or are the best ways) to prove in court that a cryptocurrency transaction occurred? For example, the transfer of 300,000 USDT from one wallet to another

HE: Actually, that is quite easy. Blockchain transactions are visible to the public. They are not encrypted or hidden. We can easily see that a transaction for 300,000 USDT happened between two wallet addresses. Even if CoinJoins and mixers are used, more sophisticated tools, like CipherTrace, can report these in a visual and easily digestible (by the courts) presentation.

What can be much more difficult is identifying the individuals involved. If the parties are using exchanges in FATF compliant jurisdictions then the KYC (Know Your Client) provisions help. It becomes a little more difficult where it’s a wallet-wallet transaction without intermediaries. Again, we can use advanced tools like Ciphertrace to start with the wallet address and match it with other transactions which have occurred elsewhere. These other transactions can then be used to either identify the party or provide sufficient behavioural information that we can identify the party using other means.

Question 3: Why is the question: “Is a Smart Contract enforceable?” important when it relates to the transfer of a cryptocurrency for which each unit has been accepted for its value?

HE: I am not sure I understand the question here. Perhaps some background on smart contracts.

A smart contract is a self-executing contract with the terms of the agreement directly written into code. It is a computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a contract.

 

The key features of smart contracts are:

• Automation: Once the predefined conditions are met, the contract is automatically executed.
• Trust: Since the contract is stored on a blockchain, it is immutable and cannot be altered, providing trust and security.
• Efficiency: By automating the process, smart contracts can speed up transactions and reduce costs.
• Accuracy: As the terms are written into the code, there is less room for misinterpretation or errors.

 

Smart contracts are used in various applications, including:

 

• Financial services: Such as trade clearing and settlement, insurance claim processing, etc.
• Supply chain management: To track and verify goods as they move through the supply chain.
• Real estate: For property sales and rental agreements.
• Voting systems: To enable secure and transparent voting processes.
• Regarding the enforceability of smart contracts, there are some key considerations:
• Legal recognition: The legal status of smart contracts varies by jurisdiction. Some countries have passed laws recognising smart contracts as legally enforceable, while others are still grappling with how to treat them under existing legal frameworks.
• Coding errors: If there are bugs or errors in the smart contract code, it could lead to unintended consequences. This raises questions about liability and enforceability.
• Dispute resolution: Traditional contracts often include dispute resolution clauses. With smart contracts, it’s not always clear how disputes would be handled, especially if the contract spans multiple jurisdictions.

• Oracles: Smart contracts often rely on external data sources (oracles) to trigger execution. If the oracle provides inaccurate data, it could lead to incorrect contract execution, raising enforceability questions.

 

In summary, their legal enforceability is still an evolving area. Singapore has taken steps to provide legal clarity around smart contracts.

 

In 2018, the Singapore Parliament passed amendments to the Electronic Transactions Act (ETA), which came into effect in 2019. These amendments provide a legal foundation for the use of electronic means to form and execute contracts, including smart contracts.

 

Key points of the amendments include:

• Recognition of smart contracts: The ETA now recognises that contracts can be formed by interacting with an electronic system, including a smart contract system.
• Validity of smart contracts: The amendments clarify that a contract formed by interacting with a smart contract system is valid and enforceable, as long as certain conditions are met (e.g., the identity of the parties can be ascertained and the terms of the contract are accessible for subsequent reference).
• Evidentiary value: The output of a smart contract system is presumed to be accurate unless proven otherwise.

 

However, it’s important to note that while these amendments provide a legal basis for smart contracts, they don’t address all the potential issues that could arise. For example, questions around jurisdiction, dispute resolution and liability for coding errors would still need to be addressed on a case-by-case basis.

 

Additionally, the Singapore International Commercial Court (SICC) has shown a willingness to hear disputes related to blockchain technology and smart contracts. In 2019, the SICC heard a case involving a dispute over a cryptocurrency trading account, demonstrating its openness to handling such cases.

 

Singapore has taken proactive steps to provide legal recognition for smart contracts, positioning itself as a friendly jurisdiction for blockchain and smart contract adoption. However, as with any emerging technology, there are still some legal uncertainties that will need to be addressed as more real-world use cases emerge. As the technology matures and legal frameworks adapt, we can expect greater clarity on these issues. But for now, it’s important for parties entering into smart contracts to carefully consider the potential risks and uncertainties around enforceability.

Question 4: A number of the “Top Exchanges” in your slide page 44, blatantly breached listing agreements entered with customers to list native tokens. The practice of many (if not all such exchanges) is to site various components of their organisation and infrastructure in different countries so that it is difficult for customers to take effective legal action.

When a customer files arbitration proceedings against the exchange, and after spending considerable money and time, finally obtains an arbitral award, there is still the difficulty in locating assets of the exchange on which an arbitral award may be enforced. Such bad conduct of exchanges (especially those in the Top 10 or so) should not be condoned by the regulatory body in every country and the exchanges themselves should take voluntary action against errant exchanges.

What is your view on this and what more can be done to improve compliance? I realise (after writing the above) that this might not be the most appropriate forum for this but I would appreciate your view.

HE: Okay. Great question. In reality, if we expect/want digital and virtual currencies to become a player in normal commerce, we need to build a suitable regulatory framework within which we can use crypto efficiently and sensibly.

 

The crypto industry came from an interesting and sometimes quite dark background. We have seen many of the cowboys crash and burn (SBF for example) and many of the coins crash and burn. Singapore, like Australia, is a member of FATF and while they are a bit conservative, they are doing a reasonable job.

 

I think there are two considerations here. The first is crypto as a trading security. The second is as a currency for commerce. Both need sensible and practical legislation. The rise of the CBDCs (Central Bank Digital Currencies) is happening, so expect many of the jurisdictions to develop reasonable frameworks for the common tokens/crypto. Schemes such as MasterCard, Amex and Visa already have policies in place for dealing with crypto exchanges (and the need for FATF compliance). The banks will do the same.

 

I am not a banking expert in Singapore, but I am reasonably familiar with the requirements here in Australia. Australian banks (and related players) are governed by APRA regulations. This framework includes not just FATF, KYC and HRC programs but also what is called Tier 1 capital requirements.

 

But simple commerce and investing is a small part of the crypto potential. If you expand this question to smart contracts and dApps, the problem increases in complexity.

 

Yes, I agree, this is probably not the best forum for this discussion.

Question 5: Do you have any insights into the Decentralised Autonomous Organisations that may potentially take over the corporate forms of companies today especially when interfacing with web3?

I didn’t explain Web3.0 in my presentation. For those unfamiliar with the term, here is a quick summary: Web 3.0 refers to the next evolution of the World Wide Web. It envisions a decentralised, open, and more intelligent web, leveraging technologies such as blockchain, artificial intelligence, and decentralised protocols. Here are the key characteristics and components of Web3:

1. Decentralisation: Web3 aims to decentralise the internet, moving away from the centralised control of a few large tech companies. It envisions a web where users have more control over their data and where applications are built on decentralised protocols.

2. Blockchain and cryptocurrencies: Blockchain technology plays a central role in Web3. It enables decentralised applications (dApps), smart contracts, and cryptocurrencies, which form the backbone of many Web3 projects.

3. Semantic Web: Web3 incorporates the concept of the Semantic Web, where data is machine-readable and understandable. This allows for more intelligent and automated data processing, enabling smarter applications and more efficient data sharing between systems.

4. Artificial Intelligence (AI): AI is another key component of Web3. It can be used to create more intelligent and personalised user experiences, automate tasks and make the web more efficient.

5. Interoperability: Web3 aims for greater interoperability between different systems and platforms. This could enable data and value to flow more freely across the web, creating new opportunities for innovation and collaboration.

HE: Decentralised Autonomous Organizations (DAOs) are an emerging concept that has the potential to disrupt traditional corporate structures, especially in the context of Web3.0. A DAO is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members, and not influenced by a central government. It operates on a blockchain network, using smart contracts to execute its rules and decisions.

Here are some key insights about DAOs and their potential impact:

 

1. Decentralised governance: DAOs offer a model of governance where decision-making power is distributed among the members rather than concentrated in a hierarchical structure. This could lead to more democratic and transparent decision-making.

 

2. Automation of processes: By encoding rules and processes into smart contracts, DAOs can automate many operational tasks, potentially reducing costs and increasing efficiency.

 

3. Transparency: Because DAOs operate on a blockchain, their rules, decisions and financial transactions are publicly auditable. This level of transparency could increase trust and accountability.

 

4. Global and borderless: DAOs can operate globally and are not confined by national borders. This could enable new types of global collaborations and organisations.

 

5. Intersection with Web3: DAOs are particularly relevant in the context of Web3. DAOs could play a key role in governing and managing Web3 applications and platforms.

 

6. Legal and regulatory challenges: The legal status of DAOs is still uncertain in many jurisdictions. There are questions around liability, dispute resolution and how DAOs fit into existing legal frameworks for corporations.

Potential use cases: DAOs are being explored for a variety of use cases, including investment funds, charity organisations, freelancer networks and even virtual worlds.

 

While it’s still early days for DAOs, they represent a potentially significant shift in how organisations are structured and governed. DAOs come with risks and challenges, such as the potential for coding errors, the difficulty of making changes once rules are encoded and the possible misalignment of incentives.

If you enjoyed this piece, explore our Webinars page where you can watch recordings of past ExpertsDirect webinars, as well as keep up to date with and register for future webinars and talks.

 

6. User control and privacy: In Web3, users are envisioned to have more control over their data and privacy. Decentralised identity solutions could give users the ability to selectively share their data, rather than relying on central authorities. Some potential applications of Web3 include: · Decentralised Finance (DeFi): Financial applications built on blockchain, offering services like lending, trading and investment without traditional intermediaries. · Decentralised Autonomous Organizations (DAOs): Organizations governed by rules encoded in smart contracts, enabling new forms of global collaboration. · Decentralised social networks: Social platforms where users own their data and are not subject to central control or censorship. · Decentralised marketplaces: Peer-to-peer marketplaces without central authorities, potentially reducing fees and increasing transparency.