Timothy Spangler is a partner in the finance group at the law firm Dechert
The largest live blockchain upgrade ever attempted – the conversion of the Ethereum blockchain from an energy-intensive proof-of-work consensus model to a much more efficient proof-of-stake model (colloquially known as Merge) – occurred with success last month.
As a result of this ambitious multi-year project, Ethereum switched to a new operating structure that reduces energy consumption by 99.9%. This engineering feat has been compared to replacing an airplane’s jet engines mid-flight.
Ethereum has been referred to as a world computer because it combines, via blockchain technology, thousands and thousands of individual computers into a distributed, decentralized, immutable network.
While the networks that support bitcoin and other virtual currencies are intentionally limited in features and functionality, Ethereum is a Turing-complete programming environment where smart contracts can be coded and run on a censorship-resistant platform.
Blockchain is considered by many experts to be a once-in-a-generation evolutionary step change in computer architecture that will eventually rival the Internet and the World Wide Web in its impact on our daily lives. Not surprisingly, this new technology raises new legal and regulatory issues that stretch the capacity of long-established concepts and terminology.
Our financial markets, for example, now face the prospect of disruption on a scale never seen before. Many familiar with blockchain technology have openly discussed the potential for almost entire transactions in financial assets to be either on the blockchain itself or be blockchain-adjacent in the very near future.
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To date, the efforts of most legislators and regulators have been mainly focused on digital assets in the context of financial regulation and investment products, and have not fully appreciated the enormity of the changes triggered by blockchain.
Unfortunately, many of these proposed solutions are built on two fundamental misunderstandings. First is the belief that all digital assets are fundamentally the same. Second is the desire to have a one-and-done solution that addresses all relevant issues in the foreseeable future.
The more you learn about the underlying technology and begin to see the scope of its deployment across industries, the easier it is to see that there can never be a single legal or regulatory response to crypto.
Importantly, technology tends to evolve far beyond its original scope and capabilities. We don’t ride in airplanes that look like the ones Orville and Wilbur Wright first flew into Kitty Hawk, North Carolina, nor do we overlook our television programs today with square wooden boxes enclosing cathode ray tubes.
When car titles and vaccination cards and airline tickets eventually reside on blockchains, we must ensure that this wave of innovation is not limited or diverted because of short-term bureaucratic “land grabs” made primarily in response to a particular set of concerns involving a initial use case (for example, comprehensively defining digital assets as financial products to protect investors from fraud).
Recognizing that different digital assets perform different functions and therefore naturally fit into different categorical curves is a significant step forward in understanding the scope of the task before us.
Innovation continues around this technology, and new use cases are tested every week. Any initial steps towards integrating digital assets into our legal and regulatory systems will need to be reassessed and reassessed over the next decade.
The Ethereum merger demonstrated blockchain technology’s ability to radically reinvent itself and expand its potential and utility.
Everyone involved in the decisions required to develop our legal and regulatory regimes to accommodate blockchain technology – regardless of the government department or regulatory body that employs them – must recognize that this technology is not standing still.
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The bylaws and rules that are being changed and updated in the coming weeks will likely need to be revisited in several months, and repeatedly in the years to come.
It is worth recalling that the World Wide Web was invented by a Briton working in Switzerland, but the ultimate monetization was overwhelmingly done by US-based firms. There is no guarantee that a single country has the right to “win” blockchain.
A number of factors will drive which companies in which countries will succeed in developing the first generation of widely adopted distributed applications, including the lack of unnecessary legal and regulatory hurdles and uncertainty.
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