By Daniel Owen, The Legal Forecast
The explosive growth of blockchain during the past two years has coincided with a parallel growth in the use of cryptographic tokens in fundraising beyond the traditional methods contemplated by Chapters 5C and 6D of the Australian Corporations Act 2001 (Cth) (Act).
Consequently, new opportunities are now emerging for early-career lawyers to focus on this growing and complex practice area, while assisting in shaping blockchain regulation.
Blockchain is a coded platform that verifies transactions through records held by a community of participants (that is, through a ‘distributed ledger’) rather than through a centralised authority.
According to Mr Michael Bacina, a Partner in the Blockchain Group at Australian law firm Piper Alderman, which is at the forefront of the blockchain industry, “The blockchain industry offers early-career lawyers the opportunity to specialise in a growth-area of the law that is both challenging and rewarding and to add a unique offering to their professional expertise.”
Token offers involve the issuer making an offer to investors which incorporates cryptographic tokens in order to raise funding for the issuer’s blockchain-based business. Token offers can broadly be separated into ‘security token offers’, which combine an offer of cryptographic tokens with equity in the issuer (or some other valuable asset) and the more controversial ‘initial coin offering’ of utility tokens (where the tokens are the only assets offered).
During 2017, initial coin offerings rose significantly in popularity, likely due to a perception among issuers that utility tokens were not regulated as financial products pursuant to the Act. In response, the Australian Securities and Investments Commission (ASIC) published ASIC Information Sheet 225 (INFO 225), which provides that, depending on its design, a utility token may in fact constitute a share, a managed investment scheme, a derivative or a non-cash payment facility. Each of these constitute a financial product and are therefore captured by the various disclosure and regulatory requirements within the Act.
The role of lawyers
Blockchain lends itself to lawyers that are digital natives with a fundamental understanding of the fluid legal status of cryptographic tokens. For example, tokens may not legally be a financial product upon issue, but may later evolve to include characteristics which cause them to constitute a financial product, at which point additional regulatory obligations crystalise.
Given the complexity of token regulation, ASIC publically states in Part E of INFO 225 that, “ASIC strongly encourages entities to carefully consider their proposal and seek professional advice (including legal advice)”.
According to Mr Bacina, “lawyers have now become a critical adviser to any token issuer to manage both the regulatory and reputational risk inherent to conducting a token offering”.
Experience in blockchain may prove relevant to any number of potential career paths, both in the public and private sectors (including in-house for blockchain start-ups).
For early-career lawyers, establishing a career in blockchain is also a unique opportunity to contribute to its regulation.
Daniel Owen is a Queensland Executive Member of The Legal Forecast. Special thanks to Michael Bidwell and Benjamin Teng of The Legal Forecast for technical advice and editing. We also thank Michael Bacina, Louisa Xu and Alejandro Vasquez Betancourt from Piper Alderman for their assistance. The Legal Forecast (thelegalforecast.com) aims to advance legal practice through technology and innovation. TLF is a not-for-profit run by early career professionals passionate about disruptive thinking and access to justice.