ADA University Blockchain & Cryptocurrency Lecture Notes 2024 PDF

SECTION 10: BLOCKCHAIN, CRYPTOCURRENCIES, AND SMART CONTRACTS by Dr. Narmin Miriyeva, PhD ADA University, 29 Nov, 2024.  CO N T EN TS Section 10: Blockchain, Cryptocurrencies, and Smart Contracts Brief: 1. Legal implications of decentralized tech...

SECTION 10: BLOCKCHAIN, CRYPTOCURRENCIES, AND SMART CONTRACTS by Dr. Narmin Miriyeva, PhD ADA University, 29 Nov, 2024.  CO N T EN TS Section 10: Blockchain, Cryptocurrencies, and Smart Contracts Brief: 1. Legal implications of decentralized technologies 2. Regulation of cryptocurrencies and digital assets 3. Smart contracts: legal enforceability and challenges 1. LEGAL IMPLICATIONS OF DECENTR ALIZED TECHNOLOGIES 1.1. The definition of (de)centralization: Decentralization is the distribution of functions, control and information instead of centralizing them in a single entity. The term is used in numerous sectors and industries, from information technology to retail and government. It also denotes a system that has multiple paths for information to flow. A centralized system is often known as a hub-and-spoke model, patterned after a bicycle wheel. Everything on the endpoints travels down the spokes to the hub, or central system. This is the essence of the mainframe computer design. Whether it's a green terminal or a PC, they all connect into the mainframe, which creates a single point of vulnerability. If the hub (in this case, the mainframe) goes down, the entire network goes down and no work can be done. The ultimate example of a decentralized network is the internet itself. When its predecessor, ARPANET, was built for the U.S. Defence Department in 1969, it was designed to survive a nuclear attack, so if one portion of the network went down, traffic would be rerouted through other parts of the network. That design remains in operation to this day. Even though local outages are fairly frequent, it is virtually impossible to take down the entire internet. Centralized and decentralized structures are polar opposites. A centralized structure implies control of the central entity by people who have the power to manage, control and oversee it. One example would be a nation's currency, which is managed by a central bank. Decentralization is the opposite of that, where no one person or entity owns, manages or controls the network or structure. Not all cryptocurrencies are decentralized, although the most popular ones like Bitcoin and Ethereum's ETHER are. Unlike centralized currencies, decentralized cryptocurrencies are not regulated by central banks, but by their programming code and the monetary policies are regulated by their respective communities. 1. LEGAL IMPLICATIONS OF DECENTR ALIZED TECHNOLOGIES What Does Decentralization Mean in Blockchain?: Decentralization is a core philosophy in the blockchain and cryptocurrency world. To learn why decentralization is important to public blockchains and cryptocurrencies, we need to understand why Bitcoin was created. Bitcoin's peer-to-peer public blockchain offers a solution by using a cryptographic protocol known as proof of work (PoW). Shortly, a blockchain consists of blocks of data with information about transactions that is used to prove the validity of the next block. Bitcoin users can add blocks to the blockchain through validation by PoW. Since the blockchain is public, it can be viewed by everyone, and anyone can add a block by providing PoW for a transaction. A more widely, a blockchain is a tamper-resistant distributed ledger used to validate and store digital transactional records. In decentralized blockchains, no single authority is responsible for maintaining the blockchain. Instead, computers called nodes in a peer-to-peer (P2P) network each store a copy of the ledger. Specialized nodes verify transactions through a decentralized consensus mechanism to reach an agreement on the state of the network. Transactions are stored in permanent, time-stamped units called blocks. Each block is connected (chained) to the previous block using a cryptographic hash created by the previous block’s data. This cryptographic linking prevents data from being altered in one block without also changing each subsequent block, maintaining data integrity. Any attempt to alter or delete transactions in a block will break the cryptographic chain and immediately alert all nodes in the network. Bitcoin is the oldest and the most valuable public blockchain network in the world. It was created by the pseudonymous Satoshi Nakamoto to be a decentralized peer-to-peer (P2P) payment network powered by blockchain technology. Users can transfer funds and make payments without going through a financial institution via the Bitcoin network. The blockchain is not owned or operated by a single entity. It is kept decentralized via a network of operators called ‘miners’ who run the network by processing and validating transactions. There is no recruitment process to become a miner. Anyone with Bitcoin mining hardware and operating funds can choose to become a miner. Core principles of decentralization – autonomy, transparency, censorship-resistant, and privacy – are at the heart of Bitcoin, Ethereum, and most other public blockchains. These public blockchains operate as open networks. Anyone with an internet connection can access the network and its ecosystem of applications built on them.  1. LEGAL IMPLICATIONS OF DECENTR ALIZED TECHNOLOGIES 1.2.The main reasons and types of decentralization: The main reasons of blockchains are decentralized is to avoid putting control in the hands of a few, or a country's central bank. That's the main motivation behind the embrace of cryptocurrency in the first place: to take banks out of the equation and have true peer-to-peer transactions. Decentralized blockchains are designed to be unalterable, and once the data is entered it is irreversible. New data can be tacked on, but the old data can't be edited or changed in any way. For Bitcoin, this means transactions are permanently recorded and viewable by anyone. Think of it as feedback on eBay taken to the next level. Not all Digital currency is decentralized. There are also cryptocurrencies that use private, centralized systems, where only a select few people have the power to add new blocks and check the validity of transactions. These tend to be used in privacy-oriented industries like healthcare and finance. The main types of decentralization in blockchain: A blockchain usually exhibits one of the following levels of decentralization: 1. Fully centralized. Entirely controlled and managed by a single, central authority. 2. Semi-decentralized. Controlled and managed by multiple authorities. 3. Fully decentralized. No middlemen or central authorities to manage or administer the network.  1. LEGAL IMPLICATIONS OF DECENTR ALIZED TECHNOLOGIES There are several subcategories of decentralization, including the following: 1. Physical decentralization involves the geographical dispersion of blockchain servers across the globe as much as possible, so no single party will own the network, and the loss of physical servers -- for whatever reason -- won't impact the network. 2. Transactional decentralization is specifically to improve the efficiency and transparency of B2B networks. Through the use of unalterable ledgers and smart contracts, a decentralized transactional system can provide a more secure, consensus-based environment for executing, verifying and recording transactions. 3. Political decentralization is more concerned with how many people or organizations control the system rather than the number of servers. The fewer people or organizations controlling the network, the less decentralized it is. Political decentralization promotes greater participation to give decision-making powers to the public. Democracy, for example, is a decentralized political system; 4. Administrative decentralization aims to distribute authority, responsibility, and financial resources; 5. Fiscal decentralization aims for financial sustainability and decentralization via self-financing, taxes, fees, loans, and more; 6. Economic decentralization promotes economic liberalization and market development policies that give resources and responsibilities, such as decision-making power, to several market participants rather than a single centralized entity.  1. LEGAL IMPLICATIONS OF DECENTR ALIZED TECHNOLOGIES 1.3. Benefits and downsides of decentralization: The benefits of decentralization are numerous. They include the following: 1. Trust is a given. From a bank to an eBay seller, knowing and trusting the other party in a transaction is essential. But no one needs to know or trust the other party in a decentralized blockchain network because the distributed ledger technology used to record the transaction can't be tampered with, in theory. If anyone tries, the majority of network members will reject it. 2. Increased data accuracy. Businesses frequently silo their data, and it often has to be reconciled one way or another. Every time data is manipulated, there is the possibility of an invalid entry or data loss. In a decentralized blockchain, data isn't siloed and is copied from one ledger to the next, thus ensuring its integrity. 3. Downtime is reduced. Decentralization can help to mitigate failures because there is no single point of failure. Everything is distributed, so if one source is unavailable or there is a system bottleneck, others can pick up the slack. 4. Transparency. Decentralized blockchains are available to the public, so they are transparent and everyone can see them. 5. Full control. The blockchain's members or users -- not a central, sometimes faceless authority -- are in control of their information and who can see or access it. 6. Immutability. This is the common term used to describe the fact that data contained in a decentralized blockchain is hard to alter because each alteration must be confirmed by each node in the blockchain network. 7. Security. Proponents say decentralized blockchains are far more secure than centralized blockchains because they employ encryption to protect data. They use either symmetric (secret key) encryption or asymmetric (public key) encryption.  1. LEGAL IMPLICATIONS OF DECENTR ALIZED TECHNOLOGIES Downsides of decentralization: Everything has a downside, and that includes decentralized blockchains. The negatives include the following: 1. Cost. A decentralized network can often be more expensive than a centralized one because of the need for more systems and people to run them. 2. Lack of consensus. There's something to be said for a single voice of authority. In a decentralized blockchain, anyone can have their say on an issue, and they often do. The democratic process can be a messy one and consensus hard to reach sometimes. 3. Lack of clarity. This goes hand in hand with the consensus problem. When many people have their say on an issue, it is important that they are clear and articulate their position. A lack of clarity can lead to paralysis. 4. Lack of discipline. It is easy to get lazy when you don't have a boss to report to, which is often the case in a decentralized network. These networks operate somewhat on an honor system where everyone involved is expected to do their job. If they don't, the network can suffer.  1.4. WH AT IS BLOCKCH AIN: 1.4. What is Blockchain (types): A blockchain is a tamper-resistant distributed ledger used to validate and store digital transactional records. In decentralized blockchains, no single authority is responsible for maintaining the blockchain. Instead, computers called nodes in a peer-to-peer (P2P) network each store a copy of the ledger. Specialized nodes verify transactions through a decentralized consensus mechanism to reach an agreement on the state of the network. Transactions are stored in permanent, time-stamped units called blocks. Each block is connected (chained) to the previous block using a cryptographic hash created by the previous block’s data. This cryptographic linking prevents data from being altered in one block without also changing each subsequent block, maintaining data integrity. Any attempt to alter or delete transactions in a block will break the cryptographic chain and immediately alert all nodes in the network. Originally developed for digital currency, blockchain is now used across various industries. Applications range from smart contracts, which are computer programs running on the blockchain, to records management in healthcare and identity and access management (IAM). Decentralized finance (DeFi), gaming, and metaverse projects also use blockchain to ensure equitable access and ownership of digital assets.  1.4. WH AT IS BLOCKCH AIN: How Blockchain Works: Blockchains listen for broadcasts of new transactions from crypto wallet addresses. Nodes within the network then group these transactions into blocks and verify the transactions to prevent double-spending or duplicate transactions. Various blockchains each use their own protocol to determine which transactions are valid and how the network reaches an agreement (consensus) on the state of the network, including the order of transactions and wallet balances. As each block of transactions is assembled and added to the chain, each block also includes a link to the previous block, forming a chain. If any of the data in a previous block is changed, this link also changes the hash value of the subsequent blocks, creating a fork in the chain. Other nodes in the network reject the changed block and its subsequent blocks as invalid, negating any financial gain in changing a previously mined block. This aspect of consensus makes blockchains immutable, meaning the data held in confirmed blocks can’t be changed without great expense. Blockchain networks use one of two primary consensus mechanisms: proof of work (PoW) and Proof of Stake (PoS). The latter of these has become more popular for newer blockchains because it uses much less energy.  1.4. WH AT IS BLOCKCH AIN: Key Elements of Blockchain: Blockchains differ in the details of how each works, but most share several key elements.  Distributed Ledger: Rather than a centralized database, blockchains use a distributed ledger with copies on multiple computers called nodes. Often, the number of nodes can reach thousands.  Cryptography: Blockchain networks use cryptography to secure both data and assets held on the blockchain. Cryptography also plays a role in crypto wallet addresses, which use an encrypted hash value as an identity on the blockchain network.  Consensus Mechanism: As a way to validate transactions, blockchains use a method of agreement called a consensus mechanism. Types of Blockchain: There are four kinds of blockchain: 1. Public: Anyone with internet access can weigh in on the consensus. 2. Private: A single, central authority holds the deciding factors. 3. Consortium (or Federated): Multiple organizations have authority status. 4. Hybrid: Elements are public access but privately held authority. Blockchain Protocols: Protocols are sets of rules used by blockchains. Blockchain protocols range from open-source public networks, such as Bitcoin, to tools designed for enterprise use, such as Quorum.  Public Blockchain Protocols: Bitcoin, Ethereum, Solana, Cardano, Tron  Blockchain Protocols for Enterprise Use: Hyperledger, Quorum and Corda  1.4. WH AT IS BLOCKCH AIN: Blockchain Pros and Cons: Blockchains can replace or complement many current solutions typically served by centralized databases or centralized providers. In comparison to other technologies, blockchain has several advantages but may not be well-suited to other applications. Pros: 1. Equal access on public blockchains 2. Censorship resistance for transactions and interactions 3. Tamper-resistant transactions with settlement finality 4. Decentralized governance for many public blockchain networks 5. Ownership of digital assets with pseudonymous privacy Cons: 1. Slower data processing due to decentralized consensus 2. More cumbersome to use compared to traditional financial rails 3. Less scalable for high-volume transaction application 4. High energy use for proof of work blockchains 5. Costly transaction on some network when block space demand is high The role of blockchains in securing transactions and data makes blockchains well-suited to a number of use cases. These range from more efficient and fair access to decentralized finance (DeFi) services to government services, including voting.  1.1.DEFINITION OF AI How does AI work? While the specifics vary across different AI techniques, the core principle revolves around data. AI systems learn and improve through exposure to vast amounts of data, identifying patterns and relationships that humans may miss. This learning process often involves algorithms, which are sets of rules or instructions that guide the AI's analysis and decision-making. In machine learning, a popular subset of AI, algorithms are trained on labeled or unlabeled data to make predictions or categorize information. To fully understand generative AI, it’s important to first understand the technologies on which generative AI tools are built: machine learning (ML) and deep learning.  1. 5. T H E D E F I N I T I O N O F B I T C O I N ( B T C ) 1.5. The definition of Bitcoin (BTC) is a digital currency that operates on a decentralized network without the need for a central authority or intermediaries. It enables peer-to-peer (P2P) transactions worldwide, offering users financial autonomy and privacy. Bitcoin transactions are recorded on a public ledger called a blockchain, which uses cryptographic technology to ensure transparency and security. As the first cryptocurrency, Bitcoin has paved the way for the emergence of numerous other digital currencies and blockchain-based applications. Bitcoin, introduced in 2008 and launched in 2009, revolutionized the concept of currency by eliminating the need for traditional financial institutions. Unlike fiat currencies issued by governments, Bitcoin is not backed by any physical asset but rather relies on cryptographic algorithms for security and issuance. One of the primary appeals is the decentralized nature of Bitcoin, meaning that no single entity controls the network, theoretically making it resistant to censorship and manipulation. Users can send and receive Bitcoin directly without the need for intermediaries, enabling fast and low-cost transactions across borders. The underlying blockchain technology ensures the integrity of the network by recording all transactions in a transparent and immutable process. Instead of trusting a bank that an account has funds available to transfer, Bitcoin makes account information and transaction history public. This allows users to confirm the availability of funds before making a transaction. The Bitcoin blockchain is based on a peer-to-peer (P2P) network that maintains a distributed ledger, and anyone can obtain a copy. Anyone can create a Bitcoin account or Bitcoin address, as there is no centralized approval process. The owner of the Bitcoin address is not recorded in transaction records, and the owner is not required to link real-world information to their account, making transactions private. But Bitcoin is not completely anonymous. If public information can link someone to their Bitcoin address, then all their transaction can be linked back to them. Similarly, if a transaction can be traced back to an IP address, location information can be linked to a Bitcoin address. Therefore, Bitcoin is considered pseudonymous because a user’s identity is hidden, but it is not truly anonymous.  1. 5. T H E DEF I N I T I O N O F BI TCO I N ( BTC ) How Bitcoin Works: At its core, Bitcoin operates on blockchain technology, which serves as a decentralized and transparent ledger to record all transactions. When someone initiates a Bitcoin transaction, it is broadcasted to the network of computers (nodes) running the Bitcoin software. Network nodes validate transactions using cryptographic algorithms. Each transaction is verified to ensure that the sender has sufficient funds and that the transaction adheres to the network’s rules. Validated transactions are grouped together into blocks. Bitcoin operates using a Proof of Work (PoW) consensus mechanism. Miners, which are specialized nodes in the network, compete to solve complex mathematical puzzles to add these blocks to the blockchain. This process, known as mining, requires substantial computational power and energy consumption. The first miner to solve the puzzle and validate the block broadcasts it to the network. Other nodes in the network then verify the block and reach a consensus to accept it. Once a block is accepted, it becomes a permanent part of the blockchain. Each transaction links to the next in the chain using a cryptographic hash. The hash is created using information from the transaction record it links to, creating a chain. This means that if any information in the record is changed, the link will no longer be valid. This mechanism protects against fraud, by making the cost of creating fraudulent transactions much higher than the possible reward. Any alteration to a block, such as reversing a transaction, would require changing all subsequent blocks, which is computationally infeasible. The decentralized nature of Bitcoin ensures that no single entity has control over the network. This decentralization mitigates the risk of censorship, manipulation, or single points of failure common in centralized systems. As all Bitcoin transaction records and addresses are public, anyone can verify that a transaction was processed. This removes the need for a trusted intermediary to vouch for someone when making a transaction. S. Nakamoto created Bitcoin to meet the need, explaining: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. Transactions that are computationally impractical to reverse would protect sellers from fraud, and routine escrow mechanisms could easily be implemented to protect buyers.” Another element is a Bitcoin wallet, which is a digital tool that allows users to store, send, and receive Bitcoin securely. Some of the most prominent crypto wallets consist of a public key, which is similar to an account number, and a private key, much like a password, which is used to access and manage cryptocurrency. 1. L E G A L I M P L I C AT I O N S O F D E C E N T R A L I Z E D T E C H N O L O G I E S  1.9. LEGA L IM PLI CAT I O N S O F DEC EN T R A LI ZED T ECH NO LO G I E S In essence, blockchain network participants’ dual challenge for now is to ensure that they are compliant with current regulations while also mitigating as much as possible the business risks associated with possible changes in the regulatory environment. The following are some of the most common compliance-related issues that arise with the use of blockchain technology: 1.Jurisdiction: Blockchain has the ability to cross jurisdictional boundaries as the nodes on a blockchain can be located anywhere in the world. This can pose a number of complex jurisdictional issues which require careful consideration in relation to the relevant activities of the platform and its participants, as well as the contractual relationships among them. To address such issues, there are increasingly a number of legal and regulatory regimes that have extra-territorial effect, such as the European Union’s GDPR or tax laws. As a result, even if blockchain users and nodes are located across the world, local laws may still apply where there is considered to be a sufficient nexus to that jurisdiction. It is the types of activities occurring in each jurisdiction and the role of each participant on a blockchain which should be carefully considered to see if they might be subject to the local laws of a particular jurisdiction. 2.Technology neutral regulatory regime: Regulatory licensing and compliance regimes are typically not drafted with the intention of regulating specific technologies. Rather the usual intent is to regulate the activities that the technology helps facilitate. However, neutral drafting can make it difficult to interpret how regulation should apply and which participants should be caught. It is, therefore, necessary to carefully assess the nature and activities of a blockchain network and its participants and determine where that platform and its participants should sit within the regulatory landscape. 3.Governance and legal documentation: The utility-like nature of a blockchain platform means that it is necessary to properly document the relationship between the blockchain network, the network operator (if any), and its participants through legally enforceable contracts. It is important to establish a clear and robust governance model concerning interactions among participants in the network. The model should also set out clearly the applicable terms and conditions to the blockchain platform, e.g. the mechanisms by which the network operator may implement changes to the network or the requirements around its participation. Objective and fair criteria should be set to govern access to the network and suspension or termination of participants from the network.  1.6. LEGA L IM PLI CAT I O N S O F DEC EN T R A LI ZED T ECH NO LO G I E S 4.Liability: Blockchain poses novel and different risks as a consequence of the nature of the technology and manner of operations, including risks relating to security, confidentiality, regulation, taxation, data protection, immutability, automation and decentralisation, among other risks. Therefore, the allocation and attribution of risk and liability in relation to the blockchain network and the transactions processed on the network (including any errors, failures or malfunctions) must be carefully assessed and documented within each layer of network participation. 5.Intellectual property (IP): To truly unlock the potential of blockchain, the underlying technology, including its software, will have to be shared in order for value to be gained. The nature of such ‘sharing’ depends entirely on the specific nature of the blockchain in question, including its purposes, subject matter, and relationship between the blockchain participants. It is therefore important to consider questions around the nature of the underlying IP, IP ownership and licensing arrangement as part of the structuring of the blockchain. The core considerations and possible IP options (e.g. in respect of IP ownership and licensing) are, to a large extent, no different than that of any other traditional IP regime or software development agreement. Developers and IP owners will have to determine their IP strategy, including who owns what, and protection on all levels. Vendors will likely want to capitalise on any other commercial benefits to be generated from the blockchain, including commercialisation of the underlying dataset by way of licensing-out the underlying IP. 6.Personal data privacy: One of the key unique selling points of a blockchain system is that once data is stored, it cannot be altered easily, if at all. This clearly has implications for data privacy, particularly where the relevant data is personal data or metadata sufficient to reveal someone’s personal details. Data protection regulation may require that personal data be kept up-to- date and accurate or deleted at the discretion of the individual, and the immutability of a blockchain system may not be consistent with such requirements. 7.Decentralised autonomous organisations (DAOs): DAOs are essentially online, digital entities or organisations that operate through the implementation of pre-coded rules maintained on a blockchain platform. The decentralised nature of DAOs presents unique questions that did not need to be addressed previously as traditional entities were centralised and had a recognisable legal structure and form.  2.R EG U LAT IO N O F C RY P TOC U R R ENC I E S A N D D I G I TA L A S S ETS : The growth of cryptocurrency from speculative investment to a new asset class has prompted governments around the world to explore ways to regulate it. As cryptocurrency has become a more significant factor in the global investment landscape, countries have taken different approaches to regulating the asset class. The EU became the first to adopt measures requiring crypto service providers to detect and stop illicit cryptocurrency uses. The U.S. is slowly approaching regulation, but users, issuers, businesses, and regulators are busy battling it out in the court system. El Salvador, the Central American nation stands out for being the only country to declare Bitcoin as legal tender. Bitcoin can be used nationwide; in fact, its acceptance by merchants is compulsory. El Salvador accepts tax payments in Bitcoin and exempts foreigners from paying any taxes on income from their Bitcoin gains. The EU’s perspective: Cryptocurrencies and digital assets represent one of the most transformative innovations of the 21st century, reshaping global financial systems and introducing new economic models. However, their disruptive potential has also raised complex legal and regulatory challenges, prompting governments worldwide to seek a balance between fostering innovation and protecting consumers, markets, and the broader financial system. The EU has emerged as a leading jurisdiction in developing comprehensive frameworks for regulating cryptocurrencies and digital assets. Of note: A digital asset is generally anything created and stored digitally, is identifiable and discoverable, and has or provides value. Digital assets have become more popular and valuable as technological advances integrate into our personal and professional lives. Data, images, video, written content, and more have long been considered digital assets with ownership rights. Stablecoins are cryptocurrencies whose value is pegged, or tied, to that of another currency, commodity, or financial instrument. Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC), which has made crypto investments less suitable for everyday transactions. Non-fungible tokens (NFTs) are assets like a piece of art, digital content, or video that have been tokenized via a blockchain. Tokens are unique identification codes created from metadata via an encryption function. These tokens are then stored on a blockchain, while the assets themselves are stored in other places. The connection between the token and the asset is what makes them unique. 1. LEGA L I M PLI CAT I O N S O F DEC EN T R A LI ZED T ECH NO LO G I E S  2.R EG U LAT IO N O F C RY P TOC U R R ENC I E S A N D D I G I TA L A S S ETS : The Need for Regulation: The rise of cryptocurrencies like Bitcoin and Ethereum, alongside digital assets such as stablecoins and non-fungible tokens (NFTs), has exposed gaps in traditional financial regulations. Concerns such as money laundering, consumer protection, tax evasion, and financial stability risks have driven regulatory action. The decentralized nature of these assets makes it difficult to enforce traditional rules, necessitating new frameworks tailored to their unique characteristics. The EU’s Legislative Framework consist of: 1. Markets in Crypto-Assets (MiCA) Regulation: The centerpiece of the EU’s regulatory approach is the Markets in Crypto-Assets (MiCA) Regulation, adopted in 2023. MiCA aims. to provide legal clarity for crypto-asset issuers and service providers while safeguarding consumer interests and market integrity Scope: MiCA regulates cryptocurrencies that fall outside existing EU financial services laws, such as stablecoins and utility tokens. It excludes decentralized finance (DeFi) protocols and non-fungible tokens unless categorized as financial instruments. Key Provisions: Licensing requirements for crypto-asset service providers (CASPs). Strict disclosure obligations for crypto-asset whitepapers. Prudential requirements for issuers of significant asset-referenced tokens (e.g., stablecoins). Anti-market abuse rules to prevent insider trading and manipulation. 2. Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT): Crypto-assets are vulnerable to misuse in money laundering and terrorism financing. The EU’s Fifth and Sixth Anti-Money Laundering Directives (AMLD5 and AMLD6) have extended AML/CFT obligations to virtual asset service providers (VASPs). Under these directives, VASPs must perform customer due diligence (CDD), report suspicious transactions, and ensure transparency in transactions. 3. The Digital Operational Resilience Act (DORA): As the financial ecosystem becomes increasingly digital, the Digital Operational Resilience Act ensures that CASPs maintain robust cybersecurity and operational standards. This includes mandatory risk assessments, incident reporting, and resilience testing to safeguard against cyberattacks and systemic disruptions.  2.R EG U LAT IO N O F C RY P TOC U R R ENC I E S A N D D I G I TA L A S S ETS : Challenges in Implementation: While the EU’s regulatory framework is a step forward, challenges remain: 1) Harmonization Across Member States: Ensuring consistent application of MiCA and other regulations across all EU member states is critical but challenging, given varying levels of technological readiness. 2) Technological Complexity: Rapid advancements in blockchain technology often outpace legislative developments, requiring regulators to remain adaptive. 3) Balancing Innovation and Oversight: Excessive regulation may stifle innovation, deterring investment in the EU’s digital economy. Conversely, under-regulation could expose markets to instability and misuse. Implications for Stakeholders: For Governments: The EU’s comprehensive approach establishes a global benchmark, enhancing its regulatory influence. The frameworks support financial stability, mitigate risks, and position the EU as a hub for legitimate cryptocurrency activities. For Businesses: MiCA’s clarity reduces legal uncertainties, enabling businesses to operate with confidence within the EU. However, compliance costs may challenge smaller enterprises and startups. For Consumers: Consumers benefit from enhanced protections against fraud, market manipulation, and insolvency of crypto-asset providers. The transparency requirements also foster informed decision-making. The EU’s Role in Global Crypto Regulation: As a pioneer in regulating digital assets, the EU’s framework influences global standards. Its emphasis on harmonization, consumer protection, and financial stability inspires similar efforts in jurisdictions such as the UK and the US. Moreover, MiCA’s clarity offers a model for international cooperation in managing cross-border crypto transactions. Conclusion: The EU has taken significant strides in regulating cryptocurrencies and digital assets through a balanced, comprehensive approach. MiCA and associated regulations address critical concerns while promoting innovation and financial inclusion. However, continuous refinement will be necessary to address emerging technologies and evolving market dynamics. By championing proactive and adaptive regulation, the EU positions itself as a global leader in shaping the future of digital finance.  3.SMART CONTR ACTS: LEGAL ENFORCEABILITY AND CH ALLENGES A smart contract is a self-executing program that automates the actions required in a blockchain transaction. Once completed, the transactions are trackable and irreversible. The best way to envision a smart contract is to think of a vending machine—when you insert the correct amount of money and push an item's button, the program (the smart contract) activates the machine to dispense your chosen item. Smart contracts are scripts that automate the actions between two parties. Smart contracts do not contain legal language, terms, or agreements—only code that executes actions when specified conditions are met. Nick Szabo, an American computer scientist who conceptualized a virtual currency called "Bit Gold" in 1998, defined smart contracts as computerized transaction protocols that execute the terms of a contract. "Smart contract" is somewhat of a misnomer—these programs are neither smart nor a contract. Smart contracts aren’t always or necessarily legal contracts in the traditional sense, despite the word ‘contract’. In essence, smart contracts are self-executable computer codes and as a result, their use may present enforceability questions if attempting to analyse them within the traditional ‘legal contract’ definition. For further clarification, a smart contract is not a blockchain per se but an application of blockchain, i.e. one possible use of blockchain. Many smart contracts are structured to automate actions, instructions or clauses of separate legal contracts but they do not constitute legal contracts themselves and these non-legal contracts present fewer legal risks. However, some smart contracts themselves are being structured as legal contracts and therefore have the full force of law. In such cases, it will be necessary to understand how they meet the pre-conditions for contract formation in different jurisdictions, as well as how they will be construed and interpreted by a court or arbitral body in the event of a dispute.  3.SMART CONTR ACTS: LEGAL ENFORCEABILITY AND CH ALLENGES As indicated above, smart contracts are not always or necessarily legal contracts, despite the use of the term “contract.” In many cases, the term “smart contract” is used to describe self-executable code which interacts with data from a separate legally enforceable contract and automates processes based on that data. However, smart contracts are capable of being legal contracts where they meet the requirements for a legal contract. As such, certain smart contracts are indeed legally binding and contain legally enforceable rights and obligations, albeit within a code-based format. There are a wide range of legal considerations relating to these types of “legal” smart contract: 1.Many jurisdictions impose legal formality requirements for a legally binding contract, and it is not clear that smart contracts will satisfy these. 2.If smart contracts operate on a decentralised permissionless network, nodes may be located anywhere in the world. This may make it difficult to determine the applicable governing law and jurisdiction of the contract if the parties have not chosen a governing law. 3.In many jurisdictions, a contract can only be valid if it is entered into by a person (i.e. a natural or legal person) and this may preclude some DAOs from entering into legally binding contracts unless they are structured as legal persons. 4.Interpretation of smart contracts and dispute settlement may prove to be a challenge. Inclusion of an arbitration clause in the contract may be advisable as arbitral bodies (drawing on expertise from industry experts) may be more appropriate forums in which to interpret smart contracts in a dispute scenario than the courts. 5.It may be difficult to attribute liability to either party to a smart contract where there is a failure of execution of the smart contract or partial execution due to a technical flaw or malfunction. In this case, the conditions under which the parties to the smart contract can act against the developer, i.e. liability is attributed to the developer, may need to be addressed. 6.Should the contractual provisions provide the authority and ability to easily reverse transactions in the event of certain circumstances, for example mistaken transactions and in what circumstances should this authority be exercised? This is relevant given the immutability of the blockchain, which means that once executed, changes to the smart contract should be impossible. 3.SMART CONTR ACTS: LEGAL ENFORCEABILITY AND CH ALLENGES Smart Contract Pros and Cons: The primary benefit of smart contracts is similar to the benefit of blockchain technology—they remove the need for third parties. Other benefits of this technology are: 1. Efficiency: They speed up contract execution 2. Accuracy: There can be no human error introduced 3. Immutability: The programming cannot be altered Some of the downfalls of smart contracts are: 1. Permanent: They cannot be changed if there are mistakes 2. Human factor: They rely on the programmer to ensure the code is programmed properly to execute the intended actions 3. Loopholes: There may be loopholes in the coding, allowing for contracts to be executed in bad faith  3.SMART CONTR ACTS: LEGAL ENFORCEABILITY AND CH ALLENGES Therefore, more attention than usual should be given to the following considerations in order to ensure the smart contract is a legally binding and enforceable contract: 1. Legal formalities: Ensuring that the smart contract satisfies the legal formalities for a legal binding contract in the relevant jurisdiction. 2. Transparency: Making the terms of a contract accessible, readable and easily interpretable by all the parties involved in the execution of a Smart Contract and dispute resolution bodies, such as arbitrators/courts. 3. Auditability: Ensuring that the contracts can be exported in a form acceptable for financial or other audits required of participants. 4. Retrospective resolution: Checking if there are sufficient mechanisms in local legal systems for disputing a contract that has already been executed. Ensure that smart contracts include a dispute resolution provision to reduce uncertainty and provide for a mechanism in the event of a dispute. 5. Marginal judgement: Designing a system that, where possible, includes a backstop for human judgement over whether a smart contract has been fulfilled, to reduce risk of over-cautious automated systems. So, in conclusion, smart contracts are code written into a blockchain that executes the actions two parties agree to outside the chain. By automating these actions, the need for an intermediary or trust between the parties is removed.  THE BLOCKCH AIN AND CRYPTOCUR R ENCY R ELATED CASES Craig Wright v. Kleiman Estate (The Bitcoin Ownership Case) Introduction: Craig Wright, who claims to be Satoshi Nakamoto (Bitcoin's pseudonymous creator), was sued by the estate of his former partner, David Kleiman, for allegedly misappropriating billions of dollars in Bitcoin mined during Bitcoin's early days. Impact: The case centered on the legitimacy of Wright's claim to be Satoshi Nakamoto and the legal status of Bitcoin ownership under disputed partnerships. It exposed the fragility of claims over Bitcoin's origin and ownership. Result: In December 2021, the court ruled in favor of Wright on most counts but ordered him to pay $100 million in damages for breach of intellectual property related to a joint venture. The case did not definitively settle Wright's claim of being Satoshi.  THE BLOCKCH AIN AND CRYPTOCUR R ENCY R ELATED CASES United States v. Ross Ulbricht (The Silk Road Case) Introduction: Ross Ulbricht was arrested in 2013 and charged with operating the Silk Road, an online black market that facilitated drug sales and illegal transactions using Bitcoin. Impact: This case demonstrated how Bitcoin can be used for illegal purposes, influencing governments worldwide to enact stricter anti-money laundering (AML) and know-your-customer (KYC) regulations for cryptocurrency transactions. Result: Ulbricht was convicted on multiple counts and sentenced to life imprisonment in 2015. The case led to the seizure of Bitcoin valued at billions of dollars and strengthened scrutiny on cryptocurrency's role in crime.  THE BLOCKCH AIN AND CRYPTOCUR R ENCY R ELATED CASES SEC v. Ripple Labs Inc. Introduction: Filed in December 2020, the U.S. Securities and Exchange Commission (SEC) alleged that Ripple Labs Inc. and its executives sold $1.3 billion worth of XRP tokens as unregistered securities. Ripple countered that XRP should be classified as a currency, not a security. Impact: The case has far-reaching implications for how cryptocurrencies are classified under U.S. securities law. It could determine whether other cryptocurrencies like Ethereum and Bitcoin are regulated as securities or remain in a separate category. Result: In July 2023, the court ruled partially in favor of Ripple, declaring XRP sales to retail buyers were not investment contracts but institutional sales violated securities laws. The decision gave clarity to the crypto market but left room for further appeals and regulatory ambiguity.  THANKS FOR YOUR ATTENTION.