International Governance of Cryptoassets: Whether, Why, What and Who?

• Author: Gary Marchant, Jalaj Jain, Oluwasegun Muse, Sayan Chandra
• Pages: 417-452

International Governance of Cryptoassets:

Whether, Why, What and Who?

G

ARY

M

ARCHANT

, J

ALAJ

J

AIN

, O

LUWASEGUN

M

USE

,

AND

S

AYAN

C

HANDRA

*

At the annual World Economic Forum meeting in Davos in January 2020,

the Global Consortium for Digital Currency Governance was launched to

coordinate the global governance of digital currencies.

1

In the same month,

five major central banks from England, Japan, Europe, Canada, and Sweden

joined with the Bank of International Settlements to form a new initiative to

study central bank digital currencies, “including how such currencies would

work across national boundaries.”

2

Several months earlier, the Financial

Action Task Force (FATF), an inter-governmental body established by the

Finance Ministers of many industrial nations, adopted new international

standards for combating money laundering and the financing of terrorism

utilizing blockchains and cryptocurrencies.

3

And after their March 2018

meeting, the G20 Ministers of Finance and Central Bank Governors issued a

statement calling upon international standard setting bodies “to continue

their monitoring of crypto-assets and their risks, according to their

respective mandates, and assess multilateral responses as needed.”

4

These recent developments signal a new trend towards

internationalization of the governance of cryptoassets, which consist of

* Gary Marchant is Regents’ Professor and Faculty Director of the Center for Law, Science

& Innovation at the Sandra Day O’Connor College of Law at Arizona State University. Jalaj

Jain is a student of law and coordinator for the Law and Technology Student Research Group at

Gujarat National Law University, India. Sayan Chandra is a student of law at Gujarat National

Law University. Oluwasegun Muse is a law student at the Sandra Day O’Connor College of

Law.

1. Amanda Russo, Governing the Coin: World Economic Forum Announces Global Consortium for

Digital Currency Governance,

W

ORLD

E

CON

. F.

(Jan. 24, 2020), https://www.weforum.org/press/

2020/01/governing-the-coin-world-economic-forum-announces-global-consortium-for-digi

tal-currency-governance/. See also infra notes 262–66 and accompanying text.

2. Jason Dorrier, Five Major Central Banks Unite to Explore Launching Their Own Digital

Currencies,

S

INGULARITY

H

UB

(Jan. 23, 2020), https://singularityhub.com/2020/01/23/five-of-

the-worlds-biggest-central-banks-unite-to-research-digital-currencies/. See also infra notes

137–38 and accompanying text.

3. International Standards on Combating Money Laundering and the Financing of Terrorism &

Proliferation,

F

INANCIAL

A

CTION

T

ASK

F

ORCE

(FATF)

, 6 (June 2019), http://www.fatf-gafi.org/

media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf. See

also infra note 142 and accompanying text.

4. G20 Meeting of Finance Ministers and Central Bank Governors, Buenos Aires, Arg., Mar.

19–

20, 2018, at 3, Communiqu

´e, http://www.g20.utoronto.ca/2018/2018-03-30-

g20_finance_communique-en.pdf.

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418 THE INTERNATIONAL LAWYER [VOL. 53, NO. 3

cryptocurrencies such as Bitcoin as well as other assets such as utility and

security tokens that may be stored and traded on blockchains or distributed

ledger technology.

5

Until these recent international initiatives, governance

of cryptoassets had primarily been at the national level, with national

regulatory approaches diverging both with respect to overall receptiveness to

cryptocurrencies as well as specific regulatory requirements.

6

These divergent national approaches and early initiatives for international

governance therefore raise the question of whether more international

governance is needed for cryptoassets, and if so, what problems such

international governance should address and by what mechanisms. A recent

survey of national cryptoasset regulators found agreement that because

cryptoassets are “generally global in nature” and because the location of the

individuals involved in storing or trading cryptoassets may be difficult to

determine with any specificity, some internationally coordinated oversight

was necessary.

7

The survey of regulators also found that “there may be

specific risks relating to regulatory arbitrage between jurisdictions” as a

result of different nations adopting divergent regulatory programs.

8

With one emerging technology after another, there has been a common

refrain by policymakers that we need to “harmonize” international

regulation.

9

Cryptoassets are no exception to this pattern. But a general call

for international harmonization is too simple; a more granular analysis is

required that asks why, what, and by who international coordination is

warranted. This article seeks to explore those questions.

Part I explains cryptoassets and their key features for governance at either

the national or international level. Part II describes the initial legal issues or

concerns that cryptoassets are raising. Part III summarizes the divergent

national regulatory responses to these legal problems to date. Part IV

presents the arguments for and against international governance of

cryptoassets. Finally, Part V explores existing and possible future

mechanisms of international governance of cryptoassets.

5. G20 Sees Crypto-Assets as Beneficial, but Considers Multilateral Regulatory Response,

L

EDGER

I

NSIGHTS

(2019), https://www.ledgerinsights.com/g20-crypto-assets/.

6. Id.

7. Board of the International Organization of Securities Commission [IOSCO], Issues, Risks

and Regulatory Considerations Relating to Crypto-Asset Trading Platforms Consultation Report, at 42,

IOSCO Doc. CR02/2019 (May 14, 2019).

8. Id.

9. Gary E. Marchant & Brad Allenby, Soft Lawlaw: New Toolstools for Governing Emerging

Technologies, 73

B

ULL

. A

TOMIC

S

CIENTISTS

, no. 2, 2017, at 108.

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2020] INTERNATIONAL GOVERNANCE OF CRYPTOASSETS 419

I. What Are Cryptoassets?

A. T

ERMINOLOGY AND

D

EFINITIONS

Cryptoassets can be defined as digital items of value that are stored or

exchanged on a blockchain.

10

These assets can be currencies, commodities,

securities, derivatives on a commodity or security, or other tokenized assets

that can be stored on a blockchain.

11

A blockchain is a type of distributed

ledger technology (DLT) in which multiple “nodes” on a network each

contain the entire set of information or items stored on that blockchain in

the form of validated blocks.

12

There is thus no central authority or point of

vulnerability for a blockchain.

13

Information is stored on the blockchain in

the form of cryptographically hashed blocks of data.

14

Each block of data

must be validated before it is added to the blockchain.

15

This validation can

be done by open competitions to solve computer puzzles in which the

system-wide applied computing power performs the validation function,

which is known as “mining.”

16

This public mining validation method is

known as proof of work, and is generally used by public or permissionless

blockchains in which any member of the public can view and participate in

the blockchain.

17

Alternatively, private or permissioned blockchains can only be viewed

and/or accessed by authorized participants.

18

These private blockchains

generally use a “proof of value” or “proof of authority” validation method in

which designated participants are responsible for validating individual blocks

of data.

19

For example, most of the blockchain platforms “developed for the

financial industry in recent years are based on a model of restricted access to

known and approved parties.”

20

10. Cryptoassets: Our Work,

F

IN

. C

ONDUCT

A

UTH

.

(Oct. 25, 2019), https://www.fca.org.uk/

firms/cryptoassets.

11. IOSCO, supra note 7 at 1.

12. Are Token Assets the Securities of Tomorrow?,

D

ELOITTE

, at 7 (2020), https://

www2.deloitte.com/lu/en/pages/technology/articles/are-token-assets-securities-tomorrow.

html.

13. Id.

14. Jimi Sinnige, How Does Blockchain Work in 7 Steps- A Clear and Simple Explanation.,

G

OOD

A

UDIENCE

, (May 6, 2018), https://blog.goodaudience.com/blockchain-for-beginners-what-is-

blockchain-519db8c6677a.

15. Daniel Piralli, How Do Blockchain Networks Validate Data,

ICO.

LI

, (Jan. 10, 2019), https://

www.ico.li/blockchain-validate-data/.

16. Id.

17. George Samman, How Transactions Are Validated on a Distributed Ledger,

S

AMMANTICS

,

(Mar. 8, 2016), http://sammantics.com/blog/2016/3/6/how-transactions-are-validated-on-a-

shared-ledger.

18. Id.

19. Proof of Authority Explained,

B

INANCE

A

CAD

.

https://academy.binance.com/blockchain/

proof-of-authority-explained (last visited Jul. 30, 2020).

20. Are Token Assets the Securities of Tomorrow?, supra note 12.

THE INTERNATIONAL LAWYER

A TRIANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW