© Philipp Paech 2017
The emergence of blockchain technology has become inextricably linked to Bitcoin, a ‘virtual currency’ that allows users to trade ‘bitcoins’ directly from peer to peer without involving banks or other intermediaries. Whereas Bitcoin in theory is nothing more than a unit of account, it has in practice developed functions akin to those of money, in particular since it can be freely exchanged against currency and is regularly used to store value. Bitcoin has also risen to prominence as a means of payment (over 100,000 retailers accept bitcoins) and as a means of speculation beyond the circles of Internet aficionados in the space of just a few years. It has also gained notoriety as being susceptible to speculative bubbles, and as the object of criminal activity. Given these characteristics, virtual currencies have ‘a good claim of being regarded as money’. However, the delimitation of what Bitcoin, Blockchain and DLT mean and in what sense they are different is not always very clear. Many commentators use these terms synonymously. Also, the legal categorisation of the assets held in these databases is unclear and a new legal category might be needed to recognise ‘virtual choses in possession’ as a new form of property.
The core point: it’s a new type of database …
The easiest way to understand what blockchain technology stands for is to think of it as an Internet-based database to store entitlements, of which identical copies of equal constitutive value are held by every network participant. The database enables each participant to trade these entitlements by instructing the database software accordingly, which will then autonomously and irreversibly effect the relevant changes to the network participants’ holdings (in addition to ‘database’, the terms ‘ledger’ and ‘record’ are also used). This was the idea originally introduced with the Bitcoin network. Later on, blockchain networks emerged that were more flexible in terms of what could be recorded in the database, the most important of these probably being the Ethereum network, which also allows users to trade entitlements but which can, in addition, record and autonomously run self-executable programmes, the so-called ‘smart contracts’.
… for all kinds of data
Meanwhile, the technology has been extended further to take in ‘real’ things, and may soon be used for a wide range of financial assets, ie those assets that, unlike virtual currencies, represent a claim against another party. With such technology, shares or bonds could be issued, traded and settled on the blockchain networks, thereby replacing stock exchanges, clearing houses and settlement systems. Indeed, the technology could be used to make all kinds of payment, and central banks could issue fiat money in this way. Likewise, derivative contracts could be concluded, administered and settled within blockchain networks. I refer to these and similar emerging structures (to the exclusion of virtual currencies) as ‘blockchain financial networks’.
Categorisation by market
Hence, there are three worlds out there:
- Virtual currencies, such as Bitcoin and Ethereum,
- Blockchain or DLT financial networks for payments, money, securities issuance, which may emerge at some point in the not too distant future, and
- Blockchain or DLT networks for non-financial things, such as patents, copyrights, or even movable and immovable property.
In respect of the second category, the blockchain financial networks, the financial industry has already spent over 1.4bn USD on research as it is expecting immense benefits from moving to the new technology; banks are hoping to save 15-20bn USD on their infrastructure by 2022. At the same time, Fintech businesses are preparing to enter the financial market with innovative blockchain-based services, while regulators and legislators are considering how to accommodate the new technology. Yet however great the current interest in blockchain technology, its adoption is still in its early infancy and very much in flux. Potential applications range from the original, highly disruptive concept underlying Bitcoin or Ethereum, which involves open, largely anonymous, unregulated peer-to-peer networks that eliminate the need for financial intermediaries, to rather unspectacular projects that use only certain parts of the blockchain technology, notably the distributed database, to modernise and harmonise IT infrastructure in a quest for greater efficiency without attempting to overthrow existing market structures.
Disruption of business models and legal and regulatory governance strategies
The disruptive potential of blockchain technology applies not only to existing business models but also threatens the effectiveness of the existing governance framework for financial markets, depending on how the technology is deployed. It is important, therefore, to set the axioms of a governance framework for blockchain financial networks at an early stage in order to further a potentially beneficial market development and avoid the cost of adjusting market practice to new rules at a later stage.
There are three ground-breaking characteristics of blockchain networks (ie, distributed ledgers, the immutability of the acquisition process and the record, and the possible storage of auto-executable smart contracts in a blockchain database) that could effect structural changes in market practice and may render traditional governance concepts ineffective.
I will analyse these in separate blog entries.
 G.W. Peters and E. Panayi, ‘Understanding Modern Banking Ledgers through Blockchain Technologies: Future of Transaction Processing and Smart Contracts on the Internet of Money’, (Working Paper 18 Nov. 2015), 3 at https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2692487, visited 30 Nov. 2016.
 The paper that laid the foundations for Bitcoin and the blockchain technology is S. Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ (Working Paper 2009), https://bitcoin.org/bitcoin.pdf visited 30 Nov. 2016; for a comprehensive description Peters and Panayi, n 3, 2-9; for technical but still accessible description E. Wall and G. Malm, ‘Using Blockchain Technology and Smart Contracts to Create a Distributed Securities Depository’ (Master Thesis Lund University 2016), 5-23 at http://lup.lub.lu.se/luur/download?func=downloadFile&recordOId=8885750&fileOId=8885765 visited 30 Nov. 2016.
 See C. Procter, Mann on the Legal Aspect of Money (OUP, 7th ed, 2012), 1.170-1.172.
 A. Cuthbertson, ‘Bitcoins now accepted by 100.000 retailers worldwide’ (International Business Times 4 February 2015), at http://www.ibtimes.co.uk/bitcoin-now-accepted-by-100000-merchants-worldwide-1486613, visited 30 Nov. 2016. See also http://www.coindesk.com/information/what-can-you-buy-with-bitcoins/, visited 30 Nov. 2016.
 See N. Mancini, ‘Bitcoin: Rischi e Difficoltà Normative’, (2016) Banca Impresa Società 35(1), 131-134; I. Kaminska, ‘The Mt. Gox Bitcoin Bubble’ (Financial Times 4 August 2016), https://ftalphaville.ft.com/2015/08/04/2136420/the-mt-gox-bitcoin-bubble/, visited 30 Nov. 2016
 See Kaminska, ibid; K. Scannell, ‘Founder of Silk Road given Life in Prison’ (Financial Times 29 May 2015), at http://www.ft.com/content/8694f87c-0646-11e5-89c1-00144feabdc0, visited 30 Nov. 2016.
 Financial Markets Law Committee, ‘Issues of legal uncertainty arising in the context of virtual currencies’ (2016) 23, at http://www.fmlc.org/uploads/2/6/5/8/26584807/virtual_currencies.pdf visited 7 May 2017.
 See https://ethereum.org, visited 30 Nov. 2016; K. Werbach, ‘Trustless Trust’ (Working Paper August 2016), 31 at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2844409, visited 30 Nov. 2016.
 For instance diamonds (http://www.everledger.io), government services in Estonia ranging from healthcare to electronic court procedures (https//e-estonia.com/component), visited 30 Nov. 2016), crowdfunding applications (see A. Sunnarborg, ‘Blockchain Startups Make Up 20% of Largest Crowdfunding Projects’ [Venturebeat 15 May 2016], http://venturebeat.com/2016/05/15/blockchain-startups-make-up-20-of-largest-crowdfunding-projects/, visited 30 Nov. 2016), and music royalties (G. Howard, ‘Bitcoin for Rock stars – A Year Later’ [Forbes 25 September 2015], http://www.forbes.com/sites/georgehoward/2015/09/25/bitcoin-for-rock-stars-a-year-later-an-update-from-d-a-wallach-on-blockchain-and-the-arts-part-1/#cd82c6522493, visited 30 Nov. 2016.).
 See G. Chavez-Dreyfuss, ‘Overstock to Issue Stock to be traded on Blockchain Platform’ (Reuters 16 March 2016), http://www.reuters.com/article/us-overstock-bitcoin-stocks-idUSKCN0WI2YA, visited 30 Nov. 2016; Nasdaq, ‘Nasdaq Linq enables first-ever private securities issuance documented with blockchain technology’ (Press release 30 December 2015), http://ir.nasdaq.com/releasedetail.cfm?releaseid=948326, visited 30 Nov. 2016.
 See DTCC, ‘Embracing Disruption—Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape’ (January 2016), at http://www.dtcc.com/news/2016/january/25/blockchain-white-paper, visited 30 Nov. 2016; Euroclear and Slaughter and May, ‘Blockchain Settlement—Regulation, Innovation and Application’ (November 2016), at http://www.euroclear.com/en/campaigns/Blockchain-settlement-Regulation-innovation-and-application.html, visited 30 Nov. 2016; Euroclear and Oliver Wyman, ‘Blockchain in Capital Markets’ (February 2010), at http://www.euroclear.com/en/campaigns/blockchain-in-capital-markets.html, visited 30 Nov. 2016.
 See B. Broadbent, Deputy Governor of the Bank of England, ‘Central Banks and Digital Currencies’ (Speech at London School of Economics and Political Science 2 March 2016), at http://www.bankofengland.co.uk/publications/Pages/speeches/2016/886.aspx, visited 30 Nov. 2016; J. Wild, ‘Central banks explore blockchain to create digital money’ (Financial Times 2 Nov. 2016), at http://www.ft.com/content/f15d3ab6-750d-11e6-bf48-b372cdb1043a, visited 30 Nov. 2016; A. Sharp, Bank of Canada to publish payment experiment result in coming months’ (Reuters 20 Nov. 2016), at http://www.reuters.com/article/canada-cenbank-blockchain-idUSL1N1D31J5?feedType=RSS&feedName=bondsNews, visited 30 Nov. 2016.
 See L. Brain, ‘Barclay’s Smart Contract Templates’ (video London 18 April 2016), at https://www.r3cev.com/projects/, visited 30 Nov. 2016; A. Karphal, ‘Barclay’s used blockchain technology to trade derivatives, (CNBC 19 April 2016), at http://www.cnbc.com/2016/04/19/barclays-used-blockchain-tech-to-trade-derivatives.html, visited 30 Nov. 2016.
 See World Economic Forum, ‘The future of Financial Infrastructure’ (August 2016), 14 at https://www.weforum.org/reports/the-future-of-financial-infrastructure-an-ambitious-look-at-how-blockchain-can-reshape-financial-services/, visited 30 Nov. 2016.
 See Santander, ‘Fintech 2.0—Rebooting Financial Services’ (June 2016), https://www.finextra.com/finextra-downloads/newsdocs/the%20fintech%202%200%20paper.pdf, visited 30 Nov. 2016.
 See European Parliament, Resolution of 26 May 2016 on Virtual Currencies, Doc. No. P8_TA(2016)0228); Financial Conduct Authority (UK), ‘Financial Conduct Authority unveils successful sandbox firms on the second anniversary of Project Innovate’ (Press release, 7 Nov. 2016), at http://www.fca.org.uk/news/press-releases/financial-conduct-authority-unveils-successful-sandbox-firms-second-anniversary, visited on 30 Nov. 2016.
 See n 14.
 See A. Wright and P. De Filippi, ‘Decentralized Blockchain technology and the Rise of Lex Cryptographia’ (Working Paper 12 March 2015), 56 at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664, visited 30 Nov. 2016.