What is Crypto Law?

September 12, 2021 (previously published in German on kryptorecht.xyz)

Cryptocurrencies are primarily considered a market phenomenon rather than a legal subject. 'Crypto law' is unlikely to become an official legal field in which one could obtain a specialist attorney title anytime soon. However, that does not mean it does not exist.

The following aims to outline some key areas that fall under the term 'crypto law.' This will also provide an overview of topics that will be covered in this blog in the future.

Let's start with the obvious:

I. Positive Crypto Law

Positive crypto law, meaning laws based on national legislation, already exists in many jurisdictions and is becoming increasingly difficult for market participants to ignore.

The German legislature introduced the term 'crypto asset' into the Banking Act on January 1, 2020. Since then, the term has also become indirectly relevant for anti-money laundering laws.

Since June 2021, Germany has recognized so-called 'crypto securities' under the Electronic Securities Act—at least in legislation.

Since August 2021, 'crypto asset' has also been incorporated into the Investment Act and the Investment Tax Act. In German legal literature, the subject is often presented in connection with capital market and banking law topics: "Legal Tech" and "Fintech" are key terms. Early works of positive legal science already fully address topics such as "Crypto Assets", "Cryptocurrencies and Tokens", "Blockchain", and "Smart Contracts".

The European Commission has also proposed numerous regulations and directives (financial services initiatives, information exchange, and anti-money laundering) that work with the term crypto asset. These Commission initiatives address the regulation of token sales, financial services related to crypto assets, as well as stablecoins, tax notifications, and anti-money laundering efforts.

The EU's proposals were preceded by FATF recommendations on dealing with virtual assets from an anti-money laundering perspective, as well as numerous studies on stablecoins, such as the G7 Working Group report.

In the U.S.—to name just one international example—the Senate is discussing what cryptocurrencies are good for (a notable video clip on this topic by Coincenter), and the current 'Infrastructure Bill' includes a provision for the special taxation of cryptocurrencies. Additionally, the regulatory debate is in full swing, and the new SEC Chairman is speaking about DeFi. The state of Wyoming has passed a controversial law on "Decentralized Autonomous Organizations." New developments emerge almost weekly.

In the Republic of El Salvador, the "Ley Bitcoin" came into force on September 7, 2021, making Bitcoin legal tender. Panama has introduced a similar legislative initiative with "Ley Cripto".

Positive crypto law is here. And it is here to stay. Much like "Internet law" emerged in the 1990s and 2000s.

II. Crypto Law in a Broader Sense

Software as Law?

It could be argued that Satoshi Nakamoto intended Bitcoin to be a new, sui generis proto-legal construct. This is supported by the White Paper's assertion that block rewards serve as incentives to "play by the rules" (see Section 6 - Incentive, in https://bitcoin.org/bitcoin.pdf).

However, mere game-theoretic incentives for rule adherence should not be equated with "law." Nakamoto explicitly sought to eliminate mediation costs and the risk of reversibility from transactions (see Section 1 - Introduction, in https://bitcoin.org/bitcoin.pdf). His goal was to impose rules on the digital realm akin to those governing the physical world—hence the paradox: 'Digital Cash.'

Bitcoin, then, is a digital imitation of physical constraints rather than a legal framework.

"But laws are not the only rules that regulate." (Lessig, 2002)

Enforcing positive law in decentralised digital spaces is challenging, if not impossible, as executive authority is limited to the physical jurisdiction of a nation-state. Without access to a legal entity, there exists a degree of enforcement resistance. This resistance applies to all public and permissionless (blockchain) networks that are sufficiently decentralised and censorship-resistant. Network nodes cannot be served with a seizure order. Their options for action remain limited as long as a sufficient number of network nodes remain unaffected by enforcement actions.

The majority of network nodes determine the rules by which transactions in the network—whose formal validation is agreed upon by participants—are processed. This creates similarities to democratic, positive law, though without legal legitimacy. However, legitimacy remains essential even in a stateless cyberspace. In the U.S. legal discourse, references to the Social Contract are common (see https://vitalik.ca/general/2021/03/23/legitimacy.html), which currently aligns with the common law tradition and social contract theory.

Blockchain networks and their client software, which dictate how "honest nodes" - as per Nakamoto (multiple references in https://bitcoin.org/bitcoin.pdf) - behave, might be considered an extension of the internet’s legal architecture—what Lessig termed "Cyberlaw". The concept of 'Cryptolaw' or 'Crypto Law in a Broader Sense' could thus be understood as the theoretical foundation of this architecture, distinct from positive law.