FinTech: Trust in the Trustless, Advancing Blockchain Regulation

‘FinTech’, which is short for Financial Technology, is overhauling the legal playing field. As an umbrella term, FinTech additionally encompasses educational technology (“Ed Tech”) and regulatory technology (“RegTech”). One of the fasting growing sections of FinTech involves banking software and crypto-currency. Crypto-currency, the most popular of which is “Bitcoin” is transferred through blockchain technology. Blockchain is the financial infrastructure through which Bitcoin, and other crypto-currencies are exchanged. As an emerging technology, blockchain has immense potential benefits such as “lower transaction costs,” “potential to combat poverty and oppression,” and “stimulus for financial innovation”1 Contrarily, there are a lot of risks which warrant regulation, such as “The Bitfinex Hack”2, double spending3, and anonymity4

Currently there is a public policy debate on how to regulate blockchain technology, and whether to allow “permissionless” blockchains, like Bitcoin or only allow private “permissioned” blockchains, like those being designed at many large banks.5 Bitcoin can be used as currency in select locations, bought and sold as a currency, and mined.6 The Bitcoin mining process records transactions on the blockchain public ledger, while also distributing Bitcoins to the miners.7

Examples of the blockchain technology can be found within FinTech alliance groups such as the R3 Consortium. The R3 Consortium is a group of over 40 banks world-wide working together to innovate the financial market.8 Currently, the R3 Consortium is targeting “secure and fast solutions for payment transactions and securities trading.”9 Simply put, blockchains are automated databases that store transactions, which is “a data-base for transactions that manages itself according to rules that have been set and is tamper proof.”10

Regulation and implementation of blockchain technology islimited, although the Financial Stability Oversight Council (FSOC) has recognized blockchain technology as a “valuable mechanism for improving market transparency.”11 Policymakers have identified any potential risks and abuses of bitcoin, including black-market transactions,12 tax evasion,13 money laundering,14 and terrorist financing.15 Policymakers arecurrently revisiting “complex, interwoven regulatory frameworks—primarily banking laws, commodities laws, and securities laws—toshoehorn the technology into existing frameworks and considerwhere new ones might be appropriate.”16 According to the IRS, virtual currencies should be treated as property for federal tax purposes.17 In short, there are still many kinks in the technology which would create large risks in mainstream financial infrastructure. Bitcoin continues to exist, with or without government adoption, and thus should continue to do so until a more reliable network can be established.

  1. See Marc Andreesen,, Why Bitcoin Matters, N.Y. Times (Jan. 21, 2014), http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/
  2. See generally Nicole Tate-Naghi, The Aftermath of Bitfinex Hack, Goodwin Procter Blog “Digital Currency + Blockchain Perspectives” (September 21, 2016), http://www.digitalcurrencyperspectives.com/2016/08/09/recalling-mt-gox-bitfinex-exchange-is-latest-target-of-bitcoin-hackers/)http://www.digitalcurrencyperspectives.com/2016/09/21/the-aftermath-of-the-bitfinex-hack/
  3. See Gareth W. Peters et al., Opening Discussion on Banking Sector Risk Exposures and Vulnerabilities from Critual Currencies: An Operational Risk Perspective, Cornell University Library, 20-23, 28-30 (2014), http://arxiv.org/pdf/1409.1451.pdf (Defining double-spending as bitcoin miners using the same bitcoins more than once, and additionally identifying problems such as reliance on IT of mining network, software problems, transaction malleability).
  4. See Ly,infra note 12, at 594-596.
  5. 18 N.Y.U. J. Legis. & Pub. Pol’y837
  6. See generally Morici v. HashFast Techs. LLC, No. 5:14-cv-00087-EJD, 2015 U.S. Dist. LEXIS 24251, at *4-*6 (N.D. Cal. Feb. 27, 2015)(explaining how Bitcoin Miners earn Bitcoin by solving difficult math algorithms, which in turn post past bitcoin transactions onto the public Blockchain ledger.)
  7. Id.
  8. Dr. Nina-Luisa Siedler and Tom H. Brägelmann, LL.M., Blockchain and the Law- When Two Cultures Collide,LinkedIn (September 9, 2016), https://www.linkedin.com/pulse/blockchain-law-when-two-cultures-collide-tom-braegelmann
  9. Id.
  10. Id.
  11. FSOC 2016 Annual Report, Financial Stability Oversight Council (June 2016), pg. 127, https://www.treasury.gov/initiatives/fsoc/studies-reports/Documents/FSOC%202016%20Annual%20Report.pdf
  12. See Matthew Kien-Meng Ly, Note, Coining Bitcoin’s “Legal-Bits”: Examining The Regulatory Framework for Bitcoin and Virtual Currencies, 27 Harv. J.L. & Tech. 587, 595 (2014) (discussing Silk Road).
  13. Id. at 595-96.
  14. Id. at 594.
  15. See Trevor I. Kiviat, Note, Beyond Bitcoin- Issuess in Regulating Blocktain Transactions, Duke L.J. 570, 589 n.140(internal citation omitted)(mentioning terrorist financing and moneylaundering as two of the possible pitfalls of Bitcoin).
  16. See id.at 589.
  17. See IRS Virtual Currency Guidance: Virtual Currency Is Treated as Property for U.S. Federal Tax Purposes; General Rules for Property Transactions Apply, Internal Revenue Serv. (Mar. 25, 2014), http://www.irs.gov/uac/Newsroom/IRSVirtual-Currency-Guidance [http://perma.cc/3F4A-KHLA].

Author: Jacob G. Shulman

Jacob Shulman is originally from central New Jersey, but has spent a significant period of his life near Chicago, Illinois. Jacob is a third year student at Rutgers Law School and received his undergraduate education from Rutgers University- New Brunswick. Jacob graduated with a bachelor's degree in political science, with a minor in economics and an Undergraduate Associate certificate from the Eagleton Institute of Politics in 2015. During the past few years, Mr. Shulman, has worked for multiple law firms in New York and New Jersey, focusing on assisting attorneys who represent mid-size and large business entities. Jacob has also worked in securities compliance as a law clerk for a broker-dealer. Jacob will be published in the upcoming volume of the Rutgers Computer and Technology Law Journal for his work in financial technology ("FinTech"). Additionally, Jacob has written about corporate governance issues, cybersecurity, and blockchain. He enjoys giving back to the community and has done so by being a member of Mt. Zion Lodge #135 of Free and Accepted Masons, various alumni groups, and the Highland Park Human Relations Commission. Jacob has had exposure to a myriad of legal and policy related internships and jobs. At the law school, Jacob was involved as the Career Services Chairman of the Student Bar Association (SBA), and served as the President of the Jewish Law Students Association (JLSA). As the Career Services Chairman, Jacob organized one of the largest judicial receptions at the law school. Jacob is a 2017-2018 Governor's Executive Fellow through the Eagleton Institute of Politics and a Business Law Fellow in the Rutgers Center for Corporate Law and Governance. His hobbies include rescuing and fostering dogs and being involved in the community.