There seems to be no shortage of bitcoin entrepreneurs or investors getting new ideas and new technology on the market, but showing all parties how NextGen payments and banking incumbents can cooperate, or even just coexist, within today’s society and under its terms is perhaps a job best left for the lawyers.
Bitcoin isn’t just magical Internet money anymore; the bitcoin technology provides the infrastructure for innovations in record keeping, smart contracts and asset distribution, among other things that could weave the fabric of a new financial system if developers can start to minimize the gap between the bitcoin consumer and the average consumer.
As such, legal and regulatory experience have begun to materialize as vital skills in this current bitcoin economy. They are the backbone of compliance functions and paramount in managing and monitoring the policies, processes and risks of the businesses building the ecosystem.
There’s $317m invested in cryptocurrency startups worldwide, $60m of it from Q3 of this year alone. For Boost VC, one of the most prominent bitcoin startup accelerators, companies that provide services meant to support the ecosystem are of high priority. Such companies, founder and CEO Adam Draper says, are mostly based in compliance and bridging the tech gap.
Others agree.
“If you think about email, television, airplanes, all these technological innovations – people benefit from them all the time but most of the world doesn’t understand how they work, I don’t understand how they work,” said David Berger, chief executive of the Digital Currency Council.
He added:
“We have to live in the world we live in. It’s the lawyers, accountants and finance folks – working closely with innovative entrepreneurs – that are going to be helping us integrate bitcoin into society.”
That integration is an issue that Berger said is only getting bigger as more jurisdictions consider regulations and more entrepreneurs try bringing the bitcoin opportunity to mainstream users.
“The supply of attorneys with the expertise to advise clients on bitcoin-related matters is already well outstripped by the demand,” he added. “And the demand is growing each day.”
Bringing bitcoin to the banks
While bitcoin might want to play outside the framework of the traditional financial system, it may be inevitable that the two interact if bitcoin is going to become more legitimate and more widely used.
Brian Stoeckert, managing director of digital currency consulting firm CoinComply, said:
“You have all these companies that are struggling to gain access to the traditional financial system in order to get their businesses on the ground, into market, gathering customers and surviving like any other business.”
Consumers look for familiarity, stability, credibility and integrity, he added, but unfortunately for bitcoin, people have leveraged its supposed benefits for more nefarious than positive purposes in its earlier stages.
Speaking at Bloomberg headquarters last month, former SEC chairman Arthur Levitt said firms should make it a top priority to educate the banking industry on “why [bitcoin] is a plus for the financial system; how it provides oil for the system rather than sand”.
“Through the [bitcoin] industry trade groups, the leadership of the industry, you’re going to break through a significant bank and the rest of them will follow,” he said, adding, “the VCs are a very large resource of business – particularly for regional banks – and they should be standing side by side with companies and calling the banks.”
Bringing the banks to bitcoin
It’s no secret anymore that after long disregard and dismissal, bitcoin is finally making banks’ heads turn. In February, Goldman Sachs issued a report denying bitcoin’s currency but conceding to its technology – a sentiment that soon became trendy among FinTech circles – one of the biggest trends of 2014.
UBS CIO Oliver Bussmann and former Citigroup CEO Vikram Pandit, now chairman of TGG, are among others that have spoken publicly to the blockchain’s capabilities. And last month in London, blockchain technology helped compose an outline of key innovations of the bank of the future, abstracted by 100 financial technology leaders.
But if the bank they imagined will ever be realized, institutions will have to step up and shape up their compliance schemes – though in the right context, it’s hard to discredit the banks’ proactivity in trying to better understand digital currencies.
Today compliance departments deal with bitcoin as they do other financial innovations, New York University law professor Geoffrey Parsons Miller said.
Miller is the director of the NYU Center for Financial Institutions, co-director of the Program on Corporate Compliance and Enforcement and this year, he’s co-teaching the new Law and Business of Bitcoin and Other Cryptocurrencies course jointly offered by the NYU School of Law and Stern School of Business.
“They will assess the risk it poses to the bank, identify potential areas of regulatory concern, and devise policies and procedures to help ensure that employees keep within the bounds of the law,” he said.
Hiring sprees around compliance
The marketplace for regulatory compliance has been on the up-and-up following the slow rollout of Dodd-Frank. Fifty-nine percent of large institutions surveyed by Deloitte last year said the provisions affected their increased compliance costs, as they did for 62% of mid-size and 78% of small institutions.
Compliance departments are booming inside financial services institutions as the AML/CTF (Anti-Money Laundering and Counter-Terrorism Financing) market continues to produce opportunities, as mandated by the Wall Street reforms.
And now, demand is increasing for in-house lawyers with advanced knowledge and ability to operationalize compliance with the filing requirements for financial innovations like bitcoin.
In the business arena, RRE Ventures founder and managing partner Jim Robinson told CoinDesk that in the last six months approximately one-third of its companies have sprouted a compliance officer “in some form or another”; those that haven’t plan to in the near-term.
However, he added, “It’s important to define ‘compliance officer’ because it may or may not be a lawyer. A law degree is helpful but far more relevant is what the person has been doing.”
Adrian Morrissey, manager of the New York compliance division at recruitment consultancy Robert Walters, echoed Robinson’s caution.
“Many hiring managers are of the opinion that lawyers are exceptional when it comes to advising on complex regulation, but hiring managers want more than that,” he said. “What sometimes separates compliance candidates from lawyers is their ability to not just interpret the legislation but to make it a working program that the business understands.”
An unconventional line of business
Nevertheless, lawyers are and will continue to be partly responsible for assimilating bitcoin into “the mainstream”, Miller said, such that they’ll help define how it fits in with various regulatory systems, organize financing for bitcoin companies and help policymakers understand its potential contributions to public welfare.
“Whether it’s the cybersecurity element, financial crimes piece, regulatory side, typical startup model – in the community there’s a need, there’s a desire for legal counsel,” Stoeckert said.
Miller added:
“Because of the legal uncertainties surrounding bitcoin, companies in this space will need to use attorneys more intensively than if they were in a more conventional line of business – for a while.”
Fifty-six percent of people surveyed in the UK turn to trusted advisors like lawyers, accountants or financial professionals when they become aware of bitcoin, according to a study conducted by the Digital Currency Council (DCC), the group committed to educating such advisors and accrediting them, if they so choose, as they prepare to seize the bitcoin opportunity.
This is especially so when making serious financial decisions.
“As bitcoin grows, these professionals are either going to throw up barriers for their clients, or become a trusted facilitator integrating bitcoin into their lives,” Berger said. “The opportunity is different for each person or business, and advisors can help tailor the opportunity to meet their client’s goals.”
A growing number of people are beginning to recognize the opportunity.
The DCC launched this September and already has over 500 members worldwide: consultants like the aforementioned who may or may not have a lot of work in the digital currency space so far, but want to differentiate themselves in the market.
Toronto-based lawyer and DCC member Stuart Hoegner said the lawyers’ opportunities are just waiting in the wings.
“There are myriad ways that counsel can help guide clients through the regulatory, tax, and private law issues that are involved [in bitcoin],” he said.” I think that most lawyers have no interest in rising to the challenge, but that spells opportunity for those who can and will.”
Book smarts versus street smarts
Bitcoin’s regulatory framework is still in the balance, and while that creates an opportunity for lawyers in the space helping clients evaluate and comply with the law, it means their counsel can’t be too prescriptive.
“Clients need to understand that with this uncertainty, no lawyer can provide you with an iron clad guarantee or letter of advice,” said Amor Sexton, a consultant and lawyer at Adroit Lawyers, Australia’s first specialist digital currency legal practice. “The legal framework is going to evolve rapidly over the next few years. Businesses and their lawyers need to anticipate and keep up with these developments.”
Robinson agreed, saying that in an uncertain and dynamic regulatory environment, the lawyers are “only as good as keeping up with what’s happening”.
He added:
“The law and legislative processes always play catch-up with new technology. It’s very much the case here as well.”
While regulators trail the market, just how far behind and how much longer they stay behind remains to be seen.
Different regulators have varying tolerances for bitcoin’s pseudonymity, but as New York Law School professor Houman Shadab pointed out, they’ve already provided a fair amount of certainty about how the law applies to digital currencies.
“Although more regulation may provide more comfort, widespread adoption of bitcoin will ultimately depend on how well companies deal with its inherent risks and build a robust infrastructure,” he said. “Educating lawyers about emerging technologies and regulation plays an important role in helping to ensure that problems are addressed before they turn into liabilities and losses.”
“The legal situation of bitcoin will clarify,” Miller said, “and at that point, it will simply be another part of the financial system presenting conventional legal problems.”
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