Digital assets like bitcoin and the underlying blockchain technology are potentially useful for New Hampshire, according to a state commission, but they’re so new and different that no one is sure how the state can — or should — capitalize on this potential.
“In the case of blockchain, there isn’t even a clear consensus on whether there should be basic ‘rules of the road’ governing how people interact over blockchain networks,” reads the published 42-page report from the state commission on cryptocurrencies and cryptocurrencies digital assets Thursday.
The commission was created last year by Gov. Chris Sununu “to offer specific insights and recommendations on the role of the New Hampshire legal system in relation to innovation related to blockchain technologies” — in other words, what new state laws or regulations are needed are. The report is riddled with questions but provides few answers beyond the need for further study.
“Because these new technologies are very specialized and complex, very few policymakers are likely to have the necessary knowledge to develop legal rules that adequately balance conflicting goals of society,” says the report. “Finding the ‘healthy balance’ with a technology as new and developing as blockchain, which is still in its infancy, is very challenging.”
The most important aspect of blockchain and the technologies that use it, like bitcoin and other cryptocurrencies, is that they offer a way to be decentralized yet trusted. Bank account information or property documents do not need to be controlled by a central authority in a bank or city hall for users to be assured that they are authentic.
Proponents of blockchain technology, which has been around for a decade, say this makes it a valuable tool for reducing costs and increasing the speed of many transactions, enabling things like “smart contracts” that update automatically. But applications remain few and far between, apart from well-publicized attempts to buy and sell cryptocurrencies based on the blockchain.
“While decentralization is an ideal touted by proponents, the reality is that most of the growth in transaction volume involving cryptoassets has occurred on platforms that practically cannot be considered decentralized,” the report states points to the multi-billion dollar collapse of FTX, a crypto trading platform.
According to the report, decentralized systems exist, but they’re slow, opaque, and have “ongoing legal risks.” They may not even be very decentralized: “It’s unclear exactly how to measure the degree of decentralization.”
In addition, taking the town hall or the banks out of the loop could have as many disadvantages as advantages. “While irresponsible actors in centralized institutions are a flaw of the financial system, responsible actors in the same positions are a trait.”
By far the largest use of blockchain comes from people trying to profit from buying and selling cryptocurrencies like bitcoin. This has led to enormous debates about how these money-making movements should fit within the legal framework for banking and trading in stocks and other financial assets.
This debate is evident in the recent conviction of Keene resident Ian Freeman on charges of money laundering, tax evasion and “conducting an unlicensed money-transmitting business” related to his bitcoin dealings, as well as the SEC’s lawsuit against LBRY, a Manchester-based company. based hosting site that uses so-called tokens on the blockchain, which the SEC says are functionally similar to securities and should be regulated as such.
“It may well be that blockchain applications, in their ideal fully decentralized peer-to-peer form, represent fundamentally new systems that require entirely new thinking,” the commission said, “but a practical intermediate question is whether centralized platforms Offering financial services related to crypto assets differs from a policy perspective from centralized companies offering financial services related to more traditional financial assets.”
The legal questions to be answered, the report says, include:
■Whether crypto trading groups like Decentralized Autonomous Organizations (DAOs) are like limited liability companies and offer some protection to their members;
■ deciding which court system will handle disputes over transactions that take place entirely online rather than in a physical location;
■How blockchain transactions should exist in the state’s Uniform Commercial Code, a set of rules governing commercial transactions;
■ What changes, if any, to the securities laws of New Hampshire “regarding various assets and activities associated with the conduct of blockchain activities and business” need to be made;
■ Clarify which blockchain transactions are subject to state business tax;
■ Monitor all federal regulations to ensure they “do not place a disproportionate burden on the privacy or property interests of NH residents”.
Meanwhile, the report cautioned against being too pro- or anti-blockchain. “Members determined that it would be unwise and unwise to take the most extreme positions of commentators on blockchain technologies (either from the evangelical side or from the ‘anti-civilization’ side).”
The report can be downloaded online as a PDF.