It was announced this week that four of the world’s #banks—Santander, UBS, BNY Mellon, and Deustche Bank—are collaborating, along with brokerage firm ICAP, in order to produce what they’re calling a “utility settlement coin,” or USC, run on #blockchain #technology, originally the rails beneath #bitcoin and now the talk of the financial, corporate,Read More
Bank Innovation
UBS, Deutsche Bank, Santander and BNY Mellon announced their “utility #settlement coin,” a new digital asset they hope will become the industry standard for #blockchain settlements. They expect #banks will initially use the coin for post-trade settlement and clearing by early 2018, after they secure blessing from regulators and central banks.
While this development signals significant market traction for an institutional use of digital assets, I have to say it’s deeply misguided. A bank-issued digital asset can only really efficiently settle between the banks who issued it. Then, two scenarios can play out.
Scenario one: all banks around the world put aside competitive and geopolitical differences, adopt the same digital asset, agree on its rules, and harmoniously govern its usage. Fat chance.
Scenario two (the more likely scenario): banks not in the issuing group issue their own digital assets with their own sets of rules and governance.
We’re kinda seeing this already, as the FT points out, with Citi’s Citicoin and Goldman Sachs’ SETLcoin. The result would be an even more fragmented currency landscape than what we have today. If banks of different digital asset groups want to settle trades with one another, they’ll have to make markets between their unique digital assets or trade between their digital assets and a common fiat currency. What a mess!
The second big problem with the “utility settlement coin” is it seems it’ll be backed by a basket of currencies. Once backed by cash, it’s no longer an asset; it’s a liability. Trading liabilities then ultimately requires moving cash across borders, re-creating today’s system but adding more friction!
We strongly believe banks need an independent digital asset to enable truly efficient settlement and we believe XRP is best positioned for that role. It goes back to the fundamentals of what makes digital assets unique and special – they’re universal currencies, meaning anyone can use them as units of value anywhere in the world. That universality gives digital assets global reach and the ability to settle much faster than traditional assets.
Compared head to head with other independent digital assets (like #bitcoin or ether), XRP settles the most efficiently cross-border, in just seconds. In fact, we’ve run tests with global banks to prove XRP can lower liquidity costs for cross-border trades. More to come on that front.
[linkedinbadge URL=”https://www.linkedin.com/in/bradgarlinghouse” connections=”off” mode=”icon” liname=”President and COO at #Ripple“]
Is #blockchain reaching a #tipping #point? I’m not talking about the public, but among the early adapters who set the tone for what comes one or two years down the line. A little evidence: A Juniper Research study reveals that venture capitalists have poured $ 290 million into blockchain technologies and #bitcoin companiesRead More
Bank Innovation
Is #blockchain reaching a #tipping #point? I’m not talking about the public, but among the early adapters who set the tone for what comes one or two years down the line. A little evidence: A Juniper Research study reveals that venture capitalists have poured $ 290 million into blockchain technologies and #bitcoin companiesRead More
Bank Innovation
Fintech.Li präsentiert hier wöchentlich die wichtigsten #News rund um #Fintech in der Schweiz, Liechtenstein, Deutschland und Österreich.
Vontobel lanciert neue Fintech-Lösung in Deutschland im Derivate Bereich
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Cookies funktioniert – das Geschäftsmodell fehlt aber noch
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Interview mit Johannes Höhener
„Our local fintech scene is an important source of inspiration and innovation for the Swiss financial industry. We support and promote the development of these creative startups”. Mehr erfahren
Die Digitalisierung bietet Banken und Sparkassen ein Milliardenpotential
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The Wretched, Endless Cycle of Bitcoin Hacks
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Overstock’s New Blockchain President to Accelerate ‘Fight Against Wall Street&8217;
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The Bank of England has created its own version of Bitcoin
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Gartner puts Blockchain at the Peak of Inflated Expectations, while Bitcoin slides into the Trough of Disillusionment
Research powerhouse Gartner Inc. recently announced their “Hype Cycle for Emerging Technologies, 2016,” which shows that “Blockchain” is in the Peak of Inflated Expectations phase. Mehr erfahren
Postbank schafft Gratis-Konto für die meisten Kunden ab
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“Auch wenn wir uns nie persönlich begegnet sind spüre ich eine freundschaftliche Bande zwischen uns. Gleich mehrere Dinge verbinden uns.&8221; Mehr erfahren
Die Schweiz und London sollten jetzt eng kooperieren
Fintech-Guru Eric van der Kleij über den Startup-Platz Schweiz und die Besonderheit des Kickstart-Accelerators. Mehr erfahren
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Former #bitcoin champion Stefan Thomas caused a small stir in the #blockchain world today when he posted an essay entitled “The Subtle Tyranny of Blockchain,” which, as the title suggests, does not reflect favorably on the #technology. “In any protocol, everyone has to act the same. But in a blockchainRead More
Bank Innovation
In a previous article I wrote about Ethereum and a prenuptial smart contract created in #blockchain, I attempted to draw attention to how blockchain transactions could be analyzed under U.S. contract law.
The prenuptial smart contract I used as a test was somewhat whimsical and didn’t address the more practical issues which could face, for example, a small business seeking to minimize financial transaction costs using this platform.
Therefore, I would like to take the legal analysis a step further and apply it to a hypothetical small retail business with modest income and significant transaction fees paid to #banks, merchant services companies, and credit card companies. Small businesses can be early #technology adopters and present a huge market ripe for change. According to the Small Business Administration, there are 28 million small businesses in the United States and account for 40% of all retail sales.
Under this hypothetical scenario, the merchant decided to use a popular online payment system to reduce costs, but soon discovered that fees intended to be avoided were again imposed once the merchant reached a certain sales threshold. In addition, the dreaded credit card processing fees were not eliminated entirely.
In addition to credit card transaction fees, the merchant was faced with various state, local and federal #taxes. The merchant wanted to pay only those taxes for which the merchant was legally obligated and limit the exposure to greater financial management costs.
This is an area where blockchain may prove to be at a great advantage — reducing transaction costs to small and medium sized businesses.
Preliminarily, however, it may be useful to explain a little about the contracting process being proposed by #smart contracts, the substance of which is reproduced here and derived from my previous post:
Virtual contracts are not new. What smart contracts (potentially) offer are streamlined and transparent transactions at a minimal and known cost. This contracting process runs without human intervention based on a sequence of coded events monitored and executed by a virtual distributed transaction-based and encrypted system. Blockchain is often described as an online decentralized ledger of financial transactions, the nature of which is transparent to others on the blockchain. Ethereum is a blockchain platform over which #cryptocurrency can be exchanged as well as smart contracts formed. Blockchain began as a transparent and public peer-to-peer financial ledger using #bitcoincryptocurrencyand is at the beginning stages of transforming how the federal government, small businesses and financial services do business.
Cryptocurrency evolved from the current fiat monetary system and has beencompared to the gold standard. These monetary forms rely on a belief that the currency (in whatever form) has an agreed upon, or market created, value. Similarly, consideration, a necessary legal contract element, relies upon the parties agreeing that the value exchanged (the consideration — whether money or promises) is sufficient for an enforceable contract. For the small business hypothetical, I will use the Ethereum platform and related smart contract formation.
The Ethereum platform uses “ether” cryptocurrency, a competitor to the more familiar bitcoin. The smart contract manages a series of mini transactions (with the colloquial meaning, not the Ethereum definition), each of which build the agreement whole. Along the way, “fees” are paid for each interaction along the blockchain process. The fees pay the “miners” who process each transaction. This activity goes on separately from the over-arching contract’s performance. Fundamentally, there are two things going on — 1) smart contract transactions and 2) the real world contract performance, each are necessary to analyze as enforceable contractual transactions.
Generally, a contract in the U.S. is enforceable if: 1) the parties can legally enter into the contract; 2) there is an offer and acceptance; 3) there is consideration; and 4) the subject matter/form is legal.
When there is a discussion about the legality of smart contracts, it is generally about two things: 1) whether the smart contract is illegal because of its purpose, e.g., a smart contract to commit fraud is illegal, and therefore unenforceable or 2) the blockchain code itself may render the contract illegal. I suggest that each step be analyzed as a separate contract (because consideration is exchanged at every stage in Ethereum) to determine whether each transaction is legally enforceable, e.g., is there offer and acceptance? consideration? legal parties? proper form/legal? All would have to exist for a legally enforceable contract in the U.S.
Thus, there are two legal landscapes over which a my hypothetical merchant must navigate — the umbrella contract itself as well as the individual transactions over the blockchain.
The contractual disputes my hypothetical blockchain merchant may face are familiar — they differ only in format and understanding. If the merchant business and its customers do not read the contracts into which they enter, are they bound? Generally, yes, unless there was fraud, duress or coercion. Should customers and merchants be expected to read code? I think there is great room for improvement here.
When a smart contract is created, there is frequently a document in human readable, ornatural language, form which is supposed to be the basis for the smart contract code. However, some process-related transactions which are required to operate under the software platform may not be included in the contract — for example, what happens if the transaction fails (no currency or no performance) or what happens when either the merchant or the buyer changes an account address after the parties have agreed to the transaction. This may be handled in the blockchain, but the terms may not be reflected in the natural language contract. These could become routine fixes because the problems are common in regular contracts, i.e., if one party breaches, identify the remedies in the contract (select breach remedy options to include in smart contract code); no changes without the parties’ permission (flag when anyone attempts to modify/change code). The mirror image rule would be useful under these circumstances.
For my hypothetical small business, what problems may it face under U.S. regulation and tax laws?
The Wall Street Journal has been very busy publishing articles on bitcoin. On July 19, 2016, it posted an article about whether nations should issue bitcoin. On June 24, 2016, it published an article about how bitcoin may be taxed. In my opinion, working through the kinks now will help shape policies and regulation later.
The WSJ tax-related article identified issues which may be faced by virtual currency owners and investors. The author referred to a letter sent to the IRS by an accountants’ advocacy group, the American Institute of CPAs. Specifically, the author asked whether virtual currency owners and investors would face capital gains tax penalties each time virtual currency is sold. In 2014, the IRS’s answer was yes, if the virtual currency wasbeing held as an investment asset. If it is used as a substitute for currency, i.e., barter or trade, then anyone using the virtual currency would face the same tax liability as that related to earning regular income, regardless of the form in which the barter appears.
Here is the IRS position copied from Notice 2014–21 under FAQs:
“Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?
A-7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Publication 544 for more information about capital assets and the character of gain or loss.”
In the U.S., taxpayers who trade services for goods, or goods for goods, are required to report the income value of the services or goods received. The letter referred to in the June 24 WSJ article asked for additional guidance from the IRS with regard to tax reporting in order to assist their members. However, for purposes of the hypothetical small business, it may be sufficient to consider that if cryptocurrency is being traded for goods or services, the tax laws would be applied in the same way as regular income, and not subject to capital gains tax penalties.
So it appears that like most U.S. taxable events, the local/regional/state/country tax laws apply. As a point of reference, these issues have been addressed similarly for online transactions.
Absent startling revelations about smart contracts or cryptocurrency, these tax obligations should be familiar to small business owners. If not, small business owners should familiarize themselves with the relevant tax laws or secure professional tax advice before accepting/trading cryptocurrency.
As for the smart contracts, careful design, planning, and predictable dispute resolution remedies will assist in promoting smart contracts as a viable business tool for small and medium-sized businesses.
[This article was posted previously on Medium on 7/26/16.]
Cynthia M. Gayton is an attorney, educator and speaker. She has advised small and medium sized software development companies as well as arts and entertainment businesses and individuals. She has an undergraduate degree in international affairs with a concentration in science and technology as well as a J.D. Nothing in this article is purported to be legal advice. You can contact the author via email at [email protected].
Digital currency lawyer Jacek Czarnecki argues recent regulatory #proposals in the EU might benefit the #blockchain industry despite criticisms.
CoinDesk
Japanese e-commerce firm #Rakuten has acqui-hired #bitcoin #startup Bitnet as part of a bid to staff its new #blockchain development lab in the UK.
CoinDesk
Fintech.Li präsentiert hier wöchentlich die wichtigsten #News rund um #Fintech in der Schweiz, Liechtenstein, Deutschland und Österreich.
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