Digital assets like bitcoin and its underlying blockchain technology are potentially useful for New Hampshire, a state commission has concluded, but are so new and different that nobody’s sure how the state can harness that potential – or even whether it should.
“With blockchain, there is no clear agreement on even the question of whether there should be basic ‘rules of the road’ governing how humans interact over blockchain networks,” said the 42-page “Report of Gov. Sununu’s Commission on Cryptocurrencies and Digital Assets,” released Thursday.
The commission was created last year “to offer specific findings and recommendations regarding the role of the New Hampshire legal system with respect to innovations involving blockchain technologies” – in other words, what new state laws or regulations are needed. The report is filled with questions but gives few answers, aside from the need for more 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 properly balance conflicting goals of society. … Finding the ‘sound balance’ with respect to such a new and developing technology as blockchain, which is still in its infancy, is very challenging.”
The report can be downloaded in PDF form here.
The most important aspect of blockchain and the technologies that use it, such as bitcoin and other crypto-currencies, is that it offers a way to be decentralized and yet trustworthy. Information about bank accounts or property documents does not need to be controlled by a central authority in a bank or city hall in order for users to be sure that it hasn’t been tampered with.
Proponents for blockchain technology, which has been around for a decade, say this makes it a valuable tool for cutting costs and increasing speed of many transactions, and allows for such things as “smart contracts” that are automatically updated. But applications remain few and far between, aside from well-publicized attempts to make money buying and selling crypto-currencies that are based on the blockchain.
“While decentralization is an ideal that is touted by advocates, the reality is that most of the growth in volume of transactions involving crypto-assets has occurred on platforms that cannot practically be considered decentralized,” the report says, pointing to the multi-billion-dollar collapse of FTX, a crypto-trading platform.
Decentralized systems do exist, the report said, but they are slow, opaque and have “continued legal risks.” They may not even be very decentralized: “It is unclear exactly how to measure degrees of decentralization.”
Further, it said, taking city hall or banks out of the loop can have as many drawbacks as advantages. “While irresponsible actors at centralized institutions are a bug of the financial system, responsible actors in those same positions are a feature.”
By far the biggest use of blockchain comes from people trying to profit from the purchase and sale of crypto-currencies like bitcoin. This has created huge amounts of debate about how these money-making moves should fit into the legal framework for banking and trading of stocks and other financial assets.
That debate can be seen in the recent conviction of Keene resident Ian Freeman for money laundering, tax evasion and “operation of an unlicensed money transmitting business” because of his bitcoin operations, and the U.S. Securities and Exchange Commission’s suit against LBRY, a Manchester-based hosting site that uses what are known as tokens on the blockchain, which the SEC said 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 an entirely new set of considerations,” the commission says, “but an intermediate, practical question is whether centralized platforms that provide financial services with respect to crypto-assets are any different, from a policy perspective, than centralized firms that provide financial services with respect to more traditional financial assets.”
Among the legal questions to be answered, the report said, are these:
- whether crypto-trading groups like Decentralized Autonomous Organizations (DAOs) are like limited liability corporations, providing some protection for their members;
- deciding what court system handles disputes over transactions that take place entirely online rather than in any physical location;
- how blockchain transactions should exist in the state’s Uniform Commercial Code, a set of rules that govern commercial transactions;
- what changes, if any need to be made to New Hampshire securities laws “with respect to various assets and activities involved in the conduct of blockchain activities and businesses.”
- clarify which blockchain transactions are subject to the state’s business profits tax.
- keep an eye on any federal regulation to make sure it doesn’t “impose disproportionate burdens on privacy or property interests of NH citizens.”
One other thing: the study says the state should look to incorporate bitcoin mining – the energy-intensive process of doing meaningless calculations to give cryptocurrencies rarity and perceived value – into its statewide energy plan. Crypto supporters say mining can use excess renewable energy and thus make green power more financially stable, an idea that has yet to be tested.
In the meantime, the report cautioned against being too pro- or anti-blockchain. “The members determined that it would be unwise and imprudent to adopt the most extreme positions of commentators on Blockchain technologies (either the evangelical side or the ‘anti-civilization’ side).”
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