Blockchain/DLT consulting

Distributed ledger technology or “DLT” and blockchain as one of the DLT technologies, bring great disruption to technological, social and other processes. These technologies represent a significantly greater potential than virtyal currencies alone, which currently represent the most well-known and widespread example of the implementation and use of blockchain technology.

 

Smart contracts, e-corporate governance, e-identity, e-elections, tokenization of movable and real estate assets, e-money and other forms of blockchain technology implementation will significantly change existing processes in financial, insurance, health and other industries. Blockchain technology brings added value in the optimization of certain processes that serve as the basis for products and services, especially in terms of security, transparency, speed and price.

 

Use of smart contracts (e.g. such as  “escrow” smart contracts, smart contracts for corporate governance or an insurance product in the form of a smart contract), organized secondary markets (stock exchanges) for trading with virtual currencies, electronic money on blockchain, question of tokenisation of movable and fixed assets. The number of cases of using blockchain technology is increasing and consequently there are more and more questions in this regard.

Implementation of blockchain technology

Not every business model or business process is suitable for blockchain or DLT technology. However, in business models where blockchain brings added value, there are quite a few different options for implementing this technology. The basic question arises in the type of blockchain, whether it is a public blockchain or a private one. Each of the mentioned varieties, decentralized and centralized, has its pros and cons. If the blockchain technology is intended to be used in regulated or partly regulated activities (e.g. "FinTech" or "InsureTech"), the key decision factor may be related to the regulator's requirements or relevant legislation.

 

Individual blockchain platforms also essentially differ among themselves. Some are more suitable for the implementation of smart contracts (Ethereum, Cardano) while others, mainly due to speed and architecture, are better suited to financial transactions (Ripple, Stellar). The final choice of a blockchain platform, which is the basis for providing services or products, thus has to be adapted to the individual business model.

 

Because the blockchain (and, in general, IT) architecture is the essence of a digitized business model, significant risks for the company arise from this architecture (operational risk, risk of loss of reputation). In order to significantly reduce these risks, so-called programme code revisions or penetrative tests are conducted in practice. The audit or tests are carried out by a software developer who is not connected with the author of software code. A (comparative) risk assessment is drawn up to identify legal or technological risk.

Business model (tokenomics)

Many blockchain projects want to create their own microeconomy, within which their own virtual currency has a specific purpose. Depending on the purpose of the virtual currency, we distinguish three main categories: payment virtual currencies, asset backed virtual currencies and virtual currencies that have a certain useful value or utility. Where the multipurpose use of virtual currency is foreseen, we refer to hybrid forms. In practice, this is usually the case of a hybrid between the "payment" and "utility" virtual currencies.

 

When designing a business model - microeconomy, it is usually crucial to assign as much functionality as possible to your own virtual currency, or to include a maximum amount of processes, built on the basis of blockchain technology (e.g. smart contracts) into the business model. A business model involving a virtual currency (“tokenomics”) that functions normally and in which a virtual currency can be replaced with an already existing one (e.g. Ethereum), is likely not sustainable.

 

In "tokenomics" it is particularly important to understand what kind of rights the possession of a virtual currency grants its holders. The legal classification of the virtual currency is dependent on this and it may consequentially involve various legal obligations for the issuer. Incorrectly designed virtual currency from the perspective of the issuer's obligations and rights of the holder can present the issuer with a number of legal and operational risks. Risks can be reflected in the procedures of the regulators against the issuer, holders against the issuer (e.g. class actions) or in the non-classification of virtual currencies into organized markets (stock exchanges).

Issuing virtual currencies

The procedure of issuing a virtual currency is connected to a number of legal questions. Rights arising from the possession of a virtaul currency are crucial for the assessment of the legal nature of the virtual currency, which is the subject of issue. The legal structure of an issue also depends on the question of the purpose of the virtual currency (see section "tokenomics") and the asset that is the basis for the issuance of the virtual currency (in the case of a virtual currency with cover in a certain asset). The key question of virtual currency issue is also the issue of investors - what kind of investor (educated, uneducated) can invest and which countries investment is limited to.

 

As a part of the issue process, it is necessary to prepare documents that serve as information for potential investors (prospect, “white paper”, technical “blue paper”), contracts with investors (“private placement” phase), legally binding document regarding the sale of the virtual currency to the public ("terms of sale") and legal opinion on the virtual currency's legal nature, which is always required by crypto stock exchanges. Since the legislation on virtual currency issue is not completely clear or standardized at the EU level, it is advisable to prepare an assessment of legal risks for the issuer in some cases.

 

Virtual currency issue is also connected to technological questions. This includes smart contracts for virtual currency creation, smart contracts for virtual currency distribution, smart contracts for management (e.g. micro payment, voting) and smart contracts for locking and gradual release of a virtual currency (“vesting”). The established blockchain architecture must reflect the provisions of the legal documentation that is the basis of the virtual currency issue.

Regulators

In case of the blockchain technology use in regulated or partly regulated activities, the companies are also subject to regulation when developing their business model. The regulation establishes premises in which the company designs its services or products. The scope of “FinTech”, “InsureTech” and “RegTech” can be subject to systemic regulation that regulates the field of banking, insurance, payment services, personal data protection, taxes, financial instruments and money laundering prevention.

 

When gradually developing a business model or part of its subsequent implementation, it is advisable to establish open and transparent communication with regulators. In practice, this means that a business model is presented to the competent regulator, individual compliance issues are discussed, and certain documents are submitted for confirmation or information purposes.

 

In order to conduct particular activities related to virtual currencies (e.g. custody, exchange services), certain licenses or previous notification of activity to the competent regulator is required in certain states. Such states include Malta, Estonia and Gibraltar. It must be emphasized that such licenses function as local licenses, which do not provide the option of cross-border business. In practice, this means, that acquiring a licence in one European country does not allow a company to provide the same service in another country.

 

In some countries, so-called regulatory sandboxes are present. These are controlled environments established by the regulator. Within said sandboxes, technology companies develop their solutions under constant control of the competent regulator. Companies must meet certain conditions in order to be included in regulatory sandboxes.

Fintech Factory offers its clients

consultations related to the implementation of blockchain technology

consultations related to smart contracts and audit of the software code

drafting tech risk assessment related to the implementation of blockchain technology

consultations related to the developing business model based on virtual currency

drafting legal documentation related to emissions of virtual currencies

drafting legal risk assessments for issuers of virtual currencies

consultations on the correspondence with competent authorities

consultations and drafting legal documentation in the licensing procedures

assistance in the application process for entering regulatory sandboxes

assistance in building multidisciplinary teams of experts (developers, marketing / PR, tax consultants)