Without A TARDIS Or A DeLorean, We Did The Best We Could: Five Blockchain Predictions – Fin Tech

While the blockchain universe continues to expand, the direction
and pace of its development will continue to be influenced by a
number of variables – including financial markets, regulatory
environments and politics. While we cannot predict how each of
these variables will play out this year, this article describes how
we think some of them will influence blockchain developments and
what we may expect to see this universe look like by the end of
2024.

1. BLOCKCHAIN INNOVATION AND DEVELOPMENT WILL CONTINUE IN THE
UNITED STATES, EVEN WITHOUT ADDITIONAL “REGULATORY
CLARITY.”

The calls for digital asset “regulatory clarity” in
the United States have been frequent – and loud – for a
long time, and there is no guarantee that the full clarity most are
hoping for will ever arrive. There is ample precedent in the United
States for legal regimes to remain a web of overlapping state and
federal requirements indefinitely. We expect that progress on
digital asset regulatory clarity will be, at best, incremental and
comprised of baby steps. (More on the U.S. regulatory outlook
below.)

With that said, we also believe blockchain innovation and
development in the United States will accelerate, even without
significant new or revised regulations.

What will those innovations look like? Blockchainbased assets
and transactions will increasingly incorporate features of
traditional assets, like anti-fraud protection, transaction
reversibility, and improved ability to debug and update blockchain
products after launch. While these features may not represent a
purist’s view of decentralized finance, they will be critical
to widespread acceptance of these products by the market . . . and
regulators.

In addition, in some cases financial products and services will
be little more than “blockchain-enabled” versions of
their traditional forms. But the momentum created by these
incremental innovations will be important proofs of concept for
markets and regulators in the years to come.

2. DON’T EXPECT THE “CRYPTO SKEPTICS” IN
WASHINGTON TO SUDDENLY CHANGE THEIR VIEWS. HOWEVER, THE WEIGHT OF
MARKET DEVELOPMENTS MAY INCH THE NEEDLE FORWARD ON DIGITAL ASSETS
REGULATION.

It is unlikely that there will be a radical shift in policy or
regulatory approach to digital assets regulation this year. There
will be little incentive for lawmakers to abandon their skeptical
and restrictive approaches to digital assets unless they have
reasons to do so. Historically, election-year political dynamics
have cut against major shifts in policy. We are, however,
optimistic about three related factors that could align to result
in meaningful movement.

• Traditional Finance Has Joined the Chat. While
  regulators will remain skeptical, the increasing involvement of
  traditional, highly-regulated financial institutions may provide
  some comfort to regulators that digital assets innovation can be
  accomplished responsibly. These traditional financial institutions
  have deep experience navigating the regulatory environment and we
  will continue to see them bring the weight of their experience to
  push digital assets products forward. As the market volume of
  blockchain-based products and services increases, there may also be
  increasing pressure on regulators to fine-tune their approaches to
  digital assets. For example, the combination of numerous bitcoin
  spot Exchange-Traded Fund (ETF) applications by some of the
  world’s largest asset managers and the loss in court by the
  Securities and Exchange Commission (SEC) regarding its handling of
  those ETF applications increased the likelihood that these ETFs
  would be allowed in the U.S. market in 2024. (Post-script: On
  January 11, 2024, the SEC approved 11 ETF and exchangetraded
  product applications for the U.S. market and these products have
  seen significant asset inflows in their first weeks).




• Take the Easy “W” If You Can Get It. In
  addition, legislators may decide that regulation on discrete
  “low hanging fruit,” such as stablecoins, may be an
  easier accomplishment than a comprehensive set of laws on all
  things digital assets. They may be more likely to do so if
  additional stablecoin products are brought to market by existing,
  well-established (and well-regulated) companies.




• Regulatory Authority Is Broad, But Not Limitless.
  While the SEC has exercised broad jurisdiction over digital assets,
  the Government Accountability Office recently said that the SEC had
  overstepped its authority by issuing Staff Accounting Bulletin
  (SAB) 121¹ without Congressional review. SAB 121 has had
  the effect of preventing most financial institutions from
  custodying digital assets for customers and limiting the types of
  digital asset products they offer to customers. The practical
  effect of this action is unclear, and SAB 121 may ultimately be
  validated. But actions like this and the ETF court case, among
  others, demonstrates that for now, there appear to be limits on
  regulators’ authority in this space. As a result, there could
  be new examples of these limits this year.

3. SPEAKING OF PLACES OTHER THAN THE UNITED STATES: REGULATORY
UPDATES OUTSIDE THE U.S. WILL ENCOURAGE SOME BLOCKCHAIN DEVELOPERS
TO ESCHEW THE UNITED STATES MARKET (FOR NOW).

Outside the United States, there has been significant movement
toward updating regulatory frameworks for blockchain and digital
assets considerations. Different countries have taken different
approaches – for example, Switzerland, the European Union,
Singapore and United Arab Emirates – and it remains to be
seen which will be successful in the long run. But for now, these
countries have established more blockchain-friendly legal regimes
and that will attract resources – capital and human –
away from markets where digital assets development is more
challenging or costly

Some of that development outside the United States has already
started; this development includes traditional financial players
issuing blockchain-native instruments in France and start-up
ecosystems developing in Singapore. To be clear, blockchain
projects and digital asset innovation in the United States is not
going to grind to a halt in 2024. Institutional interest,
confidence in US regulatory regimes and the sheer size of the U.S.
market, among other reasons, will continue to make the United
States a relevant market for digital assets in the near term. But
that relevance will not be uniform across all types of blockchain
projects.

4. SEPARATE FROM U.S. FINANCIAL REGULATIONS, LEGAL
UNCERTAINTIES IN BLOCKCHAIN APPLICATIONS WILL START TO BE RESOLVED
WITH AN INCREASED FOCUS ON UNIFORM RULES AND STANDARDS.

As blockchain technology changes the way we transfer value and
record interactions, it has raised (and will continue to raise) a
host of new legal questions. Lawyers, legislators and judges will
need to figure out what these innovations mean for rights,
liabilities, and obligations in contracts, disputes and other
contexts.

In general, legal uncertainty has a chilling effect on markets
and commerce. In some cases, rights and obligations in blockchain
transactions have been sorted out by courts after the fact, but
these decisions are often fact specific and are not broadly
applicable to the market. As a result, we will continue to see
movement toward the creation of frameworks and standards designed
to clarify these uncertainties and pave the way for trust in the
technology and confidence in the products and services built upon
it. In the next twelve months, we expect to see significant
movement in three key areas:

• Development of Uniform Laws. One of the most prominent
  U.S. examples of this is the proposed UCC Article 12, which
  provides a framework for using blockchain records for secured
  finance transactions. Article 12 addresses market concerns in
  secured finance that existing commercial law rules may be
  insufficient to support widespread electronically recorded
  instruments and records. Broad adoption by U.S. states of these
  laws – which is already underway – would remove a
  significant hurdle to broader usage of blockchain technology in
  sophisticated (and massive) financial markets.




• Industry Group Coordination and Development of
  Proposals. Industry groups, such as the Global Blockchain
  Business Council, will also continue to develop legal and market
  standards to address some of this uncertainty as well. With the
  support of legal and industry leaders, these standards will
  continue to gain traction and fill voids in the blockchain legal
  landscape.




• Technology-Enabled and Regulatorily Compliant Contractual
  Rights. Lastly, developers and technologists are developing
  new technical standards that address practical and legal
  considerations in the use of smart contracts. Building on the
  success of the Ethereum Request for Comment 20 (ERC20) standard,
  newer and more complex standards will expand on previous frameworks
  and – most importantly – address some of the legal
  uncertainties inherent in earlier technologies.

Combined, we expect these three avenues of development to
resolve some significant areas of legal uncertainty in the use of
blockchain applications.

5. THERE WILL CONTINUE TO BE NEGATIVE HEADLINES ABOUT
BLOCKCHAIN AND DIGITAL ASSETS, BUT THESE WILL BE FEWER AND
GENERALLY LESS EGREGIOUS THAN IN THE PAST SEVERAL YEARS. THE
BALANCE OF BLOCKCHAIN HEADLINES WILL BE POSITIVE.

Especially in the United States, legislators, regulators and
law-enforcement have made no secret of their skepticism of all
things digital assets. In some cases, that skepticism is justified.
When wrongdoing involving digital assets is discovered, it will be
investigated and prosecuted – just as it is in all other
areas of financial markets. And we will continue to see digital
assets skeptics blame the technology for human crimes and
mistakes.

It is a hallmark of a maturing market and ecosystem that bad
actors are flushed out and held accountable, which allows good
actors to flourish and build legitimacy for their products. We
expect that maturation to continue this year, so we will close this
article on an optimistic note: We believe that by the end this
year, there will be far more positive news in the ways blockchain
applications and digital assets can improve financial markets and
transactions than there will be news of crypto fraud.

Footnote

1. https://www.sec.gov/oca/staff-accounting-bulletin-121.

Originally published by The Computer & Internet
Lawyer.