The bitcoin boom reached its zenith two and a half years ago when a single unit of the cryptocurrency soared above $1,200 on an online exchange.
While the intervening years have produced a sharp decline in value (it’s now trading at around $500), the underlying mechanism by which all bitcoin transactions are recorded, known as blockchain, has produced a burgeoning industry as the technology is refined for use in a number of different sectors, particularly finance.
At its core, blockchain is essentially a secure ledger system that produces an immutable record of transactions. It was initially released into the public domain as an open-source code by bitcoin’s mysterious founder, who went by the name Satoshi Nakamoto but whose identity is in doubt.
“A surprisingly diverse array of businesses are exploring applications for blockchain technology,” said Santa Monica attorney Brian Klein of Baker Marquart. “Everyone is trying to figure out what it is and how it works.”
One local firm tackling blockchain is Venice’s Gem, which is eyeing health care record keeping, among other applications.
Yet the proliferation of interest doesn’t mean that it’s all smooth sailing for companies trying to make a buck in the space. In fact, some L.A. lawyers are finding a niche in providing advice not just about how well a client’s software adheres to the rules, but about where their blockchain product could be best applied.
Adam Ettinger, a partner in Sheppard Mullin’s Century City office who routinely works with companies developing blockchain applications, said his job is to inform them about how their product fits within a regulatory ecosystem.
“My role is to help figure out what the areas of regulation are and what the ultimate object of the product is,” Ettinger said. “What pain point is being eliminated as a result of the product’s application?”
This can be a difficult position, especially when dealing with tech startups that typically don’t have much knowledge of – or patience for – slow-moving and restrictive regulatory structures.
Risks, rewards
Despite an uncertain regulatory landscape, investment in the technology is only increasing. Data from CB Insights show blockchain and bitcoin startup companies received $496 million in funding last year – up from $341 million in 2014 and $89 million in 2013. Investment activity was also healthy in the first quarter of this year, with $173 million in funding.
Applications for blockchain are wide-ranging – uses in health care, real estate, and logistics are all being developed – but the most tangible examples of the technology come in the financial sector.
A report last month from Goldman Sachs estimated blockchain technology could save the global stock trading industry $6 billion annually by allowing the highly regulated sector to streamline its operations using simple code, according to the analysis, rather than expensive intermediary brokers.
But regulation is a double-edged sword for blockchain companies trying to tap the financial market’s appetite for efficiency. On the one hand, the opportunities for creating a system to track stock ownership or record trades without intermediaries is a massive business opportunity. But government oversight can be burdensome and regulators such as the Securities and Exchange Commission can be slow to recognize new technologies.
“The SEC has had this on their radar for as long as it’s been around,” Sheppard Mullin’s Ettinger said. “They can be cautious with new technology, however, to make sure it matches up with the rest of the ecosystem.”
While slow, there is movement on greenlighting blockchain applications in the financial space. In December, the SEC published its “advance notice of proposed rulemaking” concerning blockchain technology and solicited comment from stakeholders at all levels.
Blockchain’s unique, autonomous tracking system can present legal headaches when it comes to actually employing the technology on a daily basis.
“Everyone is still trying to get a handle on the technology and at the same time attorneys are trying to figure out what the legal issues are,” said Klein, who chairs the American Bar Association’s conference on digital technology and blockchain currencies.
