French Legal Aspects of Cryptocurrencies - Introduction 1/2

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1. A real "ecosystem" around crypto-assets is developing in France and around the world. However, the emergence of this new and growing sector is not easy to understand legally, given its unprecedented nature. The technical nature of the terms used, most often Anglicisms, is not likely to help the neophyte in the understanding of this new technology. The result is a profound lack of understanding of the mechanisms inherent in the functioning of crypto-assets. However, once these obstacles have been overcome, the interest in crypto-assets emerges, and the field of possibilities offered by the technology seems limitless, so much so that it can be transposed into many fields that were previously thought to be immutable.

2. Bitcoin is the first crypto-active, created in January 2009 by a computer scientist nicknamed "Satoshi Nakamoto". Originally conceived as a decentralized e-money system, its value has grown steadily over time. Its operation has been duplicated so that many crypto-assets exist today. Thus, Bitcoin, because of its anteriority, seems to fulfil the function of a store of value, as most other crypto-assets are indexed on it. As crypto-assets increasingly take the form of a real alternative economy, their growth seems to be anchored in the new generations to such an extent that it is no longer decent to deny them, as has been the case for almost ten years in France.

3. The lack of certainty as to the identity of "Satoshi Nakamoto", as well as the concomitance with the global economic crisis of 2008 illustrating the loss of confidence in the world's monetary institutions, are all factors justifying the reluctance of States to adopt a clear position on crypto-assets. As the law does not tolerate a vacuum, it is the doctrine that quickly took up the issue. Even at the qualification stage, positions are divided: Financial assets for the crypto-skeptics, real alternative currency for the pro-bitcoin. In addition to these positions, which were eminently political rather than legal, some people practised breaking down each stage of the operation in order to better understand it as a whole. While none of the approaches seems ideal, the last one is marked by pedagogy and, in our opinion, the one most likely to identify a new, rapidly evolving concept.

4. Prior to the legal analysis of crypto-assets, it is necessary to define them by dwelling on the terms sometimes used to designate them. As the terminology used has evolved over time, different terms have been used to designate crypto-assets since their creation, a source of incomprehension that has been forever inscribed in legal research on this subject. Thus, crypto-assets are all virtual assets that have a "smart-contract" as their electronic medium. The term cryptomoney was originally used to refer to Bitcoin and other crypto-assets. Regardless of the term used, it is a "currency created, not by a State or a monetary union, but by a group of persons (natural or legal) and intended to record, on a virtual medium, the multilateral exchanges of goods or services within that group". It is indeed the decentralised nature of crypto-assets that is at the heart of the definition. Thus, the term "crypto-active" was preferred to "cryptomonic", without changing the scope of the concept, but making it possible to designate all encrypted assets with greater relevance, regardless of their monetary purpose, which is marginal in view of the development of the types of crypto-active.

Indeed, it is the use of the term currency to designate crypto-assets such as Bitcoin that poses the most problems. The term money derives from the name of the temple of Juno Moneta where coins were minted in Rome, illustrating that money is a state instrument. As an economic instrument, the State has, in all eras, exercised its prerogatives over this instrument in order to control it better, so that the idea of a non-sovereign currency has always been strongly contested, when it is not simply prohibited.

5. Other terms have been used to refer to crypto-assets, although they are inadequate. For example, crypto-active as cryptomoney is also referred to as cybercurrencies, which are "currencies whose creation and management rely on the use of computer and telecommunications techniques". While it is undeniable that an active crypto is a cybercurrency, this notion encompasses more than crypto-assets: any digital, electronic or scriptural currency is a cybercurrency, without being specially encrypted and decentralised, whereas this is the essential characteristic of crypto-assets. crypto-assets are therefore a special form of cybermoney, decentralized and encrypted.

In the same vein, crypto-assets are a particular form of electronic money, which is a "currency whose units of account are stored on an electronic medium. ยป . Like the concept of e-money, e-money encompasses more than crypto-assets, since, if stored on an electronic medium, it is special and not to be confused with those used for e-money. Semantically adequate but too broad, it would be possible to include crypto-assets in the category of electronic money if its legal design did not suffer from greater incompatibilities.

6. The technological aspect of crypto-assets is central to their nature, and therefore to their definition: it is an asset stored on a particular medium, a smart-contract. This characteristic makes it possible to attach crypto-assets to various existing categories, without them fitting perfectly into it. It is the novel nature of the electronic medium that makes it difficult to integrate them directly into an existing category. Consequently, it is necessary to understand the functioning of this medium in order to better grasp it.

7. Smart-contracts" are autonomous computer programs which, once started, automatically execute predefined conditions which are written into them . They are executed automatically because they operate in a peer-to-peer network, which is "the mode of use of a network in which each of the connected participants has the same rights and which allows a direct exchange of services without using a server". Concerning the operating conditions, the range of possibilities is only equalled by the inventiveness of their creator. Therefore we will only focus on one particular smart contract, the one that created the first crypto-assets like Bitcoin: the "blockchain". It is a "mode of recording continuously produced data, in the form of blocks linked to each other in the chronological order of their validation, each of the blocks and their sequence being protected against any modification".

8. The "blockchain" is a fairly simple form of "smart-contract", allowing the decentralization of a register. This "smart-contract" is forgery-proof because each block is validated, not by a specific person, but by all the participants in the network through the block validation mechanism, which is none other than "the computer operation used to make a block forgery-proof and validate it in a chain of blocks". More precisely, this validation will depend on the computing power used by the members of the network, making it impossible for an operation to be falsified by an isolated operator. This validation results from a proof of work which is "the result of a task that consumes a lot of computing resources, whose accuracy is easily verifiable by any participant and certifies that this task has been carried out by consuming the necessary resources". Another form of validation, less energy consuming, the proof of issue is a validation method requiring, not the accuracy allowed by the power of each, but the simple consensus of the participating members.

9. Once these terminological and technical elements have been exposed, it is necessary to place the crypto-assets in a more general context. Indeed, a whole sector of activity has been born, and reducing the analysis to a mere financial object, as is often envisaged, does not seem adequate to understand crypto-assets as a whole. If it is the monetary nature of the first crypto-assets that has caused the most ink to flow, it is because of the lack of precedent in the emergence of a real alternative economy. If we see in some crypto-assets the nature of money, it is because they are at the service of a growing number of applications developed on the basis of "smart-contracts" that make it possible to free oneself from any reference to legal tender.

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