Law firms push blockchain work in finance despite ‘cryptowinter’

Finance and technology have moved in lockstep throughout history, from the abacus to the algorithm. But the increasing complexity of money matters, coupled with regulatory grey areas around emerging digital technologies, mean that lawyers have a growing role in shaping future financial systems.

Among the areas receiving particular attention is the use of blockchain. Though better associated with speculative digital assets such as bitcoin, which are facing a “cryptowinter” amid scandals and falling prices, many banks are exploring use of the technology.

“It’s the first time in 50 to 75 years where there’s an opportunity to re­imagine how financial markets operate,” says Etay Katz, a partner at Ashurst, who worked with investment bank Goldman Sachs on a GS platform, supporting settlement — the completion of payment transactions — using a blockchain.

“Shortening settlement cycles makes the market safer and more efficient,” says Katz. “The trading environment has been reduced to near perfection in terms of speed.”

Ashurst was involved in the platform’s design to gain regulatory ap­provals, reflecting the considerable divergence across jurisdictions when it comes to the legislation around blockchain.

In broad terms, there are contrasting regulatory approaches on the general licensing of digital assets globally, says Katz. Regulators in Singapore and Hong Kong are actively supportive, while US regulators have been far more prescriptive and resistant to legitimising speculative crypto assets following various scandals, such as the collapse of FTX.

“It’s taken a long time to create that bifurcation between speculative activity [in products such as bitcoin] and productive activity in changing the underpinnings of the markets,” he says.

By contrast, the EU has pressed ahead with the introduction of an extensive set of rules for the oversight of crypto assets, known as the Markets in Crypto Assets (Mica) regulation, due to come into force in 2024.

The potential of stablecoins — a form of cryptocurrency pegged to an underlying currency, in order to keep its value — continues to attract interest. While they have often been viewed with scepticism, given controversies surrounding some of the companies behind them, they have also found use for humanitarian aid.

Richard Hay, UK head of fintech at Linklaters, was involved on a pro bono basis advising the United Nations High Commissioner for Refugees on the use of USD Coin, a stablecoin that is a joint venture between US payments company Circle and listed crypto-exchanged Coinbase.

How do you think about projects that don’t have a defined end game?

The project’s aim was to send donations to internally displaced people in Ukraine through digital wallets offered by a provider, Vibrant, on smartphones that could be redeemed for cash. “As an internally displaced person, you may not have any ID but you’re likely to have a mobile phone num­ber,” says Hay. “Every phase was in­­novative — no one has done this before.”

The use of a stablecoin which, by its centralised nature, can be tracked easily, offers chances for future work in the field, he adds.

“You can see where this logically goes is tracking the flow of donations all the way down to an underlying wallet . . . You could see transfers on the blockchain; you can see the ap­peal of that degree of transparency.”

Legal advice is also needed to offset the greater risk aversion among traditional players following various crypto scandals, says Daniel Csefalvay, London-based partner at law firm BCLP, who has helped firms using blockchain technology for financial market infrastructure.

“One of the hardest things [in the digital assets space at the moment] is how mainstream financial services players are de-risking themselves from crypto-related businesses,” he says.

And the teething pains of distributed ledger technology are not the only area of financial innovation in which lawyers play a pivotal role.

Freshfields Bruckhaus Deringer was involved with the 10-year strategic partnership struck between the London Stock Exchange Group and Microsoft, last December.

For US tech group Microsoft, the deal offers the chance to plant a flag with a core customer in the financial services space, while the exchange operator gains a tech partner at a time of cutting-edge innovation.

But the scale and complexity of the agreement required considerable care, says Giles Pratt, partner at Freshfields. “You can only do this kind of deal with people you’ve known a long time,” he says. “In effect, it’s [multiple] complex deals in one, marrying together the best of fintech, pure tech, and financial services institutions.”

This type and size of IT deal, in which Microsoft paid £1.5bn to acquire a 4 per cent stake in LSEG, is different from the work done in previous decades, he says.

“How do you think about projects that don’t have a defined end game?” he asks. “Twenty years ago, an IT contract was an agreement to build a thing for a price within a given time. Now, it’s much more agile: it’s about marrying a fintech way of doing bus­iness to the depth and scale of the London Stock Exchange Group’s business.”

In the past, organisations such as the LSEG might have looked to build their own technology in-house, Pratt adds. But, with potential innovations in fields such as artificial intelligence emerging at an ever-faster rate, complex deals such as this will be increasingly likely, necessitating further need for expert legal counsel.

“We’re seeing more established companies, in need of a tech solution or acceleration, bring that in through inorganic acquisition,” he says.