UBS Hosts The First Crypto Legathon 2.0 Event
Last Friday [UBS](http://www.ubs.com/global/en.html) hosted the world's first half-day Crypto Legathon 2.0 at their [Level39](http://www.level39.co/) innovation lab in Canary Wharf, London. The aim was to bring the best legal and technical minds with interest in cryptocurrencies, smart contracts, and distributed ledgers to participate in an experimental court trial mock up - the Legathon.
Last Friday UBS hosted the world’s first half-day Crypto Legathon 2.0 at their Level39 innovation lab in Canary Wharf, London. The aim was to bring the best legal and technical minds with interest in cryptocurrencies, smart contracts, and distributed ledgers to participate in an experimental court trial mock up – the Legathon.
The event was organized by Alex Batlin: Applied Innovation, Tech Research and Crypto 2.0 Lead at UBS. He’s responsible for leading a bank wide research and development programme exploring digital currencies and smart contracts on distributed ledger technologies, their impact on existing financial services business models and future opportunities. Alex is a panel member of the Fintech50 and mentor for both Fintech50 and Level39.
“The mock trial will focus on a case where a cross border payment transacted on a distributed ledger fails to settle off-chain. The aggrieved party decides to resort to courts in order to remedy the situation. Legathon participants will have to choose which role to act out, be that the judge, jury, technical expert, defence, prosecution.”
— – Alex Batlin
During the IDX Derivatives Expo in London Batlin shed some light on what UBS has been working on in their innovation lab: smart-bonds on the Bitcoin blockchain.
IFR Asia reported that the smart-bonds were described by Batlin as bonds where “risk-free interest rates and payment streams were fully automated, creating a self-paying instrument.” Batlin expressed his opinion that, “Blockchain technologies can make banks more efficient – for example through instantaneous settlement rather than the days it takes at present, lower costs and lower operational risk.”
“The simple lesson for banks is that if we don’t do it someone else will.”
— – Alex Batlin
According to research from London-based consultancy Scorpio Partnership, UBS is the world’s leading wealth manager with $1.96 trillion of assets under management. Oliver Bussmann, UBS CIO, stated in an article for the WSJ last year, “I believe – and this is my personal view – that blockchain technology will not only change the way we do payments but it will change the whole trading and settlement topic.”
Bussmann believes that blockchain technology has potential to trigger “massive” simplification of banking processes and cost structure.
“When somebody with a strong brand and security level establishes it as a reliable service, then the whole industry will follow. That is my personal prediction.”
— – Oliver Bussmann
The Crypto Legathon 2.0
The original idea for the Legathon format was slightly modified to take a more informal approach. Out of about 30 people who reserved tickets only 14 turned up, nevertheless the expertise represented was more than adequate for the task at hand:
- Ian Cusden Associate Director, Applied Innovation Corporate Center at UBS who works together with Batlin at the UBS research lab.
- Chris James: Senior Legal Counsel, Digital Ventures.
- Ian Grigg: Co-Founder at Dinero Limited, Financial Cryptographer, Inventor of the Ricardian Contract and Triple-Entry Accounting.
- Pinar Emirdag: UKDCA, SciencePeers, Hupomone Labs, SenaHill Partners.
- Kenneth Kappler Technical Communications Director at Ethereum.
- Ismail Malik: Co-Founder and Developer Partnerships at Credits.
- Hugh Halford-Thompson: Co-Founder at QuickBitcoin, UK President at Cointrader.
- Mohamad El Boudi: Market Intelligence at Blockchain Memo.
- Paul Gordon: Founder at Quantave, UKDCA, and Coinscrum London.
- Ryan Edwards-Pritchard: Head of Business Development/Partner at DBFS.
- Marco Houwen: Managing Director at BHS Services, Luxembourg.
- Afshin Moayed: CEO at Individuum, and at Hamsan, Luxembourg.
- Nicola Minichiello: Vanbex Group, Factom, Storj, Synereo.
After a round of intros from all the attendees Alex introduced the audience to the UBS research lab, the Pathfinder program, and the use case to tackle.
Alex Batlin introducing the Legathon 2.0 and the UBS Pathfinder Program
The case was set as a “transaction structuring” experiment. The group was tasked with working out the legal structure, data flows and corresponding flows of legal rights and obligations.
Two companies engage in an international FX swap between the UK and Canada over the Ethereum blockchain. The UK company holds asset backed crypto cash GBP issued by a UK bank, which in turn holds an equivalent deposit with the Bank of England. An equivalent arrangement exists on the Canadian side for crypto cash CAN.
To mitigate counterparty risk within the swap transaction both companies send money to a wallet owned by a FX swap contract, an escrow arrangement, issued by a bank or law firm. The FX swap code takes custody of pre-agreed at contract instantiation crypto cash, transferred to it by both parties, and if all is as agreed, the contract takes its transaction fee and pays out crypto GBPs to the Canadian company and crypto CADs to the UK company.
The discussion was lead by Alex and the two legal experts in the room, Chris James and Ian Grigg, were supporting the conversation from their perspective. The remaining attendees contributed with their own ideas and arguments, and some conclusions were reached.
It was observed that ‘smart contract’ as a term is unhelpful because legally a contract is a meta construct within a judge’s and counterparty’s minds that is an aggregate of presented evidence, code alone is not a legal contract. It helped the group to think in layers, there are legal layers, and code layers. The two are separate but in court would be viewed holistically.
Code – Permissions, Ledgers and Circuit breakers
Early comments focused on permission-ed versus permission-less ledgers. Permission-ed ledgers have the advantages of latency, throughput and energy efficiency. It’s possible however that secondary mining license markets will emerge and a hostile entity may bulk purchase permission-ed ledger licenses, dominating the chain to ill intent.
A permission-less ledger may also be more acceptable in an international setting, where questions remain as to who the regulator is, and who has controlling jurisdiction. The case for a permission-ed ledger within clearly defined national borders, or existing regulated markets, appeared more compelling.
The question of jurisdiction was a theme which repeated throughout the discussion. The question of which country’s court would preside over a dispute was quickly resolved, as common practice is to stipulate the jurisdiction within the contract that two parties enter into.
Technically blockchains cannot be used in some countries, and exporting crypto technology is forbidden to certain jurisdictions. An interesting side case arose, the focus of some law is on the encryption aspect of crypto technology, but blockchain uses it for signing only. Could export laws be relaxed for blockchain technology?
At a system level, attention should be payed to what happens if malware takes over, or unintended spirals of trading occur due to complex and unforeseen interaction of algorithmic trading smart contracts.
Legal – Who owns the smart contract, Accepting terms, and Collateral risk
Ownership is important, it determines who is liable when things go wrong. According to western law, a machine cannot own a contract, only a legal entity, person, or company can. It is likely that a court would view a smart contract as a machine, hence for the smart contract to have legal validity it would have to be owned by someone. This would be stipulated in the Terms and Conditions.
How do you know if both parties accepted the terms of the contract, a legal requirement. One solution would be to borrow from API usage. Typically you need to request an API key to use the API, and as part of that process you are presented with terms and your acceptance is recorded.
In our use case a national bank is used to clear and settle the swap. There is very little risk here as central banks in principle have little chance of going bankrupt. However, what happens if the money that is used somehow becomes tainted. Most countries have laws and regulations that apply, for instance anti-money laundering (AML) policies. The easiest place to enforce those policies is in the smart contract code, before allowing a cash transaction between two parties. It was also deemed appropriate to check if the receiver happens to be in an embargoed jurisdiction, by calling a smart oracle.
The Legathon 2.0 attendees discussing the case at hand
More and more financial institutions are investing in research on new technologies, like the blockchain, and see how they can modernize and improve banking and the financial services industry. UBS is a great example of this and others have joined the bandwagon.
Exchange operator Nasdaq in May announced plans to launch blockchain-enabled digital ledger technology for equity record keeping. “Utilising the blockchain is a natural digital evolution for managing physical securities,” said Nasdaq CEO Bob Greifeld.
“Once you cut the apron strings of need for the physical, the opportunities we can envision blockchain providing stand to benefit not only our clients, but the broader global capital markets.”
— – Bob Greifeld
Derek White, Chief Designer and Digital Officer at Barclays said in an interview for BBC Newsnight, “we see the power of what this blockchain can become, venture capitalists see this. Even more exciting is the disruptive mind of entrepreneurs are seeing the power of this, and they are building new businesses in new paradigms that are going to change the shape and the face of all industries.” They have their own London-based Barclays Accelerator.
Deutsche Bank recently announced they will also launch three tech startup labs in 2015 with partners such as Microsoft, HCL, and IBM in London, Berlin, and Silicon Valley with the hope to screen some 500 fintech start-ups per year.
2015 should be a very interesting year for fintech and blockchain startups, we will possibly see innovation coming from all fronts in the financial sector. The future holds exciting developments in the space that could offer new means of doing business, and allow for easier, cheaper, and faster finance with the hopes of making financial institutions more transparent, accountable, and fair.
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