A Little Bit About James:

James advises a wide range of firms on financial services regulation and FinTech. He advises financial institutions on all aspects of EU and UK financial regulation. This includes advisory, project, and transactional work in connection with the Markets in Financial Instruments Directive, the Capital Requirements Directive and Regulation, the FCA Handbook and PRA Rulebook (including the conduct of business obligations and financial promotions), the Alternative Investment Fund Managers Directive and regulatory perimeter questions.

James’s crypto assets and blockchain work is award-winning, receiving runner-up at the Crypto A.M. Awards 2020, “Standout” at the FT Innovation in Legal Expertise Awards 2018; “Highly Commended” at the FT Innovative Lawyers Awards 2017, and “Highly Commended / Runner Up” at Legalweek: The British legal Awards 2017.

He has an MA in Law from Cambridge University, and a specialist corporate and commercial LLM from the London School of Economics, where his specialisms included Information Technology and the Law. James has lectured with LexisNexis and publishes on FinTech matters, including with the Journal of International Banking and Financial Law.

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TRANSCRIPTION:

JP McAvoy: Hi, and thanks for joining us on today’s show. We’ve got James Burnie who’s a partner specializing in Web3 at law firm Gunnercooke. It’s the largest Web3 specialists law firm in the UK and the first major UK law firm to officially accept payment in crypto assets that have offices in the UK, Germany and New York. Here’s my conversation with James. 

James, thanks so much for joining us here today. Well, you’re in the UK, where exactly are you located today?

James Burnie: I’m actually physically in Eastbourne which is outside London. It’s where people from London to retire. So I’m kind of living in the old folks home of the UK, which is the place to be.

JP McAvoy: I love it. Yes, the place to be that’s very much like our Florida where all of our elderly or snowbirds end up residing in Florida. So that’s good for audiences in both of those locations. They’ll enjoy the world. Thanks for joining us here today. Happy to speak with you because of all the questions and all the discussion that we’re getting with respect to crypto and Web3, the world is new. Is that not the case? And we’re gonna continue to see change going forward.

James Burnie: Yeah. And what’s being shipped from our perspective is we’re seeing a shift between different countries. So what’s been reassuring about FTX is the attitude of regulators globally. We’ve seen kind of how to deal with that, because one of the (inaudible) me has been along the lines of the sorts of issues FTX have, or traditional regulatory and legal questions which regulators are used to dealing with. And therefore, it’s within their comfort zone. There is nothing particularly special or magical about what happened at FTX from a regulatory perspective. We’ve been assisting, for example, in (inaudible), with the regulator of drafting their rules around crypto assets. We are getting other requests from others wanting to do the same thing. And we’ve seen an interesting group of countries turn up because you rock traditional countries, you’ve always tried to be pro crypto. So you’ve had things like Cayman. I’ve always put up very appropriate pitches. We’ve seen other countries who’ve been urged to be anti crypto. For example, China has always been a difficult place for crypto firms to trade in. And what we’re seeing at the moment is the countries in the middle of coming off the bench. So these are jurisdictions you wouldn’t necessarily think of, and the sort of approach they want to take is invariably a grown up and friendly approach. And they don’t want to get sort of, a company has gone bad, and what’s wrong with the regulator type feel to it. But equally, they do want some innovation in it. And it’s kind of a sensitive step to try and find out the way forward. And one of the biggest issues they have is this is a new quickly evolving industry. And therefore, how fast can they get up skilled or be able to do it in a proper and grunt manner, which is what they want to achieve in industry which isn’t always the easiest for people to find.

JP McAvoy: I like the way you’re describing that. There seem to be, at least many jurisdictions are looking to do it in a grown up way. They understand it’s a nascent industry, but it’s one that’s here and appears as though it’s one to stay. And so they’re looking at the best ways of managing that or as we’re describing now regulating that. What would be some of the general principles that you see for the mature, for the more favorable jurisdictions that you see evolving? So here to discuss basic principles for people to take out how this is likely to evolve. What are some of the regulatory schemes we can expect to see?

James Burnie: So broadly speaking, there are basically three things from a lawyer’s perspective to look out for. And then the fourth, which is the joker factor. The first one is AML and KYC. That’s the law in which you base. We hear people structuring offshore those rules, which they want to comply with. And the issue there is you have a wide range of approaches being taken. So in the UK, it’s a very high bar to get that, and this has put a lot of people off in other places. It’s easier. And in certain countries, there’s virtually nothing there. And it’s about getting something which your compliance department your lawyers are happy with without firstly busting the bank doing it. The second set of securities, which for Americans is always a contentious area. But interestingly, you get different groups of countries that tend to follow in a pack here. So Europe tends to take a certain approach. Arabic countries tend to follow Europe because of factsheets, the same sorts of people in both areas. The US and Canada tend to take particular approaches. And then other countries might not do their own thing, but you get this sort of grouping of countries now. 

The third area is going to be in regards to advertising. Those rules were created to stop people gaming the system. And we’ve seen all this before in the context of hedge funds. So if you look at the average hedge fund, they tend to be set up in the Cayman Islands, but they’re in the Nassau intercountry from the Cayman Islands. But in order to do that, they have to comply with local laws or plumbing which comes into the system. And we’re suddenly seeing the same crypto assets. The fourth bit, which is the Joker factor is as regards service providers because you can have the world’s gleaming, shiniest, most cool system on the planet. If you haven’t got the people there to find your directors, the people there to put to do the admin, the people there to be counted, people that do the banking, then the whole thing is a dead man walking. And a particular issue people are finding here is as regards banks. Traditionally, it’s always been an issue. An issue again sees a bit more of its regards accountants particularly in lack of FTX. The risk appetite of the county finances has diminished, which means hard to get counseling used to be. And then also, of course, contract audits. So security audits, coding audits are the other groups which are getting increasingly harder to put into play.

JP McAvoy: That was a great summary. I think flexibility is put together. And you’re right, as this continues to build out and looking to see the process of they’re in place with respect to the first thing you describe, the AML, KYC, again, I know it’s jurisdiction dependent. But what are some of the guiding principles there?

James Burnie: Sure. So the reason why I want me, there’s a sort of historical clock to the whole AML and KYC thing. As crypto became prominent, at the same time as the food money law indirectly was being put together in Europe. And the issue at hand was because the way the European mindset works, you focus on a piece of regulation you put together, you put to bed, you move on to the next piece. The focus at times on money laundering at the time, crypto businesses were being looked at. And the stress you’ve had in the room is regulators have tried to leverage the money laundering rules to go beyond what they were really designed to do. And that could lead to problems. So for example, mine was about stopping people laundering money. And it’s as simple as that, really, but they don’t allow for, for example, passports in one country and another which is a European trick. I love that, because it’s not about that. In the UK, you’ve seen a certain stress in the room. For example, the regulator’s interest in protecting consumers, but the first one was upset because she misspelled stuff, money laundering. 

So historically, you’ve seen this problem which regulators have had which is trying to protect people, but not having the relevant tools to do so. What we’re seeing at the moment are regulators being given the relevant tools. And therefore, money laundering, we would expect the next couple of years is going to be put back into his box as being about money laundering. And the new tools come in and give examples. Dubai has come up with its own specific crypto asset legislation to stop this kind of business. Kazakhstan has done the same. The UK is taking its own approach. And you’ve got MiCA in Europe. They’ve taken different approaches. And what you’re seeing between the regulators, there’s a lot of overlap. What’s your specialty? So if you take Europe, for example, MiCA was originally on equities and the big sun Europe is a big move from one country to another. Kazakhstan has got traditionally a huge mining presence that might well influence what they do when you look at the consultation paper. In the UK, a lot of the drives about being a gold standard because the idea is, if you’re busy in the UK, or taken seriously as a grownup, lots of this is about hitting bigger businesses which can achieve that. The US is about the size of the US effectively. So if you want to play in the US, it costs a lot to make them. That lots has affected the US. You can’t go down on a shoestring. But equally, there’s lots of Americans and they’ve got plenty of cash to spend on it. So you can make money doing it. The UK is more of a shoestring type place in the sense that there’s a push towards innovation, there’s more of a sympathetic environment around startups. But then the UK market is only the size it is if you see, which means you tend to want to move into another jurisdiction afterwards.

JP McAvoy: Looking for that expansion. So we understand the AML side to a certain degree. People on the internet, and now making use of crypto are constantly suggesting that it’s anonymous. But that’s certainly not the case when we talk about KYC. Again, jurisdiction. But what are the privacy concerns? What are the requirements to know your clients don’t think you’re dealing with on a go forward basis

James Burnie: There’s a soft core issue here, which is that the money laundering rules were created quite a while ago. Money laundering exists despite those rules. The philosophy of the pupil at the time that those rules were created, which is you’d only hide your identity if you were dodging. So when I am a lawyer who isn’t a client, I need a passport. I need proof of address. I need a whole lot of documentation about my client. I don’t really care about it, but I have to have it. And if you don’t give it to me, the way the rules are written assumes that you must be taught because you won’t give that information. What we’ve seen since then is a sea change because people can steal each other’s identities. People actually might have legitimate reasons not to give this port data. But that is not built within the rules. So when you start to look at this, you have this fundamental problem which is the rules are not fit for purpose if you’re going to take the view that privacy has to be important. And that’s why when you get into constant D5, these platforms try to go out there and trust in KYC and AML. (inaudible) you go well, they’ve done it, so that we can rely on it. But no, actually from a lawyer structure, you can’t rely on it because you have to take responsibility yourself. So you’ve got some intrinsic issue in the room. And I think it’s going to take an entire new generation for cultural shifts to start to dislodge that. It’s also going to take those in the community who are going to have to operate in a way, which means that they earn the trust of the regulators that they actually want to do it. And there’s gonna be an even more interesting debate, at which point, our regulator is going to come out and say that using some of these is okay. And they have also regulated green lighting technology, which is not something regulators traditionally do. 

So we’re a long way from kind of the idea which those in the crypto community will have. But then again, on the other side, fundamentals are being shaken. And again, this is going back to the FTX has shaken fundamentals. Because a fundamental core issues around indexes, they tend not to do KYC and AML. Some of the regulatory perspective, we have a fundamental issue, they are not complying. But if FTX had bee, in which you can see all the assets, it may not have gone insolvent. So we’re moving away from a debate of do your duty not comply with KYC, which is more important financial robustness or satisfying KYC requirements. And that’s a lot trickier for paying for people to go just comply with the rules, because part of the rules you don’t, you must be dodgy. So there was a massive question mark be increased in the room here and is going to come down to our philosophical discussion as to which side of the bench you want to sit on. But the traditional people who put this together, he would never curse. And why you wouldn’t want to disclose your information? And that’s the first hurdle which has to be overcome.

JP McAvoy: That’s right. There’s a disconnect that’s occurred there with the crypto community. And as you say, traditional regulators. Well, how does decentralization come into play here? So decentralization, to be a regulator, the regulator needs a party, which is it is able to enforce its judgments against to the extent that projects are decentralized. Well, is it even possible? And how is that going to impact things?

James Burnie: Yeah, so that’s quite neutral. I mean, people’s decentralization argument runs along the lines of a decentralized. Therefore, we’re outside the law. That is nonsense. It was trying to use the internet, when people on the internet are not in any jurisdiction? No, every single country, you come outside of everything, you come into everything. So if you’re generally decentralized, you comply with every kind of law. Every country in the world including North Korea, Afghanistan, US, Pakistan, any country on the planet, you’re gonna have to apply for that. We’ve had a client once who actually, literally got a pain for every country in the world for their projects because they want to be seen as truly decentralized. But decentralized here is not about reducing or legal risk. It’s about kicking straight up into the air because you’re now everywhere rather than a single jurisdiction, which you can plan towards. Then you get the group of, is it legal if they don’t know who I am? Which is the Agatha Christie dead body in the room, which if no one knows you’ve committed the murder, murder becomes legal. Sending out fake murder is still illegal. They just don’t know who the murderer is, that doesn’t mean that they’ve got away with it in the sense of legally they’re now above the law. We don’t know who the murderer is yet, so that doesn’t really work as a principle. That means decentralization has a lot of benefits, is more robust, and it works. 

So you’ve got the whole language that says debit puts in the room. And then lastly, the in house pick up is the term regulator, which is quite an interesting term. Because when people talk like, they think FCA. But there’s actually a whole lot of soft regulators out there. So if you take a bank, banks will want to do KYC and AML on the people using their banking infrastructure. They will not give bank support to projects that they feel are intrinsically illegal. That is a soft form of regulation. So when you look at decentralization, who is going to acquire a bank and who’s going to operate it? Can you open a bank account? So here’s a law firm that accepts payments and crypto because some of these decentralized organizations, as a matter of transport, do not want to open up a bank account. Because as soon as they do, they must be centralized besides opening the bank account. And the last thing, which is always an entertaining one is, again, when you say or decentralized, that’s an easy thing to claim. But if you’re saying that you’re the CEO of a decentralized company, how are you reconciling those two statements? And that becomes quite an open thing. What are you trying to achieve at the end of the day? 

If you take DAO’s we’ve got here we go, I wanted to help because I want to give governance rights to my client out. Fine, but you can have a straight or fashion company and go, whoever votes will do what they want to do. Not a doubt, it’s just a company. You just do what you’re told. The whole DAO thing is water tanks where you’re trying to get to. And it’s more philosophically questionable what we’re trying to achieve here than building infrastructure rather than a sort of, we’re now decentralized. I clicked a button because effectively, whoever thinks decentralization is ever has been what Star Wars, Star Wars, this entire galaxy or not the entire galaxy which is the human race that was centralized enough. Actually, we’re only centralizing those people using blockchain on the earth at your any centralized on the token holders within that blockchain on the earth. So in fact, we are already centralized. The question is, how centralized effectively? So it becomes a sort of line as to how far you want to go.

JP McAvoy: That’s a great way of putting it, and sort of humorously we are centralized. I’m constantly having a conversation with those that suggest that as to what they actually are. You mentioned DAO’s, let’s get into someone’s trying to structure a decentralized DAOs, what is the They frequently understand the concept. What is the choice of that entity that you advise, or that initially begins the structuring of that?

James Burnie: Okay, so you’ve got three basic options. Option one is a corporate entity with some smart contracts down the side. That was the old fashioned DAO. That’s how it starts. They tend to be centered around the BVI is a common place for that. You’re simply a contract and that, come he says, we will do what the Congress has to do. We might call the company administrator because it sounds slightly less offensive, but as a marketing ploy. The second option is the foundation. Foundations were originally created in places like Switzerland for charitable purposes. They don’t necessarily have shareholders, but they still have directors. The Cayman Islands is coming off the back of that. The effect is you’ll see a new concept which is around the idea of there’s no shareholders, therefore, it must somehow be a DAO, but there’s still a direct sort of the DAO. So we’re sort of near-ish there. And then you get those who simply go. I don’t exist until the entire time. They don’t exist, and they’ve just got to the smart contracts name for the best. That’s how you get to lose your house. Because effectively, what you’ve got there, you’ve got a collective, everyone in the collective could be held liable. And this is where if it goes past, if it goes wrong, if it gets sued. 

Every single person within that could be held personally responsible for that because you’ve just lost all your protections and all your wrappings. What’s quite extreme at the moment is there’s a move towards getting DAO’s recognized as a legal construct in the UK. And when the same question has been raised throughout the entire process is what do we want to achieve when we want to have a DAO because you’re getting very different philosophies and meanings by different people, between those people who just want to say I want to doubt, I wants outside your securities law may or may not work as a strategy. But that’s the entire plan. So those are the more fundamental philosophical thing on lines of giving power back to a group of people. But I think the key point here is to start off with what you’re trying to build, and then get a wrapper. Don’t obsess over the data in and of itself because of fetching what you know. And then the last inch problems we’re looking at is contracting DAO’s. There’s downstream at a cost, and it goes back to the chocolate bar example. So people go, I am decentralized, and you are great. This has a contract. 

Now contracting amorphous organization tactics. So we can’t negotiate, we can’t sign anything because they refused point blank to sign because they kicked them if they exist. So we enter into the chocolate bar scenario, which is I go to the corner shop, I buy a chocolate bar, I give the guy 50 P, he gives me a chocolate bar, that is a legally binding contract to buy a chocolate bar. This is how you end up contracting with the DAO. So effectively, you create alternative conditions when you contract with the DAO, the DAO will do things in action. So it might involve clicking on your website, or doing your thing, or whatever the members do. By virtue of doing that, they’ll agree to your terms or conditions. You’re going to slant in your favor as much as possible because of some force, you’ve now got to the point where you can’t trust them, you can’t sue them or do anything. So it has to be stretched in your favor because you can’t really go after them effectively. They can come after you, but they can’t do anything about that because they refuse to acknowledge their own existence. They won’t negotiate anything. She went into very one sided deals whenever you enter into it. Because effectively, you’re negotiating against someone who doesn’t exist. And as a lawyer, you always do protect your clients. So as a result, you end up in that kind of box effectively. And that’s why there were doubts that came at a cost. So the question then is philosophically, you know, is that a cost you want to ban or the two annual model?

JP McAvoy: Yeah, is it worthwhile to do so? And what type of certainty or uncertainty really, are you going to have by virtue of this choice of the way you’ve chosen to do business? We’re seeing a lot of that. Interesting that jurisdictions continue to be chosen. I think there’s jurisdiction shopping, and this will continue to evolve. I mean, just as we said earlier, a nascent industry and people will continue to figure out best practices and rely on people such as yourself and myself to determine what that actually looks like? What kind of things did you see when you were involved with the first ICO in the UK? Are you seeing many prospective IPOs, or any type of offerings at this stage?

James Burnie: We’re in a bizarre scenario because everyone tells me how I’m going to crypto winter. And I’ve never been so busy at any point. Effectively, what we’re seeing at the moment is we’re seeing people move towards states, states like Germany. As far as I’m concerned, I’m not a fan of safety at all. I think there’s an element of copy and paste with the freebie document on the internet, which is nice, but no one’s lost it. No one knows what they’re doing and sort of hits endless wars as it goes past. And also doesn’t always fit with the font of jetters, which is another thing. Just to bear in mind because of your funds to invest in tokens, you then can’t really give them equity. So it comes at a cost, but people are moving towards wanting equity along with their tokens. There’s still a solid trade going on in tokens. But we’re not being moved towards a more formula as to what it is, you should say about your token when you see it. 

So in both Mauritius and in Mica, there are now draft sections in terms of what is expected to be in the white paper and expected to be in the terms. The UK is going to do a similar thing, it’s also going to put out what is in there. I think over time, what we’re going to end up with internationally is a sort of a list of everything that needs to be included for every single thing to move forwards. And there is a really interesting, broader point here in my mind, which is what the fundraising gap is which the ICO fulfills. So if you want to IPO, that’s a million quid. If you want to bond, quite a lot of cash. In my mind, the ICO is a natural fit for the person who wants to fundraise up to 30,000 or 300,000 pounds, UK pounds. That’s the natural fit for it. Fits in it is that short term, high risk investment effective, which is coming in. And that’s why I think we’ll continue to have more to play. And what we don’t want is we don’t want you all to get so onerous that we can affect your form perspective. Because if you will, from a form perspective, you might have a general fashion equity, and it locks those firms outside the market. The glorious thing about the ICO is that there’s little firms to hire small amounts of money to get things off the ground and then move on to bigger things rather than sell the equity to cheap.

JP McAvoy: And it’s just you’re used to saying $3,000, it’s just, I guess the cost of entry of the various entries are too significant to do otherwise or more traditional IPOs.

James Burnie: Yeah. If you got to drop off a full IPO and all the rest of it is the cost of the lowering, the cost of all the baggage is that, I mean, there was a time when you did just a white paper in a certain season, you’re good to go. I’m not saying that’s the best answer, but there’s a sort of halfway house between the two. So when you look at things coming out, the length of the rules is two or three sides of a formalist requirement that there’s empty achievable, if you serious to me at a reasonable cost. That is what you want to achieve. So there’s something that, so it’s not a total joke. But equally, you’re not paying the project for overlying because bluntly, lawyers come at a cost. And that’s not always helpful.

JP McAvoy: That’s right. As I said earlier, oftentimes, a barrier and what we’re finding is a lot of people involved in this space are choosing not to concede Law Legal. They’re willing to just assume the risks and they don’t extend, they understand the extent to which they’re taking on risks particularly if they’re doing something with a rapper that we described earlier. What type of risks would you see? So the shift that’s occurred, I know you’ve written on, you know what’s going on with staking now as well. So interesting to see some of the recent comments by Gary Gensler and now he intends or imagines the SEC is going to regulate crypto while crypto, blockchain or Bitcoin by the sound of things. What is the treatment of staking going to be for at least progress on a go forward basis?

James Burnie: Stacking is quite an interesting one. Because first of all, you got to work, you got to work out for which form it was taking because you’ve got validators taking you, what device taking and they’re entirely different models. It’s misleading to stick the two together.

JP McAvoy: I appreciate you saying, hey, let’s break them down and deal with one at a time. So we’re just talking about from a validating perspective. So let’s just use a theory as an example.

James Burnie: Staking is not a regulated activity, I mean, outside the US effectively, in of itself, staking is not a regulated activity. We need a license to do it or anything like that. The issue you have in the UK and other parts of Europe is whether it falls on deaf ears or something called a collective investment scheme, which is a lawyer way of saying the word fund. And basically, if you get stuck together, you pull it. Imagine you give a return then you’ve got the potential for funding, which would be a security, and that’s why some of the more mature models are actually people lending investors the software the investor runs the whole thing. And therefore, you come outside the definition by running that way. So it’s about setting up in the right way. Now, there are issues there still with things like, for example, liquids taking where you put it together and you get a target representative to do other things with that tends to start to fall within the definition of asking more strongly. And there’s an interesting open question here, because the intellectual thinking behind the staking company is somewhat different qualitatively between thinking of a fund manager, or faster staking providers are concerned. They are simply running a piece of software in the way you would any other set forth, but they do not think they’re making investment decisions. Yet, the problem you’ve got is the way these rules are drafted are so broad that they’d capture it anyway. And that creates interesting slight nuances between different countries. 

So for example, in Germany, sometimes they look more at the intention of the people participating. In the UK, it’s more about whether it’s managed as a whole new level of control to people participating, which might sound like a sort of niche thing. But actually can lead sometimes to slightly different outcomes for different people in the system. So that’s where we’re getting, I mean, I think there’s a good argument for bringing staking outside of regulation altogether because it inherently is a good thing. And the risk profile is not the same as it would be if you’re buying NFTs or something like that. It inherently supports things. The threat of staking and the philosophical argument here is taking versus banking. Because at the end of the day, in both models, you have an asset, you lock it up, and you get more stuff off the back of it. And the risk profile is entirely different because we have a bank, your risk profile is on the solvency and the ability of the bank to meet its individual payments. With staking, the issues with regards to the ability of the blockchain protocol to continue functioning whether the software operates properly. So it’s a different risk profile, but has a similar outcome. And both are at the lower end of risk for the industries which don’t involve that. 

So if you put cash in a bank, you consider that a low risk thing to do. And quibbling and crypto used to staking instead of less high risk if you’re buying NFT’s and the like. So there is a philosophical question here as to the similarities of the two where one wants to tolerate the other and how they will fit together. And as a user, whether you want to diversify your counterparty risk to a blockchain risk for similar types of products on the market, and that people are not really talking about in a mature way at the moment. But I can see the arguments for wanting to have some of both because it does a similar investment in terms of the feel a bit. But actually behind the scenes, it’s a somewhat different set of risks you’re relying on, and risk diversification which suggests that you should do some of both.

JP McAvoy: Interesting. So you say, well, you have to, do you think the banks are going to play ball? This presents a real threat to them because there’s only so much capital to go around. The second model is just described as one that’s going to reduce the market for the banks, again, going back to Gary Gensler, he’s already warned banks about taking on the assets themselves. So I think that from that, the banks actually won’t be involved. So who has a bet actually winning in the long run in the end game here?

James Burnie: What are you seeing? For example, Zodia, has come out of standard chartered, that is a bank beginning to offer more cryptic custody type services. You’re gonna see banks moving in the sector more. Some people will give the assurance fund that because effectively, we’ve got old fashioned banking regulation behind them. You’re going to get a new group of people who will be people like (inaudible), and people like that Panda will turn up. And effectively, they are a new form of doing things. But new competition is not in itself necessarily a bad thing. It’s just more competition. I mean, there’s an argument that there are too few banks in the world, and there should be more banks in order to give you a more robust system. And if you believe in decentralization, then the more, the better because it’s more decentralized. And what’s really, really interesting as a regulatory noise, you see a global shift all the time towards centralization, decentralization and recentralization. So there was a time when people thought that the part that fell the whole way fall was decentralized risk between central players and decentralized masters the way forwards. We have Lehman Brothers, but this pushes us towards decentralization. So he’s getting verse four, but this is not recent. This has been happening since time or that we’ve seen him move back and forth, and back and forth. 

There was a time of the Scottish banking system, if you don’t mind going up slightly where there are, the Scottish bank had its own current sent as a fully decentralized model that was imported together and there was a central currency for costs or banks. You’ve got the British pound note, and that’s how it went in that way. That’s moved from decentralization, centralization because we considered better because things were less likely to go insolvent. So there is no good answer here. But what you get is you get a reaction. And at the moment, the reaction is away from centralization to decentralization. Neither is the right answer. Neither is perfect, but we’re saying good decentralization, we back towards centralization. And this is just gonna go on forever effectively because neither are right. And all you can hope for is somewhere in the middle. We try to get the best of both worlds. And therefore, what you’d like to build is an infrastructure which tries to take the best of both. Knowing that there’s a simple trade off here, which is the more risk is centralized. In big organizations, you’ve got the past look at it, the less likely they are to go insolvent or go wrong. But if they do go and so on go wrong, the effects on the economy are far greater than the decentralized model. So it’s about bringing that all together. Just to turn one last wildcard, take Lehman Brothers. Lehman does not necessarily go insolvent because it went bust. Lehman Brothers wasn’t lacking confidence within the bank. If Lehman Brothers had held all of its assets using a stable coin, and the regulator was able to see which Lehman Brothers had held that record, it could have come out and gone. Lehman Brothers is completely solvent. We’ve looked at the books, it is fine at which point the panic may have stopped and embers might still exist. And I think you’ve got to support a technology which might have avoided something like them. But there’s a nice twist, and it’s worth exploring. But it doesn’t mean, shares are the other instrument. Yeah, let me ask you a question. Do you know what to share in a company? 

This big question because most people don’t, it’s not voting rights. It’s not ownership. Sharing economy as a percentage of the proceeds in the event of liquidation, and that potentially might be nothing. Shares are banned in the UK for being a high risk investment because they’re highly speculative. You couldn’t touch them. We didn’t know where they were from, there were a whole lot of scams. And that looked suspiciously like the press. You get round crypto assets, you just roll out principal, the worst shares, and you’ve got exactly the same press as you had around the (inaudible) in the UK. The response was to make shares illegal in the UK. And for the next 100 years, effects of the UK, effects really fell back compared to other markets because we didn’t have shares and other countries tend to head on they did. And there was a massive reversal on shares that would walk back into the UK as a concept, because effectively, we were losing to other economies out there. And I think the interesting thing from the US is a loss of the debate feels to an outside, like the debate on shared ways about when. You can legalize everything is fine, but other countries will move forward. And then there will be the moment because, actually, we need to bring this back into the US because we can’t ignore it. It’s gonna go ahead anyway, do we want to sort of become part of it again?

JP McAvoy: Yeah, dude. You’re hitting it on the head to the extent that it looks as though the US will become even more unfavorable to do business. Business will go elsewhere. And as you say, that pendulum swings back and forth. There’ll be a determination made, it’s time to get back into that game. You mentioned stable coin situations. Well, I think of nation states and banks attempting to create their own crypto currencies as well. Do you think that people will want to use a CBEC? What do you think the uptake of the products that are now being developed by the banks and nation states are going to look like?

James Burnie: I mean, there’s always pictures of  CBEC versus private crypto assets. I don’t see it in those terms, I think that CBEC will be used. Let me just give a sort of another one. So if you want to move money from bank A to bank B, the original legal system which came into effect around moving money from bank A to bank B was created at a time before the Internet where people literally put the money in a wheelbarrow. And they took the wheelbarrow from one bank to another bank, and they deposited it in the other bank, and that soundbite money moved from Bank A to bank B. This is why you have a settlement period of a couple of days when you move money across to allow that bill bar to get going across the streets. Now, we no longer do that. But what you do have is a model where banks campus and what’s really happening at this point, the bank is keeping the money, the bank gets paid interest on that money. And therefore, it is an additional set of money which goes to the banks, not to the consumer, which is the bit where the wheelbarrow goes across. It’s actually interesting. And because there’s little incentive to update the rules, when you get paid interest in a set with crypto assets in a CBDC, that money might move across in 10 minutes. That would speed up settlement times. Now, you might tell me that this is nonsense because you could speed up anyway. And the answer is yes. But unfortunately, the median excuse here is a blockchain based concept. 

Other things you can achieve here is better settlement. If you’re buying and selling stuff on an exchange, the ability to have real time know where the money is made. Of course, you could sell tokenized securities for CBDCs in a way that increases settlement and makes it easy to make it faster. So I’m not really pitching CBDCs in some sort of philosophical end of the world type. It’s all changed time. What I’m saying is there are certain use cases where it is very, very useful for the CBEC to exist. You do have the dark side. So for example, you know your people spend stuff on the bat and depending on your philosophy, you might have a different view. So seeing what people spend on, what’s quite funny, people say that they’ll go completely right. We should do that, it stops money laundering, it stops the bank getting the money. 

And if another government says that go, this is the government’s, absolutely outrageous, they can see our every move. And it’s the same sense. It comes down to your politics and what you make with the person who gets away when you trust them or not effectively. But you can have adverse events and also have a private, it’s no different. People tend to trust private companies more than governments because they do, I’m not going to go into that and use it to me. And that becomes the first part of it. So I think there will be CBDCs, I think there are specific things you can point to where they will make life easier. And people like their lives who made this, they will do that. I don’t think they’re going to replace traditional private currencies either, if you see what I mean. But I think there’s a different market, some different group of people who want to do it. Not everybody gives a monkey’s about holding a Bitcoin. Simple as that. Some people will just want to be able to move their US dollars from one place to another. And if it’s done in 10 minutes on three days, fantastic. Called a CBC. But I can get my dollars from one bank account to another. That’s what I want to do because I want to buy McDonald’s at the end of today.

JP McAvoy: Yeah, I think you’re probably right. And also, who’s going to make it easiest for me? It’s the honor app, I think that’s the biggest barrier right now. I think it will continue to be so. I couldn’t agree with you more in that regard. I think there’ll be a general distrust of the CBDC addiction. People more sophisticated, had an alternative that why not use a trustless system where they don’t have to rely upon a bank or some third party where they know they can actually send it to themselves or control the process itself. But as they say, as things evolve, we’ll continue to watch for the most part. Most people won’t be educated on the things that we’re discussing here. You say just great, move it quickly at the best price for me with the least amount of hassle. So I think that’s all I’m seeing with regards to those. We’re going to have NFT’s turn the conversation, though just to watch and to think about how things have evolved there. And as I say NFT, I’m not just talking monkey pictures. But certainly, we’ve seen a great amount of value created through these in an industry emerge for NFT’s and cells, what do you think the future holds for that?

James Burnie: And it is very interesting because the sorts of people you have regulating crypto assets tend to have a compositional securities background. If you look at fungible tokens, I’m not seeing you all, but a lot of those tend to mirror investment like type things. So they say that this feels like an investment. People are buying things to make money. Therefore, they feel they’ve got a role in it. NFTs can be anything from hoover’s and who plays at a rock concert to membership of a club, and you literally anything you want. You throw this joker in the room, which is a whole lot of things which have absolutely nothing to do with investment whatsoever. But suddenly, in this world of crypto and what we’ve seen in the UK perspective is a recognition of that. And therefore, some of the new rules coming to the UK will not apply to NTfs. Because the nature of the business means that they’re not doing that type of thing. But what you then get is those who are involved in the, or fashion more investment sense go, oh, I caught an NFT. I’m outside the law, we’ll just make everything an NFT and bugger off to the races. Now, that will of course cause friction back again. So you’re going to enter this debate as to what should or should not be called. And that’s going to be an interesting thing for the next few years.

JP McAvoy: So with the shift that occurs, you say people will look at the best way, what is the best way to actually structure then to avoid that?

James Burnie: Well, again, this is going back to the three parts. And to be blunt about it, It’s easy when you’re not dealing with the US because the US securities debate better minds. The mind can spend quite some time on it. But from a straight non US perspective, the first question is in KYC. Well, yes, you can use NTfs to launder money. In the local AML and KYC rules, they will tend to want to be caught as long as they can use to move over me to be. So that will tend to apply to any other assets. So you’re gonna do your money long term. The securities question then just comes down to the fact that in quite a lot of jurisdictions, there’s a list of things that are securities. And if you’re not on emoting notes, like equity, it’s things like bonds, you kind of know when you see it. You’ve got the two jerk factors in the room. The first one was payment services. Most entities are not used for payment services. That one is gonna be quite a novel thing to get it within that. And then the last one is the fund question, which is the one we keep coming back to. But the fundamental standpoint, that one is getting a variable return the discretion. So if you get a fixed return, or if you get no return, you tend to be fine. And that’s why entities tend to generally fall outside of the scope of most securities because most people have an entity that are not looking to get any form of return. They’re looking for access for goods and services that affect you in some way, shape or form. 

So I tend to be outside of that. And then the last one is going to be advertising. Which again, the people who regularly advertise, you’ve got the office security’s advertising people, they will tend to not want to get MFTs if they’re not allowed to do a skirt is. But again, if you’re promising an infinite return, so on and so on, then effectively, you’re going to start to get people’s attention. And there are all fashion advertising standards authorities out there who also come into play. So when you make dumb statements, they will tend to wake up at the same time. So it is a different infrastructure. You’ll like to touch their securities, but it’s your business. You’re probably going to be fine. And the client immediately comes up with something you never thought of and something you’re not fine with. If you never thought you could do that, if you sue us, I mean, it’s one of those sorts of ones.

JP McAvoy: Yeah, we’re spending time thinking of just that. What are the things that hadn’t been thought of yet? So as always, there’s disruption and entrepreneurs looking for a new way, a better way, and trying to take market share. However, they look at the increase in the way that they’re trying to increase in value, the value of their project with these new innovative technologies. What are the ways that entrepreneurs are able to protect themselves?

James Burnie: Set themselves welcoming new ideas. So we’ve got to take take a sense in terms of protecting yourself. What you will have is your setup in a country. You can pick your country, you’ll have to have sufficient substance in that country to operate from. Those will be the home rules effectively. And those are the ones which you will play with because of battery or base. The way you would do it you subsidiary. Usually, that subsidy will be in the relevant country, and that subsidy will sell the goods and services. And that’s how you comply with those rules. The second set of rules for you apply into. In the UK, there might be a move towards the end of the year towards increasing definition of what is causing there to catch people who may not have any presence in the UK, or the UK client base for UK facing to pin them in the UK licensing regime. That’s the second set of rules. And then effectively, you’ve got couple of choices. You either, it’s about a number game. So where’s my money coming in? Where you focus? Where’s it coming in? And it’s the cost of getting the local laws happy from that. And then you can go and packs. So most of Europe in the UK of the same underlying framework, so you can stop that. And apparently, that’s it. Then grow the business organically getting advice for each one. And as a very, very important rule of thumb, if you get local advice from a lawyer saying it is fine, and the lawyer isn’t a relatively the right area. Don’t go to a source of shipping lawyer for advice and securities. It’s like kind of lawyer, they will to write a relatively sensible piece of advice which you can operate towards. And if they happen to be wrong, you can show it to the regulator. And okay, you may or may not have complied if you see what I mean. But the regulator will read it, you’ve tried to do the right thing at the end, and they regulated to human beings. So if you’re trying to do the right thing, you’re coming at it the right way. Whether the regulator gives you or not, there’s a high chance I’ll agree with you because you’ve hired competent advice. If they don’t agree with you, they’re appointed to stop doing it. But you have tried to comply. So this is the anger level now just dissipated. Because you’re a guy, you just made an honest mistake. And that’s how from across. 

So that’s what it’s about taking that and moving that forward. And just going through that kind of basis in terms of where it’s in the innovations. That’s quite interesting because the way I see it is that the divisional blockchain is a bit like the iPad. You get a massive thing everyone has and goes, wow, that’s amazing. It’s completely new, never seen before. You then get ripples. So some of the first ripples are quite big. So the app, applying smart contracts to blockchains ethereum, is a big innovation. What you then get is you get smaller and smaller ripples. So the latest iPad, the mover, the hijackers, nobody cares about that. We shouldn’t further the apple, but that’s how people tend to view it. Okay, might be slightly bearish, you might be slightly lighter, but you’re not going to rush out to shops and actually buy it because it’s a minor change. But what you’re going to get next, which can be the interesting bit is the cross fertilization from something like a traditional technology, and blockchain, and crypto, and you had to give you an idea smart contracts existed as well before blockchain existed. But as when you combine too, then you get these huge externalities and all these new ideas. You’ve got other events like quantum computing and the like, these are new models when they come to exist. Bringing that back together with technologies like blockchain is where the action is likely to lie because of taking new technologies and planning together and adding one plus one to make three.

JP McAvoy: Yes, that’s just one to one plus three. If you were to predict what the network’s future looks like as it is, it has been established that ethereum is going to be the network of the future where smart contracts will for the most part lie.

James Burnie: I think it’s an interesting one because different people want different things. And we’ve got at the moment (inaudible) the biggest income player, they’ll always give it the market advantage. You’ve got people at Neos who are focused on things like security, and security might want something like that. You’ve got questions around user interface, you’ve got questions on security, you’ve got questions around speed, but they are finite. So the question becomes with any new layer one coming out is, where’s it going to fit within the ecosystem? And why would you use that rather than an incumbent given that e-commerce already got the infrastructure built on it. So I think that’s going to be the interesting plan. And that is going to be bringing it all together on the one hub because a new industry now is going to move from one to the other. It’s likely that people are going to want to make some maps and play around, and that’s always going to be, and that’s the core of innovation. That’s how businesses get creative move forward. So that’s going to be the next part of it. So I think it’s gonna be a question of, there’ll be dominant players. And the question then becomes almost dominant players, how they will combine? How do they work together? And how do they interact? And that’s going to become an industry in and of itself effectively. And what’s mentioned a moment you’ll see a new language has been created and destroyed effectively. 

And again, I’m no coder. But the question is, which ones are the right ones to move forward? There’s gonna become an interesting question for the future. The other thing that’s coming in is that seems to be a huge generational shift. I work at a law firm a lot. When you start a law firm, the older group of lawyers, they exist in a time before intense. Embassies rental lawyers who like to write everything down, they will then give it to someone they’d want to type up. The idea of using this horrible internet is just horrible. You got the next group with a tough day to use one finger to do it. If she’s been there, it was a loving thing to watch in action, you then get the generation you bang away and it’s kind of eyeball popping at the speed at which it was generated and the Innovate guru. Basically, if the internet goes offline for over 30 seconds, they jump from a high building because their life’s now become completely pointless, meaningless. You’re going to get, I think the same with the whole crypto thing. There’s gonna be people who grow up with this. So things that we think are new and wizzy. And all the rest of it, I’ve got a whole thing walking to me one day and said, I did the first ICO in the UK. And they’ll go, what a bloody dinosaur that dates and masters the (inaudible). That hurt. They’re going in that direction, I think will be really interesting. The younger generations who grew up with the internet, grow up with something everyone can code, I think we’re going to be quite frightened when they get into this because. I think a lot of stuff which is moving forward at the moment, though, suddenly going, oh, you just do this, and it’s just gonna get so much faster.

JP McAvoy: Speed at which it is going to occur is only going to increase Moore’s Law. And as we see this industry while we do appreciate the speed at which we’ve gone through all the concepts within CTA, you mentioned for people that are looking for advice, it make sense to talk to somebody that understands the issues, can give you an opinion, at least that you can fall back on or keep in your back pocket depending on how things evolve. It’s certainly going to be a good idea to have some that chase, what’s the best way for people listening to this, you find the year more and maybe learn more.

James Burnie: So you can either email me. My email is James, J-A-M-E-S, .burnie, B-U-R-N-I-E @gunnercooke,  G-U-N-N-E-R-C-O-O-K-E .com (jamesburnie@gunnercooke.com). On LinkedIn, James Burnie, B-U-R-N-I-E FRSA.

JP McAvoy: James, thanks for spending your time. For most people listening and we’ll have all this, of course, in the show notes and everything as well. James, we really do appreciate your time here today. I look forward to discussing these issues with you again, in the future as things continue to evolve. I love to end the shows with one thing that somebody is building a product or maybe it can be more than one thing. But at best practices, maybe that isn’t the best way of saying it. For those that are building that are looking for the disruption for the waves of the future, what are some things or something that you can meet people with here today?

James Burnie: So nobody loves lawyers. You look at them and you think that’s very expensive. I don’t want to do that. Bear in mind that if you’re smart, you’re legal and compliant that can become a money making opportunity in its own right. So think also about how you can use it to your advantage as well as being a cost because you can make the vegan plants that make you money, that’s a good thing.

JP McAvoy: That’s well separated from one lawyer to the next. James, thanks so much for being on the show today, The millionaire’s Lawyer.

James Burnie: Thank you very much.