Blockchain Securities, Insolvency Law and the Sandbox Approach


Blockchain is a new technology that is based on an algorithm which allows participants of an IT network to process, store and share data across multiple points without the need for any intermediary, at least in order to ensure the integrity of the data dealt with. This technology is simplifying financial markets—many organizations are launching initial coin offerings to facilitate the financing of new business ventures; moreover, ‘securities’ that are issued in such a digital form can be bought and sold in the secondary market without the intervention of the traditional intermediaries. However, this use of blockchain could give rise to many problems which, in this article, will be analysed from the prospective of insolvency law. This paper will argue: first, that these problems originate from the fact that the issuance of blockchain securities is creating a divide between the world where securities are issued, offered and sold, and the world where law is enforceable; secondly, that these problems cannot be managed easily because of the lack of an apt point of attack, rather than because of the claim that the principle of technological neutrality should be observed; thirdly, that—under certain conditions—the sandbox approach that is being adopted by the UK financial conduct authority could contribute to directly shaping the platforms in pursuit of regulatory goals.

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  1. 1.

    This paper refers to those blockchain platforms which are non-public, where an administrator grants permissions to participate in the network. These platforms can be either fully private, or the result of a consortium set up between private organizations that already exist. In both cases, the presence of an administrator does not contradict the assumption that blockchain platforms do not need an intermediary that would ensure the integrity of the data processed—here, the correct functioning of the system, including protection against the problem that the same amount of money could be erroneously or maliciously spent many times, is ensured by the algorithm itself. Non-public platforms are different from public platforms, to which anyone may have access. Usually, public platforms are employed for the issuance of cryptocurrency. The expression ‘initial coin offering’ (ICO) mirrors the more familiar expression ‘initial public offering’ (IPO) and refers to a fundraising event which is effected through a distributed ledger technology offering ‘tokens’ or ‘coins’ to participants in a business venture in return for either cash (fiat currency) or cryptocurrency, such as Bitcoin or Ether. ICOs are typically announced through online channels such as cryptocurrency forums and websites. Even though every ICO involves cryptocurrencies, the ICO in itself is different from the issuance of cryptocurrency: first, because the issuance of cryptocurrency does not aim to finance a new business venture; secondly, because, at least in the case of Bitcoin, the issuance of cryptocurrency is an activity aiming at giving people an incentive to participate in the decentralized process of validation of the ‘blocks’ which is called ‘proof-of-work’. This explains why those people who spontaneously validate these blocks are called ‘miners’ and why this activity is called ‘mining’.

  2. 2.

    This statement does not imply that these tokens must be necessarily considered as ‘securities’ in accordance with the law which is applicable. This point must be ascertained jurisdiction by jurisdiction. For example, on 25 July 2017 the United States Securities and Exchange Commission (SEC) stated that the tokens issued by that Decentralized Autonomous Organization (DAO) created by the German corporation ‘ UG’ were ‘securities under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).’ In this respect, see SEC (2017).

  3. 3.

    Gullifer (2010), pp 1-32.

  4. 4.

    This paper aims at demonstrating that blockchain-based platforms may clash with the basic principles of insolvency law. This explains why, intentionally, this paper refers neither to a specific jurisdiction nor to a specific type of insolvency proceedings. As regards the principle that insolvency law should respect pre-insolvency entitlements, unless it is otherwise provided, see: for the common law system, Goode (2011), para. 6–01—this book refers to UK corporate insolvency law; for the Germanic legal system, Bork (2017), paras. 227–230—this book refers to German insolvency law; and for the Roman legal system, Pérochon (2014), paras. 1458–1459—this book refers to French insolvency law.

  5. 5.

    Theoretically, another scenario might be possible where the debtor was cooperative and willing to make the securities purchased through a blockchain-based platform available for his/her/its creditors. Here, if the debtor has been totally divested of his/her/its assets, he might communicate to the insolvency practitioner his/her/its secret key in order to allow him to sell the securities and distribute the proceeds of the sale to pay his/her/its creditors; if the debtor remains in possession of the insolvency assets, he himself, she herself or its directors might use the secret code to perform the same operations. But, it goes without saying that a similar scenario is very unrealistic.

  6. 6.

    Takahashi (2017), p 15.

  7. 7.

    Van Erp (2017).

  8. 8.

    For example, consider the accommodation of property law to airport take-off and landing slots—these objects have no physical dimension, but they are specifically determined in an environment where they are scarce or rival. Actually, property law has demonstrated that it is able to accommodate also to those intangibles which are determined in an environment where they are neither scarce nor in competition—even though this accommodation is producing some crucial changes to the traditional contents of the right. These changes have been brilliantly highlighted by Perzanowski and Schultz (2016). This is the case of intellectual property in a digital environment, which is outside the scope of this paper.

  9. 9.

    Available at, p 5. This ‘White Paper’ describes a project which is sponsored online.

  10. 10.

    Digest (Digesta seu Pandectae),

  11. 11.

    Takahashi (2017), p 16. As regards the fact that the ‘key’ very often consists in an activity which could even involve many bodies, see Fairfield (2014), pp 62 et seq.

  12. 12.

    Goode (2011), para. 13–127; Bork (2017), paras. 129–130; Pérochon (2014), paras. 1153–1155.

  13. 13.

    Peters and Panayi (2015), p 28.

  14. 14.

    Goode (2011), para. 13–136; Bork (2017), paras. 244–245; Pérochon (2014), paras. 1460–1462.

  15. 15.

    For instance, at European level see: both Art. 7 of Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems [1998] OJ L166/45, and Art. 8 of Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements [2002] OJ L168/43. These directives are available at: and, respectively.

  16. 16.

    As regards the so-called principle of technology neutrality, see Reed (2007a), pp 1 et seq.; Reed (2007b), pp 1 et seq.; and again Reed (2010), pp 1 et seq. As regards the origin of the so-called principle of technology neutrality, see again Reed (2007b), fn. 8.

  17. 17.

    Certainly, we are aware that the concept of ‘principle’ is one of the most highly controversial concepts in jurisprudence—to have just one sample of this diversity in positions, see: Alexy (1986), pp 71 et seq.; Dworkin (1977), pp 23–39; and MacCormick (1978), pp 152–156. However, here the point is not to open a theoretical debate on the ontology of the claim for technology neutrality, but—and more concretely—to ascertain how general this claim is and whether this claim should necessarily prevail over other claims.

  18. 18.

    FCA (2017a), para. 1.4.

  19. 19.

    FCA (2017a), para. 1.17.

  20. 20.

    Takahashi (2017), especially from p 14.

  21. 21.

    Barnett et al. (2017).

  22. 22.

    As regards the UK, see reg. 32 of ‘The Uncertificated Securities Regulations 2001’ (SI 2001/3755). This instrument is available at:

  23. 23.

    McLuhan (1964), where the first chapter is titled ‘The Medium is the Message’—here the author put forward the thesis that the media, not the content that they carry, should be the focus of study. In 1967, together with the graphic designer Quentin Fiore, McLuhan further developed this concept in a book which was titled ‘The Medium is the Massage: An Inventory of Effects’. Of course, the fact that in the second book the authors used the expression ‘massage’, rather than ‘message’, stimulated a vivid debate which, however, is outside the scope of this paper.

  24. 24.

    Lessig (2006), p 3. The passage which is quoted in brackets already existed in the first edition of Lessig’s book (Lessig 1999b). Here, the author had already put forward his main idea that computer codes regulate human behavior in much the same way that law does.

  25. 25.

    Lessig (2006), p 15. This passage too already existed in the 1999 edition.

  26. 26.

    In this respect, the FCA is behaving in a manner different from that adopted by the SEC. In fact, the SEC, after having issued the so-called ‘DAO Report’ (see SEC (2017)), has started to adopt a series of initiatives of enforcement against ICOs. The full list of these actions is available at: This difference in approach between the SEC and the FCA is not accidental, and it appears to correspond to a more general difference in regulatory culture between the USA and the UK. As regards this, see Vogel (1986), who maintains throughout the book the idea that the US approach is more deterrence oriented, while the UK approach is more compliance oriented.

  27. 27.

    FCA (2017a), para. 1.18.

  28. 28.

    FCA (2017a), para. 1.19.

  29. 29.

    FCA (2017a), para. 1.7.

  30. 30.

    FCA (2017a), para. 1.78.

  31. 31.

    Available at

  32. 32.

    FCA (2017a), para. 2.5.

  33. 33.

    For example, the regulatory sandbox is capturing the attention of the ‘Innovation Hub’ of the Australian Securities & Investments Commission (ASIC) ( and, more recently, of the European Commission (COM (2018) 109/2, Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions—FinTech Action Plan: For a More Competitive and Innovative European Financial Sector. This is available at: This resource was retrieved on 29 March 2018. By contrast, some scholars are suggesting the idea that regulators should set up a regulatory sandbox for ‘Robo Advice’. As regards this, see Ringe-Ruof, ‘A Regulatory Sandbox for Robo Advice’, paper presented at the University of Oxford on 29 November 2017. By express choice of the authors, this paper is not available.

  34. 34.

    Lessig (2006), p 10. As regards the idea that sometimes strict enforcement could be counterproductive, see Deakin (2015), p 27.

  35. 35.

    FCA (2017b).

  36. 36.

    FCA (2017b), paras. 2.17–2.18.

  37. 37.

    FCA (2017b), paras. 2.13–2.16.

  38. 38.

    FCA (2017b), paras. 2.8–2.9.

  39. 39.

    FCA (2017b), paras. 2.10–2.12.

  40. 40.

    FCA (2017b), para. 3.4.

  41. 41.

    FCA (2017b), para. 2.17.

  42. 42.

    Here, the term ‘cooperative regulation’ is employed in a very broad sense, since it refers to both ‘cooperative regulation in commanding’ and ‘cooperative regulation in enforcing’. In particular, ‘cooperative regulation in commanding’ refers to a group of strategies where a regulator shares with its regulatees some regulatory functions by the combination of commanding regulation with self-regulation. For example, at European level something similar happens in the arrangement which was introduced by Art. 46a of Directive 2006/46/EC [2006] OJ L224/1 as regards the adoption of codes of corporate governance. By contrast, ‘cooperative regulation in enforcing’ refers to a group of strategies where a regulator shares with its regulatees some regulatory functions in law enforcement, such as the collecting of information about non-compliant behaviours and the application of sanctions. This strategy is very popular in taxation law where regulators incentivize citizens to voluntarily declare their evasion by promising waiving and/or rescheduling as regards those claims that citizens have failed to pay. For both groups of strategies, see Ayres and Braithwaite (1992), pp 101 et seq.

  43. 43.

    This regulatory strategy includes various models, among which the most popular is that of ‘nudge’. In this respect, see Thaler and Sunstein (2008). By contrast, for an application of regulatory design to IT, see Lessig (1999a), pp 501 et seq.; and Murray and Scott (2002), pp 491 et seq.

  44. 44.

    FCA (2017b), para. 2.17.

  45. 45.

    Ehrlich (1913), Vorrede (Foreword).

  46. 46.

    For a sample of this type of analysis see Deakin (2015), pp 14 et seq. Of course, this statement does not necessarily imply that every intervention that had been adopted proved to be successful, because sometimes the opposite was the case. See Ferran et al. (2012).

  47. 47.

    FCA (2017a), para. 1.6.

  48. 48.

    FCA (2017b), para. 2.6.

  49. 49.

    FCA (2017b), para. 2.4.

  50. 50.

    Technically, a ‘hard fork’ is a strategy which allows a platform to modify the path of the block and, therefore, to change the program in execution. In this respect, the FCA reports ‘[t]he DAO was a group of individuals who agreed to interact on the basis of code that was executed on the Ethereum protocol. The code enabled investors to participate in a self-directed venture capital fund, without the need for an investment manager. Security flaws in the code enabled a malicious third party to siphon funds from the DAO, resulting in substantial losses to investors. To resolve the issue, the Ethereum foundation’s core developers resolved to create a “hard fork”, effectively reversing the transactions to restore investors to their original position.’ FCA (2017a), para. 4.5.

  51. 51.

    In fact, this statement does not automatically imply that in the near future the FCA will swap authorization or accreditation in the UK market in exchange for cooperation in law enforcement with all the issuers of blockchain securities—traditionally, issuers are unwilling to build into their products ‘hard forks’, ‘emergency exits’, ‘backdoors’ or similar safeguards. However, this statement does mean that, when the FCA gives authorization or accreditation in the UK market for cooperation in law enforcement, those issuers who want to reassure investors about the integrity of blockchain investments will accept the proposal to cooperate with the FCA in law enforcement (here: the issuers’ incentive consists in the desire to reassure investors about the greater degree of integrity of their own products), because the sandbox will allow these issuers to signal to every potential investor the fact that their own products are safer than those offered by other issuers. As regards these market dynamics and the need for a producer to signal to the market that his/her product is better than the product offered by another producer, see Akerlof (1970), pp 488 et seq.


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Correspondence to Renato Mangano.

Additional information

This paper reproduces and combines the contents of two lectures that were delivered in Australia, at Queensland University of Technology (QUT), Brisbane, on 12 September 2017, and at Deakin University, Melbourne, on 15 September 2017, respectively. The author is particularly grateful to Prof Rosalind Mason, QUT, and Dr Christian Chamorro-Courtland, Deakin University, for their generous invitations. Sometimes this paper refers to homepages and other Internet resources. When this is the case, and unless otherwise provided, these resources are assumed to have been retrieved on 20 December 2017 last.

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Mangano, R. Blockchain Securities, Insolvency Law and the Sandbox Approach. Eur Bus Org Law Rev 19, 715–735 (2018).

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  • Blockchain
  • Initial coin offerings (ICOs)
  • Technology neutrality
  • Regulatory sandbox
  • Insolvency law