Starting a Blockchain Business: Blockchain technology has seen rapid development in recent years and is now used in many areas. In addition to cryptocurrencies such as Bitcoin, there are many other applications that are being developed. Founding a company in the blockchain space can be promising, but also poses legal challenges.
This blog post aims to highlight the legal aspects and challenges of setting up a blockchain company.
Table of contents
- Blockchain technology and its possible applications
- Start-ups in the blockchain sector – current development
- Legal aspects of Starting a Blockchain Business
- Choice of corporate form
- Tax aspects
- Regulatory requirements
- Protection of intellectual property
- Data protection and data security
- Challenges in the blockchain space
- Technical Challenges
- Regulatory challenges
- Security and privacy concerns
Blockchain technology and its potential applications
Blockchain technology is a decentralised database that is able to process and record transactions. The data is collected in blocks and stored in a chain. Each block contains a kind of fingerprint of the previous block, which makes manipulation almost impossible. Blockchain technology thus enables secure and transparent processing of data and transactions.
The possible applications of blockchain technology are diverse. In addition to cryptocurrencies, contracts, deeds or other documents can also be stored on the blockchain. The technology is also increasingly being used in logistics, healthcare or supply chain management.
Other possible uses of blockchain technology are:
- Smart Contracts: A smart contract is a self-executing contract that is stored on the blockchain. It regulates the execution of contract terms automatically and independently of a central instance. Smart contracts can be used in many areas, such as insurance or supply chain management.
- Tokenisation of assets: Tokenisation of assets means that physical or digital assets are converted into digital tokens. These tokens can then be traded on the blockchain. This offers advantages such as faster settlement and greater transparency.
- Identity management: Blockchain technology can also be used in the area of identity management. Identity data can be stored securely and decentrally on the blockchain. This offers advantages such as higher data security and the possibility to verify identity data easily and quickly.
- Energy trading: In the area of energy trading, blockchain technology can help to promote renewable energy trading. By using smart contracts, for example, surpluses of renewable energy can be traded automatically.
- Gaming: There are also possible applications for blockchain technology in the gaming sector. Through the use of digital tokens, for example, in-game items can be traded.
The possible applications of blockchain technology are therefore very diverse and extend far beyond the area of cryptocurrencies.
Are there limits to the possible uses of blockchain technology?
Despite the many possible uses of blockchain technology, there are also limits and challenges that need to be considered when implementing blockchain projects. Some of these limitations are:
- Scalability: Blockchain technology currently still has difficulties in processing large amounts of data. However, greater scalability is essential to enable the use of blockchain in various sectors.
- Regulation: The regulation of blockchain projects is still unclear or at an early stage in many countries. Companies therefore have to deal with different regulatory authorities and comply with different laws.
- Interoperability: Blockchain technology is currently not yet interoperable, meaning that different blockchain networks cannot communicate seamlessly with each other. This can be an obstacle to the use of blockchain in certain areas.
- Security: While blockchain technology is very secure, there are also risks. In particular, attacks on smart contracts and vulnerabilities in blockchain technology can lead to security problems.
- Acceptance: The acceptance of blockchain technology among consumers and companies is currently still limited. More education and awareness-raising is therefore needed to highlight the potential of blockchain.
These limitations show that blockchain technology cannot yet be used in all areas and that various challenges need to be considered when implementing blockchain projects. Nevertheless, the technology offers many opportunities for many companies and industries and will certainly play an important role in the future.
Starting a Blockchain Business – current development
Start-ups in the blockchain sector are steadily increasing. According to a report by the Startup Association, an increase of 65 percent in startups in this field could be recorded in 2022. In particular, the connection with the Internet of Things as well as streaming and download services are emerging. The sharing community is also a target group for blockchain technology.
The blockchain thus offers many opportunities for founders. However, due to the complexity of the matter, comprehensive technical and legal expertise is essential.
Further developments in the blockchain area are:
- DeFi (Decentralised Finance): DeFi describes financial services that are based on the blockchain and do not require a central authority. These include, for example, loans, insurance or investment opportunities. DeFi has gained a lot of importance in recent years and is a promising area for founders.
- NFTs (Non-Fungible Tokens): NFTs are digital tokens that are unique and can represent, for example, works of art, collectibles or virtual properties. Trading in NFTs has increased significantly in recent months and offers potential for new business models.
- Blockchain-as-a-Service: Blockchain-as-a-Service (BaaS) is a cloud service that enables companies to develop and operate blockchain applications without having to build their own infrastructure. This can be an attractive way for smaller companies in particular to use blockchain applications.
- Sustainability: Blockchain technology can also help address sustainability issues. For example, it can help to make renewable energy trading or the carbon footprint of companies more transparent.
However, when setting up a blockchain company, not only technical know-how but also legal expertise is essential. Many legal aspects must be taken into account, for example with regard to the choice of corporate form, the tax treatment of cryptocurrencies, compliance with data protection regulations and the regulation of financial services on the blockchain. Comprehensive advice from a lawyer with expertise in the blockchain area is therefore strongly recommended.
Additional relevant developments in the blockchain space include
Incorporate blockchain companies: Other interesting developments in the blockchain technology space that may be relevant for founders are these:
- Blockchain and identity management: blockchain technology offers opportunities for secure and decentralised identity management systems. This could be relevant, for example, in areas such as the healthcare industry or online identities.
- Tokenisation of assets: Blockchain technology enables the tokenisation of assets such as real estate, works of art or companies. This allows assets to be traded more easily and efficiently.
- Smart Contracts: Smart contracts are programmes that are executed on the blockchain and automatically fulfil certain conditions. They offer great potential for the automation of processes, for example in the area of supply chains or the settlement of financial transactions.
- Public blockchain networks: Most blockchain networks are currently private networks operated by companies or consortia. However, there are also public blockchain networks such as Ethereum or Bitcoin. These offer great potential for applications in the field of Decentralised Applications (DApps) or Decentralised Financial Services (DeFi).
- Hybrid blockchain networks: Hybrid blockchain networks combine the advantages of public and private blockchain networks. They offer both transparency and security and are particularly interesting for applications in the area of supply chains or the management of government documents.
Legal aspects of Starting a Blockchain Business
In addition to technical know-how, founding a blockchain company also requires a deep understanding of the legal aspects. This is because, as with any business start-up, various legal framework conditions must be complied with when starting a Blockchain Business. In the following, we will explain the most important legal aspects that need to be considered when founding a blockchain company.
Choosing the corporate form – Starting a Blockchain Business
The choice of the right corporate form is an important legal aspect when starting a Blockchain Business. In Germany, there are various company forms that can be considered for starting a Blockchain Business. The choice depends on various factors, such as the number of founders, the scope of the planned business operations and the liability risk.
One possible company form is the GmbH (limited liability company). The GmbH is a corporation in which liability is limited to the company’s assets. This means that the shareholders are not liable with their private assets. However, the foundation of a GmbH requires a share capital of at least 25,000 euros.
Another option is the UG (limited liability), also known as a mini-GmbH. This form of company is a special form of the GmbH and only requires a share capital of one euro. However, the legal requirements for the UG are somewhat stricter than for the GmbH.
For blockchain companies that require a high degree of flexibility and quick decision-making, the establishment of a GmbH & Co KG (limited partnership) can also be considered. This is a hybrid form of partnership and corporation. The limited partners are only liable with their contribution, while the general partners (managing directors) bear full liability.
The choice of the right form of company also has an impact on the tax treatment of the company. It is therefore advisable to seek advice from an experienced tax advisor and lawyer in order to choose the appropriate form of company.
Other company forms to choose from
In addition to the GmbH, UG and GmbH & Co. KG, there are other company forms that can be considered for the establishment of a blockchain company:
- AG (public limited company): The AG is a corporation in which the share capital is divided into shares. The shareholders are only liable for their share of the share capital and participate in the company by purchasing shares. However, the foundation of an AG requires a minimum share capital of 50,000 euros.
- GbR (Gesellschaft bürgerlichen Rechts): The GbR is a partnership in which two or more persons come together to establish a joint enterprise. All partners are liable without limitation and jointly and severally with their entire private assets.
- OHG (general partnership): The general partnership is a partnership in which all partners are liable without limitation and jointly and severally with their private assets. In contrast to the GbR, however, the OHG must be entered in the commercial register.
Which form of company is the right one depends on the individual circumstances of the blockchain company. It is therefore advisable to seek advice from an experienced lawyer and tax advisor in order to choose the appropriate company form.
Starting a Blockchain Business: Tax aspects
When setting up a blockchain company, there are also tax aspects to consider. For example, questions need to be clarified such as:
- How will the company’s income be taxed?
- Which tax returns have to be filed?
- How is the turnover tax accounted for?
Depending on the corporate form and business model of the blockchain company, there are various tax aspects to consider. It is therefore advisable to seek advice from an experienced tax advisor in order to minimise possible tax risks and optimise the company’s tax burden.
Tax aspects can also play a role in the implementation of blockchain technologies. For example, the general tax conditions must be observed when issuing tokens. Here, it is important to carry out a legal and tax review in advance and, if necessary, to seek tax advice.
In addition, there are special tax regulations for cryptocurrencies such as Bitcoin that must be observed when trading and selling. Here it is important to find out about the applicable regulations and taxes in the respective country and, if necessary, to seek professional help.
In addition to the legal and tax aspects, regulatory requirements must also be taken into account when founding a blockchain company. Regulatory requirements include legal requirements that the company must comply with in order to protect itself from regulatory consequences.
Depending on the business model and geographical location of the company, different regulatory requirements may apply. Some possible regulatory requirements are:
- Money laundering prevention: blockchain companies that offer cryptocurrencies or conduct transactions must implement certain money laundering prevention measures in many countries to minimise the risk of money laundering and terrorist financing.
- Data protection: Blockchain companies must ensure that they handle and store personal data in accordance with applicable data protection regulations.
- Authorisation and licences: Depending on the area of activity, blockchain companies may require certain permits or licences. In some countries, for example, crypto exchanges or wallet providers must apply for certain licences in order to operate legally.
- Consumer protection: Blockchain companies that offer products or services to consumers must comply with certain consumer protection regulations in many countries.
It is therefore important that founders of a blockchain company look into the applicable regulatory requirements in their business area and location at an early stage and, if necessary, seek professional advice to minimise potential regulatory risks.
Intellectual property protection
Another important aspect of setting up a blockchain company is the protection of intellectual property. The development of blockchain technologies and applications can give rise to new business ideas that are protectable. These include, for example, patents, trademarks and copyrights.
Patents can be registered for innovative blockchain solutions, for example. If a company has developed a new technology or application that is new and inventive, it can apply for a patent for it. With a patent, the company can prohibit others from copying the technology and thus has a competitive advantage.
Trademarks also play an important role in the blockchain sector. Companies can have their trademarks protected to ensure that other companies cannot use the trademark and thus benefit from its recognition and reputation.
Finally, copyrights can also be relevant. For example, blockchain companies may develop software or code solutions that are protected by copyright. By protecting copyrights, the company can ensure that other companies do not use the code or software without permission.
It is therefore important that founders of a blockchain company address intellectual property protection at an early stage and, if necessary, seek professional advice to protect their ideas and innovations and thus strengthen their competitiveness.
Data protection and data security
Starting a Blockchain Business: Another important aspect of starting a blockchain company is data protection and data security. As blockchain technologies are usually aimed at increasing data security and integrity, it is crucial that data protection is also ensured.
Data protection refers to the protection of personal data and is governed by specific laws and regulations in many countries. Blockchain companies that process personal data must ensure that they comply with applicable data protection regulations. This includes, for example, compliance with the European Union’s General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA) in the USA.
Data security refers to the protection of data from unauthorised access, loss or theft. As blockchain technologies are based on encryption and decentralisation, they already offer a high level of data security. Nevertheless, blockchain companies need to ensure that their systems and databases are protected from attacks and that they take appropriate measures to prevent data loss or theft.
Some measures blockchain companies can take to ensure data protection and data security are:
- Implementing privacy and data security policies
- Training employees and customers on how to handle personal data
- Use of encryption technologies
- Use of multi-factor authentication
- Regularly reviewing and updating security measures.
It is therefore important that founders of a blockchain company consider the privacy and data security requirements of their business model and location, and seek professional advice where necessary to ensure the integrity and confidentiality of data.
Challenges in the blockchain space
Despite the potential of blockchain technology and the continued growth in the blockchain space, there are also some challenges that need to be considered when starting and running a blockchain business. Here are some of the main challenges:
- Regulatory uncertainty: as Blockchain technology is still relatively new, many countries do not yet have specific regulations and laws tailored to it. Regulation in the blockchain space is often unclear or unpredictable, which can be challenging for founders.
- Interoperability: There are currently many different blockchain networks and protocols that are not always compatible with each other. This makes it difficult for companies to integrate their Blockchain solutions and connect to other networks.
- Scalability: Scalability is a challenge for many Blockchain solutions, especially those based on public Blockchains. Since transaction capacity is limited, network latency issues can arise when many users access the blockchain at the same time.
- Security: Although blockchain technology is designed for security and decentralisation, blockchain networks are not immune to attack. It is important that companies regularly monitor and update their blockchain solutions to minimise security risks.
- User acceptance: Blockchain solutions are often still unknown and incomprehensible to many users. Companies must make an effort to explain their solutions and gain the trust of users in order to be successful.
It is important that founders of a blockchain company take these challenges into account and, if necessary, seek professional advice to ensure that their solutions offer the best possible benefits while meeting the necessary requirements.
Besides the legal and regulatory challenges, there are also some technical challenges in the blockchain space that are relevant for founders:
- Complexity of the technology: Blockchain technology is very complex and requires deep technical understanding to use it effectively. This can be a hurdle for non-technical people and make it difficult to develop Blockchain solutions.
- Interoperability: As mentioned earlier, interoperability between different blockchain networks and protocols is a challenge that complicates the integration of blockchain solutions.
- Development of smart contracts: Smart Contracts are an important component of Blockchain solutions as they enable automated, self-executing contracts. However, the development of smart contracts requires specialised knowledge in programming and contract design.
- Scalability: As also mentioned in the regulatory challenges, scalability is a technical challenge. Public blockchains in particular have difficulties keeping up with the growing number of users and transactions.
- Privacy and data security: Blockchain technology requires specific technologies and protocols to protect the privacy and security of users’ data. Founders need to be aware of these requirements and take appropriate measures to ensure the security of their blockchain solutions.
It is important that founders of a blockchain company understand the technical challenges and take appropriate measures to overcome them. This can be achieved by hiring experts, partnering with other companies or investing in specific technologies.
Starting a Blockchain Business: regulatory challenges
In the blockchain space, there are also regulatory challenges that founders of blockchain companies should be aware of:
- Lack of a legal framework: As blockchain technology is relatively new, many countries do not yet have specific laws and regulations tailored to it. This can create uncertainty and unpredictability for founders and investors.
- Complexity of the regulatory landscape: The regulatory landscape in the blockchain space can be complex and confusing, as there are a multitude of regulators responsible for different aspects of blockchain technology.
- Different regulatory approaches in different countries: As there are no uniform international standards for the regulation of Blockchain technology, regulatory requirements can vary widely in different countries. This can pose a challenge for global blockchain companies.
- KYC (Know Your Customer) and AML (Anti-Money Laundering) requirements: As Blockchain transactions are often conducted anonymously or pseudonymously, KYC and AML requirements pose a challenge. Blockchain company founders need to ensure they meet these requirements to ensure compliance.
- Data security and privacy requirements: Blockchain technology is often difficult to bring into compliance with data privacy and data security regulations due to its decentralised nature. Blockchain company founders must ensure that they comply with applicable regulations and take appropriate measures to ensure the security and protection of their users’ data.
Security and privacy concerns
Security and privacy concerns are important challenges that can arise in relation to blockchain technology. Here are some of the most important aspects:
- Private keys and wallets: protecting private keys and wallets is critical to the security of Blockchain transactions. Blockchain company founders need to ensure that adequate security measures such as encryption and two-factor authentication are in place to protect access to private keys.
- Smart Contracts: Smart contracts are code-based transactions executed on the blockchain. They are immutable and autonomous, which means that once they are stored on the blockchain, they cannot be changed. It is important that smart contracts are error-free and secure, otherwise they can lead to significant losses.
- Anonymity and pseudonymity: As Blockchain transactions are often conducted anonymously or pseudonymously, there is a risk of abuse, fraud and criminal activity. Blockchain company founders must ensure that they take appropriate measures to ensure compliance with anti-money laundering and other regulatory requirements.
- Data protection: As Blockchain transactions are stored on a public ledger, there is a risk that personal data may be inadvertently disclosed. Blockchain company founders must ensure that they take appropriate measures to ensure compliance with data protection regulations.
- Scalability: The scalability of blockchain networks can be a challenge. The larger the network becomes, the more resources are needed to validate and store transactions. It is important that founders of blockchain companies take appropriate measures to ensure that their networks are scalable and can keep up with growing user numbers.
Starting a Blockchain Business: Lawyers advise
When setting up a blockchain company, there are legal, technical and business aspects to consider. The complexity of the matter therefore requires comprehensive advice, which should be provided by experts in the field of blockchain technology and business law.
Lawyers can provide valuable support when setting up a blockchain company. They can advise the founders in the following areas:
I. Choice of corporate form: Lawyers can advise on the choice of the appropriate corporate form that meets the needs of the blockchain company. In doing so, they take into account aspects such as limitation of liability, tax advantages and equity requirements.
II. Regulatory requirements: Lawyers can inform founders of the regulatory requirements that apply to blockchain companies and help them take appropriate steps to ensure compliance with these requirements. This may include compliance with anti-money laundering regulations, data protection and consumer protection regulations and other regulatory requirements.
III. Protection of intellectual property: Lawyers can advise founders on the registration of patents, trademarks and copyrights and ensure that the company’s intellectual property is protected.
IV. Data protection and data security: Lawyers can inform founders about the data protection and data security requirements applicable to blockchain companies and help them implement appropriate measures to ensure compliance with these requirements.
V. Liability issues: Lawyers can inform founders about liability issues related to the use of blockchain technology and assist them in developing risk management strategies to limit the company’s liability.
In summary, starting a blockchain business presents many challenges. Comprehensive advice from lawyers practising in the field of blockchain technology and business law can help founders successfully overcome these challenges and build a successful business.