An interview with Geoff Costeloe, an entrepreneur and associate with Lindsey MacCarthy LLP in Vancouver, on why the legal sector must not underestimate the future of digital assets.
Yves Faguy speaks with Geoff Costeloe of Lindsey MacCarthy LLP in Vancouver, whose legal practice focuses on estate planning and administration with a focus on digital assets. They discuss how digital assets are very different from traditional ones, why lawyers need to get up to speed quickly, and what regulators can do to prepare for the future.
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Yves Faguy: You're listening to Modern Law, presented by the Canadian Bar Association's National Magazine. I'm Yves Faguy and you're listening to Modern Law. Welcome to Modern Law, a CBA podcast where we discuss the law's ability to keep pace with change. On today's show we're going to talk about digital assets. Why they're different from traditional assets. Why lawyers need to get up to speed quickly, and how we should be treating them under the law.
Over the last decade, and in the last couple of years in particular we've seen digital assets and crypto really hit the mainstream. In conversations at least if not always in people's wallets. Digital assets are making new investment categories possible, and accessible eve to retail investors. they can be accepted as payments in private transactions, or used as investment instruments.
And now of course we have non-fungible tokens, NFTs that also hold value and that use block chains to sell originals of digital artifacts for example. By one measure the decentralized finance, or DeFi essentially financial services with no central authority because they're carried out on a block chain. Well the DeFi market today has a total locked in value by one estimate across all markets of $94.3 billion US as of today.
And it's a pretty safe bet it'll only get bigger. And the legal sector should not be underestimating the future of digital assets Even if it all sounds opaque, and a little weird to a lot of lawyers. Because here's what you need to know. As adoption grows your clients, be they individuals, families, or businesses – those clients who hold digital assets will inevitably come across your legal practice.
Which is why lawyers of all stripes need to pay attention. Because sooner or later you're going to have to handle digital assets. And they're very different from traditional ones. So you're going to have to get up to speed.
To help us understand what's going on, and why it's important to your practice Geoff Costeloe is with us today. Now Geoff is a lawyer, an entrepreneur. He's an associate with Lindsey MacCarthy LLP in Vancouver. His legal practice focuses on estate planning and administration with a focus on digital assets.
Basically it's his job to make sure that his client's Bitcoin, their Ethereum, their NFTs what have you are securely held, and properly aligned into an estate plan. We'll explain what some of that means in a bit. I just want to add that Geoff is also an active member in LexDAO, an organisation focused on legal engineering in the Web3 ecosystem, and LeXpunK which is a group of lawyers advancing research and advocacy on the legal implications of crypto currencies.
Geoff's got a lot of ideas, and a lot of interesting things to say on a range of topics. So I also recommend that you follow him on Twitter @gcosteloe. That's at G, C, O, S, T, E, L, O, E.
Anyway welcome Geoff. Thanks for joining us today.
Geoff Costeloe:Hi Yves, thanks for having me. Really excited to talk.
Yves Faguy: OK, great. Listen you're the expert so briefly tell me first how it is that you came to become a lawyer specialising in digital assets? And you know tell me what is it about digital assets that you find particularly compelling?
Geoff Costeloe:Sure, so I passed the bar in Alberta in 2016. And found my way into estate planning at that time. Felt I really liked the practice. I liked the personalities. I liked the problems and I liked kind of the personal nature that I was dealing with.
I didn't take estate planning or a wills course in law school. But I found my way in there and I found I really enjoyed that practice area. About the same time I made my first Bitcoin purchase because I always liked technological things. And I thought this was a crazy idea and I wanted to kind of try it out for myself and see what it was like.
And those kind of two interests didn't intersect until probably about a year and a half ago. When I started really thinking harder about you know, if adoption grows on these currencies and in this technology then there's going to be some real issues around how to handle them in our kind of traditional legal world.
So estates is the area that I focus on, but other areas of law: family law, divorce, other sorts of – bankruptcies. What's the intersection of those areas and this kind of new domain of digital assets? So I've tailored my practice to kind of – and it's been great here at Lindsey McCarthy They've given me a huge opportunity to kind of explore this space and carve out a niche kind of in a total Wild West of figuring out how all this stuff is going to work.
And that's a lot of what we're doing right now is kind of as this technology is evolving we're kind of figuring out how to make the legal system work. You know, how it interacts with it, and what kind of we can do to serve our clients.
And as you said in your intro it's a really important piece of I think every lawyer’s practice going forward needs to have. At least some understanding of what these are, what the risks are, how the law has a cursory – like will interact with them. Just kind of at, at least an introductory level so that they don't kind of get into trouble themselves. Or – and make sure that they can provide their clients with the best advice that they can.
Yves Faguy: So – well K, so start by maybe giving us the lay of the land. Like the big, big picture. Where are we at in terms of the whole digital assets space? And actually you know, let me ask you a first question. You know, I think sometimes people confuse a few things. What's perhaps the difference between a digital asset and you know a crypto asset? Because I think those get confused right?
Geoff Costeloe:Sure, yeah, yeah so lots of lawyers, if you read wills as a good example lots of lawyers in wills will have a digital assets clause. And the digital assets clause will cover things like getting into the iCloud to get photos. Getting into your Facebook account. If you have – essentially if you have an online service or some third party that you'll need to access to get information from, that clause, the digital assets clause in the will, will give the executor the power to kind of access those assets and get them.
Now those assets are kind of what I would call more traditional digital assets. So things like photos stored on an iCloud. They're important, they have sentimental value. But they're also easy to copy. So there is lots of ways you can control+C, control+V around your photos around your computer. You can send them to lots of different people. You can share them on Facebook and anybody can look at them.
Crypto kind of digital assets that I'm talking about are little different. Because they have – they're secured by a block chain, and they're secured cryptographically to make sure that only one of any sort of type of the asset can exist at any one time. So you can't copy and paste them. And you can't kind of – you have to secure them in different ways to make sure that they stay intact and the integrity is maintained of the block chain, and of the accounts that you have.
So you can't lump one type of digital asset into another. And I think that's a mistake that's really easy for lawyers to make. It's like oh, this is just kind of like these other digital assets that I talk about. Or this is kind of like an iCloud thing that I can log into. But it’s very different. Because if you have an issue with a Bitcoin wallet there's nobody you can call. It's a fully decentralized protocol.
So it's really important to know that, that distinction is there. And if you make a mistake dealing with a cryptographic digital asset it can be a real problem. Because you can't go get a court order to have those assets recovered, or moved, or anything like that. The court can order whatever they like, but they don't actually have – there's no authority that they can go to, to assist in moving those assets.
So you have to be very careful dealing with them, and be mindful of those consequences and the immutability of transactions of this type. And if they're lost then they're lost forever, so.
Yves Faguy: OK, so there's a lot in there that I want to get to. But fundamentally I guess what you're dealing with in your practice are you know, digital assets that have a certain inherent value to them. And so those are you know what are your topline assets that you're dealing with?
Geoff Costeloe:Sure, so I mean Bitcoin's the one that everybody knows the name of Ethereum is the second largest kind of crypto currency. And Ethereum has a lot of kind of different qualities to it. Which I kind of talked about in the article I wrote for the CBA national about in the decentralized finance space. It runs mostly on Ethereum. Because it's a programmable layer. So you could have contract interactions.
Which in computer speak let's you kind of do certain actions at a distance without anybody kind of being on the other side of them. And then NFTs, and NFTs are you know, if you talk about them people roll their eyes, or they kind of laugh. But I can tell you from my practice that it's actually a super exciting space and a lot of artists are finding new ways to reach new audiences. To monetize different kinds of types of art in new spaces.
And it's really exciting for the artists as well as for the kind of developers, and the tech people who are building out these projects. So NFTs can be anything from – it's a non-fungible token. Which means it's unique. It's not interchangeable with anything else. Just like a piece of art is unique. And it can …
Yves Faguy: Or like a piece of Bitcoin could be exchanged for another piece of Bitcoin?
Geoff Costeloe:Yeah, like a Bitcoin is interchangeable with another Bitcoin right? If one Bitcoin equals one Bitcoin. But one NFT does not necessarily equal another NFT. Because they're all distinct.
But there's also other kinds of NFTs. Like I know that there's an ENS Domain System. Which is kind of like URLs. And those are also stored as NFTs. So you know, you can buy a URL on the Ethereum network that's kind of like a Geoff.com. But then that is stored as an NFT.
So an NFT is really just a way of coding any sort of asset that is non-interchangeable with something else. It has some unique qualities to it.
Yves Faguy: So I mean you know in my mind I think we're a little bit past the point where cryptocurrencies are just novelty assets. And I think – I suspect you'll agree with that.
I'm not sure if you know, the mainstream is coming to that conclusion. I suspect a good part of it is kind of reaching that point. But you know, tell me you know, in your view you know, to what extent have we really transitioned from an analogue to a digital asset owning society?
And I'm not saying that analogue's going to disappear, but like how important is digital asset ownership become now?
Geoff Costeloe:Yeah, I think it's you know, we're definitely heading in a direction where more and more value is going to be coded digitally. And kind of the analogy that I think about a lot you know, I'm 34. So 30 years ago when I was just a toddler walking around we didn't have the internet in the way that we do now. And getting information from different parts of the world was actually you know, difficult. You know, if you wanted to understand what was happening in Africa, or in Japan it was actually not trivial to figure that out. Especially if you wanted up to date kind of updates. Not delayed by a week or a few days.
So you need to have a translator. You'd need to have the right – the time zones lined up. You'd need to have a bunch of services to act as intermediaries. And that was surprisingly cumbersome. But now we live in a world that's very interconnected. And figuring out what's happening on the other side of the world is trivial. With translation software, and Google, and kind of the way that the information flows around the internet.
So the development of the internet from you know, over the last 30 years has really kind of permanently changed how we think about information travelling around the world. So the way I see cryptocurrency, and the way I see kind of the kind of digital asset revolution is it's going to do the same thing for value that the internet did for information.
So even though I now with the current internet. With Web 2.0 I can go, and I can find out exactly what's happening in Japan. I can get you know, right on Twitter and talk to people around the world anytime I want.
But if I actually want to do business with somebody in Japan it's actually quite difficult to do. And again you run into these non-trivial issues about currency exchanges, and what if the banks don't line up? And how do you get a wire transfer into a different you know? How do you need to do a translation of the wire transfer information. And what if the banks don't have software that talks to each other?
So there's all sorts of those kind of same intermediary issues that I think cryptocurrencies have a way of kind of solving, and allowing people to transact more seamlessly across different currencies. Across different borders. And it allows them to collaborate capita in totally new and creative, and exciting ways.
So we're not there yet, but we're moving in that direction. And I think that you know that's – people will talk all the time in the crypto community about this is kind of like 1997 of the internet right now that we're living through in this kind of next iteration.
So it's a really exciting time and I think that anybody who you know, we look back on people who dismiss the internet as just a joke. Or what's the point in sending an email when I can just pick up the phone back in the day. You know, I think we're hearing some of those things you know, now about this is just a big Ponzi Scheme. And it's just a way for people to make money.
But if you get into the technology, you understand it you can see that there are some real kind of world changing implications to the way that this operates.
Yves Faguy: Yeah, and I think that worries a lot – I mean we've talked about this before you and I. I mean you know, I think the analogy to the internet is a good one. And I think a lot of the problem is people are waking up today and saying oh my God.
Perhaps we should follow a little more resolutely about you know, how we should regulate this beast of the internet. And I’m wondering if you know, I'm wondering if some people don't look at you know, DeFi, and crypto and all these kinds of new terms that are moving into the mainstream and worrying about that oh my God we're going to head into some like dystopian financial world? You now what do you think about that?
Geoff Costeloe:I think it's a totally – I think it's a totally legitimate concern. I think you know, part of the reason we got to where we got to, we are today with the internet and kind of the problems that have arisen about misinformation, and kind of monopolies between Facebook, and Google, and kind of the big tech companies is partially because there wasn't good regulation at the outset of the internet because a lot of the established people didn't think that it would be as big a thing as it actually was.
So really this presents an opportunity for regulators, and for legislators, and for you know, whatever your industry is to say you know let's really wrap our heads around this now. Let's not wait until you know, Bitcoin's worth a million dollars. You know, we could have been thinking about regulation five years ago.
But it wasn't worth much then, but if we're making the same mistake over and over again we're going to always be falling behind on the regulation. So I think what I'm really passionate about right now is helping educate lawyers, accountants, professionals, politicians, whatever it is about the technology itself. So that they can start thinking about how will this interact with my practice? How will this be regulated? How should this be regulated? And even questions that you know, we're having in kind of the conversations in LeXpunK and some of the places that I'm interacting with other lawyers is, is the FCC in the US the traditional kind of securities regulators. Are they even the appropriate people to be regulating this sort of stuff?
Or do we need some sort of new crypto focused kind of regulator? That will be able to take on the distinct technological issues that it brings. So it's an opportunity to kind of get ahead of the curve. And I think no country has made a big step in any kind of real way with this.
And I think that it'd be a great opportunity in Canada, in BC. If a province wants to take it on to really kind of tackle this. It's a huge opportunity. There's lots of money and jobs flowing into this space. Smart people. We need to kind of make sure that there are structures around them legally with regulators that want to collaborate with them, and work together to regulate it properly.
And we can really build a great kind of industry wherever we want to.
Yves Faguy: So you know, on that like so tell me like in the Canadian regulatory environment you know, what's it like? You know, is ours an environment where regulators are supportive of the development of digital assets? Or are we way behind the 8-ball? What are other countries doing well?
I mean I guess in another way how should a smart government, a forward-thinking government kind of approach regulation?
Geoff Costeloe: Yeah, so I think Canada is maybe a little ahead of the curve in some areas. So I think we're the only country that I know of that our securities regulator has approved a Bitcoin and Ethereum ETF. So the trades on the Toronto Stock Exchange.
And those applications are still pending at the FCC. And they have been for a while. Most of the regulation in the crypto space falls on the backs of what is defined by Money Service Business, or MSBs. And those are the entities that are exchanging Canadian dollars or Fiat currency for crypto assets. So in order to kind of – and they have to follow a lot if the same regulatory guidelines that a traditional ban would follow. So in order to open an account you need to provide ID so that they know who it is.
And there's a bunch of anti-money laundering steps that get that. So the regulation is largely falling on those kind of like exchanges.
Yves Faguy: And so they have to register with FINTRAC essential, or Financial Transactions and Reports Analysis Centre of Canada?
Geoff Costeloe: Correct, so they're going to be doing all of that in compliance with FINTRAC. So that part of it has actually been quite well developed, and it is quite well-regulated. But there's a whole kind of new, emerging area about what are these tokens?
You know, are they securities? If I go out you know, the technology just didn't exist for me to make a token in my bedroom you know, in a couple hours. And then push it out on the internet and have people paying to buy it for whatever value they may see in it. Is that a security? If it's a security who does it report to?
You know, there was a really interesting tax article that I came across just last week. And I forget where it was, but it was talking about kind of is Bitcoin a foreign asset? Like under tax you know if you're a Canadian small business you have to kind of – you get taxed differently on whether you're holding foreign assets or Canadian assets. Is Bitcoin a foreign asset?
And the answer is kind of like well we don't know. You now, we can kind of make some guesses on some ways we could try to get it within a local kind of Canadian jurisdiction. But we don't really know. because it's a decentralized ledger that's spread all around the world and there's no entity that has a mailing address. And there's all these kind of interesting questions that remain unanswered. And we really need some smart legislators, and regulators to be excited about this. And say hey, this is a really exciting industry. We need to work with the people who are building it, and understand the technology. And not just kind of put a square peg in a round hole of saying well you guys just have to fit into this – the old way of doing things.
Because in some ways it just doesn't fit.
Yves Faguy: Geoff Costeloe: So what is it that you think our regulators need to worry about?
Geoff Costeloe: So I mean …
Yves Faguy: What worries you is a different way of putting it.
Geoff Costeloe: So I think you know, what worries me right now is to some extent you know, is just a lack of direction that there is. That it's even being thought about. And I think some of this is because there's a lot of talk from the FCC and Gary Gensler about regulating …
Yves Faguy: Who's the FCC Chair.
Geoff Costeloe: He's the FCC Chair, and he's talking very seriously about doing a bunch of probably much more significant crypto regulations. And I think that a lot of jurisdictions are probably sitting on their hands and waiting to see how that shakes out. Before they develop their own, because the FCC obviously has a huge impact on how these things move around you know, the world.
So we'll probably hear from them first and then the other jurisdictions will kind of move in a similar direction or a different one depending on what they want to do. But the concerns I have largely you know, in a legal context are just making sure that lawyers understand the risks of these assets. And they come with a lot of benefits, and they come with a lot of risks. And you know, money laundering is an issue. It's not as big an issue as people make it out a lot be. In a lot of the mainstream kind of media, or in a lot of the news articles.
You know the Pandora Papers that just came out on rich people you know, finding tax shelters ad havens around the world. They're all done in regular dollars. And you know, it's actually in a lot of ways not ideal to do money laundering and criminal activity on a block chain. Because it creates a permanent history of every single transaction you've made. So once you start cracking some identities on the chain it's actually pretty easy to really get in-depth details and audit people's transactional history.
So it's – but those kind of technological issues are the things that lawyers should be starting to be aware about. About saying how does this get recorded? What does a transaction look like? How can I do safe transactions? How can I verify addresses?
Those are the kind of things that keep me up at night. Because I worry that lawyers are going to stumble into some kind of situations that are not anybody's fault. It's just a matter of it's a new technology and there's a learning curve.
But if they don't handle this properly because of the immutable characteristics it can be you know, bad for your client. It can be bad for you from a professional liability perspective. And you want to make sure that you have all the tools to make the right decisions and advice your clients safely and effectively.
Yves Faguy: OK, well actually let's talk about that notion of immutability. And the risks that come with it, particularly from the perspective of a lawyer handling digital assets. And so you know, how do you handle for example a digital asset?
I mean I guess you know, can you put it in trust? Should you put it in trust? Is that a bad idea? And perhaps I should explain let's start with like what is immutability?
Geoff Costeloe: Sure, so for those people who don't know the technology underlying a lot of these digital assets is a block chain. And the block chain adds a new block every 16 seconds, or 10 minutes, or it varies depending on what type of currency you're using. And every single transaction, or interaction that happens in that currency is recorded permanently on that chain.
So you can basically pick a block, and go into it and look at the transactions and then move backwards through time all the way back to the founding of the ecosystem. And go through every single transaction that's ever occurred. So that's great from some perspectives, and that's one of the ways that you can verify exactly how many assets you have, and prove that you are the actual owner of them.
The disadvantage of that, and the disadvantage of the immutability side is that really if the protocol records a transaction you can't then go back and undo it. There are in the eyes of kind of the protocol there are no fraudulent transactions. Because if the cryptographic qualities are met then the transaction is deemed to be valid. So if there's – let's say there's some sort of fraud or some sort of mistake happens. You can't go to a court and get an order that you normally could to have the property returned to you. Or moved to a different beneficiary. Or handled differently in probate.
So you have to be very careful and conscious when you're dealing with these assets of that characteristic. From a professional risk management point of view I would not actually hold these assets in trust. I would help my clients navigate holding it themself. But I don't want to ever hold the cryptographic keys for my client's assets because I feel it's too big of a risk professionally.
And there's a lot of unknowns around holding keys as well. You don't always know who else will hold a key that may be able to swipe the money. Or the assets out from underneath you.
So there's a whole bunch of layers to that. And really what I do in my practice on the estate side is I try to build a structure of different keyholders, and different kind of contingency plans and succession plans. That matches what the legal document says in the will.
So if it's all to my spouse, all to my kids that's great. We will build a kind of – you can use multi-signature wallets, and you can do a bunch of kind of creative things to kind of have successor holders for these keys. And we try to line that up with what's happening on the estate plan.
So when somebody passes away we can kick that into gear and we can start transacting, or we can start doing you know, going through the hierarchy of how to move the assets around and distribute them. But we have to do that in a way that's kind of – we still report them to probate because it's an asset that you hold on death. But we have to do it in a conscious way where we're not going to end up in a situation where we're relying on the court to make any of these transactions for us. We have to be you know, conscious of that and just aware. Very, very aware of where the keys are sitting, who's holding them, and what happens when somebody passes away or is ill?
Yves Faguy: You know, I think one of the reasons why maybe this – all these notions kind of make lawyers feel uncomfortable is because it sort of upends the whole rule that you know, possession is 9/10 of the law. And so – but you know back again. So you know presumably, so you have the block chain, but you do have someone who is entering information into the block chain, an outsider from the system. And you know that could be a lawyer right?
Geoff Costeloe: What do you mean entering information? Yeah …
Yves Faguy: What I mean by that I don't know, would you call it an oracle? Could a lawyer be an oracle? Or – and you know is there liability that comes with that?
Geoff Costeloe:Yeah, so I think you know, the idea of lawyers being oracles is a really interesting one. And I think that's something we're going to start to see in a couple years. I mean I know one of the projects that we're working on right now …
Yves Faguy: Explain to me what an oracle is.
Geoff Costeloe: Sure, so on the block chain it's a self-contained ecosystem. So if you want to in the DeFi world – so decentralized finance. If I want to change one coin to another, which is something I can do fully on chain in a decentralized manner. I need to know what the exchange rate is.
And because the ecosystem itself doesn't have that information it has to get it from somewhere. And it's this whole complicated process of developing what's called oracles. Which are decentralized, trustless sources of information.
So you can trust them. They're not going to be able to – there's a bunch of protocols built into them so that they can be reliably used without – and know that the information coming in is valid. And then you can use that r your exchange rate, and it plugs into the contract. And then the contract can execute and do your exchange.
So you need to have some ways of bringing some out of crypto information onto the chain to allow contracts to work, and so that they can respond to somebody passing away or some sort of action. And one of the really interesting projects that we're working on at LexDAU actually is building kind of arbitration panels.
So there's ways that if there is something wrong with your contract, or code you can actually have that code call and arbitration hearing essentially. Some of the lawyers in our group will look at it and make a determination. And enter that, what they find for the way that the transaction should have processed back into the chain. And then the transaction will process however the arbitration panel deems that acceptable.
So we're kind of you know, experimenting with these ideas of being kind of oracles in a sense. It's a service that we're providing to some really kind of experiential and niche kind of projects. But it's a fun place to be doing that experimentation because it's – and I'm not on any of those panels yet, so I haven't done any of that. but it's a fun place to be exploring that experimentation because it does allow for these kind of alternative dispute resolution mechanisms to be triggered. And it's all happening kind of permanently encoded on the chain. Which is a really kind of fascinating, and interesting way to again, to coordinate capital. To resolve disputes, to align different kind of values, and coordinate businesses.
Yves Faguy: I just wonder if – it's interesting because you know the whole idea is like about you know decentralize finance is also is removing friction from the whole system. Is that not a way of reintroducing friction into the system?
Geoff Costeloe: It's totally a way of reintroducing friction into the system. But the problem you run into you know, it's – as lawyers there is no case is the same. No dispute is ever the same. There's nothing you know, cut, and paste at all in what we do. Even though people from the outside may think there is.
And so you know, we find those issues are now emerging kind of in the crypto sphere. Is that a code gets put up, a contract gets setup. And some strange kind of quirk of it doesn't totally – doesn't get seen when the code gets launched. And then something goes wrong. And then the question is well what do we do now? Because there's no dispute mechanism that we have access to on chain. Because you can't go to a court to fight it out. Because does the court have jurisdiction?
There's all sorts of kind of these weird questions. So the community is trying to find kind of ways to build dispute resolution mechanisms into them. And lawyers are probably going to be a big part of that. But again how we do that, what jurisdiction it falls under is all kind of totally novel, interesting kind of areas of legal-ish practice.
Because it's not really kind of work that you're doing on a legal level. It's kind of experimentation you're doing on building these structures.
Yves Faguy: No, I get it's early days, but it strikes me though that you know, this concept of immutability is going to probably evolve. Maybe some of the rougher edges of immutability are going to be shaven off though. Is that a decent prediction?
Geoff Costeloe:I don't know. It will vary from protocol to protocol. And there have been – so one of the big kind of events that happened in Ethereum's history was one of the first it's called the DAO, the Decentralised Autonomous Organisation. Which is a new way of kind of doing collectives.
And I think this was in 2016 or 2017. And it had sucked up a whole bunch of money. Several billion dollars which at the time was a lot because the ecosystem was a lot smaller. And it got hacked, and there was kind of a flaw in the code that somebody exploited. And basically swiped all that money.
And then there was a very controversial kind of decision that the whole community had to make of do we collectively reverse that because the damage to the entire ecosystem was so bad? Or do we just say the chain is immutable. That's what happened. Let's all move on.
And in that case they actually did go back, and enough of the community – and there's some complex decision making that happens here. Because there isn't a single organisation that makes this call. Every single person has to agree within the network to accept a change. And that's what happened. They actually went back and unwound that exploit, and returned the funds.
But that caused a fraction and essentially booted a bunch of people out of the ecosystem. So …
Yves Faguy: Pretty major split in that.
Geoff Costeloe: Yeah, so it led to Ethereum and then there's another – so Ethereum and then there’s another competing currency called Ethereum Classic. And those are exactly the same chain up until the point where they went back and fixed it. And now they run as two totally separate currencies because they've forked into different paths is what we say.
So there are you know, there are ways of kind of unwinding things. They are very cumbersome, and they are massively controversial. Because there's a big philosophy and the whole idea that you know, there shouldn't be a single person who have authority to change the protocol, o adjust the rules. That's part of the whole idea behind Bitcoin was that it has to be predictable and it shouldn't be politicized. Well if you don't want it to be politicized then you've got to try to keep the number of decisions you have to make to an absolute minimum.
So I don't think that immutability will disappear in that sort of way. On the base layer of the chain I do think that as more and more kind of commercialization projects happen that things won't be written to the chain at quite the same rate that they are now. And that may give some time for kind of the regular user experience to be kind of a bit smoother and more familiar.
But underlying chain itself don't think will ever be non-immutable. It will permanently be a record there because that's kind of like the certainty that the whole systems based off of. And if the rules can change, the value of that system changes significantly.
Yves Faguy: Yeah, I mean I think it's interesting. I think it kind of ties into this broader discussion sometimes about you know, worries, and angst over you know, our financial system getting totally disrupted by digital currencies, and decentralized finance. And you know, is it – I'm guessing would you say that it's fair to say that you know, were going to see digital instruments that incrementally over time get integrated into a more kind of conventional, financial world?
Geoff Costeloe: I think that’s the case. I mean if you talk to some – we call them you know maximalists. They really want to see kind of Fiat currency disappear and replaced with Bitcoin or something else. And I don't think that' ever remotely going to happen. I think that some of these currencies, Bitcoin especially provides a nice check perhaps on governments that will limitless – you know, print limitless money. And here's an alternative that isn't. And that's kind of in a nice kind of political world like a nice kind of check on that.
But yeah, I think that more likely what's going to happen over the long-term is we’re going to see traditional financial actors starting to adopt the underlying technology here. Because there's lots of different kind of advantages to it in terms of scalability, speed of settlement. There's lots of big advantages there. And they're going to adopt that.
And for the end user in 10 or 15 years they may just be going into their Scotiabank, or their BMO bank you know, to do transactions. And they may just seem faster and cheaper, but they're actually happening kind of on one of these underlying block chains.
I think we're going to see the release of at least one or two central bank digital currencies released. So that'll be like a Canadian Dollar, or US Dollar, but it's running on its own chain. Which has a lot of advantages for governments because they can deposit it directly into somebody's wallet, digital wallet and not have to go through intermediary.
And that also allows them to kind of have a lot of – for better or worse a lot of investigatory tools to be able to see exactly every transaction that's happening all the time immediately without having to go again through a traditional bank, or traditional finance.
So governments are going to like this for the power that it gives them in terms of being able to supervise, and kind of direct the economies, and direct kind of the monetary system. And the underlying technology will bring a huge amount of scalability to users. Whether that is an overall good thing you know, I don't totally know at the end of the day. But if it isn't I think people will go with whatever currency that they trust. And that they want to use for philosophical, or investment reasons. And the opportunities to use other currencies, Bitcoin, Ethereum whatever it is are going to increase going forward.
So I think that what is good is that I think some of the existing Fiat currencies are now actually going to have to compete to justify their existence. And kind of prove their worth to people. And that's not a bad thing in competition. It's good for that kind of stuff. Will crypto ever overtake it? I don't think that that's the case, but I think like I said it's good to have a challenger that challenges our world view on the way that we've been doing things for hundreds of years. And we just keep doing the because that's the way we've always done them.
Yves Faguy: Well it also sounds to me that you know lawyers perhaps should not be overly worried about becoming completely obsolete in this brave new world. So tell me what you know, how do you think digital assets will reshape the practice of law? You know where do you see the legal profession moving with respect to digital assets?
And I men – and let's go beyond you know wills and estates, your practice. I'm guessing this is going to have a pretty you know, they're going to have a pretty general application in many practices.
Geoff Costeloe: Yea, I mean it depends on adoption. And it's still early in the adoption curve. And it depends on what types of clients want to actually start using them. So if there starts to be business use cases beyond just kind of holding Bitcoin and hoping that the number goes up. You know whether you're able to kind of – NFTs are a good example.
You know, artists being able to release art on an NFT platform, and they're going to be able to make a commission every – you can code into an NFT every time it changes addresses that artist makes a little bit of a commission on it. Which is something that previous you know a physical art a lot of times they don't have.
It's similar to royalties for music. And that all happens instantaneously and it settles on chain. So …
Yves Faguy: So that's an idea.
Geoff Costeloe: So that – yes. So exactly, so there's all sorts of kind of – there's very few areas of law that I think won't be affected by this in some ways. But how they get affected will be different depending on the industry, depending on where the value is for clients. And where the efficiencies are.
And in some areas they're you know, it won't change that much. I mean crypto is not going to dramatically change the practice of family law. Except when it comes to figuring out how to divide certain types of digital assets. And so there's this nugget that's going to kind of have to fit into all sorts of traditional practice roles. That each lawyer is going to have to come to grips with in some shape or form. And I think you know, I always learned in law school the idea of taking clients as they come with whatever their problems are.
And I don't want to turn a client away or anything because they have an asset that I'm not comfortable using, or I'm not familiar with. I want to get up to speed, learn about it, find the opportunities and then be able to provide the best advice I can for my clients.
Yves Faguy: And so what are you seeing out there in the marketplace? Or in the legal marketplace? Like how are lawyers responding to these assets?
Geoff Costeloe: Few and far between right? So when it comes to kind of the expertise on this, and I'll broaden it out a little bit and say just within the professional class. There are very, very few specialised people who understand this stuff on a deep level. So there's a handful of accountants that I know in Canada who are very, very competent at doing DeFi tax reporting. Because it can be very complicated and you have to have a really again a strong understanding of the underlying technology. What's happening on chain? Who's borrowing from what? Because you don't actually get a receipt for any of these transactions.
You get a transaction hash that you can look up in the chain itself. And that is your receipt. But you can't go and say give me my monthly statement like you can with your traditional bank account.
You know, tax is a really big one. Because you already you know, the CRA has already put out a bunch of bulletins talking about paying capital gains on appreciation for all sorts of digital assets including NFTs. If you have it, and it gains value you're probably going to have to pay tax on it.
But again how you report to the CRA is an interesting one. If they audit you, what do you provide to them? What do I provide to them to say that you know a picture that I bought for $80 is now worth $8,000 and it's a jpeg that you know, is sitting on chain. And I don't have a receipt for it.
How do I audit them? Does the CRA have the technical capacity and expertise to actually kind of do an audit on me?
Yves Faguy: Has CRA thought about this?
Geoff Costeloe: I don’t know if they've thought about it. I know that I haven't – myself or none of my clients have been audited in that kind of way. And I think that's one of the things that's a little frustrating from where I'm sitting is that there's lots of lawyers like myself – well not lots. But there are lawyers like myself who are trying to come to grips with this area and develop expertise. And they go to either their law society, bar association, a regulator like the CRA and they say hey. I've got this issue and I want to be transparent with you, and I want to collaborate so that we can work together. So that I can you know help my client follow the law. And help my client you know, make sure they're not off-side of anything.
But we need some advice on how to do this. And then you don't hear back from them, or you kind of get pushed to the side. And then you're kind of in limbo because you're doing what you think is best for your client. You're really trying to follow the letter of the law.
But you don't actually know what's going to end up coming down the pipe. So more collaboration between all sorts of regulators, and more education on behalf of those regulators to understand how this technology works. What the upsides and the downsides are. And how their employees are going to have to start handling it as – like I said CRA's doing audits. Or if you know the Ontario Securities Commission is going to start looking at tokens they have to understand the technology underneath it.
So right now we're still in kind of a big education mode with lawyers. And I think – I teach a course for CLE credits called The Law of Bitcoin. Which I'm happy to always teach to other lawyers. And it's really a great way to kind of get your first baby steps into this. And to do a transaction, and to see what the chain looks like.
And we go through some kind of practice advice on best practices. And it's really great to see kind of lawyers say oh, this is great. I see that now it's more than just a headline in a newspaper that I wasn't familiar with. I got to receive some and send some. And I kind of get it now a bit more.
And that's really kind of – but to some extent that’s all that lawyers need to so. They don't need to become an expert. They just need to kind of become aware of what the pros and cons are, how to manage risk, and when to call somebody like myself who probably knows a bit more than them on a complex issue.
Yves Faguy: Well yeah that's a good point. Where should lawyers go to learn about digital assets? I mean are you suggesting that they should actually acquire some, and live the experience? Or are there other ways that they can go about learning about this?
Geoff Costeloe: Yeah, I mean there's lots of resources too. They could always reach out to me and I'm happy to help them. But there's lots of resources to learn. And I don't think that you know, it's my job to – we said like shill assets to people and to kind of talk about you know, oh you should own these assets.
I don't think that lawyers you know, anybody should be doing anything that they don't want to do on an investment front. But I think doing a transaction sending and receiving five bucks, or 10 bucks is worth doing. Because you can see like oh, this is how it works. And you know, this is the cost of the transaction.
So it's really easy to send money across borders, or to kind of have an understanding. I think that's worth a bit of time. And again there's lots of resources out there. I'm happy to send you some to post at CBA. Or people can look me up and I can pass them on.
But there's so many resources to take your first steps. It's a really exciting space, and again I know for me that was a big light bulb moment was when I sent in and received my first Bitcoin transaction. I said wow. This is amazing and it's going to change everything.
And I still believe that, and I can see that look on some other lawyer's faces when they get beyond the headlines and get their hands on it a bit more.
Yves Faguy: Yeah, they're kind of proud of what they – proud that they can make it happen.
Geoff Costeloe: It's fun. It's fun.
Yves Faguy: So you know there used to be this whole notion that it was hard to get Bitcoin. Is it hard to get Bitcoin now?
Geoff Costeloe: No, no. There's lots of exchanges that are run out of Canada that are regulated, follow all the FNTRAC guidelines. There's an approval process to make sure they have all the information they need to be compliant. And then it's just like operating you know, a regular you know, just like your trading account at Questrade or whatever.
You put some money in, you deposit some money. You buy some Bitcoin at the market price and then you can withdraw that asset to a digital wallet that's associated with the protocol.
Yves Faguy: We’ve been discussing mostly digital assets with monetary value. What about the sentimental stuff? The music, the photos online, words we've written? Do you deal with that in your practice at all? Do those ever raise issues?
Geoff Costeloe: So sometimes. I mean they're kind of the less sexy stuff that I do. Because they don't have monetary value there tends to be like you said less litigious stuff around those. Because you don't need to kind of fight over them in the same way you would if it was a locked bank account or something similar.
But there are a lot of people who hold digital kind of photos, or keepsakes, or passwords. Or even information in their email accounts, or on the Cloud, or on servers all around the world. And so yeah, the best thing is to have a robust kind of digital more traditional digital assets clause in the will. To make sure that you can after probate provide that will to your internet service provider. Or to Google itself and Google will provide you access, or the executor access to those accounts.
I have done this once or twice. It's not a super smooth process but it does work. So it's worth having those assets and it’s worth having a conversation with your clients if you’re talking about family you know, if you're talking about succession planning, and inheritance. It's important to talk about those things.
Like who has the passwords to get your photos? Where do you keep your stuff? Because those are things that clients don't think about. And then it can cause some emotional distress, and some family friction if one person holds the passwords and they don't want to give it over.
So it's another thing that you can think about advising your clients on. Is it going to be the end of the world? Not in the same way that kind of you know, a million dollars I a locked bank account is. But it is something that a good lawyer should be thinking about when they're doing an estate plan.
Yves Faguy: Yeah, so those are all things to think about. Tell me now a little bit you know where do you see like all the debate going now next? Like what do you have your eye on the lookout for in the whole digital asset space? Give me a 12 month rise, and a five-year horizon.
Geoff Costeloe:One thing that's really surprised me over the last six months has been the rise and the growth in the NFT and the kind of digital art space. And I think that, that is going to continue to expand. One of the things that's great about that space is that it brings together a whole bunch of – it brings together a different culture than the traditional crypto culture. Which is kind of much more kind of like stock trading.
The NFT people are you know, there's a lot of artists, there's a lot of creative people who are just trying to find new ways to connect with their audience, and to monetize their work. Which is kind of you know difficult for artists to do in some cases. So I think that there's going to be a lot more exposure in that space over the next 12 months.
I think we'll see some bigger named artists both in print and you know, sorry image artists as well as kind of other types of art. Because any type of art can be encoded onto the block chain.
So other types of artists who may start adopting and using these sort of platforms. And I think there's going to be more mainstreaming of that kind of stuff. We know there's Dapper Labs is a company based out of Vancouver and they have been doing NBA Top Shot which is kind of like collecting video highlights as if they were collector's cards. And that's all running on Ethereum.
I think it's running on Ethereum as an NFT system. So there's going to be kind of more adoption of that kind of stuff. Over the next five years I think you're going to see more traditional finance players traditional banks get involved in the space. And find ways that they can use the technology to scale their existing services. And probably even to tap into the liquidity in the existing DeFi market. Because right now the DeFi market is quite siloed off from the traditional finance market. And there's a whole bunch of kind of opportunities there between the two, to both lend, and borrow. And provide liquidity to each other. And I think there needs to be some kind of channels build there, and I think those will get built out.
And then I think we're going to see the spread of kind of some central bank, digital currencies where governments are going to run their own version of Bitcoin that's going to be a Canadian Dollar. That's going to be worth $1 Canadian backed by the Canadian Government, but running on a Canadian you know, a Bitcoin – its own chain.
And that will probably help a lot of businesses kind of scale their costs more in terms of accepting cash from clients. It'll be faster to kind of settle transactions in a lot of cases. And again that depends on how these governments decide to build it out. But I don't think there'll be any way we get through the next five years and we don't see a whole bunch of those start to roll out. So that's kind of the next kind of couple years, but it's a very exciting space.
We always joke you know, on the inside that you know, two months feels like decade in the way that things change so rapidly. So COVID has been very, very long if you work in this space. But it's so exciting and there's all sort of room and capacity for people to come in and put in effort, and learn, and teach. And carve out a niche for themself. Because it's like the Wild West and if you can be the guy who's making horseshoes you can run a great business and find a place that you can have a great – provide a lot of value to a community. And find clients, and connect with kind of new ideas.
It's just – I couldn't be happier to be working in a different – I couldn't imagine myself working in a different area.
Yves Faguy: How do you keep up? Because you know as you said like it seems to change every day.
Geoff Costeloe: You don't sleep. You don't sleep that's how you keep up. And I say that like half jokingly.
Yves Faguy: How do you keep up to date?
Geoff Costeloe: Yeah, I mean it's very social media driven. So once you get into the space you need to be on crypto Twitter and be on Twitter. And then there's a lot of kind of chatrooms that happen off the side of that, that you can quickly find your way into.
I think even this afternoon, every two weeks I run a Twitter Spaces. We have a bunch of lawyers who talk to each other about the current legal issues every two weeks on Twitter. So it's just kind of you go on Twitter and we have a space and anybody who wants to listen in can listen in and ask questions.
And it's just kind of a way for us to connect with each other and talk through these big ideas. So there's lots of kind of – how do you keep up? Basically you just have to kind of be trying to do it 24/7. Because it's like if you leave, when people go on holidays for two weeks and they come back and everything has changed.
So that's part of what makes it so fun. It is exhausting for the developers who are pushing out products because they have to be working 24 hours a day. But fortunately I don't have to do that.
Yves Faguy: Just to close off this interview give me one piece of advice for lawyers who you know, to get them interested in this space.
Geoff Costeloe: Do some trading other than just kind of what you see about the Bitcoin price in the Toronto Star, or the Wall Street Journal or whatever newspapers you read. Get beyond the headlines a bit, do some digging.
Learn about it. Message me, email me and I can give your firm a presentation, or I can come and talk to lawyers one on one. And talk about kind of how this technology's going to change the way that we practice, and how we can be on top of that and help our clients. And also help kind of our legislators and regulators adapt to the new environment.
Yves Faguy: All right, thanks. Geoff that was really, really helpful to get some insight into what handling digital assets can involve. And thanks for talking about what is obviously a very exciting area.
So you should consider yourself quite fortunate to be in this practice. It's obviously going to take up a lot more of our attention in the coming weeks. I don't think these are novelty assets and nothing more. So coming weeks, months, years, we're going to be working through these issues. So thanks so much Geoff Costeloe for joining us today. Thanks for being here.
Geoff Costeloe: Thank you Yves. It was great to talk to you and I'm always – I love talking about this stuff. So anytime.
Yves Faguy: OK, so follow Geoff on Twitter @gcosteloe. That's G, C, O, S, T, E, L, O, E. Thanks again.
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