Blockchain: A Regulatory Overview

Posted on 29th July 2019

Connectivity

A blockchain is a type of distributed ledger technology (DLT) consisting of a decentralised network of immutable databases, shared equally across the system. Although currently in the early stages of development, blockchain has demonstrated immense potential in areas ranging from cryptocurrencies to smart contracts and beyond. The European Union (EU) has hailed blockchain as “transformative” and has established initiatives to encourage development and uptake of the technology. During the opening of the European Blockchain Partnership, Mariya Gabriel, EU Commissioner for Digital Economy and Society, boldly asserted that “in the future, all public services will use blockchain technology”. As this disruptive technology continues to develop and attract attention, regulation of blockchain is becoming an important discussion.

In the second instalment of our Blockchain series, we review the regulatory landscape and consider the challenges associated with blockchain management.

Obstacles to Blockchain Regulation

While making it attractive, blockchain’s innovative nature creates numerous problems for regulators. Blockchains are distributed and decentralised. As a result, the nodes within a network can be located all around the world, without a definite ‘home-base’, making the question of legal jurisdiction complex.

The structure of blockchains creates issues concerning liability and accountability as permissionless public blockchains have no form of a central authority or decision-maker that can be held responsible for the actions carried out within the network.

Additionally, within a blockchain, data is distributed across each of the nodes or participants of the network, each maintaining a full replica of the database. This presents a challenge where intellectual property is concerned, making it difficult to determine the author or owner of the data.

Privacy is another challenge for regulators of blockchain. Transactions are linked solely to a network account address rather than a personal identification, seemingly ensuring privacy. However, if a connection between the two identities is made and subsequently revealed, the protection of the individual’s privacy is no longer possible.

Indeed, once data is added to a blockchain, it cannot be modified nor deleted. While guaranteeing transparency and traceability, as well as a secure and tamper-proof database; immutability causes issues with compliance of the EU’s General Data Protection Regulation (GDPR), which enshrines the individual’s right to be forgotten. Each of these obstacles must be addressed to effectively regulate blockchain.

The Current Regulatory Landscape

Blockchain regulation, like the technology itself, remains very much in its infancy. Initiatives above the national level, such as the EU’s Blockchain Observatory and Forum, the European Blockchain Partnership and the Mediterranean Seven, focus on supporting its use and development, largely avoiding regulatory issues. This stems from a lack of consensus on blockchain and its applications; while some countries have treated it with suspicion, including China, others such as Malta and Estonia have enthusiastically embraced it. This has created a regulatory landscape which varies significantly from country to country.

Italian and Swiss authorities are among those who have chosen to observe, for the time being, rather than embarking on the time-consuming process of creating new legislation that may soon be outdated given the early stages of blockchain technology development. “Switzerland doesn’t need new special regulations for blockchain”, asserted Ueli Maurer, the country’s Finance Minister. The government has instead opted to update their existing laws to account for this novel technology.

Other countries have taken the opposite approach and have chosen to adopt new national legislation, solely addressing isolated aspects or specific applications of blockchain. Particular attention has been paid to its application in the financial sector and crypto assets such as Bitcoin. Countries such as Poland, France and Luxembourg have chosen to adopt specific regulations tailored to these issues.

Meanwhile, a few countries such as Liechtenstein have taken a more progressive and forward-thinking approach. The ‘Blockchain Act’, approved in June this year, marks a milestone not just for Liechtenstein but for the international community. It provides the first holistic regulatory framework to govern the underlying concepts of blockchain, as opposed to its applications and will more able to facilitate and complement the rapid development of the technology.

The Future of Blockchain Regulation

Moving forward, regulators will need to strike a fine balance when drafting blockchain legislation; overregulation will stifle development while neutrality creates legal uncertainty, which ultimately harms progress.

Blockchain must be regulated in such a way that accounts for the associated risks it produces while simultaneously fostering development of the technology. As such, legislation cannot simply consider current technologies but must seek to be applicable to the generations of technology to follow. In addition, while crypto and finance-specific regulation is undoubtedly necessary, regulators must also adopt holistic frameworks capable of regulating the multitude of blockchain technology applications, both now and to come. Non-financial applications are likely to gain more traction and influence over the coming years, thus requiring greater focus.

Standards will play a necessary role in the future of blockchain; guiding its development and encouraging uptake by ensuring that the technology is seen to be secure and reliable. This trend is beginning to appear as many standard-setting bodies are engaging with the issues associated with blockchain and DLT. The International Telecommunication Union (ITU) has created a Focus Group on Application of Distributed Ledger Technology dedicated to the development of DLT standards. The Institute of Electrical and Electronics Engineers (IEEE) has established a Blockchain Initiative to collaborate with its Standards Association on blockchain standardisation efforts. The International Organisation for Standards (ISO) has a dedicated Blockchain and DLTs Technical Committee currently working on a series of blockchain and DLT guidelines, covering everything from terminology to privacy to smart contracts, due to be released in 2021.

While companies and businesses working with blockchain currently operate in a relatively regulation-free space, this is likely to change in the near future. It is important that they keep abreast of developments and actively seek participation in the regulatory process, to shape policy outcomes and ensure a regulatory framework that continues to support innovation.

Author: Catherine Williams, Policy Analyst, Access Partnership

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