Blockchain and Regulation: A Definitive Guide To The Future

@golubev Golubev_Od_UA

Crynet.io (project manager), EU structural funds, ICO/STO/IEO, NGO & venture, marketing projects

Many experts and public service officers are not absolutely happy or impressed with the blockchain technology appearance in the modern world. It has many opponents and skeptics, including financial regulators, who are not inclined to rush things faster as possible.

However, widespread commercial use of blockchain is already visible on the horizon, if the main challenges and claims of regulators will be corrected and eliminated, which we will consider some of them below.

When it comes to blockchain, it is usually presented as a technology that will rebuild, or better to say, conceptually revise whole sectors of the world global economy. In principle, this is a revolutionary approach, because the blockchain can remember and record identity, financial transactions, and all sorts of legal and not only transactions.

Nevertheless, the technology and its application are still subject to study and remain at the initial stage of formation and development, especially in the banking and financial sector, where the regulatory public authorities and bodies are charged with coordinating and guaranteeing the stability of their industry. Hence, each regulator, endowed with certain powers of monitoring, control, analysis, and recommendations, makes its own conclusions and references concerning the blockchain trend. Some of them are negative in their statements, others are neutral, but attentive to the trend, others are loyal.

But at the same time, it is possible to stress out the general apprehensions that are typical for the statements and press releases of regulators and other regulatory experts recently in the whole world. Namely:

The legal basis for the adoption of blockchain as a chain of immutable and protected from unauthorized access nodes that ensure the reliability of the information contained in them.

Before using the blockchain as a unique and reliable source of identification, a legal framework is needed, this is not yet available. Before this becomes possible, standardized regulation is necessary to protect data and authenticate the identity of legal entities.

Although there is a broad consensus among the IT community about the practical immutability of the information blocks in a well-defined network of blockchains, or because it is technically impossible to modify the blocks in the system or better say in the “try test” modes or other types of control related to consensus- mechanisms, there still has no legal fact of recognizing this aspect of the blockchain, and therefore it cannot be used as a legal argument in a court as well.

The legal basis of the characteristics of the blockchains and distributed registers (DLT).

This includes issues of territoriality (issues of jurisdiction and applicable law) and who will take responsibility if something goes wrong.

By definition, shared distributed registers (or DLTs) do not have a specific location. With regard to jurisdiction and applicable law, territoriality is a problem, because each node of the blockchain network can be subject to various legislative requirements, and there is no “central set of administration” responsible for each allocated register whose citizenship (possible administration office) could act in as a starting point, in terms of regulatory issues.

Following these same considerations, the concept of “responsibility” also represents claim concern by regulators, since there can be no party that ultimately has legal responsibility for the operation of the distributed registers and the information contained therein.

Fear of regulating the interpretation of the “right to be forgotten”. 

Since the protected from unauthorized access characteristics of the blockchain collide with this right granted in accordance with European law to protect personal data, a potential conflict is created. The fact that the block is unchanged can pose a problem, as it may conflict with other rights recognized by governments and regulators.

One example is the “right to be forgotten” granted to every citizen in accordance with European law, which allows any European citizen to store information stored in external databases, either on paper or in electronic format, if they so wish.

The only solution that allows combining such rights with the very nature and essence of the blockchain may be the replacement of the right to “delete information” with the right to “prohibit the use” of personal information by third parties.

This can be reached out by the combination of automatic data encryption under certain conditions (which may mean the use of intellectual contracts) or some alternative solutions to prevent access to specified information points when a person decides to realize his right. At this stage, the blockchain cannot yet technically guarantee even the right to “prohibit the use.”

Legal framework concerning the validity of financial instruments issued in the network of blockchain.

When the blockchain is used as a platform for determining financial instruments, such as bonds or derivatives, recognition of the legal force of these financial instruments by regulators and supervisors is required for sure. It is obvious that money is one of the key financial instruments that can be issued within the framework of the blockchain.

Their money, issued in the blockchain, can have serious consequences for monetary policy and macroeconomics and require a deeper defined analysis. Many regulators today have already engaged in this analysis.

The legal framework concerning the legality of documents held in the Blockchain as evidence of use or existence.

Like the recognition of the blockchain as a unique, indisputable source of authenticity, a second new level of recognition is required before blockchain can be used in certain types of entrepreneurial activity. This concerns not only the recognition that information cannot be changed but also the recognition that the inclusion in the blockchain of an act declaring ownership or the availability of an asset is a genuine proof of ownership or the actual existence of the named asset.

However, assuming that the verification process regarding the existence of the property before the document is included in the block is sufficiently substantiated, and we are confident in the effectiveness of the cryptographic mechanisms used in the blockchain technology, then recognizing the blockchain as a true source of trust implies that the documents located in the blocks, can indeed be used as evidence of existence or property.

However, it is another matter whether the courts of each particular country can accept this. Again, for us, there is no jurisprudence at this stage of the formation of the blockchain.

Legal basis for smart contracts. Issues relating to territoriality and liability are also applicable to smart contracts but require a number of additional interpretations. As for jurisdictional problems, there is not only the question of whether the distributed register (DLT) itself has a specific place, but also the issue of signing a contract subject to various laws in accordance with their jurisdictions.

As for obligations, many parties are participating in smart contracts: not only the parties to the contract but also a kind of encoder and custodian of the contract. If it is probable that one of the contracting parties will break the contract, there is a threat that the smart contract itself may be corrupted, either because of encoding errors or because of design errors. So, when a smart contract does not work properly, which side is responsible?

Regulation of use of the blockchain as an effective regulatory register for the Internet of things.

The blockchain can be useful for the Internet of things. On the Internet of things all connected devices have identification.

Therefore, it would be really useful to create a common distributed registry that stores “identification” and information about each related thing (gadget), allowing them to conduct transactions among themselves, including payments M2M (machine-to-machine).

The idea of ​​having one or more “common distributed registers” for the Internet of Things seems to be gaining popularity and will require in the future a legal framework that recognizes distributed registers (DLTs) as valid registries.

All of the above problems related to the territoriality, responsibility, and applicability of smart contracts, of course, are also appropriate for any blockage related to the functioning of the Internet of things.

So far, at the moment, the regulators have not come to common opinion, or to a single global interpretation of the blockchain, since they do not yet have a specific legal answer to the questions posed above. Their fears in this case are fully justified.

Sergey Golubev

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