Blockchain: Legal Regulations vs. Utility (p.2)

I. Intro

In simple terms Blockchain is a huge digital database running on the Internet for recording[1] various types of information. It represents a performant distributed technology tool for keeping unaltered information about any kind of transactions or any other information, providing a reliable degree of trust that information will be secured and unaltered. In case of blockchain, each participant maintains, calculates and updates new entries into the database.[2] Before a transaction is considered valid, it must be authorized by each participant of its constituent nodes through the consensus process. [3] When it comes to information about commercial transactions they are cryptographically validated and data are not under the control of any third party person or entity. All information is recorded in a database which is verifiable, secured and transparent having a timestamp.

We have referred to the types of Blockchain, consensus mechanism in previous blog as well as to related legal issues.

II. What is used for?

Blockchain technology has expanded mainly in business environment, especially in the financial services industry, nevertheless the discussions on application of Blockchains in public sector is also widely discussed[4] by many governments as well as European Union. Governments are taking action to learn more about Blockchain technology and to introduce Blockchain concepts in states’ policies and development strategies. For instance, the European Commission considers blockchain as a strategic technology and encourages governments, European industry and citizens to benefit from blockchain opportunities.[5]

2.1. By government:

a) Identity Management

Civil status certificates or citizens’ identity management are other examples of the fields that potentially could benefit from new technological decentralized innovation technology. Nowadays governments are already discussing the possibility of combination of blockchain and biometric technology. Blockchains could be used to establish digital identities[6] for citizens, residents, businesses, and other government affiliates. In addition to using Blockchain technology to manage identity, multiple aspects of the identity could be managed using Blockchain technology. For example, birth certificates, marriage licenses, passport and visa information, and death records could be managed via Blockchains.[7]

b) National Cryptocurrencies

Since blockchain has brought a new stage of development in fintech and revolutionized payment methods, many Governments are considering creation and implementation of own digital cryptocurrency and how they might benefit from blockchain technologies taking into account its advantages as security, transparency, immutability etc.[9] In this regard we notice that Dubai holds the title as the first country to launch its first cryptocurrency called Emcash back in 2017. [10] Emcash operates on the basis of their own blockchain and is being used in various government and non-government activities such as utility bills, coffee charges and purchases we make every day.[11] The government of Tunisia have decided to integrate blockchain technology with eDinar. EDinar is widely used to make money transfers also, and users can pay their bills as well. [12] Senegal has launched its digital currency being inspired by Tunisia example. It is based entirely on the blockchain. It is also designed to be compatible with other digital currencies in Africa. [13] Venezuela has launched own cryptocurrency but later it was ruled unconstitutional by the Venezuelan National Assembly in March 2018.[14] Estonia started a project on issuing own national cryptocurrency but scaled back plans of launching after being criticized by the European Central Bank.[15]

c) Taxes

Blockchain technology has the potential to make taxation systems more efficient by reducing process on tax-related information from weeks or months to a matter of seconds. Governments can create blockchain-based taxation systems that automatically check transactions, tying all the information in one, immutable chain. [16] Blockchain reduces or even eliminates the need for manual verification, allowing businesses to optimize their operations while also ensuring governments don’t lose potential tax revenue in the process. For employees, blockchain-based taxation also means that tax returns are processed much quicker.[17]

d) Digital Voting

The idea of paperless voting is on the table of discussions for a long time but never closer than opportunities offered by blockchain technology. There were so many cases when opposition or people blamed governing parties for cheating voting process and violating fundamental principles of democracy. Blockchain offers the ability to vote digitally, but it’s transparent enough that any regulators would be able to see if something were changed on the network. It combines the ease of digital voting with the capacity to be unhacked at the same time making every vote secured and decisive[18] since votes on the blockchain are immutable and can be tracked in real-time. By implementing new technology governments will have the potential to determine election winners in a more efficient manner. This can enhance the convenience and confidence for citizens. By ensuring that individual votes are eligible and counted correctly, use of Blockchains also has the potential to help prevent voting challenges such as ballot rigging, which still persist in many countries.[19]

e) Official records (medical, real estate, land, auto etc.)

Personal records may be managed with Blockchains. Health records, for example, could be made accessible and interoperable to all hospitals in a network or in a country.[20] Blockchain offers even more safety and convenience, in addition to storing patient records, the patient, who possesses the key to access these digital records, would be in control of who gains access to that data. When someone is buying or selling land, a house, or a car, he/she will need to transfer or receive a title. Instead of handling this on paper, blockchain can store titles on its network, allowing for a transparent view of this transfer, as well as presenting a crystal-clear picture of legal ownership.[21]

2.2. By business:

a) Execute Legal Contracts

Smart contracts are self-executing electronic instructions drafted in computer code.[22] Smart contracts self-execute the stipulations of an agreement when predetermined conditions are triggered.[23] The parties “sign” the smart contract using cryptographic security and deploy it to a distributed ledger, or blockchain.[24] According to another opinion, a smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties, at the same time, transactions are trackable and irreversible[25].

 b) Money Transfers

Money Transfers might become history with new blockchain technology taking into account scenario by offering different forms of Money transfer services. With the advent of digital currency and blockchain technology, companies are not holding back in adopting currencies like bitcoin to enable remittance services. With this service, companies are trying to solve multiple issues such as high transfer cost, limited money distribution methods, limited brand options, limited ways to deal with money, etc. The cryptocurrency market is still in an early development stage to reach the migrant population masses but promises massive potential in the future.[26]

b) Paying Employees

Thanks to blockchain technology and smart contracts running on its base employers are able to pay salaries to their employees by using new technology. In the end of every payment period smart contracts can automatically make money transfers to the bank accounts of each employee proportionally to workload or billable hours.

c) Banking

Blockchain Brings Banks Together, in 2017, a consortium of the world’s largest banks joined forces to exploit the benefits of blockchain technology.[27] The consortium, known as the Unity Settlement Coin (USC). USC is a digital currency created by Switzerland’s UBS bank, in conjunction with UK-based Clearmatics. By exploiting the benefits of blockchain technology, USC partners expect to make it faster and safer for central banks to settle transactions. [28]

d) Issue shares

By using tokenization of assets method companies might “issue” stocks or shares and offer them for sale to the public. This sort of shares is called Security Tokens. Through this public issuance of blockchain-based securities the history of capital markets is entering a new era, the era of blockchain-based securities.[29] Because blockchain networks validate and settle transactions so quickly, it could eliminate the multiday wait time investors encounter when selling stocks and seeking access to their funds for the purpose of reinvestment or withdrawal. [30]

III. Legal issues

a) Lack of regulation & Governing Law

Despite its popularity and large potential that brings blockchain only certain governments across the globe have undertaken certain steps to regulate tokens given to some categories are treated as securities, in most of cases smart contracts are still unregulated. At the moment in European Union only Malta has fully adopted legal framework related to smart contracts, blockchain and tokens. One more country which embraced the legal regulation of everything is related to crypto is Belarus a former soviet country.

b) Liability

Most likely the issue of liability would be a top risk related to blockchain transactions especially when it comes to the security and confidentiality. Deriving from the nature of each type of blockchain certain risks could arise, as inability to control or stop functioning of public blockchain, or in event of breach, malfunctioning or misconduct of private blockchain. In that cases who is going to be liable for the risks occurred or who is responsible if laws are broken using blockchain?

c) The enforceability of smart contracts

Thanks to the blockchain technology a new sort of technical-legal tool has been created, so-called “smart contracts”. Smart contracts are blockchain based mechanisms which are automatically executed when specific circumstances or conditions coded into the smart contract are met. When conditions are fulfilled the execution of the smart contract happens automatically without being enforced by the third party. This creates a new level of development in contract law but at the same time brings new challenges due to its new and unregulated field. Smart contracts twists both legal and technology knowledge.

 d) Data privacy

One of the most important advantages of the blockchain is the protection of data, once data is recorded in blocks it cannot be altered without other participants to the network knowing that one block was altered or hacked. So, blockchain technology has close ties with data privacy, particularly where the relevant data is personal data or metadata sufficient to reveal someone’s personal details as well as commercial secrets. In order to find solution to these risks there is a need to create a tool for privacy-protecting within blockchains. This might include other legal risks especially when it comes to carrying out the Know Your Customer proceedings etc. It remains to be seen how stakeholders involved into the industry will tackle the balance of privacy versus transparency.

IV. Conclusion

When it comes to benefits of blockchain technology UK Government Office for Science stated in its report that it “one of the greatest potential benefits of DLT is its ability to remove barriers and friction in the market and enable the creation of new forms of information marketplaces… The sharing of information between economic entities through distributed ledgers would enable new forms of innovation to emerge. This would allow ministers to achieve policy outcomes centred on assisting [small and medium-sized enterprises] achieve economic growth through effective use of technological innovation.”[31] Now it is up to state authorities whether to take steps and create a legal framework for regulating new technology and its outcomes or leave it and let other progressive countries to move further to economic progress through embracing blockchain opportunities.

 

 

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References*:

[1] https://medium.com/coinmonks/blockchain-for-beginners-what-is-blockchain-519db8c6677a

[2] https://www.coindesk.com/information/what-is-the-difference-blockchain-and-database/

[3] https://www.draglet.com/blockchain-services/blockchain-technology/private-or-public-blockchain/

[4] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[5] https://ec.europa.eu/digital-single-market/en/news/information-day-19-december-2017-horizon-2020-blockchain-distributed-ledger-technologies-topics

[6] An example of a Blockchain-enabled identity program is the ID2020 initiative (https://id2020.org), as discussed in OPSI’s Embracing Innovation in Government: Global Trends 2018 report. See http://oe.cd/innovation2018 (page 22).

[7] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[8] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[9] https://minergate.com/blog/countries-with-national-cryptocurrency/

[10] https://cryptoverze.com/national-cryptocurrencies/

[11] https://cryptoverze.com/national-cryptocurrencies/

[12] https://cryptoverze.com/national-cryptocurrencies/

[13] https://cryptoverze.com/national-cryptocurrencies/

[14] https://www.coindesk.com/venezuelas-national-assembly-declares-petro-cryptocurrency-illegal/

[15] https://www.ccn.com/estonia-scales-back-plans-of-ambitious-state-cryptocurrency-estcoin/

[16] https://coincentral.com/blockchain-in-government/

[17] https://coincentral.com/blockchain-in-government/

[18] https://www.fool.com/investing/2018/04/11/20-real-world-uses-for-blockchain-technology.aspx

[19] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[20] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[21] https://www.fool.com/investing/2018/04/11/20-real-world-uses-for-blockchain-technology.aspx

[22] SAMUEL BOURQUE & SARA FUNG LING TSUI, A LAWYER’S INTRODUCTION TO SMART CONTRACTS 4 (2014).

[23] Reggie O’Shields,Smart Contracts: Legal Agreements for the Blockchain, 21N.C. Banking Inst.177 (2017). Available at:http://scholarship.law.unc.edu/ncbi/vol21/iss1/11

[24] INST. OF INT’L FIN., GETTING SMART: CONTRACTS ON THE BLOCKCHAIN 2 (2016).

[25] https://en.wikipedia.org/wiki/Smart_contract

[26] https://gomedici.com/11-money-transfer-companies-using-blockchain-technology-2/

[27] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[28] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[29] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[30] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[31] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

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