The word “regulation” can be interpreted in many different ways, depending on the context of its use. But, for the purposes of our discussion, we share the popular view that systems, functions and processes are “regulated” when rules, formats or procedures exist, that counteract chaos and promote good order in the best interests of the public.
Therefore, on face value, one might intuitively argue that any amount of “order” can only be a good thing, no? Perhaps so. But, over-regulation can also stifle innovation. And, in the case of Blockchain, which has decentralization at its core, wouldn’t regulation be defeating the key purpose? Let’s take a closer look.
Blockchain – the story so far
Bitcoin –the pioneer of cryptocurrencies- hardly needs any introduction. In 2009, its whitepaper titled, “Bitcoin: A Peer-to-Peer Electronic Cash System”, stated, “We have proposed a system for electronic transactions without relying on trust.”
Throughout the document, references are made to “blocks” of cryptographically-validated digital transactions that are linked to each other to form “chains”, hence the colloquially used term “blockchain”.
The whitepaper continues to describe the shortcomings of Internet commerce that still relies “almost exclusively on financial institutions serving as trusted third parties to process electronic payments.”
And, as a solution, it recommends, “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Therefore, of course, Blockchain became the backbone of the Bitcoin digital currency. But, that’s not where it ended for Blockchain. In fact, it was only the beginning.
Notwithstanding Bitcoin’s popularity –i.e. today it still represents 54% of the overall cryptocurrency market capitalization value, even given the fact that there are now 2,112 different currencies in existence- blockchain has also skyrocketed to stardom in its own right.
In recent years, the world has increasingly come to realize exactly what vast potential the Blockchain concept offers for moving any digital assets –e.g. currency, data or legal title- around the globe on interconnected networks.
Blockchain is currently one of the hottest fintech buzzwords around and, thanks to its meteoric rise, is now often also referred to as a technology in its own right. And Blockchain technology offers countless benefits and advantages that are ideal for the Digital Age that we live in.
But, one particular characteristic stands out like a head above shoulders: the fact that immutable computer code now replaces the counterparty trust traditionally required by systems involving the exchanging of value.
Historically, trusted intermediaries –such as a regulated banks, financial institutions or other reputable parties- were required to act as middlemen, or “escrows”, between transacting parties.
Whereas, in the case of Blockchain technology, secure computer code replaces the customary middlemen. Software programs, such as Distributed Applications (“dApps”), include components that are described as “immutable” Smart Contracts.
Which, essentially means that, once transacting parties have agreed to and locked in the terms of their agreement in a Smart Contract, then none of the parties can unilaterally change or cancel the execution thereof – i.e. from that point onwards, the remainder of the process is fully automated.
How the world perceives Blockchain at the moment
Of course, the concepts of cryptocurrency and Blockchain have only been catapulted into the limelight during the past decade. And, at the same time, as our understanding of the “new kids on the block” grew, we also figured that Blockchain represents a distinctive, underlying technology, while crypto is just one of the many applications thereof.
And, because tech evolves much, much faster than what legislation does –the popular tale of the tortoise and the hare comes to mind- key countries across the planet are still trying to play catch-up.
Further, as can be reasonably expected, regulators everywhere were the quickest to focus on the applications that have been invented thus far, and not on the Blockchain technology as such.
A case in point is the taxation of cryptocurrency gains. While it’s still work in progress for most nations, the current verdict around the globe is –by and large- that crypto gains are indeed taxable.
Additionally, countries like China have also banned crypto exchanges outright. And, even though others like Russia, South Korea and India have not gone to the same extreme lengths, crypto activities only continue under the extremely watchful eyes of the authorities.
While, on worldwide scale, the perception of crypto is still a situation of utter flux and many governments are often not clear themselves as to the way forward, therefore they simply adopt a wait-and-see approach.
Shifting the focus away from the applications and onto Blockchain technology itself, most nations seem excited and receptive on the future possibilities in that regard.
While major economic regions such as the United States (U.S.) and the European Union (EU) have always been approachable and consultative on most matters relating to Blockchain and crypto, even the more crypto-sceptic countries appear keen to participate in the Blockchain technology side of things.
For instance, the Stock Exchange of Thailand (SET) has launched its “LiVE” blockchain crowdfunding platform, which facilitates peer-to-peer (P2P) lending.
And, surprisingly perhaps, positive news is also coming out of China, as the South China Morning Post reported last year, “People.cn, the official website of the People’s Daily, has launched a section dedicated to blockchain coverage, signaling Beijing’s official endorsement of the technology, even as a crackdown on digital currencies began in September.”
Whereto from here – should Blockchain be regulated?
At the outset it must be noted that, where Blockchain technology is leveraged for illegal purposes anywhere in the world, then the fullest extent of existing criminal laws apply, which is outside the scope of this discussion.
The question of whether Blockchain should be regulated or not, only comes into play where legitimate, transacting counterparties utilize the applications associated with this technology to lock in agreements between themselves.
While, based on pure probability, it is perhaps safe to say that the vast majority of Smart Contracts are likely to execute successfully and conclude without incidence, there will always be exceptions to the rule.
And, how we handle the exceptions, very often means the difference between good order and chaos. For instance:
- What if a coding glitch unfairly benefits one party to a Smart Contract and disadvantages another?
- What recourse does the counterparty have to claw back damages?
- If the “glitched” Smart Contract executes across international borders, which country’s jurisdiction will apply for claw-back purposes?
Also, the feature of “immutability” is a major drawcard of blockchain technology, because it gives users the peace of mind that, once a value exchange has been agreed and locked in by counterparties, then it cannot be altered unilaterally. Also, that the transaction will remain on the blockchain afterwards.
However, as reported by Fortune magazine, this may pose significant problems. Fortune writes: The EU has taken a firm stance on data privacy, implementing stringent regulations that have notable implications for blockchain.
The General Data Protection Regulation (GDPR), which took effect on May 25, seeks to harmonize data privacy efforts across the union, mandating, in particular, that EU citizens have a ‘right to be forgotten’ online.
For many blockchain companies, this right may contradict the immutability and decentralization that the technology provides its users. The new GDPR standards rest upon the moral foundation that EU citizens should have the fundamental right to control their data.
The onus, therefore, will fall on blockchain companies to ensure that the EU threshold for data ownership is met sufficiently.”
The scenarios quoted in the preceding paragraphs are mere examples and quite likely only represent “the tip of the iceberg”. But, after the fateful voyage of the Titanic, do we need reminding of the potential catastrophe and chaos that lurk below?
The world is excited for Blockchain and so it should be. And, while Blockchain is a young technology, its sheer transformative and disruptive power has been likened to the coming of the Internet itself, by market commentators.
It should further be accepted that, due to its very nature of being a decentralized and distributed ledger solution, Blockchain will not only be used to exchange assets digitally within geographical jurisdictions, but also on a truly, global and borderless scale.
It is therefore imperative that global regulatory frameworks for blockchain be established –without undue delay- to serve as a foundation and the building blocks for the way forward.
Such frameworks should be accommodative and not suppress tech advancements unduly. Yet, at the same time, it should effectively address the key issues that are known to us already, also those that can be reasonably foreseen.
And, while it is reasonable to accept that the Blockchain technology journey has only just begun and will likely take many years to come to global fruition, stakeholders around the world should participate now already to establish and nurture the frameworks that will promote successful outcomes in the future.
Blockchain technology represents an ideal solution for our Digital Age. A flexible, agile and collaborative global regulatory framework will determine the difference between good order and chaos.