The blockchain boom has caused a reactionary knee-jerk from regulators across the globe in recent times. Blockchain is so vast, so all-encompassing and so disruptive that the status quo is being thrown out of alignment by what is being called ‘the Fourth Industrial Revolution’.
Blockchain has entered the mainstream consciousness on the back of well-publicised cryptocurrencies. It has hit a place of critical mass, where it is big enough and viable enough for regulators, governments and legislatures to take notice and make sure it fits into a global society.
Initially, blockchain was largely associated with the shadowy world of the dark web. As time has gone on, though, the technology has expanded and been expanded on, to cover a wide variety of sectors.
Financial regulators have stepped in, governments have said their piece, and even the courts and legislators have had to come to terms with the blockchain revolution. But are regulators keeping up?
Technology moves quickly, whereas regulation and law-making is a slow and bureaucratic process. So, what is the effect of this disparity? Are regulators a handbrake to innovation? How much influence should they have on the growth of new technology?
There are already instances where technology has taken strides, only to have been brought back down to earth. Then there are instances of regulation that fundamentally clash with blockchain, despite their intention to be forward-thinking and digitised, such as the General Data Protection Regulation (GDPR) in Europe.
Different Levels of Regulation
Another issue with regulation’s ability to keep up with technology is the fact that there is no one set form of regulation for what is a global phenomenon. The spectrum of regulation is both broad and varied – from China and its total ban on exchanges, and even access to foreign exchanges, to the likes of Iran and Venezuela, which are looking at launching their own government-backed cryptocurrencies.
There are countries such as the USA and UK that have tried to amend certain laws and regulations to encompass cryptocurrencies with broad strokes, hoping this unprecedented technology will find its fit in established regulations. Then there are a few nations, like Australia, that are actively working towards implementing new regulations designed specifically with blockchain in mind.
The issue is that, in all instances of regulation, the process is long and time-consuming, whereas the technology is rapid and ever-evolving. So, in extreme cases, such as China’s outright bans, it has already been shown that even blanket regulation is not enough. The latest move from the Chinese government has been to erect ‘the great firewall’ on cryptocurrencies.
Keep Up or Get Out of the Way
While regulators seem, on the surface, to be struggling to keep up with the way in which blockchain moves forward, there are still huge regulatory movements to try to control the technology. As a decentralised entity, though, it is difficult to regulate, or even to come to an understanding of what needs to be regulated.
Andrew Sheng, a former central banker and financial regulator, and now a Distinguished Fellow at the Asia Global Institute, University of Hong Kong, believes regulators have two choices: to keep up or lose control altogether.
“The number of regulatory changes globally that banks must track has tripled since 2011. It is not surprising that innovation, talent and money are moving from the banking system into the asset-management industry, which is much more lightly regulated,” he told the South China Morning Post.
“Welcome to the technical innovation called cyber currencies, which was made possible for peer-to-peer transactions across a distributed ledger system. This is a bottom-up system that can avoid official oversight. Indeed, cyber currencies or tokens were invented precisely because users do not trust the official system.
“Those who want to increase the complexity of regulation must remember that for every 50ft wall, someone will invent a 51ft ladder.”
“Another reason the cyber-P2P business is flourishing is because the official sector is worried that further regulation will hinder innovation. Those who want to increase the complexity of regulation must remember that for every 50ft wall, someone will invent a 51ft ladder.”
Should Blockchain be Regulated?
Sheng’s assertions are focused on the financial aspect of blockchains. That, for a few reasons, is not surprising. Firstly, financial regulation is stringent and necessary, and when it comes to a new fintech, it calls upon regulators to act.
Marco Santori, who leads the blockchain-technology team at Cooley, explained to Forbes: "Blockchain and cryptocurrencies aren’t regulated as a technology, generally speaking. It depends on the application. So, whatever they’re used for, it’ll fall under the appropriate regulator – and sometimes the inappropriate regulator."
This begs the question as to whether it should be blockchain that is regulated or, more appropriately, cryptocurrencies. But that in itself is problematic, as the separation of the two aspects of the ecosystem has never so far been done successfully.
Case Study: GDPR
GDPR, which was enforced in May, is a regulation that was enacted to help secure individual data, allowing individuals the right to request it be changed or removed. However, while this is a forward-thinking piece of legislation, it is already arguably out of date when it comes to blockchain.
“Blockchain is immutable and data stored on it cannot be removed. Thus, if a company was to store a user’s data on there, and he or she requested it be deleted under GDPR, it would be an impossibility.”
The blockchain is immutable and data stored on it cannot be removed. Thus, if a company was to store a user’s data on there, and he or she requested it be deleted under GDPR, it would be an impossibility and the company would be subject to hefty fines.
So, fundamentally, this regulation and the technology cannot co-exist. It is an example of an instance where new regulations have come through but are already out of date, leading to compromise and interpretation occurring over and above that legislation.
Thomas Power, Bloomberg Listed PLC Director, believes there is a way around this clash, but there will be teething problems in enacting it. “What you’ve got is one law, GDPR, that is, in effect, saying, ‘delete me, delete me’, and a new technology called blockchain, which is saying, ‘keep me, keep me’. I think the irony of all this is, if you were to go to Amazon and say, ‘Take me off all your databases and your call centers’,” they’ve got to keep a record that they’ve deleted you. Even that sentence is an oxymoron,” Thomas explained.
“The whole point of GDPR is ‘expunge’. A blockchain is about an immutable record state. I don’t think many people want to be deleted unless they feel they’re being spammed by whatever organisation via their email, their cell phone or their domestic or office line.”
Regulation Playing its Role
There is no doubt that regulation has a big role to play in the eventual mass adoption of blockchain, with a particular focus on cryptocurrencies. The general population is law-abiding and dependant on a smooth legislative process when it comes to any new technology.
If regulators are indeed catching up, then their effect will start to have a bigger aura. To that end, Ethereum co-founder Vitalik Buterin has already commented that the days without regulator influence are all but gone.
“The blockchain space is getting to the point where there’s a ceiling in sight,” Buterin said in an interview with Bloomberg. “If you talk to the average educated person at this point, they have probably heard mention of blockchain at least once. There isn’t an opportunity for yet another 1,000-times growth in anything in the space any more.”
China has seemingly entirely committed to its anti-crypto stance. In September 2017, Renminbi to Bitcoin made up over 90% of trades, which alarmed the government and led to the immediate outlawing of fiat currency being used to buy cryptocurrency. It even imposed travel bans on executives from two of the largest exchanges, OKCoin and Huobi.
In what seems a strange announcement in the time of blockchain mania, China has hailed the move a resounding success. Today, Renminbi is involved in less than 1% of all Bitcoin trades worldwide. China may be succeeding at holding off cryptocurrency for the time being, and it seems likely a state-issued equivalent will materialise at some point. What is less clear is whether the sweeping move will come back to hurt them.
Illustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]