In English common law, everything which is not forbidden is allowed. When new technologies emerge, there is a general sense of ambiguity about them. When they operate in a legal vacuum, there is a period of unrestrained growth and there are both expected and unexpected outcomes.
However, with opportunities also come challenges and, sooner or later, new technologies will find themselves subject to the laws of the land. Blockchain is no exception.
The Need for Standards
With blockchain technology, laws and regulations intersect with one another at various stages, such as fund-raising, operations, human resources, data security and others. The way regulations affect the people involved in blockchain, particularly the developers, is crucial. Regulations impact not only how they code and develop, but also what impact they can have on society.
New laws regulating blockchain development have emerged in China, Switzerland and the EU. Other jurisdictions are going to have to approach blockchain sooner or later as well. The need for regulations is driven by differing social, legal and political considerations. In China, for example, regulations came into effect on February 15, 2019. The Cyberspace Administration of China (CAC), a Chinese governmental body, stated in a press release that it would like the blockchain industry to strengthen its “self-discipline, [establishing] and [improving] industry self-discipline system and industry standards”.
The Chinese authorities would also like to guide blockchain information service providers to improve service standards and promote an industry credit evaluation system. The end goal is that these businesses accept social supervision, improve the professional quality of the staff of the blockchain information services, and promote the healthy and orderly development of the industry.
Regulators and the Blockchain Industry
Self-regulation has long been a buzzword in the blockchain industry. It has not been enough, though, to protect developers and the public at large from an emerging tech that operates at the frontier of technological development. In a sense, the blockchain industry is like the wild west in its heyday.
The Blockchain Industry Compliance and Regulation Association (BICRA) published a whitepaper earlier this year in which it reinforces the need for regulation.
“Between advanced cryptographic mechanisms, decentralised organizational structures, transnational commerce and international communities, regulators are mostly operating in new, dark territory”
“In this wild west of new, exciting technology,” it finds, “lawmakers and regulators have a duty to protect the public from danger and hold accountable those that are misusing their power. Still, the blockchain industry has been extraordinarily difficult to regulate. Between advanced cryptographic mechanisms, decentralised organisational structures, transnational commerce and international communities, regulators are mostly operating in new, dark territory.”
How has the dynamic changed? Binary District Journal talked with David Ben Kay, legal counsel at Pundi X, a blockchain startup based out of Jakarta, Indonesia. Regulators and industry, he hopes, can find the right balance between controlling abuse and not stifling innovation. It is only natural that regulators have had to step in to create a healthier environment.
“The underpinning principles of decentralisation and the revolutionary nature of the technology make it nearly impossible for the innovators themselves to set limitations. However, regulators are put into a difficult position of balancing interests too,” Kay says. “They have a duty to protect the interests of their citizens and, at the same time, they are supportive of innovation - blockchain is not a panacea but it is providing a platform that can deliver great benefits to society.”
Legislative Impact on the Ascent
The European Union has put in place General Data Protection Regulation (GDPR), which is at once both aligned with the goals of blockchain and in direct opposition to them. Major industries that have taken to adopting blockchain technology, particularly the financial services sector, have to be wary about the consequences of falling afoul of GDPR as it can lead to fines, litigation and a damaging loss of reputation.
“Contrary to what many feared, DLT systems are very much compliant with GDPR”
France’s Commission Nationale de l’Informatique et des Libertés (CNIL) issued a paper that outlines responsible use of blockchain in the context of personal data. With regard to developers, it suggests that they be considered ‘data processors’. In the instance the CNIL has highlighted, a software developer offers a solution to an insurance company in the form of a smart contract that allows passengers to be automatically reimbursed when their flight has been delayed.
According to CNIL, this person would be considered a data processor if they intervene at any point in the processing of personal data, while the insurance company would be designated as a data controller. Now, under GDPR, the data controller has a higher degree of compliance responsibility, while data processors should ideally establish contract with a controller to make the obligations of all parties clear.
We spoke to Marta Piekarska, director of ecosystem at Hyperledger. The company recently created a report which addressed the impact of GDPR on blockchain’s development.
“GDPR and blockchain-based identity systems, which, by definition, are self-sovereign, come hand in hand,” Piekarska says. “Contrary to what many feared, given data on a blockchain belongs and is controlled fully by the creator, DLT systems are very much compliant with GDPR. Even the European Commission looked at projects like Hyperledger Indy and Uport, and was quite pleased with these solutions.”
Blockchain Industry Should Be Proactive
Developers run the risk of falling on the wrong side of the law. At the 38th GITEX Technology Week Conference Brian Quintenz, commissioner of the US Commodity Futures Trading Commission (CFTC), explained that developers should, in some instances, be held liable if the applications they create are used for illegal activities, particularly if they could foresee such an eventuality.
“Think of someone asking you to borrow the keys to your car because they want to rob a bank,” Quintenz posits. “If you let them borrow your car, it would be reasonable for the government to hold you partially responsible for the ensuing criminal activity. However, it would be unreasonable for the government to prosecute the car manufacturer.”
He went on to highlight the need for developers to engage with authorities to check that their code complies with CFTC regulations.
“Every country determines what parties should be responsible for abuse or harm caused when regulations are broken,” Quintenz continues. “Should one hold gun manufacturers responsible for mass shootings? Should Facebook be held liable for leaking data? Should a cryptocurrency exchange be held liable for tokens stolen in a hack? These are very difficult questions and ones that will be certainly be confronted in the blockchain world moving forward. It’s very rare for a country to apply a regulation retroactively.
Thus, the questions underscore three things, he concludes:
first, the need for the blockchain industry to be proactive rather than reactive in ensuring that regulations are reasonable;
second, the need for regulatory transparency and clarity so that developers, for example, are aware of the regulatory parameters;
and third, the opportunity for the insurance industry in offering coverage for developers.
On the subject of regulation, Piekarska believes that there are no clear and unified guidelines. She says that, while efforts have been made to regulate cryptocurrency markets and tokenisation, this has not been the case so much for blockchain itself.
“We are not regulating machine learning, neural networks, operating systems or diesel engines,” she says. “We may have some requirements on norms they need to adhere to (like CO2 emissions), but not on how they should be built and using what tools.
“Blockchain is a technology, and as with art, should not be subject to legislation. Its usage, maybe. One thing I am curious to see in the future is the regulation of smart contracts. Today, there is no clear path of responsibility with regards to the outcomes of a smart contract. Many companies will write one for you, but nobody will give you a warranty it won’t do any harm.”
Regulation Leads to Brain Drain
Regulation could help focus the spurt of blockchain projects and create a flourishing development scene, or it could have the opposite effect. India’s Economic Times newspaper cited a survey conducted by Incrypt, which concluded that 80% of the country’s blockchain developers would be forced to move abroad or work only on foreign projects if the country does not adopt a “robust regulatory framework”.
“The chronic shortage of blockchain developers makes them precious and countries cannot afford to bleed talent”
On the other hand, jurisdictions that move quickly to build a regulatory framework for emerging technologies can become a hub for developers. Already many Indian companies and developers are making a shift to Singapore, Estonia, Malta etc. The chronic shortage of blockchain developers makes them precious and countries cannot afford to bleed talent.
Governments, in their efforts to regulate trade and stymy money laundering and cash flow, often neglect to give thought to the side effects of their regulatory policies, which may stop illegal cash flows but encourage brain drain. There are signs, though, that governments are recognising the importance of blockchain as well.
“Regulators are slowly wrapping their heads around blockchain,” Piekarska says. “It has been a learning curve for everyone, and realising blockchain is not just one thing or one solution was a breakthrough. Another advancement occurred when everyone got on the same page about cryptocurrencies - an implementation that sits on top of a blockchain network, not the other way round.
“At Hyperledger, we observe this closely. Just three years ago, hardly any government wanted to work on blockchain, and we had no government institutions as members of our collaboration. Today, we have associate members including Smart Dubai, State of Illinois, Ministries from Poland, Lithuania and others. We see tremendous interest from all over the world.”
For Piekarska, it is important to regulate what needs to be regulated (like ICOs or STOs) and adopt what has the potential to improve the processes and functions of governmental institutions. She cites examples of wallets based on Hyperledger like Indy, introduced by the government of British Columbia, and of a payment gateway using Hyperledger Fabric in the UAE. They have bi-monthly calls in their public sector Special Interest Groups, which points to growing interest from the governmental side.
Regulation Is Inescapable, so Work with It
Blockchain is not a phenomenon isolated to a particular geography and neither are blockchain developers.
Traditionally, blockchain projects have had elements of privacy, decentralisation and anonymity that can put them in conflict with certain governments. As governments the world over begin to realise the potential of the technology, concerted efforts to work together on global regulations may emerge. This could be facilitated through bodies such as the G20, OECD, the European Union and others.
Developers, then, should prepare themselves to engage with authorities instead of looking for greener pastures here and there.
“It’s important for regulators to understand the concerns that developers have, and this is generally best accomplished through industry associations”
“To the extent possible, it’s important for regulators to understand the concerns that developers have and this is generally best accomplished through industry associations,” says Kay. “It will be incumbent on developers to form or join industry associations that can play an important role in educating and, where appropriate, influencing regulators.”
Developers also need to have a heightened awareness of their actions and develop a sense of digital responsibility. There is no get out of jail free card, as they may be held partly responsible for wrongdoings, particularly if they have mala fide intent or knew beforehand that their actions could lead to the law being broken. This is especially true in the financial services field, where there are already stringent regulations in place. So whether it is decentralised exchanges, privacy coins, ICOs or ETFs, there will be no other option in the future but to work closely with the powers that be.
Piekarska agrees about the need for collaboration between legal and technology teams – and not only in blockchain but in other tech spaces as well. “Wise developers should look into both understanding law and policies, and invest time into educating ‘the other side'. There are already projects like the Accord Project that aim to do this. Similarly, Mobi is a mobility initiative that brings not only manufacturers and legal agencies to understand tech and law.
“In the future of autonomous driving, smart cities and connected manufacturing houses, we will need to create governance structures and fallback solutions if things go wrong. This can only be done by people who understand why things can go wrong. We are on the verge of a creation of renaissance sapiens; this time, in technology and humanities.”
There is one major problem when it comes to regulating blockchain technology: those creating the regulations can’t move as quickly as those creating the tech. Just as governing bodies catch up with one iteration of any piece of technology, numerous additions and significant developments have already been made. This represents a serious problem for legislators - blockchain is developing at such a pace (and not in wholly predictable ways) that any regulation is likely to be defunct or unfit for purpose quickly after it is issued.
Regulation has failed to prevent monopolies in tech and failed to sufficiently protect those working in the new economy it has created - just look at the widespread strike action recently undertaken by Uber drivers over pay and conditions. The gig economy is founded on technology and governments have been unable to effectively manage it. To avoid losing control of blockchain or artificial intelligence, for example, regulators should look to the tech industry for support and collaboration to effectively managed its development. Unhindered progress can be vital in a tech’s embryonic stage, but law-makers eventually have to step in when that tech begins to affect people’s lives. Blockchain is developing fast, let’s hope regulation can keep up.
Illustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]
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