Should Blockchain be armed with its own regulations?
Now that we have a better understanding of the technological, economic and strategic implications of what blockchain is, it is of upmost importance to address the question of whether blockchain and Distributed Ledger Technologies (“DLT”s) need, beyond any specific trade sector, a dedicated and harmonised legal framework at both EU and international levels.
Blockchain appeared in 2008 with the peer-to-peer electronic cash system developed by Satoshi Nakamoto (called Bitcoin), and it is on the verge of revolutionising how we interact and conclude transactions in the digital world. It has far-reaching applications, from the financial industry to many other sectors of the economy, such as transport, healthcare, real estate, etc. Now that we have a better understanding of the technological, economic and strategic implications of what blockchain is, it is of upmost importance to address the question of whether blockchain and Distributed Ledger Technologies (“DLT”s) need, beyond any specific trade sector, a dedicated and harmonised legal framework at both EU and international levels.
THE CURRENT REGULATORY LANDSCAPE
Since 2016, many regulators have become more proactive in helping existing blockchain projects find a place to call home (Securities and Exchange Commission, Financial Conduct Authority...). Countries such as the USA, Singapore, Canada, Australia and Dubai have paved the way for the rise of their own nascent blockchain industries.
In Europe, several jurisdictions are adjusting their local business and tax laws to create new crypto and DLT-friendly ecosystems. Even countries traditionally known as being
strong guarantors of investors’ protection such as France have recently adapted their legal and taxation regimes. In that respect, the new French regulatory landscape is probably
one of the most attractive with :
- the Ordinance of the 8 December 2017 dedicated to Security Tokens Offerings (“STO”);
- the Pacte law, which :
- enshrines the possibility for France-based issuers to launch an Initial Utility Tokens Offerings stamped by the AMF (Autorité des Marchés Financiers, the French stock market authority), and
- provides for an optional regulation of crypto assets providers ;
- the 2019 budgetary and taxation law which clarifies the manner in which crypto assets are taxed.
Indeed, if blockchain and DLTs reach their full potential, they will have a major impact on how companies do business and interact with each other and with their customers.
That being said, as non-permissioned blockchains such as Ethereum or Eos are developing and the blockchain industry matures further with the apparition of new protocols and APIs ensuring the interoperability of DLTs, some players consider that new legislation would be needed to cover crucial areas linked to cybersecurity and sovereignty stakes, financial stability and systemic risk exposure.
Indeed, some voices raise concern over the need for standardisation and normalisation to ensure a sound development of DLTs and crypto assets. They thus express a need for a regulatory harmonisation and convergence at both EU and international levels.
LEGAL AND GOVERNANCE CHALLENGES OF USING BLOCKCHAIN TECHNOLOGY AND DLTS ON A CROSS-BORDER BASIS
The proponents of harmonisation point out that, as crypto assets are being transferred across jurisdictions while no specific standardised protocol for such distributed databases exists, there is a clear need for standardised requirements at global level for messaging, cybersecurity, data protection and continuity of activities (in the context of a major incident). Such requirements may be specified whatever the trade sector.
Interoperability is probably the most important topic to consider, as it focuses on ensuring secured links between blockchains so that (i) all players may develop their own system for the market to select which one to use whilst (ii) ensuring that users may enjoy the benefit of common features to facilitate their handling of such crypto assets.
Finally, a last key concern to address is the question of liability when delegating some essential or critical tasks related to the use or the operating of a blockchain. This is especially important with respect to non-permissioned blockchains that are theoretically fully decentralised i.e. without identified miners1 bearing some kind of liability beyond their role of checking and validating the transactions.
Given all these critical aspects, and considering the crosscutting nature of blockchain, such a technology can no longer be seen as a neutral one only requiring minimum adaptions of each sectoral regulation. Indeed, if blockchain and DLTs reach their full potential, they will have a major impact on how companies do business and interact with each other and with their customers.
Public authorities and policymakers will have to consider legislative actions not only to prevent market players from evading or circumventing laws, but rather to create a wellstructured regulatory framework, adapted to the stakes of blockchains and crypto assets’ development.
Within this context, the European Union must assume leadership in identifying specific features to regulate blockchains on a cross-sectoral basis. As a good first step, the European Commission published a fintech action plan in March 2018 highlighting its appetite to propose concrete measures for the next 2019-2024 legislature.
The question is therefore whether these regulations will incentivise good conduct or, on the contrary, prescribe and prohibit. Most players hope that they will belong to the first category.
Counsel and Head of Market Intelligence and Regulatory Watch and co-Head of the blockchain and crypto assets practice for CMS Francis Lefebvre Avocats.
Partner and Head of Financial Services, and co-head of Blockchain and crypto assets practice for CMS Francis Lefebvre Avocats.
(1) Miners are the parties validating the transactions and building the consensus to make the blockchain unalterable.