Blockchain: I Chapter, Blockchain technology and its applications

Giovanni Perani - Dissertation Blockchain


SUMMARY:
1.1 BLOCKCHAIN: A DISTRIBUTED LEDGER TECHNOLOGY;
1.2 BLOCKCHAIN FROM 1.0 TO 3.0.;
1.3 A GLANCE AT THE IMMEDIATE AND DISTANT FUTURE.

‘The first generation of the digital revolution brought us the Internet of
information. The second generation – powered by blockchain technology – is
bringing us the Internet of value: a new platform to reshape the world of
business and transform the old order of human affairs for the better’
[10]

1.1. BLOCKCHAIN: A DISTRIBUTED LEDGER TECHNOLOGY
The new era of technology has begun, and underlying it there are several technologies which have in many ways revolutionised the world as we once knew it. Many people, however, are overly sensitive to these new technologies and especially to how these new technologies will transform their routines. The new technologies seem to be growing more and more complex and this increased complexity presents a socio-cultural problem. Most new technologies initially meet
resistance before they are fully understood, adopted and brought into widespread use.
In spite of the resistance which greets a seemingly complex new invention, most technologies are not as complex they appear. In fact, one of their main purposes nowadays is to make repetitive and mechanical processes easier. In addition, they may simplify complicated problems or aid in shortening the times involved in performing certain tasks.
One example of this would be the creation and introduction of digital currencies and the impact they have had on the financial and banking industries. Ever since the global financial crisis in 2008, in fact, states have been putting more and more effort into controlling financial and banking operations by introducing stricter regulations and policies. In many cases, these new changes have been met with controversy ‘as many people believe that policy makers should promote freedom and transparency by empowering the public to directly interfere and change the system for public interest’ [11].
The complexity of regulations, however, has not made the financial system an easier and safer place, and it remains controversial whether states should continue to implement and encourage policy makers or allow the free expansion of freedom and transparency with effective financial tools [12].
Here is where technology may alter the complexity of regulations and open up new opportunities to fix these problems. The use of digital currencies represents a perfect example. In fact, in a world where digital technology is increasingly making everything paperless, the creation and use of digital currencies can only be seen as an intuitive development. Bitcoin, as the first digital currency introduced into our market, was created by Satoshi Nakamoto [13] in 2009. It was the first conceptualisation of ‘blockchain’ technology and its impact has begun to be felt more widely.
Today the blockchain is used to simplify money transactions. Furthermore, financial institutes have also started to use this technology in order to enhance efficiency – for example, smart contracts, smart assets, Clearing and Settlement, Payments and Digital Identity [14].
On one hand Bitcoin has become the most well-known application of blockchain technology, and a growing number of people have started to understand it. On the other hand, blockchain technology itself is still new to most people. All this is despite the fact that it has been involved in modernising several other fields, such as property certification, intellectual property, social inequality and contracts [15].
So, what is blockchain and when was it born?
The first work on a cryptographically secured chain of blocks was done between 1991 and 1997, but it was only in 1998 that Nick Szabo introduced Bit Gold as a mechanism for a decentralised digital currency and smart contracts.
Subsequently, in the first year of the new millennium, Stefan Konst introduced a general cryptographic theory of secured chains, but the first real conceptualisation of the blockchain technology had to wait till the arrival of Bitcoin. This, however, was only the first generation of blockchain technology. In 2014 blockchain took another step forward with its
evolution, called Blockchain 2.0, and new applications of this technology were seen.
The reason for this faster16 evolution and the wider use of blockchain is due to its characteristics and simplicity; the mechanisms underpinning it are simpler than may be expected. Blockchain, in fact, is a distributed database (Distributed Ledger Technology) and it is defined by the authors of Blockchain Revolution as ‘an incorruptible digital ledger of
economic transactions that can be programmed to record not just financial transactions but virtually everything of value’ [17]. This meant that for the first time technology allowed consumers and suppliers to connect directly and perform digital transactions without need of a third party.
Sarah Underwood in the Journal Communications of the ACM18 defines blockchain technology and its impact as an ‘open, global infrastructure that allows companies and individuals making transactions to cut out the middle-man, reducing the cost of transactions and the time lapse of working through third parties.’ Furthermore, the technology is grounded on a distributed ledger structure and consensus process which permit the creation of a reliable connection between computers on the network without central control of any authority, and since it is public, it is viewable by all the network users [19].
Thus, a blockchain is nothing more than a database (or ledger) of virtually any type of recordable information, made-up of ‘blocks,’ or stored data, and ‘chained’ together to form a cohesive, unbroken record of that information [20].
The arrival of blockchain formed the foundation for the revolution which involves any value transaction, whether those transactions are based on money, goods or property. But the importance is not only limited to this. Since every transaction is recorded and distributed on a public ledger, its potential uses may be almost limitless. In fact, once we believed the revolution was simply the cryptocurrencies based on the blockchain technology. This, however, was only the first step of the journey.

1.2. BLOCKCHAIN FROM 1.0 TO 3.0
When a discovery is made in the technological world, often it will have multiple applications, and this is certainly true of blockchain. Although blockchain was used for the first time to create a particular digital currency, namely Bitcoin, and others such as Litecoin21 and Dogecoin [22], the technology has started to be used for other purposes.
It is important to note, however, that the terminology surrounding this phenomenon is not helpful and can be confusing. For example, the word ‘bitcoin’ is generally used to refer to three different concepts: the first one, is the underlying technology, the blockchain itself. The second one is the protocol, which is the software that transfers the money using the blockchain ledger. Finally, the last layer is Bitcoin, or rather the currency itself [23].
Blockchain is already the cash of internet, a digital payment system, but this is just its first application [24]. For that reason, it is frequently referred to as Blockchain 1.0. Furthermore, since a cryptocurrency can be a programmable open network for decentralised trading of all resources, the concept of Blockchain 1.0 has already been extended to Blockchain 2.0 [25]. This is seen ‘as a programmable distributed trust infrastructure.’26 As opposed to it being viewed as a process which permits only the decentralisation of money and payments, the new concept of Blockchain 2.0 increases the scope of the technology and enables the decentralisation of markets across different fields. More broadly, by providing registers for certificates, rights and obligations, Blockchain 2.0 transactions can involve other types of assets such as real estate, IPR, cars, works of art and so on [27].
Thus, the idea behind Blockchain 2.0 is to use the decentralised transaction ledger to register, confirm and transfer all the processes by which contracts are made and assets transferred, creating so-called smart contracts.
Smart contracts are another application of decentralised public ledger technology. They can also be viewed as self-executing transactions, or as ‘automated programs that transfer digital assets within the blockchain upon certain triggering conditions’ [28]. However, smart contracts are not a completely new concept [29] and they are defined as ‘computer protocols that embed the terms and conditions of a contract’ [30]. The blockchain technology, in fact, enables parties to enter into contracts and mitigates the risk of entering into a contract without the need for a third party. Trust is created and maintained by the simple fact that the blockchain technology is a database which cannot be tampered with and all transactions, once established, should be carried out with a minimum or no risk to either party, and therein lies its power.
In Harvard Business Review, Patrick Murck said, ‘The power of blockchain technology is that it can algorithmically enforce private agreements and community principles at a global scale by shifting the cost of trust and coordination to the network. This is what allows blockchains to create new markets where they couldn’t exist before, whether for political or for economic reasons. To do this, we have to be able to trust the blockchain, and to trust that no one controls it’ [31].
Thus, for the first-time technology allows parties to connect directly to each other, eliminating the need for a third party, such as a subject, a state or ‘trust.’ Patrick Murck also said, ‘Blockchain networks tend to support principles, like open access and permissionless use, that should be familiar to proponents of the early internet. To protect this vision
from political pressure and regulatory interference, blockchain networks rely on a decentralised infrastructure that can’t be controlled by any one person or group. Unlike political regulation, blockchain governance is not emergent from the community. Rather, it is ex ante, encoded in the protocols and processes as an integral part of the original network
architecture. To be a part of a community supporting a blockchain is to accept the rules of the network as they were originally established’ [32]. Furthermore, in any blockchain transaction the parties don’t have to trust the counter-party to achieve their duties, since the web guarantees this through automated, standardised processes.
So, we can finally define the blockchain-based smart contracts by using the definition provided by Richard Genda Brown in ‘A simple model for smart contracts.’ He states that the smart contract is ‘a piece of code, deployed to the shared, replicated ledger, which can maintain its own state, control its own assets and which responds to the arrival of external information or the receipt of assets’ [33].
Financial services and public records, as well as crowdfunding and smart property, can be migrated to the Blockchain 2.0 technology. Thus, the idea of Blockchain 2.0 is not applicable only for smart contracts, but it is really to be seen as a platform for many other applications.
Not only is blockchain technology revolutionising and reinventing every category of economic and financial services, but it is having a great impact on the idea of central authority. It creates a decentralised model for organising activities and effectively removes the need for a central authority to supervise or monitor these transactions. Indeed, Blockchain 1.0 and 2.0 focus on providing benefits such as economic efficiency and cost savings, both of which spring
directly from interaction in decentralised network models without the need for intermediaries. The revolution does not stop there, however. The next step is Blockchain 3.0. With the interconnections created by the web, all humans are part of the same network, creating a global process that was previously unimaginable.
Blockchain 3.0 is the unleashed potential of the technology application in every form imaginable, ‘in particular to allow for increasingly automated resource allocation of physical-world assets and also human assets’ [34]. We are speaking about blockchain beyond currency, markets, and economics.
Furthermore, in her book, Melanie Swan says that every system in life comes down to economics to some degree, thus blockchain could be applicable too. For that reason, the wider view of Blockchain 3.0 could be used in any field such as in facilitating big data’s predictive task automation. The idea is to use Blockchain 1.0 and 2.0 technology to change the ratio behind other tasks. Blockchain 3.0 aids in revolutionising the organisational model we used to know,
‘perhaps, all models of human activity could be coordinated with blockchain technology to some degree, or at a minimum reinvented with blockchain concepts’ [35].

1.3. A GLANCE AT THE IMMEDIATE AND DISTANT FUTURE
The new millennium has seen new applications of technology change the traditional concept of financial firms: the so-called Fin-tech (financial technology) firms provide a wide and varied array of services which rely on technology and which have brought about change. Bill Gates, 20 years ago, opined that ‘Banking is essential, banks are not’ [36]. In our
near future, technology may take the place of banking, for example. It is already doing so in ways that were unimagined only a few decades ago. Peer-to-peer lending and crowdfunding, for example, have become possible due to the technology of the internet and the interconnections which come directly from it.
Blockchain is and will be a fundamental part of this process of decentralisation. This is already occurring with e-money or cryptocurrencies. The transition into widespread use of virtual currencies is still at its dawn and blockchain is now moving out of the cyber universe and interacting more often with the real world. In fact, this is creating difficulty for
the institutions and governing bodies which have until recently been the regulators of all financial transactions.
Fundamental issues such as an exact definition of virtual currencies have proven to be elusive and difficult to pin down. The Central Bank of Canada defines the decentralised e-money based on blockchain technology as e-money which is ‘stored and flows through a peer-to-peer computer network that directly links users, much like a chat room. No single user controls the network’ [37]. The ECB report on virtual currencies 38, on the other hand, defined e-money based on its
interaction with fiat money and the real economy, and so its value is calculated based only on the interaction with real money – that produced and controlled by states and banks. According to the ECB report, cryptocurrencies are commodities, and not real currencies. However, it is the market that dictates their prices and values.
Finding a precise definition of e-currencies is only part of the problem, especially since it only touches on the first layer of Blockchain technology, that is to say Blockchain 1.0. The other matter is finding a common approach toward this new technology. Although it is becoming more and more accepted by states and banks, there are some countries in which Bitcoin is considered illegal, such as in Bolivia, Ecuador, Kyrgyzstan and Bangladesh [39].
Therefore, there is another problem which should be evaluated: whether states will be open to the growing array of the applications of the blockchain technology. Furthermore, the Blockchain 2.0 revolution is approaching. In fact at the inaugural Smart Contracts Symposium held at Microsoft’s New York City headquarters, many blockchain experts ‘discussed the myriad of ways that smart contracts are poised to disrupt the status quo in 2017 and beyond’ [40].
Therefore, it is clear that interactions between technology companies stand to benefit from the application of blockchain or distributed ledger technology and this opens up a new era of opportunities. The market and regulatory agencies will contribute even more in the next year to increasing the benefits which consumers will have [41]. Moreover, ‘leading the trend by transforming business model and taking steps to apply Blockchain technology in financial activities would be a tactical preparation for a sustainable development of corporations in general’ [42].
The market and people are ready for this revolution. Technology will be part of our ‘new world,’ but every process, every step along this path must be taken into a web that controls part of our freedom, the states.
How is blockchain viewed by regulators and states? Have regulations or laws which circumscribe blockchain technology already been put in place? Before analysing these issues, we must understand what is a regulation and why we need to regulate.

Contributo di Giovanni Perani, Blockchain and Cryptocurrencies Expert at Carnelutti Law Firm, LL.M. at Singapore Management University



TABLE OF CONTENTS

INTRODUCTION
I CHAPTER – BLOCKCHAIN TECHNOLOGY AND ITS APPLICATIONS
1.1. BLOCKCHAIN: A DISTRIBUTED LEDGER TECHNOLOGY
1.2. BLOCKCHAIN FROM 1.0 TO 3.0.
1.3. A GLANCE AT THE IMMEDIATE AND DISTANT FUTURE

II CHAPTER – THE OBJECTIVES OF REGULATION
2.1. UNDERSTANDING REGULATIONS
2.2. THE BIRTH OF NEW REGULATIONS
2.3. THE PURPOSE OF REGULATIONS
III CHAPTER – CURRENT SITUATION
3.1. EARLY REGULATIONS AND ACTIONS BY STATES
3.2. CASES AND EARLY FRAMEWORKS
3.3. SHOULD THE TECHNOLOGY ITSELF BE REGULATED AS DISTINCT FROM THE APPLICATIONS?
IV CHAPTER – ANALYSIS
4.1. WHAT: IS IT THE DLT TECHNOLOGY OR THE APPLICATION WHICH MUST BE REGULATED? AND WHEN: BEFORE OR AFTER CREATION?
4.2. WHO AND HOW: DO WE NEED A SPECIFIC NATIONAL OR INTERNATIONAL ORGANISATION OR WHO SHOULD HAVE THE POWER TO DO SO?
CONCLUSION
BIBLIOGRAPHY



_________
10 Don Tapscott, Canadian business executive.
11 Quoc Khanh Nguyen, ‘Blockchain – A Financial Technology for Future Sustainable Development’ (3rd International Conference on Green Technology and Sustainable Development (GTSD), Kaohsiung, November 2016) 1. 12 ibid.
13 Bitcoin were invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto. Satoshi Nakamoto was also involved, during the Bitcoin implementation, in the first blockchain database. L.S., ‘Virtual Friend Fires Employee’ (Naked Law, 1 May 2009) www.economist.com/blogs/economist-explains/2015/11/economist-explains-1 accessed 30 June 2017.
14 Chris Skinner, ‘The five major use cases for financial blockchains’ (Brave NewCoin, 11 March 2016) www.bravenewcoin.com/news/the-five-major-use-cases-for-financial-blockchains accessed 1 August 2017.
15 Don Tapscott and Alex Tapscott, Blockchain Revolution (1st edn, Portfolio Penguin 2016).
16 Mark Buitenhek, ‘Understanding and applying Blockchain technology in banking: Evolution or revolution?’ (2016) 1 J of Digital Banking 111-119.
17 Tapscott and Tapscott (n 15).
18 Communication of the Association for Computing Machinery (ACM) was established in 1957. It is a monthly journal where articles focus on practical implications of advances in information technology.
19 Sarah Underwood, ‘Blockchain Beyond Bitcoin’ (2016) 59 Communications of the ACM 15.
20 Definition of Blockchain in the Clyde & Co LLP survey, June 2016.
21 Litecoin https://litecoin.org/it.
22 Dogecoin http://dogecoin.com.
23 Melanie Swan, Blockchain, Blueprint for a New Economy (1st edn, O’Reilly 2015).
24 Annah Levine and Andreas Antonopoulos, ‘Let’s talk Bitcoin! #149 Price and popularity’ (podcast, Let’s Talk Bitcoin, 30 September 2014) http://letstalkbitcoin.com/blog/post/lets-talk-bit-coin-149-price-and-popularity.
25 Swan (n 23) 5.
26 Tim Swanson, ‘Blockchain 2.0. Let a Thousand Chains Blossom’ (Let’s talk Bitcoin, 8 April 2014) www.letstalkbitcoin.com/blockchain-2-0-let-a-thousand-chains-blossom.
27 Martin von Haller Gronbaek, ’Blockchain 2.0, smart contracts and challenges’ (Bird&Bird Article, 16 June 2016) www.twobirds.com/en/news/articles/2016/uk/blockchain-2-0–smart-contracts-and-challenges accessed 20 June 2017.
28 Joshua Fairfield, ‘Smart Contracts, Bitcoin Bots, and Consumer Protection’ 71 (Wash & Lee L Rev Online 36 2014) http://scholarlycommons.law.wlu.edu/wlulr-online/vol71/iss2/3/ accessed 7 May 2017.
29 Nick Szabo, ‘Formalizing and Securing Relationships on Public Networks’ (First Monday, 1 September 1997) www.firstmonday.org/ojs/index.php/fm/article/view/548 accessed 6 August 2017.
30 Von Haller Gronbaek (n 27).
31 Patrick Murck, ‘Who Controls the Blockchain?’ (Harvard Business Review, 19 April 2017) www.hbr.org/2017/04/who-controls-the-blockchain accessed 5 July 2017.
32 ibid.
33 Richard Gendal Brown, ‘A simple model for smart contracts’ (Richard Gendal Brown, 10 February 2015) www.gendal.me/2015/02/10/a-simple-model-for-smart-contracts accessed 24 June 2017.
34 Swan (n 23) 29.
35 ibid.
36 For further information and reports by SVB about the investment trends in Fintech, please go to http://www.svb.com/News/Company-News/ 2015-Fintech-Report–Investment-Trends-in-Fintech/?site=uk.
37 Bank of Canada, ‘Decentralized E-Money (Bitcoin)’ (Backgrounders, April 2014) www.bankofcanada.ca/wp-content/uploads/2014/04/Decentralize-E-Money.pdf.
38 European Central Bank, ‘Virtual currency schemes – a further analysis, Eurosystem Report’ (February 2015) www.ecb.europa.eu/pub/pdf/other/virtualcurrencyschemesen.pdf.
39 Wikipedia, Blockchain https://en.wikipedia.org/wiki/Blockchain.
40 Rob Marvin, ‘Blockchain in 2017: The Year of Smart Contracts’ (PCmag, 12 December 2016) www.pcmag.com/article/350088/blockchain-in-2017-the-year-of-smart-contracts accessed 4 July 2017.
41 Nguyen (n 11) 53.
42 ibid.





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