Analysis of Blockchain: IV Chapter

SUMMARY for Analysis of Blockchain:
4.1. WHAT: IS IT THE DLT TECHNOLOGY OR THE APPLICATION WHICH MUST BE REGULATED? 4.2. WHO AND HOW: DO WE NEED A SPECIFIC NATIONAL OR INTERNATIONAL ORGANISATION OR WHO SHOULD HAVE THE POWER TO DO SO?

‘Governments that wish to repress the voices of citizens everywhere and have
captured technologies like the Internet to silence dissidents and block outside
media will find blockchain technology significantly more challenging’
[111]

4.1. WHAT: IS IT THE DLT TECHNOLOGY OR THE APPLICATION WHICH MUST BE REGULATED? AND WHEN: BEFORE OR AFTER CREATION?

Part of Analysis of Blockchain.

In the idea of Blockchain 1.0, where the only application imaginable was virtual currencies, regulations affected only the currencies themselves. States, banks and regulation makers focused their work on how a decentralised ‘money’ would affect the economy. However, there are differences between money and value, and the evolution of blockchain did not centre only on virtual currencies. As we saw previously, the eras of Blockchain 2.0 and Blockchain 3.0 are near.
Indeed, the revolution has already started. We are talking about money in all its forms: savings, pensions, companies, rights, people’s livelihoods, stock portfolios and the economy, and this will touch everyone [112].
Since we are on the verge of a revolution, it seems strange there is not a broad set of regulations or guidelines under development to manage the effects. As Don Tapscott and Alex Tapscott say in their book, Blockchain Revolution, ‘Can and should governments show restraint in the face of the seismic shifts to come?’113 Furthermore, should the DLT technology or the applications be subject to regulation?
Governments will be key in this process. In fact, unlike its role in the past, governments will lose their historical role in monetary policy, financial regulation and in being the ‘third party’ in almost all the important value transactions [114].
Therefore, if we need a way to regulate the blockchain technology, where should we begin? Governments, start-ups and incumbents believe we need regulation, but the path seems more unclear than what some people claim [115]. For example, Russia’s government is moving ahead and they want to introduce rules for blockchain. According to the news service TASS, ‘the adoption of legal acts’ related to blockchain is near, positing 2019 as the timeframe for the update [116].
Furthermore, Dmitrij Medvedev [117], during an investor event in Sochi in late February, said, ‘I’m not against the use of [blockchain] technologies that have become widely circulated and which may thus decisively change our lives.’ [118]
In certain circles, the concept of blockchain technology is well accepted. However, regulating the technology will put a brake on people’s freedom to create and write their own code, therefore limiting what it may offer.
The European Parliament was the first to analyse whether it is the DLT technology or the application which must be regulated. During an event which took place on 11 May 2017 the MEPs focused on the future of blockchain regulation in the 28-nation economic block. When asked ‘When and how should governments intervene?’ MEP Jakob von Weizsäcker said, ‘It’s probably too early to intervene at this stage, because we as legislators don’t yet see sufficiently
clearly to know what the main issues are going to be – so in order not to stifle innovation, we don’t want it to be now [119]’.
Nevertheless, the idea was to adapt existing regulation to new technology rather than creating a specifically new one. In a famous widespread keynote speech the technologist, Vinay Gupta, chosen by the EU to ‘outline a framework to understand the difficulties in regulating software,’ said that this wasn’t possible. ‘Software is regulated for what it does,’120 he said in an interview with CoinDesk, and MEP Eva Kaili echoed this thought, ‘We can’t legislate the technology, but we can legislate the uses [121]’.
Thus, there are two important issues which must be analysed. The first of these is deciding what exactly needs regulating. The underlying code or the uses? The problem lies in the fact that we don’t know, a priori, what the potential uses of this technology may be. The hundreds of pilots and proofs-of-concept currently in motion are just a little piece of what the endless possibilities of this technology are [122]. Second, ‘the unusual schism (for a technology) of private vs public networks requires two different approaches. While it’s possible to draft laws regarding the development of private blockchains, regulating public networks according to their uses is obviously a non-starter given the international, free-access nature of the distribution [123].’
Finally, it seems the EU is following a new strategy and is giving lawmakers greater freedom in deciding the future of new technology, and especially blockchain technology. Emerging technologies will soon benefit from endorsement [124]. The plan is composed of two important steps: the first one will explore use cases to test impact and laws, and the second one will give more self-confidence to new businesses to ensure that their work will be accepted by the market and governments [125]. ‘This approach could not only encourage an ecosystem of thinkers and doers. It could also end up making Europe a prime destination for blockchain development, as businesses choose the continent for their domicile and as talent flocks to the area [126]. The process of acceptance and recognition of this technology is slow, but it is already beginning to move towards a process of openness and security. As MEP Eva Kaili said during the event in the European Parliament, ‘Maybe this way we can regain some trust [127]’.
Therefore, it seems clear that regulating the application of blockchain technology is the easiest way. However, the implications and the immediate results that this might have, may be dangerous for the web, the market and state security.
It would be possible to create guidelines or supervision over this process, but these regulations or standards can only be indicative. If the control over these technologies were to be too strict, the risk would be to remove the freedom of the author to create their own code, and thus limit the future potential of the technology.
Another problem would be creating regulations or standards on future applications without knowing if those applications would be legal or illegal. This begs the question: who would have the power to decide whether an application is legal or illegal? The implications are greater than we thought. Blockchain has the potential to destabilize the state monopoly over the citizens and increase our freedom through the web. Using this technology is like taking a step towards independence. The web, with its global character, would enable us to become master of ‘neutral’ data commands through our own input (coding).
However, the risk to lose control remains, and so, is it just sensible to have some governance before the ‘bad’ blockchain is created?
Furthermore, another issue which must be evaluated is if the regulations must focus on the technology first, thus before the creation of any application, or only on the applications themselves. Let us start by saying, ‘In the context of the decentralized ledger technology ecosystem, determining which incentives to present and when to present them is further complicated by “law lag”, a term often used in law and technology literature to refer to the circumstances’ [128] in which ‘existing legal provisions are inadequate to deal with a social, cultural or commercial context created by rapid advances in information and communication technology.’ [129]
Furthermore, history has taught us that regulating prematurely, which means before grasping the implications, can have deep consequences. The Locomotive Acts (or Red Flag Acts), which were introduced during the latter part of the 19th century, are a prime example of this. The most draconic restrictions were that all road locomotives, which included automobiles, had to travel at a maximum of 4 mph in the country and 2 mph (3.2 km/h) in the city. They also required a man waving a red flag to alert bystanders and horses of the coming arrival of these strange road vehicles pulling multiple wagons. The idea of regulation was prevention, but the result was obviously counterproductive and worse than expected. [130]
The same conclusion was reached by Steve Beauregard, CEO of GoCoin131 who said, ‘When Web pages were first going up, regulators were trying to determine what regulatory regime they should fall under. One idea surfaced requiring
people who built and hosted Web sites to get a citizen’s band radio license because it was seen as broadcasting. Can you imagine having to have a CB radio license so you could put a Web site up?’ [132]. Fortunately, as Don Tapscott and Alex Tapscott pointed out, that’s never come to pass.
The opportunity here lies in not trying to regulate too much too soon, but rather in involving both governments and the users and developers of the technology in dialogue, as stated by the authors of Blockchain Revolution. [133] In fact, they declared, ‘We believe effective regulation and, by extension, effective governance come from a multistakeholder approach where transparency and public participation are valued more highly and weigh more heavily in decision making. For the first time in human history, nonstate, multistakeholder networks are forming to solve global problems.’ [134]

4.2. WHO AND HOW: DO WE NEED A SPECIFIC NATIONAL OR INTERNATIONAL ORGANIZATION OR WHO SHOULD HAVE THE POWER TO DO SO?

Part of Analysis of Blockchain.

The evolution of the web as it is today can be divided into three phases: Web 1.0, composed of the classic HTML technologies, in which the users acted essentially as consumers with a very restricted group serving as creators; successively Web 2.0 where the approach to the world of the network became more participatory. Through mass social networks, blogs and forums the lines of cooperation and interaction became wider, and the participants assumed a less passive and more active role. The vulnerability of this new system consisted in, and consists in, the credibility of the sources. In principle so-called ‘fake news’ is difficult to control because it is relatively easy to manipulate information and links, and therefore establish the credibility of the information based on the name or site publishing it. Web 3.0 cannot be defined precisely at the moment because it is still in evolution and we do not know how far it will go. In general it is rooted in the idea of ‘connective intelligence,’ or rather in the new ability of web software to connect data, ideas and people. [135]
It is in this new idea of Web 3.0 that we find the application of blockchain technology. Here the internet is nowadays considered the ‘internet of value’136 and the risk is higher than in Web 1.0 and 2.0. However, the internet and the web have become a global resource in such a short time, and this evolution occurred under strong leadership and governance in spite of the powerful forces against it. Thus, who governed the first-generation of internet and how? And who and what will the next one be like?
According to Marc Pilkington the first-generation internet was governed by ‘a vast ecosystem of companies, civil society organisations, software developers, academics, and governments, namely the U.S. government, in an open, distributed, and collaborative manner that we cannot measure by traditional command-and-control hierarchies and frameworks. No governments or group of governments control the Internet or its standards, though several U.S. government agencies once funded it.’ [137]
Nonetheless, nowadays with the arrival of Web 3.0 and blockchain, governments have thus far shown both restraint and foresight as well as interest. They have demonstrated restraint by limiting regulation and control thereby allowing the internet to evolve independently and foresight by allowing the ecosystem to flourish before trying to impose rules and regulations. However, ‘this multistakeholder network worked for the Internet, but we need to recognise that there will be a greater role for regulation of blockchain technologies. Whereas the Internet democratised information, the blockchain democratises value and cuts to the core of traditional industries like banking. Clearly there will be a regulatory role to ensure that consumers and citizens are protected. Yet, our research suggests that the Internet governance model is a good template.’ [138]
Moreover, another problem is understanding which jurisdictional laws to apply since the domiciles of the blockchain creators, generally, are not known. However, ‘the main public blockchains have been rigorously tested by the market, and have – to date, at least – proven to be resilient. So, focus can shift to the applications built on top of public blockchains. Even here reach will be limited, as apps can be launched from anywhere, by anyone, in some cases with indeterminate jurisdiction. In this case, regulators have no choice but to let the market decide.’ [139]
Thus, what will the national or international organisation working on this new regulation be? Will it be a ‘new’ regulation or a reapplication of another current regulatory framework? And how can it be built?
In essence, at this point we have a wall in front of us: how to face the problem of the inadequacy of applying any regulatory approach to the decentralized technology industry. In the article ‘The Algorithmic Governance of Common-Pool Resources,’ written by Jeremy Pitt and Ada Diaconescu, the authors analysed the problem and offered three different proposals:
1. Apply existing law to Alt-coin140 and other decentralised virtual currencies by considering them as a normal asset or property category (on analysis of Blockchain).
2. Use federal financial services law to all decentralised virtual currencies in order to address the money laundering risk, but leave the remaining policy issues to the states.
3. Leave the DLT to a self-regulation organisation. [141]
Furthermore, the authors also said that ‘notably, most of the proposals in each category focus on building a regulatory approach to Bitcoin and other decentralised virtual currencies, and do not address regulation of the underlying decentralised ledger technology. When the literature does turn its attention to the legal implications of decentralised ledger technology, it tends to skip the question of how to regulate the blockchain and moves straight to jurisprudential questions of how the blockchain might disrupt or alter known legal structures such as contract law, [142] property law, [143] and judicial decision making [144].’[145]
Let’s now try to analyze these three ideas in order to find out which might be the most appropriate approach to further regulation. So, the first group recognizes all applications springing from blockchain as assets or real property, the only difference being that they are used ‘virtually.’ As absurd as this may seem, this theory has a stable and valid principle underlying it. All the applications of blockchain technology are attributable to real goods, such as intangible property, [146] money, [147] securities, [148] uncertificated securities, [149] or some other presently recognized form of legal asset. [150]
If we were to take this out of the virtual world and view these applications as the means to legal recognition, the path would seem all downhill, and the application of current financial and real property law, now mature, would seem perfectly attractive. This, however, is only in theory. These legal frameworks follow different patterns from those based on DLT technology. Various problems of compliance between alt-coin and normal currencies can arise, but one figure is still missing, the third party. As we have said, this figure plays an important role and characterizes our political and economic systems. By forcing this technology into opposing legislative environments which do not exactly mirror each other, even if they share the same common denominator, the principal risk is that only the application is regulated and the blockchain technology is not. Since the technology is multiform and lends itself to many applications, this would only create strain and difficulty in compliance, thus leading to effects in conflict with those desired.
The second proposal is ‘that decentralised ledger technology service providers, and especially those offering a service related to decentralised virtual currency, should remain subject to existing “customer-identification program and
AML compliance program requirements of Sections 326 and 352 of the USA PATRIOT Act, and with the economic sanctions regulations enforced by OFAC” and FinCEN regulations as appropriate, and that the remaining regulatory functions should be left to state governments.’ [151] We can therefore say that these transactions must be inserted as assets into categories of real goods, but we have to understand more broadly that they must enter into specific categories of
‘consumer protection.’ For this the most suitable regulations should be applied. To provide an example, Bitcoin is the cryptocurrency par excellence which most resembles every other currency on the market. Therefore, to be able to buy and use that currency, it must be subject to the various financial regulations present today in different states. The purpose of forcing such conformity stems from the need to limit the risk of consumers to the volatility of cryptocurrencies, [152] on one hand, and the desire to limit the risk of money laundering and facilitating other illicit activities, on the other. [153] The situation here is similar to the one above, ‘These proposals, like both the first group of proposals and current regulation, minimise compliance risk and illicit use at the expense of innovation and adaptability. Further, these proposals lack structured consideration of issues related to minimising malfunctions, data security, or systemic risks. Finally these approaches will likely not garner broad stakeholder support, especially among industry stakeholders. As a result this group of proposals generally only upholds two of the criteria to a high degree.’ [154]
The third option, in the end, is the most interesting, but above all, is the most complex. The process of self- regulation, in fact, is based on the technology of blockchain itself. Since this technology is capable of being independent from ‘third parties,’ it can support itself independently. Obviously, to do so, there must be a “code itself acting as law to restrain activity; contractual obligations self-imposed through a service provider’s terms of service, privacy policy, and other consumer-directed documents; and private lawsuits to hold service providers ‘liable for all losses due to their negligence, recklessness, or disregard for users’ rights.’155 As the process was similar to the birth of the Lex Mercatoria,
it came to be called the Lex Cryptographia. [156] The authors of that theory, in fact, defined it as ‘a set of rules administered through self-executing smart contracts and decentralised (and potentially autonomous) organisations’ [157] and they argue that ‘one of the key consequences of the blockchain could be a rapid expansion of what Lawrence Lessig referred to as “architecture” – the code, hardware, and structures that constrain how we behave – or at a minimum a redefinition of how laws and regulations are designed, implemented, and enforced.’ [158]
Like the Lex Mercatoria and the Lex Informatica which adapted itself to the social era in which it arose, the Lex Cryptographia will also be a child of its times. If its function will be characterised by the self-regulation of blockchain, it will be based on the needs required by the technology itself.
Furthermore, the Lex Mercatoria and the Lex Informatica are focused on rules and principles for the private sector whereas many of the fundamental dynamics surrounding the technology of decentralised ledgers imply public rights issues. As a result, can a system of self-regulation, including that of the Lex Cryptographia, be sufficient for the great reach of such a revolution?

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

Potrebbero altrettanto interessare: Criptovalute e blockchain, nascita, funzionamento ed evoluzione e Blockchain: is self-regulation sufficient? e Blockchain: II Chapter, The objectives of regulation e Blockchain: III Chapter, The current situation e Blockchain: IV Chapter, Analysis e Blockchain: Bibliography e Blockchain: Conclusion e GoodDollar, sai cos’è?

TABLE OF CONTENTS for Analysis of Blockchain

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 of Blockchain
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

_________
111 Tapscott and Tapscott (n 15) 245.
112 ibid 296.
113 ibid.
114 Please see chapter 1.1: Blockchain: A Distributed Ledger Technology.
115 Noelle Acheson, ‘Blockchain Regulation: Is Europe Getting It Right?’ (CoinDesk Weekly Journal, 15 May 2017) www.coindesk.com/blockchain-regulation-europe-getting-right accessed 18 June 2017.
116 TASS is available here: http://tass.ru/ekonomika/4234819.
117 Dmitrij Medvedev is a Russian politician, currently the Prime Minister of Russia.
118 Stan Higgins, ‘Blockchain regulation likely by 2019, Russian Ministry says’ (CoinDesk Weekly Journal, 8 May 2017) www.coindesk.com/blockchain-regulations-likely-2019-russian-ministry-says accessed 19 July 2017.
119 Noelle Acheson, ‘Regulating Ethereum? EU Parliament Weighs Blockchain’s Big Issues’ (CoinDesk Weekly Journal, 15 May 2017) www.coindesk.com/regulating-ethereum-eu-parliament-weighs-blockchains-big-issues accessed 12 June 2017.
120 Jeremy Nation, ‘Vinay Gupta Speaks To European Parliament About Blockchain Technology’ (ETH News, 11 May 2017) www.ethnews.com/vinay-gupta-speaks-to-european-parliament-about-blockchain-technology accessed 12 July 2017.
121 Acheson, Regulating Ethereum? (n 120).
122 Nolan Bauerle, ‘How Could Blockchain Technology Change Finance?’ (CoinDesk Weekly Journal) www.coindesk.com/information/how-blockchain-technology-change-finance accessed 28 May 2017.
123 Acheson, Regulating Ethereum? (n 120).
124 Joseph Young, ‘UK Government grants permission to issue blockchain-based currency’ (Cointelegraph, 12 February 2017) https://cointelegraph.com/news/uk-government-grants-permission-to-issue-blockchain-based-currency accessed 16 May 2017.
125 Laura Shin, ‘Blockchain Summit Examines The Role Of Privilege In Spreading A Democratizing Technology’ (Forbes, 4 August 2017) www.forbes.com/sites/laurashin/2017/08/04/blockchain-summit-examines-the-role-of-privilege-in-spreading-a-democratizing-technology accessed 9 August 2017.
126 ibid.
127 Amelia Tomasicchio, ‘Bitcoin regulation in Europe: “it’s too early”’ (Holy Transaction’s Blog, 12 May 2017) www.holytransaction.com/blog/2017/05/bitcoin-regulation-europe-early.html accessed 3 August 2017.
128 Carla L. Reyes, ‘Moving Beyond Bitcoin to an Endogenous Theory of Decentralized Ledger Technology Regulation: An Initial Proposal’ (2016) 61 Villanova Law Review 191.
129 Jeremy Pitt and Ada Diaconescu, ‘The Algorithmic Governance of Common-Pool Resources’ in John H. Clippinger and David Bollier (eds) From Bitcoin to Burning Man and Beyond: The Quest for Identity and Autonomy in a Digital Society (Off the Commons Books 2014).
130 Locomotives Act 1865 (UK).
131 ‘GoCoin is a boutique Bitcoin payment processor. We provide all the tools, integrations, and customer support for merchants to accept Bitcoin and other digital currencies online. We let customers pay with the currencies they want to use, and pay out our merchants in the currencies they use to pay their bills.’ https://www.gocoin.com/about.
132 Don Tapscott and Alex Tapscott, Interview with Steve Beauregard (April 30, 2015).
133 Tapscott and Tapscott (n 15) 298.
134 ibid.
135 Glenn Remoreras, ‘Forecast 2020: Web 3.0+ and Collective Intelligence’ (Glenn Remoreras Blog, 28 July 2010) www.glennremoreras.com/2010/07/28/forecast2020 accessed 8 June 2017.
136 Marc Pilkington, ‘Blockchain Technology: Principles and Applications’ in F. Xavier Olleros and Majlinda Zhegu (eds) Research Handbook on Digital Transformations (Edward Elgar 2016) https://ssrn.com/abstract=2662660.
137 Don Tapscott and Lynne St. Amour, ‘The Remarkable Internet Governance Network – Part I’ (Global Solution Networks, U of Toronto 2014).
138 Tapscott and Tapscott (n 15) 299.
139 Acheson, Regulating Ethereum? (n 120).
140 Altcoin are Alternate cryptocurrencies or Bitcoin alternatives.
141 Pitt (n 130).
142 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 9 July 2017.
143 Joshua Fairfield, ‘BitProperty’ (2015) 88 S Cal L Rev 805.
144 Michael Abramowicz, ‘Cryptocurrency-Based Law’ (2015) George Wash U, Research Paper 2015-9.
145 Pitt (n 130).
146 Rhys Bollen, ‘The Legal Status of Online Currencies: Are Bitcoins the Future?’ (2013) 24 J Bank & Fin L & Prac 272.
147 Nicholas A. Plassaras, ‘Regulating Digital Currencies: Bringing Bitcoin Within the Reach of the IMF’ (2013) 14 CHI J INT L 377, 403.
148 Ruoke Yang, ‘When Is Bitcoin a Security Under U.S. Securities Law?’ (2013) 18 J TECH L & Policy 99, 108.
149 Jeanne L. Schroeder, ‘Bitcoin and the Uniform Commercial Code’ (2015) Benjamin N. Cardozo Sch. Law, Research Paper 458.
150 George K. Fogg, ‘Perkins Coie: The UCC and Bitcoins – Solution to Existing Fatal Flaw’ (CoinDesk Weekly Journal, 29 Jan 2015) www.coindesk.com/perkins-coie-bitcoin-can-learn-real-estate-law accessed 9 July 2017.
151 Trautman (n 3).
152 David Groshoff, ‘Kickstarter My Heart: Extraordinary Popular Delusions And The Madness Of Crowdfunding Constraints And Bitcoin Bubbles’ (2014) 5 WM & MARY BUS L REV 489.
153 Stephen T. Middlebrook and Sarah Jane Hughes, ‘Regulating Cryptocurrencies in the United States: Current Issues and Future Directions’ (2014) 40 Wm Mitchell L Rev 813.
154 Pitt (n 130).
155 Rhys Bollen, ‘The Legal Status of Online Currencies: Are Bitcoins the Future?’ (2013) 24 J Bank & Fin L & Prac 272.
156 Wright (n 9).
157 ibid.
158 ibid.