In a paper entitled Are Blockchains and Cybercurrencies Demanding a New Legislative Framework published earlier this week in the journal Law and Digital Economy, Stephan Breu posits crucial questions about the way the fundamental ways that legislators will need to think about regulation of decentralized economic technologies such as distributed ledger.
Breu offers that blockchain operates ‘completely independently from the physical location of the involved legal entities,’ which creates a unique situation for governments whose jurisdiction is traditionally thought of as being centered within and across their borders. Breu mentions the all too real example of a transaction occuring between two entities in separate countries using data stored in a third.
The question here comes down to whose jurisdiction does the transaction fall under? Breu contrasts two competing regulator approaches which are emerging- self regulation in the style of Switzerland, and top-down government regulation in the style of Gibraltar.
Breu points to Switzerland as an example of self-regulation, where the Swiss Crypto Valley Association (CVA) has published a code of conduct for ICO’s. The code includes, among other things, a requirement for business transparency, an avoidance of discrimination, and a mutual respect for property rights.
Contrasting this model, Breu describes the Gibraltar Financial Services Commission’s Distributed Ledger Technology Regulatory Framework, one of the first legal frameworks developed at the state level created to regulate the blockchain. This framework has similar goals to CVA’s agreement, but is slated more towards consumer protection.
One of the questions implied by the paper is what these legal frameworks really amount to, given the very nature of the blockchain described. Both the CVA, and the nation of Gibraltar, can only impose limited restrictions on their guidelines, especially given the international and private nature of blockchain companies. The CVA’s most severe restriction it can impose is an expulsion from the private group of copmanies, and Gibraltar can only impose ‘soft regulation,’ operating as a local ‘gatekeeper’ on what is really a transnational technology.
Breu mentions that in fact that ‘it is very difficult to establish a harder regime as understood in traditional regulation of markets. Mainly because the concept of legal entities is nearly impossible to maintain with blockchain applications.’
Breu offers that this will be an increasing problem for authorities as blockchain technology expands from financial transactions, to services such as licensing, medical and legal data storage, and other areas in which governments traditionally can exert control as intermediaries to access.
With this in mind, Breu argues that authorities need to be proactive in building models moving forward which give both the industry and regulators as much access to data as possible, they need to build international legal models which allow international flexibility and cooperation to enact sanctions and limits, and finally they will need to crucially support and enable industry self-regulation.