Not all people are enthusiastic about the blockchain technology appearance, especially slow public and banking institutions. A blockchain has many opponents and skeptics, including representatives of regulatory authorities who are never inclined to rush things.
A blockchain is usually presented as a technology able to rebuild or conceptually revise entire sectors of the world economy. This is a fundamentally revolutionary approach because a blockchain can record and keep identity data, financial transactions, and all sorts of legal or other transactions.
However, the technology and its application are still subject to study, being at its initial formation and initiation stage. It is especially true for the banking and financial sectors where the regulatory authorities are in charge to coordinate and guarantee their industry stability. Thus, each regulator, vested with certain monitoring duties, analysis and recommendation powers, makes their judgments and conclusions concerning the entire blockchain trend. Some of the regulators’ representatives make negative statements, others remain neutral but attentive to the trend, still others, on the contrary, are loyal. At the same time, we can single out some general fears present in the regulators’ declarations in recent times all over the world.
Blockchain and Legal Basis
– There is no legal basis for adopting a blockchain as a chain of irreversible and protected from unauthorized access nodes ensuring the reliability of the data contained in them. To use a blockchain as a unique and reliable identification source, a legal basis is necessary, but it is not yet available. Before it becomes possible, it is necessary to develop standardized regulation to protect data and authenticate legal entities. Data recordings in a blockchain still have no legal recognition fact. That is why it cannot be used as a legal argument in court.
Legal nature relating to the characteristics of a blockchain and distributed ledger technology (DLT).
Territoriality (jurisdiction and applicable law) and responsibility issues are not defined either. Common distributed ledgers (or DLT) do not have a specific location. With regard to jurisdiction and applicable law, territoriality remains an issue because each node in the network can be subject to separate legislative requirements. Furthermore, there is no “central administration” responsible for each node whose citizenship (possible administration) could act as a starting point from the perspective of regulatory bodies. Following the same ideas, the notion of “responsibility” is also a concern of regulators, as it is not possible to find a single party that has ultimate legal responsibility for distributed ledgers operation and data stored in them.
Fear of regulating the interpretation of the “right to be forgotten.”
Since the protected from unauthorized access blockchain feature collides with this right, granted in accordance with European law to protect personal data, a potential conflict is created. The fact that a blockchain is irreversible can pose an issue, as it may come into a conflict with other rights recognized by governments and regulators. One of the examples is the “right to be forgotten” granted to every citizen in accordance with European law. It grants any European citizen the right to store data in external databases, either on paper or in electronic format or to delete it if they wish to do so. The only solution, which will allow combining such rights with the blockchain characteristics and essence, may be the possibility to replace the right to “delete data” with the right to “prohibit the personal data utilization” by third parties. To achieve this, it is possible to combine automatic data encryption under certain conditions (meaning the use of smart contracts) and alternative solutions to prevent access to data specified when a person decides to exercise their right. At this point, a blockchain is unable to technically guarantee even the right to “prohibit the utilization.”
The legal framework regulating the legal force of financial instruments emitted by a blockchain
When a blockchain is used as a platform for creating financial instruments, such as bonds and derivatives, regulatory and supervisory authorities’ recognition of these financial instruments validity is required. Obviously, money is one of the key financial instruments issued within a blockchain. Money emitted by a blockchain platform can have serious consequences for monetary policy and macroeconomics and require a deeper analysis. As of today, many regulators are already engaged in the analysis of this kind.
The legal basis for the legal status of documents recorded in a blockchain as proof of ownership or existence
Like recognizing a blockchain as a unique indisputable reliability source, a new level of recognition is also required prior to the blockchain utilization in certain kinds of business activity. This concerns both the data irreversibility recognition and the recognition of the fact that acts declaring ownership or asset availability, recorded in a blockchain, are authentic proofs of ownership or actual existence of the asset specified. If the process of checking the property existence is sufficiently substantiated before it was recorded in a blockchain, and we are confident in the efficiency of cryptographic mechanisms, recognizing a blockchain as a true source of trust implies that the documents recorded in the system blocks can be used as proof of existence or property ownership indeed. However, the question remains whether the courts of each particular country can accept blockchain ledgers as a proof.
The legal basis for smart contracts
Concerns relating to territoriality and responsibility are also applicable to smart contracts but require a number of additional interpretations. As for issues with jurisdiction, the question is not only the distributed ledger (DLT) specific location but also in the contract signing procedure which complies with various laws of various jurisdictions. As for obligations, multiple parties take part in smart contracts: apart from the parties to the contract, those may also be encoders and contract keepers. In addition to the fact that one of the contracting parties violates the contract, a probability that the smart contract itself may be corrupt also exists either due to encoding errors or design errors. Therefore, when a smart contract does not work the way it should, it is difficult to pinpoint which of the two parties is responsible.
Regulation of the blockchain utilization as an efficient regulatory ledger for the Internet of Things
The blockchain technology can be useful for the Internet of Things where all connected devices are identified. Thus, it would be really useful to create a common distributed ledger storing “identification” and data on each related thing (gadget), allowing them to conduct transactions among themselves which also include M2M payments directly between the machines. The idea of one or more “common distributed ledgers” for the Internet of Things seems to be gaining popularity now. That is why a legal base that recognizes distributed ledgers (DLTs) as valid will be required in the future. All the aforementioned issues, related to the smart contracts territoriality, responsibility, and applicability, are also appropriate for any blockchain connected with the functioning of the Internet of Things.
At the moment, regulators have not arrived at a common opinion or at a single global interpretation of a blockchain since they do not yet have any specific legal solutions to the issues posed above. Their fears in such a case are fully justified.
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