Blockchain is a technology that was created in 2009 by the mythologized Bitcoin cryptocurrency creator Satoshi Nakamoto. The term Blockchain itself partially describes the tasks that this technology solves, meaning literally “chain of blocks”. And not just some chain. It maintains a strict sequence of actions and a system of relations. At the same time, to write a new block, it is necessary to sequentially read information about the old blocks.
When we’re talking about “regulation” in cryptocurrency context, it most likely refers to following basic concepts:
Also there are rules regarding issuance and trading of securities. Regulations in case of securities serve the purpose to protect investors and ensure that funds are used for their intended purpose (and for legitimate purposes). The KYC and AML rules were created to verify the identity of clients and assess the risks of their use of business relations to counter money laundering or other illegal activities.
The rules of KYC and AML are usually compulsory for all banks and financial institutions, although this varies from country to country. In 2018, most crypto companies and exchanges made minimal efforts to establish the real identity of their customers. This pattern had to be changed quickly. Considering that Crypto companies understand that they need to follow with KYC and AML experience to avoid potential regulatory repression.
Despite this desire to make blockchain as free as possible, in order for it to be widely distributed in given investment community, there must be some degree of adaptation with traditional ways of investing by introducing its regulation. The massive adoption of blockchain is due to the high degree of protection against hacker attacks, which is embedded in blockchain system itself, in which there is no single server, it is possible to control the transactions by any member of the community. In addition, blockchain, as a technology, has led to the possibility of transferring values without boundaries between participants and innovative ways to attract capital or investments in promising projects. Another reason for massive adoption of blockchain is that the number of mobile Internet users in the world is growing sharply.
However, there is another side to it: cryptocurrency is used as the main exchange of values for illegal activities, and people are deceiving an uneducated investor with fraudulent ICOs.
First of all, blockchain regulation exists to protect investors from fraud. The regulatory standard provides a certain level of protection for an inexperienced investor. However, imposing restrictions on who can invest in unregistered securities significantly depletes the number of potential investors, which causes inconvenience for honest projects, but also sets barriers to raising money for bad or outright fraudulent companies. Strengthening regulation will reduce the investment risk of blockchain and increase institutional investment.
Currently, many state authorities are considering the possibility of using the blockchain technology for storing and exchanging documents with heading “For official use” and “top secret”. Some are already using it. United Arab Emirates, Switzerland, Malta, Sweden in particular.
Analyzing the current rate of blockchain technology advancement, it can be safely assumed that by 2030 at least 60% of potential consumers would embark on the path of widespread adoption in both public and private sectors of global economy. This would become a part of our daily life. Next few years would be crucial for the blockchain triumph. It is known that education became the main activity of the blockchain supporters. Education of all sections (general public and business owners) would show the desired result.
Regulation, eliminating the anonymity of users prevents the possibility of money laundering and terrorist financing, which is the main task of regulation in relation to virtual currencies. Regulators have a curtail part to play regarding safety.
Blockchain networks themselves are usually very secure, and they can eliminate the vulnerability of a single company controlling transactions. Regulation of the blockchain will establish mechanisms similar to those used by stock exchanges to prevent a market crash, when a fall in stock prices may be virtually impossible to implement through distributed ledgers.
Regulatory reactions to new technologies in the United States at the federal level, and the blockchain in particular, range from nervousness and suspicion of criminal intent to indifference. Congress held a total of seven hearings on blockchain and digital currencies, all from 2013 to 2017. Starting from the impact of virtual currencies on protection of small and medium-sized businesses, national security to the impact of breakthrough technologies and threats to cybersecurity. In total, two federal blockchain bills relating to virtual currencies, the Law on Protection and Moratorium on Cryptocurrency Protocol and the Law on Protection of Online Market 2014, were proposed. Even these bills were far from revolutionary: they proposed a five-year moratorium on federal and state regulation of cryptocurrencies.
In 2017, without much media attention, Arizona quickly passed a bill recognizing blockchain records, amending existing legislation on electronic records. The Arizona House Bill 2417, introduced on February 6, 2017, passed both state chambers and was signed by law on March 29, 2017.
In 2018, the bill was passed to Washington State Senate that encourages the development of distributed book and blockchain technology. The bill provides for legal recognition of digital signatures when checking blockchains.
The state of Wyoming also proposed a bill that would allow issuing tokenized share certificates using blockchain technology. Bill aims to clarify the legality of digital assets and permit storage of digital assets through banks.
To date, California has not made any attempts to further regulate the blockchain or digital currencies.
In Hawaii, on January 25, 2017, a draft law “Act on Economic Development” was submitted. This bill establishes a “working group consisting of representatives of the public and private sectors to study, train and promote best practices in implementing blockchain technology” for the benefit of local enterprises, residents and the state of Hawaii.”
On March 21, 2017, the Illinois House of Representatives adopted a Joint Resolution of the House of Representatives 25, in accordance with which a task force was created to explore the benefits of the blockchain for local government records.
The most important events for the regulation and implementation of the blockchain in evidentiary context occurred in Arizona (recognition of smart contracts), Vermont (blockchain as evidence), Chicago (real estate records) and, most importantly, in Delaware (awaiting initiative Delaware companies in the form of a blockchain). Because it includes 64 percent of Fortune 500 companies and more than 1 million legal entities, adopting a Delaware initiative will change the regulatory framework for securities, setting a precedent in the most important US corporate jurisdiction.
Today, the main priority of Europe in relation to blockchain technologies is – creation of a clear regulatory framework. It is necessary to determine the legal status of tokens, order of cryptocurrency exchanges activity in European space. Having a clear legal framework will strengthen the confidence of banks. Creation of a single deliberative platform is an essential step towards the implementation of tasks set by European authorities. In particular, the EU has taken a firm position on data privacy, implementing strict rules that have noticeable implications for the blockchain.
General Regulation “On Data Protection (GDPR)”, which entered into force on May 25, 2019, is aimed at harmonizing data protection efforts in the EU.
Zagreb authorities seek to introduce blockchain technology and integrate it into daily activities of the state, especially in protecting confidential documents and monitoring business processes of local firms. The Blockchain technology has been identified as a secure means of storing official documents and digital certificates.
July 4, 2018 marks a historical day for Malta, as the Parliament of Malta officially passed 3 laws, setting first regulatory framework for blockchain, cryptocurrency, and DLT (distributed accounting technology). This makes Malta the first country in the world to provide official set of rules for operators in blockchain, cryptocurrency and DLT space.
Until recently, countries of the Middle East were using “business first, regulation – later” approach, in which government agencies allowed blockchain companies to operate without restrictions. But since cryptoterms exploded, the East Asian countries began to subject blockchains under control by the regulatory authorities. Saudi Arabia and the United Arab Emirates are reportedly launching official interbank cryptocurrency. At the moment, the project is at the experimental stage, and there is practically no information about it. Their goal at this stage for experiments is to gain a better understanding on implications of the Blockchain technology for facilitating cross-border payments.
While China was once considered an international refuge for crypto-conversions, this changed dramatically in 2017 when the National Bank of China banned the country’s initial coin offers (ICO), sending a clear signal that cryptocurrency exchanges in their current form would not be tolerated. South Korea followed through, although blockchain technology is usually encouraged within its boundaries, internal ICOs were banned for the foreseeable future.
Singapore has a number of examples that proudly declare themselves as blockchain supporters. One in particular stood out for me: owned by the government of Singapore, Temasek Holdings and Singapore Stock Exchange invested in a platform that allows you to collect funds through the offers of security tokens. STO is, in fact, asset tokenization, and Singapore makes a big statement in its position for blockchain-based integration.
Singapore Public Service can also take on blockchain to check vendor’s track record on the GeBiz government’s e-procurement portal of Singapore, track government employee’s career steps and audit processes. The Ubin project – another notable example of Singapore’s participation in blockchain technology adoption.
Recently, the blockchain community of South Korea has flourished. While the government is looking at blockchain technology favorably, it has yet to determine its position on legal and regulatory aspects of cryptocurrency financing and trading, leaving South Korean market uncertain. In addition, internal ICOs are prohibited.
Japan was one of the first countries in the world to recognize bitcoin as a currency and issued licenses for the exchange of cryptocurrency to enterprises seeking official classification in accordance with the law. At the same time, Japanese regulators limited their assessment of crypto-conversions exclusively to Bitcoin and are currently not ready to cover other enterprises operating on the blockchain.
Federal Law No. 161 of June 27, 2011 (“On the National Payment System”) defines electronic money. It is noted that it is permissible to perform settlement operations without necessarily opening an account in a bank. Cryptocurrency can’t be an analogue, since it doesn’t have real security in cash. Its usage as a mean of payment also is not defined by law.
Law regulating any actions with cryptocurrency on the territory of Russia may be adopted in the coming days, until the end of June 2019 by the State Duma of the Russian Federation
It may seem that there is more disagreement between regulators and industry experts than unity on how space should evolve. However, this is expected to change in the near future, as blockchain would become an internationally recognized important technology for companies seeking to connect the dots in an increasingly globalizing world.