Blockchain: Getting the Governance Right

IFC
IFC
Apr 4 · 3 min read

By Marina Niforos, Gordon Myers, John Salmon

With the bursting of the cryptocurrency bubble, many proclaimed the era of crypto winter and the technology’s imminent demise. But blockchain, the technology underlying cryptocurrency, is regarded far more positively — even by the most ardent crypto-sceptics. What the decline of the hype has also shown is that, for the technology to become useful, it has to solve mundane governance, regulatory, and compliance challenges that some bad actors thought they could simply circumvent.

This is no small task. While blockchain has the potential to deliver enormous benefits to emerging markets and may allow them to leapfrog steps in the traditional development cycle, its full potential, as a “trustless” and truly decentralized platform, is also quite unlike any technology that preceded it.

Blockchain’s decentralized structure poses unprecedented challenges for organizations that want to use it, as well as for the authorities that regulate them and courts that adjudicate them. All of these actors will have to do some serious thinking about the many new legal, governance, and regulatory issues blockchain presents.

Current national and international laws, as well as existing governance, regulatory and compliance regimes, were designed for organizations and businesses with a centralized, singular seat of control and responsibility. Essentially, if there’s a problem, there’s an office or an individual to turn to.

Not so with blockchain.

By design, blockchain hopes to turn this centralized world upside down. Often when blockchain is implemented, there is no central authority or intermediary that takes responsibility for and controls the services or data provided or shared on the distributed ledger.

The very features of blockchain that make it so appealing to development — and give it the potential to re-engineer economic models and enable the creation of markets and products previously unavailable or unprofitable across emerging markets — can also engender real risks and management challenges for users of the technology.

Just a few of the many legal and regulatory challenges posed by blockchain include:

· Jurisdictional problems, as the data held on the different nodes on a blockchain can span multiple locations and countries.

· Cryptocurrency issues, as blockchains often use tokens, which are seeing vastly different treatment by regulators around the world, ranging from a welcoming stance to outright bans.

· Privacy and the protection of data, which is a particularly thorny issue as blockchain technology and its associated governance can make it very difficult for individuals to assert their privacy law rights against holders of data.

There are many other issues that need to be worked out surrounding blockchain, including cyber-attacks, taxation, and data transfer, among others.

So, what’s a regulator to do?

IFC is already mulling these very issues. They’re discussed at length in EM Compass Note 57 Blockchain Governance and Regulation as an Enabler for Market Creation in Emerging Markets, which examines governance and regulation issues surrounding blockchain and Note 63 Blockchain and Associated Legal Issues for Emerging Markets, which looks at associated legal issues for emerging markets that stem from blockchain’s adoption.

Additional applications for blockchain opportunities for private enterprises in emerging markets can be found in this IFC report Blockchain: Opportunities for Private Enterprises in Emerging Markets — Second and Expanded Edition, January 2019.

It’s notable that most early success stories involve permissioned, centralized systems that mesh well with existing governance and regulatory expectations. (Even then, there have been some spectacular governance failures.) Working these issues out in a way that allows for the safe and fair implementation of the technology in its fully decentralized form will require organizations that use blockchain to truly understand the inherent risks, so they can adequately manage and mitigate them. And regulators will need to remain flexible in their approach to the technology and avoid viewing and treating it like something they’re already familiar with.

Most important, perhaps, is that blockchain innovators and regulators will have to fully engage with each other and collaborate to forge the future of the technology so that it benefits all parties — and society as a whole.

Authors

Marina Niforos is the founder of Logos Global Advisors, a strategic advisory firm on strategy and innovation, and Visiting Faculty at the Hautes Etudes Commerciales de Paris (HEC), a French business school. In March 2018, she was appointed to the Blockchain Policy and Framework Conditions Working Group of the EU Blockchain Observatory & Forum. (marina.niforos@logosglobaladvisors.com)

Gordon Myers, Chief Counsel, Legal Department, Technology and Private Equity, IFC, and Co-Chair, Legal and Policy Community, ITS Innovation Lab, World Bank Group.

(gmyers@ifc.org)

John Salmon, Partner, Hogan Lovells International LLP, London, UK.

(john.salmon@hoganlovells.com)

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IFC, a member of the World Bank Group, is the largest global development institution focused on the private sector in emerging markets.