Blockchains In Real Life: an Overview of the Global Regulatory Climate
Blockchain is often referred to as the next big thing, probably the most promising technology of the near-term future. It is undeniable that distributed ledger technology is sprouting up in an incredible number of industries in some obvious and not-so-obvious implementations. But how are countries and governments worldwide welcoming the change? Are governing bodies even able to create legal frameworks to support the technology? And if so, when?
Blockchain technologies are gaining incredible interest by global entities and governments. The World Economic Forum estimates that the overall share of global GDP tracked, managed, and stored on blockchain will reach 10% in 2027, as compared to the mere 0.025% in 2015!
Governing entities within a country have the power to either suppress emergent technologies, or they may foster, embrace, and incentivize the use of it. Therefore, individual countries hold an incredibly central role in defining the future of distributed ledger technologies on a grand scale. Thus, the introduction of legal frameworks by sovereign nations will ultimately play a decisive role in determining whether mass adoption of blockchain technology will be a coming-soon phenomenon in our daily lives… or not.
There are an increasing number of countries that are in fact taking substantial steps towards the regulated adoption of blockchain technologies, and making a leap forward to embracing the “crypto world”.
In order to provide a practical overview on the topic, this article offers a quick snapshot of the regulatory frameworks of several countries worldwide regarding what concerns their respective legislative agendas towards blockchain.
In this article, we will analyze the approaches pursued in Japan, the United States, Australia and Estonia. The greatest shared concerns relate to the topic of privacy. In other words, transparency and clarity of how data is handled are promoted to address AML (Anti-Money Laundering) and CFT (Combating Financial Terrorism) practices. Then, while crypto exchanges are often required to be registered, not every jurisdiction require that taxes be applied to each and every individual transactions made in cryptocurrencies. Furthermore, it behooves me to mention that mining, interestingly, remains a legal and unregulated activity in all of the aforementioned regions.
Japan has been a well known player in the blockchain environment since the early days. To a certain extent, it could be regarded as a paradise of cryptocurrencies and it is undeniably the most advanced player in East Asia. Japanese were among the first miners, and the country was the first one in the world to introduce the notion of virtual currency as a legal term. Cryptocurrencies were legalized as a means of payment in 2017 and it was home of the biggest cryptocurrency exchange in the world. Even the pseudonym of Satoshi Nakamoto is clearly Japanese-sounding.
On a general level, Japan has been a major player in the technological sector for decade, and this is greatly traceable to the country’s regulatory framework, which enabled and pushed for early adoption of advanced technologies, as well as incentivized for the creation of novel ones.
Quoting from an article from 2018, Coincentral reported that “The country [Japan] experienced enormous growth in their blockchain sector after making BTC legal tender last year. In an effort to lure even more investment capital to the market, the Tokyo Metropolitan Government Accelerator Program started hosting the ‘Block Chain Business Camp Tokyo.’ The program is scheduled to last two months and is aimed at stimulating private innovation in the sector. The goal is to promote blockchain projects that have the potential to improve Tokyo residents’ quality of life. As well as those that will further the economic standing of the city in the blockchain sector.” That project is aimed at accelerating the adoption in Japan of technologies such as blockchain, AI and IoT.
However, openness to disruptive technologies often comes with a risk, and Japan was in the past years also home to one of the biggest cyber attacks in history. This triggered worries toward users security and led the country to enact a number of laws between 2015 and 2019. In June 2015, the country requested any virtual currency exchange to be registered and/or licensed. Starting from 2017, then, Japan put in place regulations with the main purpose of protecting customers and crypto exchanges and addressing AML and CFT issues and enhancing clarity and transparency of trade. Largely due to the latter, in 2018 Japan created a ban on privacy coins such Monero, Dusk, or ZCash.
At the time of writing, many businesses in the United States accept cryptocurrencies as a payment for daily operations. The USA is indeed considered to be the most advanced country in blockchain and cryptocurrency adoption today, as well as the implementation of a supporting regulatory framework. However, due to the federal system adopted by the United States, while digital currency are recognized and legalized throughout the country, laws are not (yet) homogeneous and standard across all states.
Joanna Caytas, a judicial law clerk in the US Court of Appeals, President of the Columbia European Law Association, and one of the most prominent figures in the legal debate centered on the topic of blockchain, pointed out in a paper from 2017 that “key developments for blockchain’s regulation and implementation in an evidentiary context occurred in Arizona (recognition of smart contracts), Vermont (blockchain as evidence), Chicago (real estate records), and, most importantly, Delaware (pending initiative authorizing registration of shares of Delaware companies in blockchain form)”.
Arizona is particularly well-known in the blockchain world for having allowed for the legal recognition of smart contracts in the state in 2017. The same piece of regulation allowed for the recognition of digital signatures and records secured via usage of blockchain technology.
Vermont, by the same token, allowed in 2016 for the recognition of blockchain-based records in court. The American state passed a law in 2018 allowing, in short, limited liability companies to utilize blockchain for matters of corporate governance, coining the term of BBLLCs, or Blockchain-Based Limited Liability Companies.
With respect to the protection of users and the fight against crime, it is relevant to mention one interesting fact. The Federal Trade Commission (FTC) during the past few years opened a new branch addressing the concerns posed by AML and CFT frameworks, called “the Blockchain Working Group,” and the FTC is active even at a federal level. The group is also endorsed with the task of researching new implementations and developments of distributed ledger technologies, as well as brainstorming any potential arising concerns.
With respect to taxation issues, the Internal Revenue Service (IRS) of the United States was given the task of enforcing the disclosure of identity of cryptocurrency users in order to allow crypto-based transactions to be taxed as property transactions.
As the country that invented Google Maps and the home of the WiFi, Australia has supported believed in and supported blockchain technologies since their rise, both with investments in the technology and the creation of a supporting legal framework.
Since as early as 2014, the Australian Securities Exchange (ASX) has supported listing of cryptocurrencies and distributed ledger organizations. In 2016, the country launched its first ICO and the experimentation with distributed ledger technologies intensified substantially. As an example, the Australian government hypothesized ways of trading electricity via this new disruptive technology. The country also devoted substantial funding to the development of the technology: an article on Cryptovest in July 2018 reported that “Australia’s federal government has decided to invest A$2.2 million ($1.6 million) in a blockchain initiative as a way to make its key sugar production more competitive”. Also, Fist Digital Capital (FDC), an Australian management company, recently claimed their goal to raise $30 million to be invested in the technology.
Last but not least, Australia is expected to be fully converting to blockchain by 2020 by replacing the Clearing House Electronic Subregister System with distributed ledger technology infrastructure. The project, which is expected to both allow for cost reduction and enhancement of users options, would be a first timer worldwide. Australia is also under discussion to allow blockchain utilization for government payments.
With its investments and support put into the growth and fostering of the technology, Australia is on a path to becoming globally influential to mass adoption of distributed ledger technology.
The European context has been proven over the years to be a highly conservative environment, privileging the conservation and utilization of legacy technologies over the adoption of emerging ones. With respect to other geographic areas worldwide, the legal framework in Europe is generally not open to the inclusion of new technologies. Legacy systems seem to be “set in stone” and extremely difficult to change. This closeness to change and difficulty to include new practices in different sectors has been the main cause of the incredible delay of European countries to embrace blockchain technologies.
A great outlier in the European context is Estonia, a forerunner of the adoption of blockchain and a leader in the adoption of new technologies to replace or complement legacy systems both in the private and public sectors.
The reason for Estonian’s huge advancement as compared to its neighbors has roots originating about thirty years ago. When Estonia regained its independence from the USSR, the country pushed for the need of rebuilding a network for taxes, public provision points, and another number of social and governmental services. By building a new society from scratch anew, Estonia decided to leverage the growing potential of Information Technology to enhance moderness, speed and efficiency of its national services to citizens, especially in rural areas.
Today, Estonia boasts, among its other numerous technological achievements, the availability of over 90% of its governmental services to be accessible online, integrating blockchain technologies to a number of public services, which include e-voting, online tax returns, digital cabinet meetings, and what is commonly known as “e-residency.”
Interestingly, any world citizen may request an Estonian e-residency card, which allows any holder to set up and run a virtual business in Estonia. It should be pointed out however, that this document does not include Estonian residency and holders shall regularly pay taxes in their respective countries. Despite its still small size of around 45,000 individuals worldwide, the e-residency program has proven to represent a great incentive for the country to spur innovation as an entrepreneurial hub and to attract foreign capital both from within and outside the European Union, which suggests that Estonia has managed to establish itself as a highly technically advanced and quickly growing society.
Another project worth mentioning is the international blockchain-stored Health Registry that Estonia is contributing to build with a number of other partners, with the aim to allow the quick matching of similar cases, or donors and receivers, from a huge number of patients from different countries. All this, being secured and stored on a blockchain or distributed storage, would also allow for complete privacy and security of sensitive patients’ data, by leveraging intrinsic encryption schemes designed for blockchain technology.
Beyond embracing the benefits of adopting distributed ledger technology, Estonia is also well aware of the many risks that come with it. For this reason, the country has been continuously working on increasingly security methodologies to prevent cyber attacks. The same tool that has been developed by the Estonians is currently being used in such organizations as NATO, the US Department of Defence, and the European Union information systems. Once again, the main focus of the project is on granting users’ security and tackling problems arising from AML and CFT topics.
Just a couple of years ago, Estonia was the first country worldwide to hypothesize the launch of an ICO to introduce a state-backed coin to be used as a token and enhance the potential of the Estonian e-network. However, the response of the European Union was immediately negative, and the country is still working on possible options.
Further Examples of Regulatory Approaches
Although the article has been focusing on four examples, many countries worldwide are moving toward adoption of blockchain technology.
Malta, also known in the crypto world as “The Blockchain Island,” enacted in 2018 three laws aimed at fostering the adoption of cryptocurrencies and incentivising the creation of blockchain businesses.
In Spain, “Banco Bilbao Vizcaya Argentaria (BBVA), the second largest bank in Spain by assets and capitalization, became the first global bank to use blockchain technology throughout the entire process of issuing a 75 million euro ($87 million) loan”, as reported by an article in 2018.
Despite its highly contrasting responses to the development of distributed ledger technologies and the adoption of cryptocurrencies in China, an increasing number of cities in the Red Country are currently launching substantial investments toward the support of blockchain developmental ecosystems.
Other countries that could be mentioned as supporters of blockchain adoption are Belarus, Marshall Islands, Eastern Caribbean Islands, Thailand, Vietnam, and more.
A legal framework that supports the research and adoption of new and emerging technologies has been proven over the years to be the among the main determinants of the technological advancement of countries worldwide. By the same token, countries’ openness to emerging technologies is today shaping the rate of adoption of blockchain in the world. Adoption of distributed ledger technologies, in the private and public sector, and both at the business and individual level, is skyrocketing in countries that are more prone to develop a supporting legal framework to regulate blockchain practices and protect the users. It may be argued that the speed at which blockchain mass adoption will happen is highly dependent on the rate at which countries’ governments will open their doors to it.
The international panorama in this respect is highly varied. In fact, not all countries around the world are opening their doors to the adoption of blockchain technology, and some are more afraid of the potential harmful effects of it than by its alleged benefits. Nevertheless, it is true that an increasing number of states and countries are implementing frameworks to embrace and incentivize the use of cryptocurrencies and distributed ledger technologies both at the private and public level.
In general, the group of countries which are on they way to building a supporting a complete legal framework around blockchain technology is working toward this goal with two main objectives in mind. First, these countries aim at regulating the already existing cryptocurrency activity in order to protect users. Second, there is a shared belied that blockchain technology may substantially increase interoperability between and efficiency of both private and public systems, and enhance security. Regulations are designed to increase transparency, grant privacy, and address the possible problems arising from AML (Anti-Money Laundering) and CFT (Combating Financial Terrorism). Finally, the action line that is generally being adopted by countries worldwide includes that, for safety reasons, cryptocurrency exchanges shall be registered. Requirements are not however homogeneous for what concerns taxation of cryptocurrency-based transactions: while in countries like the USA taxes are applied, Switzerland and others consider such transactions as tax exempted. Finally, mining remains a largely legal however unregulated activity.
In conclusion, more and more countries in time are embracing the rise and adoption of blockchain technologies by designing regulatory frameworks that support it. However, the discussion is far from reaching its conclusion, and tools to address concerns arising from cyber attacks and protection of users (not least, in compliance with such bodies of law as the GDPR) are rigorously being researched.
Interview with Chris Polmans, CEO and co-founder of DCG Trips