Blockchain technology has recently piqued level of interest and speculation as to how it will disrupt the existing centralized systems and enable global transactions in various fields by utilizing distributed ledger system.
Projected uses of Blockchain Technology/ Blockchain Based Solutions in various industries
Banking and Payments : Bitcoin based remittance service are under development.Banking sector is aspiring to make banking more secure, efficient and faster using blockchain.
Supply Chain Management : Blockchain will be used to monitor costs, manforce at every point of the supply chain. Blockchain will also be used to trade status of products by enable tracking from origin to endpoint.
Insurance : Blockchain will integrate actual real-world data with blockchain smart contracts to improve the issues of trust and credibility.
Healthcare : Blockchain will enable healthcare industry to safely store confidential information like medical records and share it with authorized professionals or patients.
Real Estate : Blockchain will remove the dependency on paper based record keeping and help with verifying ownership, tranferring and tracking. These features will help to eliminate the problems of lack of transparency in the industry.
Worldwide Blockchain Technology Market is Anticipated to exhibit a Compound Annual Growth Rate of 58.7% between 2016 and 2024. It is believed to be worth $20 billion by 2024 as per a research conducted by Transparency Market Research (TMR).
Despite a very promising future, blockchain as a technology is questioned for its regulatory status. There are many myths related to blockchain and its components which have created an atmosphere of ambiguity amongst the users.
Myth 1 : “One Blockchain” Concept
Many people are under the impression that the concept of blockchain is like internet i.e one big or parent blockchain exists and everything is connected to it.
In reality, different blockchains are made for different purpose. Blockchain can be public (Bitcoin, Ethereum) which allow open participation, semi open blockchain that allow selective participation (Ripple) and private blockchain that enable limited participation.
Myth 2 : All Blockchains have to be public
The public feature of a blockchain is optional and flexible. It is up to the users if they want to make their blockchain private or public. There is also a way of stacking private blockchain on a public blockchain and authentication is done without revealing private information.
Myth 3 : Blockchain cannot be used in non-financial sectors
Financial sector has adopted blockchain for secure payments and currency transfer. Blockchain is popular in this sector for its tamper resistance and guaranteeing transactional integrity. The security of the overall transaction is guaranteed. There are few skeptics which are unsure about the adaptability and profitability of blockchains in non financial domains. Blockchain can be programmed to record anything and everything of value, financial or otherwise.
Academic institutions can adopt Blockchain to verify the authenticity of academic certificates. Governments can use Blockchain to authenticate voter identity and reduce fraud. Logistics and Automotive industry can streamline the process of shipping, selling and buying using Blockchain. Music industry can be benefitted by protection of intellectual property rights, managing royalties and enabling direct transfer without intermediaries. Hence blockchain is a very versatile technology with diverse applications in many fields.
Different industries are trying to analyse specific uses of Blockchain technology, this massive inclusion of blockchain has increased the need for regulation. There is also a cloud of enigma about legal and just use of blockchain technology. A widespread misconception that blockchain based cryptocurrencies like Bitcoin are only used for black market transactions whereas in reality cryptocurrencies like Bitcoin are just an easier way to exchange assets of value digitally.
Regulatory initiatives are in nascent stages globally however there is a lack of specific regulation. Standards for blockchain regulation are slowly emerging.
Key areas of global regulatory attention with respect to blockchain is centered around :
- Virtual currencies (including tax implications)
- Data encryption
- Identity management (including KYC and FCC)
Tables of position of relevant authorities on virtual currencies and distributed ledgers : Source : Bbva Research by Javier Sebastian Cermeno
Position of policy-making authorities on virtual currencies and distributed ledgers
|European Parliament||EU||Neutral to Positive||Virtual Currencies/ Distributed Ledgers||Hands-off approach to regulating blockchain technology. Creation of a task force to analyse it|
|European Commission||EU||Neutral||Virtual Currencies||Inclusion of virtual currencies players in the AML Directive. DLT workstream inside the Financial Technology Task Force|
|US Senate||USA||Neutral||Virtual Currencies/ Distributed Ledgers||Request to regulators for guidance on these technologies|
|US House of Representatives||USA||Neutral||Virtual Currencies/ Distributed Ledgers||Resolution calling for a national technology innovation policy including digital currencies and blockchain technology|
|US Congress||USA||Positive||Virtual Currencies/ Distributed Ledgers||Creation of a caucus (study group) dedicated to bitcoin and blockchain|
|State Governments||Several US states||Positive||Virtual Currencies/ Distributed Ledgers||New York, North Carolina, Vermont and Delaware have promulgated specific regulations|
Challenges that the regulatory bodies are facing are to provide a conducive environment for innovation along with providing a secure technical space for blockchain enthusiasts.
Concerns associated with Blockchain
1) Cybersecurity Concerns
As at the moment there aren’t any common protocols or standards, users tend to use their individual technology stacks and back office systems. The security of transaction maybe compromised as due to varied level of encryption.
2) Error identification and reporting
The FCA Business Plan for 2016/17 has mentioned in its chapter on the Risk Outlook : “Blockchain technology represents an alternative approach to the safe storage of information of value such as trade execution, clearing and settlement and custody. It can provide for secure, transparent and immediate confirmation of information that can then be distributed to all interested parties without the need for a central record-keeping authority. While this new alternative approach has many advantages, it also presents new challenges related to data privacy, defect corrections, and trust in decentralised financial servicing.”
Despite being very secure blockchain may compound the problem of fraudulent transactions in some cases. If a transaction is fraudulent yet verified, it becomes embedded in the blockchain. At a later stage, even if it is identified as a fraud, it is difficult to identify the source and to separate that particular set of transactions from the rest of the system.
3) Blockchain self regulation
If a blockchain starts malfunctioning, there is no system that would audit and rectify as a secondary line of defence. The absence of an independent auditory mechanism may make the technology more vulnerable to risk of error and fraud.
4) Blockchain adaptation
Blockchain uses distributed ledger technology which will have to be integrated with existing infrastructures. There could be technical challenges involved and absence of common standards would mess up the situation further! ISO and W3C are working on creation of some common regulatory standards to address this problem.
5) Irreversibility of blockchain
Blockchain is immutable i.e transactions cannot be revoked or cancelled or modified. A need of correction mechanism is strongly felt to rectify potential mistakes from governance and technological perspective.
6) Quantum computing threats
Quantum computing is an emerging technology that specifically targets
asymmetric cryptography. Blockchain could be susceptible to such attacks as it relies on public and private keys which are cryptographically generated.
7) Susceptibility towards attacks
It could be a possibility that a malicious program becomes embedded in the blockchain and it is difficult to shut it down owing to the decentralized structure of blockchain.
Despite these “theories” blockchain is arguably the most safest technology at the moment. Technologies in use currently have more severe limitations in terms of scalability, security and tamper proofness.
Blockchain is the technology of choice for many startups. As per a research by Outlier Ventures Research Team in May-June 2016, 200 New Startups added in 6 Weeks.
Here is how international bodies and major geographies are working on regulatory parameters of blockchain to encourage its wider adaptability.
In June 2016, the world bank published an article on “Blockchain technology: Redefining trust for a global, digital economy”. World Economic forum recently prepared a report on “The future of financial infrastructure: An ambitious look at how blockchain can reshape financial services” and mentioned the strong possibility of blockchain to become the “beating heart” of the global economic system.
European Commission has created a new task force to understand blockchain technology and its utility. The aim of this task force is to build expertise in distributed ledger technology by blockchain which would be overseen by European commission itself.
In USA, as the legislation is federal, each state is exploring and taking independent steps towards blockchain. Vermont legislation is on its way to utilize smart contracts for state registries becoming pioneer in the field. In a report published in January 2016 they acknowledged that “blockchain is a reliable way of confirming the party submitting a record to the blockchain, the time and date of its submission, and the contents of the record at the time of submission”.
Countries like France and Japan are harnessing the power of blockchain for their fintech sector. Japan may issue its own cryptocurrency within this year and France is exploring application of blockchain technology in various sectors.
Singapore has established specific legal “sandboxes” which allows blockchain startups to work under a temporary regulatory approval. This system encourages engagement and interaction between regulators and blockchain startups which may help formulate better regulatory provisions.
The question is will blockchain meet the safety prerequisites and be built to a functional and cost effective level?
Technical experts all around the globe are working tirelessly to create network protocols and technology parameters which will allow seamless integration of blockchain with multiple networks securely. As blockchain continues to gain popularity, steadily regulatory bodies are moving towards enforceable regulation for it. However as blockchain and its components do not fit in the traditional enforceability and jurisdiction hence new foundation of law along with amalgamation of technology is the need of the hour.