Blockchain may be the emerging technology that propels commerce into the future, but the concern for many in the community is with one of the institutions the technology is trying to disrupt -- government. In PwC’s recent global blockchain survey, 48 percent of respondents ranked regulatory uncertainty as one of their top three barriers to blockchain adoption.
The irony of blockchain is that its decentralized nature has drawn immense attention from governments and central banks, requiring global coordination to achieve its promise as a universal, cross-border technology. Much like the blockchain market, the regulatory landscape is in a highly experimental phase. This requires innovators to be actively engaged with lawmakers and regulators at all jurisdictional levels.
The landscape is splintered. In the U.S., blockchain is facing increased scrutiny. Congress included blockchain provisions in the National Defense Authorization Act for FY18 (H.R. 2810), which was enacted in December 2017, and the DHS Authorization Act (H.R. 2825), now being considered in the Senate. Specifically, each asks executive agencies to create reports on the military applications for blockchain as well as threats the technology poses to national security. As with any emerging technology, defense hawks are eager to understand how blockchain might play into cyber warfare -- not just the economy of the future. On non-defense issues, the Congressional Blockchain Caucus, established in 2017, has been focused on information gathering from industry and government agencies rather than on actively introducing bills.
Cryptocurrencies, the most prominent application of the technology, have forced federal financial regulators to grapple with fitting them into existing regulatory constructs. Specifically, the anonymity associated with cryptocurrency transactions makes it difficult for law enforcement to tackle issues surrounding anti-money laundering and “Know Your Customer” initiatives. In addition, there has been confusion at the federal level about whether to classify cryptocurrencies as securities, commodities, or currencies for enforcement purposes. Indeed, the booms of cryptocurrency trading have led to market manipulations in Initial Coin Offerings in which unwitting investors are defrauded. These are a source of ongoing concern that will need to be addressed to build trust.
At the state level, the majority of legislatures have introduced bills or enacted laws to formalize blockchain working groups that would provide policy recommendations to lawmakers as its applications evolve in the private and public sectors. However, the intent of these initiatives vary, as some efforts stem from a stance of skepticism and distrust, particularly as cryptocurrencies have enabled illicit transactions. Other perspectives are more optimistic about blockchain’s potential to solve difficult transparency issues. Given that a patchwork regulatory environment could hamper widespread adoption of distributed ledger technologies -- which is critical to blockchain success -- developers and investors should leverage this opportunity to engage in the public conversation.
In the European Union, 24 member countries have co-signed the Declaration on the establishment of the European Blockchain Partnership which aims to support technical and regulatory best practices for blockchain development as part of the EU’s campaign for a Digital Single Market. China’s five-year plan named blockchain as a key pillar for building its edge in the global information technology market. Its Ministry of Industry and Information Technology has already established a National Blockchain Distributed Accounting Technology Standardization Committee to ensure consistency and adoption nationwide. At the municipal level, public funding initiatives are emerging in Beijing, Shanghai, and Shenzhen. The Hangzhou government alone has committed the equivalent of USD $1.6 billion to blockchain startups.
In Southeast Asia, members of the Indian parliament have expressed concerted support for blockchain technology, specifically to securely distribute agricultural subsidies. The southern state of Telangana recently entered a memorandum of understanding with an IT giant in India to develop the country’s first Blockchain District, which would incubate local startups and serve as a testing environment for real-world applications. These, along with Estonia’s Digital Society and central bank pilots in South Korea and Singapore, are highly welcome to boost blockchain adoption.
While countries and regions experiment with policies to regulate blockchain, transnational initiatives are advancing. In March 2018, the G20 Summit included working sessions among central bank representatives to develop global governance frameworks and standards for crypto-assets and digital currencies, which have significant effects on market risk, confidence, and capitalization. Meanwhile, the International Standards Organization (ISO) has chartered technical committees of experts to address issues of interoperability, governance, and security, which would facilitate global adoption and deployment of the technology.
As developers and early adopters try to address the public trust challenge, they will need data use cases to inform the public. Encouraging lawmakers to provide a supportive regulatory environment that balances innovation with oversight would be valuable. The alternative is to move the blockchain business to a jurisdiction where interaction with other business can help demonstrate blockchain’s potential by informing reasonable safeguards. In order to make that strategic determination, business leaders must gather policy intelligence and constructively engage lawmakers and regulators at all levels and across all borders -- municipal, regional, national, and international. A strategic, coordinated effort is the only way to build trust and transparency for a technology meant to enable the same.
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