Establishing Trust in Blockchain
In 2009, a seismic shiver ran through the financial sector. The global financial crisis was more than just a practical disaster. On a psychological, philosophical, and ethical level, it exposed crippling uncertainties within the financial arena. Like a weed in the heart of the garden, the roots of this failure ran frighteningly deep.
One of the responses to this has been a shift away from centralised banking and towards technologically driven decentralised networks. Enter Blockchain. Blockchain represents an ideological statement that rejects the central ledger approach, and instead gives power to hundreds of thousands of users, each participating in the transaction approval process. Known as decentralised ledger technology (DLT), Blockchain harnesses technological innovation for financial security, stability, and trust.
Digital money. It sounds at once exciting and daunting. After all, how can trust be established in a digital arena that contains so many intangibles? This is perhaps one of the most interesting aspects of DLT. By enabling all users to be able to effortlessly trace transactions, both responsibility and visibility are enhanced.
Blockchain technology has two primary features. It is both permanent and immutable. What this means is that transactions cannot be tampered with, and the system itself is a stable entity that cannot be altered. Underpinning this are advanced algorithms, and these give rise to important DLT characteristics. Analysts claim that Blockchain enables Single Ownership, no risk of overspending, and no double spending. In other words, it is a digital resource that enhances agency and autonomy.
Hacking into Blockchain?
Hacking is an ever-present concern in the digital landscape, and not only in DLT. Any bank is theoretically at risk. The difference is Blockchain is that the system is designed to reject straightforward tampering. A hypothetical risk is present in the unlikely event that a single user owns 50%+1 of the network. However, this is virtually impossible.
An Achilles Heel?
The only potential weakness in the system therefore exists in the Smart contracts. These are in a separate tier to the DLT technology and are not part of the Blockchain technology itself. Responsibility for protecting smart contracts from infiltration by bugs is therefore a core consideration.
Smart Contracts and Blockchain
Smart contracts are changing the dynamic of the financial world. The era of intermediaries is over, and a future where trust is placed in robust and reliable algorithmic logic has dawned. Programmers will have the power to be able to make contract breaches impossible, and this can be extended to features such as a ‘self-destruct’ device, intended to protect either or both parties.
Questions remain about the status of smart contracts as legal personalities. The forthcoming TAS Bill will aim to address that question in greater detail, and particularly with regards to the MFSA’s Financial Instrument Test. In short, what this means is that the emergent issues are being explored and addressed as a matter or urgency.
Practical Blockchain Examples
Blockchain has multiple practical applications both within the financial sector and beyond. Many of these reflect the growing reliance upon a globalised human experience. For instance, Blockchain can be used to securely store digital information such as educational qualifications, insurance systems, healthcare systems, ICOs, media rights and royalties, and generalised contracts. This means that people can access their documentation wherever they are, regardless of national and geopolitical borders.
By extension, Blockchain can be used for national systems, such as voting. Enabling voting to occur in a secure, digital realm enhances efficiency and, in some turbulent political climates, increases personal security.
Blockchain and Currencies
As has been previously discussed, Virtual Money is in itself a decentralised solution. It is a representation of a value that is not controlled and manipulated by a central authority. As such, it is a plausible, decentralised, alternative.
Considerable attention is being paid to safety and security. In particular, interest is focused upon the power of Cryptocurrencies, such as Bitcoin, which use technological encryption to enhance both visibility and security. There are, inevitably, many intangible questions, particularly relating to philosophical and legal definition.
Virtual Currency vs FIAT Currency
One of the profound questions is whether or not all Cryptocurrencies exist within legal definitions of money. It may sound strange that such a question could exist, but it is nevertheless an important one. E-Money is already classified as legal tender, but the case for Cryptocurrencies can be more opaque.
Currently, money has three core legal characteristics:
- It is a medium of exchange
- It represents a unit of account for pricing, and
- It has store value for saving
In order for a currency to be recognised as legal tender, all three characteristics must be represented.
Putting it to the Test
However, these characteristics are necessarily open to debate in the case of Cryptocurrencies. In the CJEU Judgment [Skatteverket vs David Hedqvist C-264/14] in 2015, Bitcoin transactions were defined as those “involving legal tender, whilst also being classified as a ‘means of payment’”.
This shows that in some circumstances, Cryptocurrencies can satisfy the requirements for classification as legal tender. It is likely that more CJEU judgments will further clarify the situation as cases emerge.
Can Blockchain be Regulated?
A paradoxical question, perhaps, given the crucial characteristic of decentralisation. However, this question in itself reaches into the ethics of regulation, and whether this should occur on a supranational, national, or perhaps even local level.
Currently, the Malta Digital Innovation Authority (MDIA) Bill concentrates on these aspects of innovative and emergent technology, and is wholly responsible for certifying innovative technologies. Importantly, in recognition of the rapidly changing digital landscape, the MIDA recognises the role of digital ‘arrangements’. The aim is to enable harmonization, and also to develop systems that grow in sympathetic tandem with the evolving technology.
Malta’s Proposed Blockchain Regulatory Landscape
Inevitably, the complex situation regarding digital innovation has led to some head scratching in terms of regulation. The Virtual Financial Assets Bill (VC Act) raised as many questions as it did answers. By its very nature, current legislation is operating along the parameters of exclusion. That is, definitions are discussed in terms of what something is not, rather than what it is. This is a necessary temporary situation. Rather than seeking to impose third-party classifications, the legislative system is evolving naturally to meet the unique demands of the innovation. This is a situation that is both exciting and dynamic, with new legislation set to be powerfully liberating.
What is clear is that Blockchain technology is moving from strength to strength. There is a clear demand for it, and the promise of overhauling an antiquated and faulty financial system is a refreshing reassurance after so many years of global financial uncertainty. Combined with a robust financial services system, a vibrant IT sector, and a healthy pro-business philosophy, Malta isn’t nicknamed ‘Blockchain Island’ for no reason!