Blockchain technology is currently disrupting most major industries across the globe. From financial services, supply chain management, and cyber security to online music distribution, cloud computing, and philanthropy, the blockchain is rewriting the status quo in many sectors. The distributed ledger technology that was pioneered by the cryptocurrency bitcoin is also becoming a valuable tool for the public sector as it can be used to record and store digital identities, for electronic voting, and to distribute welfare payments, among several other applications. However, the change that the blockchain will bring in business and in society will also force lawmakers to write new laws that will govern the technology’s innovations.
Five key areas that will require “blockchain laws” in the near future include the use of cryptocurrencies as a payment method, the use of smart contracts, data privacy, property ownership, and anti-money laundering.
The use of cryptocurrencies as a payment method is something that lawmakers and financial regulators have been discussing since bitcoin first hit the mainstream in 2013. Due to the decentralized nature of most digital currencies, central banks and government have no control over these new currencies.
Some countries, such as Japan, are embracing bitcoin and have decided to accept it as a legal payment method. Other countries, such as Bangladesh and Bolivia, have outright banned the use of digital currencies such as bitcoin. However, in the majority of countries, there is little to no legal framework covering the use of digital currencies at this point. In most cases, central banks have only warned against the risks of using virtual currencies without giving any clear guidelines on the matter.
Lawmakers will have to agree on how cryptocurrencies will be classified and how they will be taxed as well as whether it should be considered legal tender or not. And if so, if there will be a type of depositors insurance for digital currencies like there is for fiat currency in most developed economies.
An important role of financial regulators is to prevent acts of money laundering. Through the emergence of digital currencies as well as digital assets that can be bought and sold at a reasonably anonymous level, new laws will need to be created to prevent cryptocurrencies to be used for money laundering purposes. That would most likely mean extending KYC (Know Your Customer) requirements as well as introducing cryptocurrency-specific AML (anti-money laundering) measures for all bitcoin payment processors and exchanges, such as those that the Chinese regulator is planning to introduce in June.
Furthermore, laws will need to be written on how to punish those who use cryptocurrencies for criminal activities and those who aid criminals in the process.
Blockchain-based smart contracts are protocols that create an immutable digitized contract for two or more parties. This enables “what if” scenarios to be coded into agreements, which, for example, can include self-automated payouts in specific scenarios. The most popular smart contract platform is the Ethereum blockchain, on which smart contracts and decentralized apps can be developed on.
However, for smart contracts adoption to take place, they must also become legally binding in the eyes of the law. That means that there must be clear legislation governing smart contracts otherwise smart contracts will not be recognized as bona fide legal contracts and will, therefore, not become usable for industries such as the financial services sector.
Smart contract laws will also have to be agreed upon across borders given today’s globally interconnected business world.
The ownership of property and land is a key driver of wealth for individuals in many developing countries. Property and land ownership disputes are, therefore, also a major issue in these parts of the world. It is not uncommon for governments to repossess privately owned land to make way for corporations or personal gain and in cases where there is little official record of land ownership wealthy individuals often take advantage of the undereducated who have little understanding when it comes to their ownership rights.
This issue, however, could be almost entirely alleviated by implementing blockchain technology to record property and land titles securely. There are already startups, such as Bitland in Ghana, that are working on recording land titles for private individuals to create a solution for this problem.
Having said that, for blockchain-based property and land ownership records to be legally viable, laws need to be created that will accept blockchain records as official.
Blockchain technology is an excellent tool to securely store a large amount of data and only provide access to the data to those with the right access keys. Once recorded the data becomes effectively impossible to destroy or to tamper with due to the immutability of the distributed ledger technology. However, that can cause legal issues which need to be addressed by lawmakers in the future.
Due to the ‘right to be forgotten’ laws, some financial institutions are required by current laws to be in the position to remove data when required to do so by a court. This, however, can become a problem when data is stored on an immutable blockchain as one of the security key features that its data cannot be deleted as it is stored in encrypted blocks. That means that under current laws it is very difficult for some financial services companies to store specific data on blockchains.
While data privacy, overall, will be improved using blockchain technology in many areas of business and for individuals, there also need to be updates in current privacy laws to ensure the technology can flourish while individuals privacies are preserved.
New technology has always developed faster than regulators and lawmakers have been able to keep up with. It is not different in the case of blockchain technology today. For the blockchain to become an integral part of society as well as the business world, the right laws and regulations need to be put into place at a domestic as well as international level for the technology to flourish and its benefits to be felt.