Legal Regulation of Blockchain
Legal regulation of blockchain. Latest changes and prospects for the development of legislation
Blockchain Technology is a developing technology on which basis new applications in the field of finance appear daily. Regulators of some countries have already reported their intentions to study the use of blockchain technology, which is also called distributed ledger technology (DLT).
The new technology is potentially attractive to the regulators because of the increased level of transaction security and risk reduction of manipulation, but, at the same time, it creates complex legal problems that regulators are trying to understand and resolve. In this article, we will try to make a brief analysis of the approach of regulatory authorities to blockchain technology.
Regulation in the USA
The regulators in the USA are seriously monitoring the development of blockchain and other DLT (as well as cryptocurrency, in circulation on the basis of such registers). Some express concern about their impact on financial stability and market integrity.
At the same time, the US Securities and Exchange Commission (SEC) is actively exploring the potential possibilities of the use of blockchain and other DLT for financial transactions on the securities market.
Another regulator, which also studies how blockchain and other DLT can be used in the derivatives market, is the Commodity Futures Trading Commission (FCTC). The Technical Support Committee of the SEC, back in April 2016, noted that the lack of single standards in the industry is the result of the fact that Blockchain and the remaining DLT are still in their infancy and their implementation will be gradual.
The US Financial Crimes Enforcement Network (FinCEN) is a regulatory organization that publishes administrative regulations and interpreted guidelines for virtual currencies and blockchain. Thus, for example, the FinCEN has issued a guideline according to which online brokerage operations with precious metals conducted with the use of blockchain are the subject of regulation in accordance with the provisions on remittances.
In addition, recently the Office of the Comptroller of the Currency has informed in its semi-annual report on risks that virtual currencies provide anonymity to cybercriminals, including terrorists and other groups of individuals who seek to transfer and launder funds.
Other US government agencies, such as the Federal Trade Regulatory Commission and Bureau for Financial Protection of Consumers, apply coercive measures and issue regular warnings to consumers regarding the risks with bitcoins and virtual currencies in general.
Regulation in the European Union
The European Securities and Market Authority (ESMA), which is the main regulator for all National Securities Commissions in Europe, published a document in June 2016 entitled “Application of Distributed Ledger Technology for securities markets”, which outlined the potential risks and the benefits that DLT may have in the securities markets, especially in the view of public policy.
The UK Financial Services Authority (FSA) is actively involved in the financial and technological part, participating in the development of a regulated financial and technological test operating system. This approach has been mostly used to observe how the technology develops. So, already in April, 2017, FSA published a document “Discussion materials on the issue of distributed ledger technology”, in which it calls for commenting on risks, giving feedbacks on the use and prospects for the development of distributed ledger technology in the financial sector. In this document, the possibility of using DLT is considered in the context of database models of common (joint) use of cryptocurrencies, digital assets trading and primary placement of cryptocurrencies, among other things, regarding how regulation should be applied to the users, based on the continuous development of technology.
Regulation in Ukraine
In Ukraine, the legal regulation of distributed ledger technology has not been conducted yet. At the same time, the head of the National Bank of Ukraine stated that the NBU is not able to recognize cryptocurrency as a currency due to the absence of a central regulator. The head of the National Commission for Securities and Stock Market supported the idea of the head of the NBU and noted that “cryptocurrencies do not have information support and, especially, protection of investors’ rights”.
Prospects for the development of legal regulation of the sphere
It is absolutely clear that regulators will continue to monitor further the development and use of distributed ledger technology in the regulated sphere. Previously, they tried to avoid the regulation of technologies as such and paid more attention to their use and products that could be promoted or developed on a technology platform.
While the market monitors potential regulatory changes, the effective management is key to the successful implementation of DLT to protect participants, investors and stakeholders, while ensuring the sustainability of the system to systemic risks, confidentiality concerns and cyber security threats.
The direction of development of the normative approach is still not clear, but generally the industry should monitor the applications to which blockchain can be applied and avoid products and processes that are illegal or may cause systemic risks. Otherwise, we can expect that strict regulation will limit the future development of technology and the benefits that it can provide.