Legal support as a prerequisite in efforts to develop blockchain technology
by Antonis Michaelides*
The hype around bitcoin shone a spotlight on the technology which supports this and similar types of currencies. The much-talked about blockchain technology is expected to play a leading role in the so-called Fourth Industrial Revolution, changing drastically the way that modern societies work at the state and public level as well as at the private level.
Blockchain can transform the way we exchange information and carry out transactions, so that everything is executed without intermediaries, faster and cheaper. It is essentially a series of transaction-related entries in a public, shared, and decentralised digital ledger. Each device on the blockchain network can keep a copy of this ledger. The blocks are created through a verification process called “proof of work”, during which a complicated mathematical problem is resolved through an algorithm. Each new group of entries (block) is connected with previous groups, thereby creating a blockchain.
The great potential of this technology lies in its features, since the public access to blockchain ensures information dissemination as well as security and transparency of transactions. As a result, blockchain has been adopted by a quite significant number of businesses, organisations, and governments around the world, who use it in various services, while their number is expected to increase significantly in the near future.
At the same time, the EU launched a Blockchain Observatory and Forum in the beginning of 2018, with a view to monitor developments and promote blockchain technology, while 26 EU member-states together with Norway signed a Declaration creating the European Blockchain Partnership, committing to cooperate on developing blockchain-based technologies. In October, the European Parliament adopted a resolution on distributed ledger technology (DLT) and blockchain, estimating that it can be a useful tool for companies and organisations, which will ensure legal certainty in various processes of their services.
Malta, as an EU member-state, has already established a regulatory framework for companies active in cryptocurrencies, blockchain, and DLT by enacting three new laws. Apart from this, the Maltese government has created a detailed state strategy on blockchain based on six main pillars, which prove a deep understanding of blockchain technology and its evolution. This strategy entails provisions on the transfer of public registers to blockchain as well as on e-residency, digital identities, and smart governance.
Estonia has since 2016 digitised all its citizens’ data (tax, medical, pharmaceutical etc.) as well as almost all of its public services data, adding them to blockchain. At the same time, the adoption and establishment of e-residency attracted more start-up companies active in cryptocurrencies than in any other European country, since ICOs (Initial Coin Offerings) are now being launched only by persons whose backgrounds have been checked and approved by the Estonian government and police, and have been rated as “trusted ICOs”. This gives a sense of security and trust to potential investors towards the persons who launch ICOs.
On a broader scale, Singapore has been the first Asian country who introduced blockchain to the aviation industry, allowing all interested parties (cabin and ground crews, airport employees, and passengers) to gain access to the continuously updated airport system on arrivals, departures, and delays. In this way, it managed to reduce the risk of contradicting information that users can find online by airlines and/or at the airport website. Singapore airlines have also restructured recently their clients’ payment and reward system by adopting blockchain. Singapore’s Ngee Ann Polytechnic (NP), a higher education institution, has also introduced blockchain to its educational system, as a way of verifying the authenticity of its diploma certificates. By using the blockchain-based student IDs, potential employers are able to retrieve important academic information about the students and their educational background. There are also evident administrative and financial benefits from blockchain adoption, since by using blockchain-based student IDs, universities can retrieve original certificates of their students on their own, thereby reducing the possibility of certificate forgery by the students.
Blockchain can also be used by the land registry department for the registration of property rights, reducing significantly bureaucracy and the possibility of human error, since by registering and validating a title deed through blockchain, title owners can be sure of the accuracy and permanency of their titles. Blockchain ensures that they will never experience what the citizens of Haiti experienced during the deadly earthquake of 2010, when a large amount of state and citizens’ data, documents, and information were destroyed and citizens were left without title deeds. The UK, Georgia, Sweden, and Ukraine have already started working towards this direction. Blockchain is also a useful tool in electoral processes, preventing potential electoral fraud and/or manipulation of results, thereby restoring public confidence in the electoral system. After adding the votes to blockchain, there is no possibility of any kind of manipulation, as this was evidenced in the mid-term elections of 2018 in West Virginia, USA, where this technology was used.
However, as with all kinds of technologies and innovations, blockchain is not a panacea, since it may be risky in many ways and has several disadvantages. The verification process before adding an activity to blockchain requires a huge amount of energy. Another significant disadvantage is that it can be used for illegal transactions and activities, as was the case with “Silk Road” in the USA, an online platform on the “dark web”, where users were carrying out illegal bitcoin transactions and could not be traced. As a result, US regulations today prevent users active in cryptocurrencies from remaining completely anonymous, obliging such online platform owners to collect clients’ information while registering, validate their identity, and confirm that their names are not included in any terrorist group list. Additionally, although this technology is safer and can reduce drastically the possibility of human error and/or information manipulation, the complete exclusion of human intervention will undoubtedly bring about several negative results in both society and economy, which need no further elaboration here.
Without a doubt, blockchain is a new and continuously evolving technology under evaluation, which is not yet sufficiently regulated. As a result, citizens who use blockchain technology usually act outside the law, while others even avoid using it, fearing possible violations of the law. Therefore, the establishment of a progressive and proactive legislation on blockchain will enhance citizens’ confidence in this technology and make it safer and attractive to more people. At a time when citizens’ direct involvement in public service activities through digitisation is becoming more and more common as well as necessary, and when public dissatisfaction with data manipulation and/or hacking is increasing, blockchain is viewed as a necessary evolution in their daily interaction. Of course, any such effort requires full respect for personal data protection, especially in EU countries, where detailed legislations imposing extremely high fines have been established on this issue.
Cyprus, following the above examples and on the basis of a more modern and progressive understanding of global developments, far from practices and ideologies of the past, can also play a leading role in the regulation of certain aspects of blockchain, establishing a framework that the regulatory authorities and users can trust. A regulatory framework based on a sufficient and effective legislation can make Cyprus an attractive destination for investment and the establishment of companies using blockchain. More specifically, the adoption of blockchain technology can contribute positively to different aspects of the society, including economy, education, and health, provided that blockchain legislation will be established and the existing legislation will be updated, to ensure that blockchain technology will not be used for illegal activities. However, such an initiative requires legal advisors specialised in such issues as well as experienced Information Technology professionals, to ensure that legislators sufficiently understand blockchain technology, in order to guide and protect citizens through such legislation.
As this was analysed above and is evidenced by the aforementioned examples, Cyprus is yet in the early stage of blockchain understanding and, even more, of blockchain use. Nevertheless, the adoption of this technology and the establishment of sufficient legislation on several areas of interpersonal relations and everyday life will soon be a necessity instead of a choice. The adoption of innovative and technologically advanced services and applications, as well as of legislation governing such issues, will be the only way for Cyprus to remain a possible destination for such investments in a rapidly developing and chaotic world, which constantly offers new options.
*Advocate at Clerides, Anastassiou, Neophytou LLC