Regulatory aspects of Blockchain have constituted an important part of the European Blockchain Convention in Barcelona on 29.11.2018. Some questions remained without answer or without international consensus about the answer, such as the tax treatment of STOs, the rules to be applied to STOs on secondary markets, or the issue whether a StableCoin is a virtual currency. At the legal Round Table (Flavio A. Soares, Joey Garcia, Joshua Ashley Klayman, Guenther Dobrauz-Saldapenna, Xavier Gasia, James Muscat Azzopardi) there was a consensus though, to recommend to look carefully at specific regulations for such instruments and to keep in mind :
– in the US to have a look at the Rules at the level of the particular State where the activity takes place, normally the sale of (any kind of ) Token is considered as selling a security, the (now 7 years old!) “Howey” test of the US Supreme Court is applied together with the concept of added value, keeping in mind the very extensive scope of the sphere of competence of US Federal regulations (e.g. if a Token is sold to a US person; actually it has even been judged that US Law applied in a case where the criterion was that a majority of nodes was situated in the US);
– in Europe the variety of state of progress of the National regulations, with some European Countries or Territories (e.g. Malta (with a three-steps test to define STOs), Switzerland, Baltic Republics, Gibraltar) being more advanced than others. The emerging supranational regulations should first be tried in “Sandbox” environments. There is a need for harmonization in Europe, but regulation cannot be efficient if it concerns a technology that has not yet reach a sufficient stage of maturity of development. It was repeatedly advised against performing Token- or Cryptocurrency-related operations in places where the rules are not clear.
Generally the operators should be prepared to be sued by investors where investors are.
The Central Banks (Spain, Switzerland, Lithuania, England) were also present and it was impressive to watch the depth of preparation from in particular the presentation by Michael Kumhof of the Bank of England: the effects of the introduction of Central Bank Digital Currencies (CBDC) on the Monetary Policy being carefully analysed as well as the conditions of the return to a stable steady-state after a transition period. The advantages of CBDCs are the improved ability to stabilize inflation and the business cycle, but it introduces some new risks.
Smaller-scale, but real-world experiments by the Lithuanian Central Bank are the creation of a numismatic Digital Collector Coins, and of a blockchain sandbox platform.
Although cryptocurrencies are not allowed in any financial institution in China, it is expected that China might be the first country to introduce a CBDC because it is currently working on a prototype.
As for the private banking sector, also represented (Triangularity, Trustworks, Everis, DAG, Pheidon, E&S) they are concerned about not being too dependent on a particular platform. The specificity of the banking sector is that at the end of the day they have to lend FIAT money to their customers, and have KYC imperatives. Banks like centralization. The fundamental question is whether or not we want to give power to a central digital platform. For applications where the ecosystem has the willingness to trust a third party, Blockchain might be the right solution. Regulation should first take place in a Sandbox environment for all the aspects that have never been regulated yet. In any case the financial regulations only regulate the use case, not the technology.
The technological challenges of Blockchain will be in the areas on scalability and interoperability.
It is important for blockchain enterprises to start small and to be able to expand at a later stage. Many blockchain projects fail, and according to the Panel on Smart Cities (Renato Lucio de Castro, Dr. Stefan Junestrand, Shawnna M. Hoffman, Lewis Freiberg) indeed the majority of the blockchain projects in the Public Administration do fail because a small group does not always understand the complexity of working with Blockchain in such complex environments as e.g. vehicles with wallets interacting with services of the city, involving privacy and fragmented Digital-ID issues. It is important to be aware of what should go on the blockchain and what should not.
The Panellists “Interchain Mediators” (Manel Medina, Marta Piekarska, Victor Escudero Rubio, Jose Parra Moyano) underlined that the big issue of interoperability is the willingness to cooperate, i.e. to be ready to accept to have someone looking at the inner circles of the Corporation, away from the common practice of striving to lead and have one’s own data protected. There is in programming no concept of interoperability of one language with respect to another (Ethereum, Hyperledger). The Panellists did not agree on whether or not Blockchain will be standardized, but there is a consensus that where the systems interact they need to have some rules, as small changes have massive implications on the outcomes, and some form of governance, as governance is better than forks.
You need to see the code in order to trust it, and it is important to have an independent assessment. The considerations above argue for audit activities that go beyond auditing “just the 20 lines of code of a Smart Contract”, to encompass the framework options, the responsibilities, the content of the conventions, the choice of protocols, and the security aspects (“once you have coded something, it works for a few days but it will be hacked after that”, Victor Escudero Rubio, Cybersecurity Solutions).
As Catalin Sorin Ivan, member of the European Parliament underlined it, Blockchain is not about just making things better, it is about reinventing everything.