Blockchain: a tale of two codes

Blockchain technology and distributed ledgers (DLTs) are the next evol­utionary step of decentralised communications systems that also enabled the birth of the internet. The disruptive nature of such technologies is immense. DLTs are constantly being evangelised as the way to get rid of the middle-man, the disintermediation of how we transact, carry out business and transfer information, value and assets to one another.

Blockchain is a technological revolution in the making. But will or should this instigate a regulatory revolution? Is the regulation of intermediaries active in the blockchain space a contradiction in terms when one of the most liberating and powerful concepts behind block­chain is disintermediation itself?

Blockchain is a technological revolution in the making. But will or should this instigate a regulatory revolution? Photo: ShutterstockBlockchain is a technological revolution in the making. But will or should this instigate a regulatory revolution? Photo: Shutterstock

Unfortunately, the consultation paper published by the government, entitled ‘Malta, a leader in DLT regulation’, raises more questions than it offers clear answers.

Technology always finds ways to regulate itself and this generally does not happen through legal statutes but through technical standardisation. The rest is technological neutral legislation. Nobody concocted an Internet Act or a national Internet Authority just because the internet was born. Nevertheless, international technical standards were developed by the industry itself, which effectively regulate how the internet works, through protocols such as TCP/IP, irrespective of what legis­lators of any given country think or want to control.

The regulation of decentralised and borderless architectures like the internet, cloud computing and now blockchain, inevitably raises questions as to if and how you do it and who should do it. Should it be through legal code, as embo­died through laws, or should it be through computer or machine code, embodied through standards and protocols? Additionally, should this regulation emanate from one nation or should it be a collective endeavour, reflecting the borderless nature of the technology and the medium? For certain, the two types of code are not one and the same thing.

It is sad to note that even though Malta is positioning itself as a pioneer or trailblazer through the introduction of a certification framework for DLT platforms and related service providers, Malta does not even have observer status, let alone membership, in the technical committees such as TC307 within the International Organisation for Standardisation (ISO), established specifically to develop industry blockchain standards. Should we work in a vacuum or echo chamber when it comes to this global technology?

The digitisation of business and contractual relationships is not something that started with blockchain, not even the internet. Before the WWW code was released and electronic commerce started to flourish, banks were already transacting electronically, mostly through systems like Electronic Data Interchange (EDI). With the dawn of the internet, international technology neutral legal frameworks, most notably the UNCITRAL Model Law on Electronic Commerce in 1996 and the EU Electronic Commerce Directive in 2000, transposed in Malta by virtue of the eCommerce Act, provided national legislators with a set of internationally acceptable rules aimed at removing legal obstacles and increasing legal predictability for electronic commerce.

Technology always finds ways to regulate itself and this generally does not happen through legal statutes but through technical standardisation

The international legal equivalence of an electronic contract was born through a balancing act that focused on the law, not on the underlying technological architectures. That is technological neutrality. Does a self-executing and self-enforceable smart contract fall outside of these long established definitions on electronic contracts?

According to many authors, smart contracts are already to a large extent covered by UNCITRAL’s model laws but further clarity on certain challenges, such as choice of law and dispute resolution mechanisms when applied to smart contracts, would be welcome.

The fact that the blockchain is not really reinventing any regulatory wheel is further confirmed by the recitals of the new UNCITRAL Model Law on Electronic Transferable Records, adopted in July 2017, and which provides that “the adoption of the principle of technology neutrality allows to accommodate the use of all methods and technologies, including distribu­ted ledgers (blockchain)”.

How will the concepts of technology neutrality, functional equivalence and non-discrimination be embodied in a proposed law regulating ‘technology arrangements’? Since the consultation document was not accompanied with the actual proposed text of the law, it is still early days to pass judgement on that.

Irrespective of whether we really need a Digital Innovation Authority, a home-brewed voluntary certification process for DLT platforms or a new law on smart contracts altogether, specific legal challenges with blockchain and smart contracts still and will continue to abound. Answers to these questions are nowhere in sight.

How do you exercise your right-to-be-forgotten on the blockchain? How can a warrant of prohibitory injunction be enforced in a system which is decentralised and autonomous by nature and where certain nodes might even fall outside the jurisdiction of a particular court?

How will a machine interpret and enforce clauses which are typically humanly subjective in nature, such as a ‘force majeure event’ or the ‘best endeavours’ of the parties?

Who or what is responsible for a decentralised (autonomous) organisation? Should it be recognised through registration with the Legal Persons Register or a Protected Cell Company? Or should we merely apply the ‘nearest person theory’?

What about product liability and consumer protection?

 Can all the answers be found in the three-week consultation period that the government regaled us with?

As postulated by Wright and De Filippi, “regulating [blockchain] architecture can be a treacherous task, and without careful contemplation, runs the risk of undercutting the powerful interconnecti­vity of the internet and tradi­tional notions of free expression”.

Beyond positioning Malta as a natural destination for businesses that operate in the DLT space, our nation’s blockchain strategy should look beyond simple, yet important, economic benefits. More importantly, we should look at how DLT advantages, such as its permanency and incorruptibility, can be put to good use within government itself.

We should seriously explore, for example, how public procurement is transformed and rendered accoun­­table and transparent for all citizens or how the Freedom of Information Act becomes superfluous since all government actions and decisions are open for everyone to see through a click of a button. This may be utopian.

Antonio Ghio is TMT Law Partner at Fenech & Fenech Advocates. He lectures in ICT Law at the University of Malta and specialises in legal aspects of internet security.

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