Blockchain Origin and Practical Application

Rep­re­sen­ta­tives from Dr. Wern­er & Part­ner attend­ed a Sem­i­nar [organ­ised by the Mal­ta Insti­tute of Accoun­tants] deal­ing with the ubiq­ui­tous word we have now all grown accus­tomed to: Blockchain.

Estab­lish­ing trust in Blockchain.

Pre­lim­i­nary dis­cus­sions focused on estab­lish­ing ‘trust’ in the Blockchain tech­nol­o­gy. Keynote speak­ers not­ed that where­as before, trust was placed sole­ly in the Bank­ing sys­tem, post 2009, we are now expe­ri­enc­ing a shift­ing of trust from ‘banks’ to ‘net­works’ and ‘tech­nol­o­gy’.

The whole idea and moti­va­tion why clients should invest in Blockchain per­tains to its unique char­ac­ter­is­tic of a Decen­tralised net­work…. shift­ing an ide­ol­o­gy from a cen­tralised bank­ing tech­nol­o­gy [stored in a cen­tral ledger] to a decen­tralised ledger tech­nol­o­gy [DLT] – eas­i­ly acces­si­ble by hun­dreds [if not mil­lions] of poten­tial users who would approve trans­ac­tions being con­duct­ed.

Blockchain tech­ni­cal­i­ties.

As pre­vi­ous­ly dis­cussed in past arti­cles, cre­at­ing ‘dig­i­tal mon­ey’ might sound tempt­ing and easy, but if cus­tomers gen­uine­ly fear its poten­tial ‘replic­a­ble’ nature, then Blockchain can help alle­vi­ate any fears they might have. After all, the whole idea of imple­ment­ing a DLT is so that all users can effec­tive­ly trace all trans­ac­tions.

More­over, Blockchain tech­nol­o­gy is both per­ma­nent [mean­ing trans­ac­tions can­not be tam­pered with] and immutable [mean­ing that the sys­tem can­not in any way be changed]. Com­plex algo­rithms are need­ed to val­i­date a pro­posed trans­ac­tion and even­tu­al­ly add it to the main ledger. As men­tioned by the speak­ers, Blockchain helps users keep track of a ‘dig­i­tal resource’ to ensure: 1) Sin­gle Own­er­ship 2) No over­spend­ing and also 3) No dou­ble spend­ing.

Hack­ing into Blockchain?

An inevitable con­cern that most clients might have con­cerns ‘hack­ing’ into the Blockchain sys­tem. Can it hypo­thet­i­cal­ly hap­pen? It goes with­out say­ing that: ‘the infra­struc­ture guar­an­tees that no sim­ple tam­per­ing with the data is pos­si­ble’, since the net­work auto­mat­i­cal­ly rejects such changes. The only sig­nif­i­cant [even if imprac­ti­cal] way data may be altered is if a user owns 50%+1 of the net­work [although this is vir­tu­al­ly impos­si­ble]. Smart­con­tracts ‘can’ be tam­pered with only because the bugs pur­pose­ly writ­ten into the sys­tem would be found in a tier ‘above’ the Blockchain and NOT inher­ent with­in the Blockchain tech­nol­o­gy itself. In this con­nec­tion.…

Smart con­tracts & Blockchain.

The future of any prospec­tive agree­ments, smart con­tracts will most def­i­nite­ly rev­o­lu­tionise the way we con­tract and enter into nego­ti­a­tions. Gone will be the days of an inter­me­di­ary [such as notaries], as a com­plex log­ic will help gov­ern the agree­ment. Pro­gram­mers will be able to com­pute code ensur­ing that con­tract breach­es would not be per­mis­si­ble and in some extreme sce­nar­ios, a smart­con­tract can also con­tain a ‘self-destruct’ button…to pro­tect either par­ty accord­ing­ly. Blockchain tech­nol­o­gy pro­vides an archi­tec­ture for a DLT on which we can auto­mate the exe­cu­tion of process­es using smart­con­tracts.

The ques­tion remains: Can a smart con­tract be endowed with legal per­son­al­i­ty? The TAS Bill will hope­ful­ly try to answer that. Specif­i­cal­ly, ref­er­ence will be made to the MFSA’s Finan­cial Instru­ment test [pre­vi­ous­ly dis­cussed in oth­er arti­cles].

Prac­ti­cal Blockchain exam­ples.

Imag­ine the Nation­al Land Reg­istry sys­tem imple­ment­ing Blockchain tech­nol­o­gy – ensur­ing all con­tracts are per­ma­nent­ly stored on the Blockchain. The same can be said for Col­lege Cer­tifi­cates [where users would be able to trav­el freely from one coun­try to anoth­er and sub­mit CVs with­out hav­ing to phys­i­cal­ly prove their com­pe­tences – Blockchain would per­ma­nent­ly store all their infor­ma­tion]. The same tech­nol­o­gy can be imple­ment­ed for Vot­ing sys­tems, Insur­ance and Health­care sys­tems, ICOs and even Media Rights/Royalties [where rights would be ful­ly decen­tralised accord­ing­ly].

Blockchain & Cur­ren­cies

As seen in pre­vi­ous arti­cles, we have not­ed that whilst Dig­i­tal Mon­ey is mon­ey not held through phys­i­cal means [hence the term: E-mon­ey], Vir­tu­al Mon­ey is a dig­i­tal rep­re­sen­ta­tion of a val­ue not issued/governed by any cen­tral author­i­ty and can thus be used as an alter­na­tive to mon­ey. A Cryp­tocur­ren­cy is a dig­i­tal vir­tu­al cur­ren­cy that uses encryp­tion tech­nol­o­gy in its cre­ation to ensure secu­ri­ty of trans­ac­tions.

Vir­tu­al Cur­ren­cy vs FIAT Cur­ren­cy.

Do all Cryp­tocur­ren­cies fit into the def­i­n­i­tion of mon­ey? Mon­ey can be usu­al­ly clas­si­fied as a (a) A medi­um of exchange, (b) Unit of account for pric­ing and © has a store val­ue for sav­ing. For a ‘cur­ren­cy’ to be clas­si­fied as a legal ten­der, all 3 con­di­tions are usu­al­ly required to be sat­is­fied.

Inter­est­ing­ly, men­tion was also made of the CJEU Judg­ment [Skat­tev­er­ket vs David Hedqvist C-264/14] where­by it was seen that ‘Bit­coin trans­ac­tions were those involv­ing legal ten­der, whilst also being clas­si­fied as a ‘means of pay­ment’.

There­fore, not all vir­tu­al cur­ren­cies can be clas­si­fied as legal ten­der although Bit­coin man­aged to sat­is­fy the require­ments accord­ing­ly. Clients must appre­ci­ate that eMoney, on the oth­er hand, is already clas­si­fied as ‘legal ten­der’ – since it is sim­ply an elec­tron­ic store of a FIAT Currency/monetary val­ue on a tech­ni­cal device.

Can a Blockchain be Reg­u­lat­ed?

It might be tra­di­tion­al­ly impos­si­ble to reg­u­late some­thing so ‘decen­tralised’. More­over, at what lev­el should one reg­u­lat­ed the Blockchain? On the supra­na­tion­al, nation­al or even local lev­el? The Mal­ta Dig­i­tal Inno­va­tion Author­i­ty [MDIA] Bill focus­es on inno­v­a­tive tech­nol­o­gy arrange­ments and their uses and will be whol­ly respon­si­ble for cer­ti­fy­ing tech­nol­o­gy arrange­ments with a focus on inno­v­a­tive plat­forms.

There­fore, the idea might be to not even ‘reg­u­late’ Blockchain but specif­i­cal­ly dig­i­tal ‘arrange­ments’ which pri­ma facie might seem eas­i­er to do. The idea of the MDIA is to ulti­mate­ly also har­monise prac­tices and facil­i­tate the adop­tion of min­i­mum stan­dards.

Malta’s Pro­posed Blockchain Reg­u­la­to­ry Land­scape

The ‘Vir­tu­al Finan­cial Assets Bill’/VC Act was undoubt­ed­ly met with mixed reac­tion by the reg­u­la­tors. It goes with­out say­ing that at this moment in time, we are reg­u­lat­ing mere­ly by exclu­sion since no law is cur­rent­ly in force. Nev­er­the­less, the future seems excit­ing and with new leg­is­la­tion around the cor­ner, Blockchain tech­nol­o­gy will cer­tain­ly grow from ‘strength to strength’ on a con­stant basis. Cou­pled with a sound finan­cial ser­vices sys­tem, a boom­ing IT sec­tor and a pro-busi­ness phi­los­o­phy, Mal­ta isn’t nick­named ‘Blockchain Island’ for no rea­son!

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