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 (c) 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!
