On 14 November, techUK held an informative and timely discussion on the legal and regulatory issues which may arise from distributed ledger technology. The overall consensus was: ‘it will depend’. Our speakers felt that, as regulation never addresses a technology per se, what rules apply will vary greatly according to use-case. In addition, some rules may have to be modified to encompass DLT.
Rodger Oates, Partner, Tata Consultancy Services introduced and moderated the session, posing the question: how can DLT best be industrialised. He also flagged techUK’s new White Paper, Playing Catch Up: Incorporating Distributed Ledgers into the Technology Stack and Repurposing the Wider Ecosystem. This paper tracks the rise of DLT, charts its current and potential applications and examines the risks for companies when deploying it.
Sue McLean, Partner, Baker Mackenzie covered some of the intricate legal issues and uncertainties surrounding DLT. She noted that the regulatory risks are currently unclear and will depend on the use-cases. She felt no regulation will emerge which deals with DLT as such, but revision of existing legislation to take account of DLT is likely to be required – e.g. on data privacy, jurisdiction, contract, competition, corporate legislation, dispute resolution and consumer protection.
So far, the FCA has taken a firmly technology-neutral stance (see FCA Discussion Paper on distributed ledger technology). However, it is monitoring developments and identifying whether a different regulatory approach may be needed in future.
Sue also mentioned the publication by Cambridge Centre for Alternative Finance (CCAF) of its first Global Blockchain Benchmarking Study. This identifies how regulations are opaque and that current legal and regulatory frameworks, industry standards, governance and security provisions can hinder growth, and hamper interoperability.
Patrick Spens, PwC felt that the most important application for blockchain will be in enabling digital identities, especially for those who are currently stateless and have no official ID (1.5 billion people, according to UN estimates). The UN ID2020 programme aims to rectify this through digital IDs, thus delivering enormous benefits for economic development, health, security and society in general. 193 heads of state have signed up to the programme’s charter. Patrick stressed that existing databases e.g. DVLA remain hugely important and DLT should not be seen as replacing these.
For Patrick, the ultimate goal of digital IDs housed on the blockchain is the possibility this would create for individuals to take back control of their own data. He sees the GDPR, which requires citizens to accept, and allows them to take, individual responsibility for their own identity, as the first step. Digital ID would add to this – but there is still a long way to go.
Lawrence Lundy, Outlier Ventures tackled the controversial area of digital currencies and Initial Coin Offerings (ICOs). Digital companies, especially blockchain and crypto-currencies, are ‘issuing’ coins (or tokens) to investors as a way of raising capital for their own development (850 different tokens were issued in the last year). Such ICOs raise huge issues around fraud, protecting rights for minority shareholders and the circumvention of anti money-laundering regulations. There is also much controversy over whether these tokens are, in essence, exactly the same as securities and should attract the same regulation.
There are arguments on both sides and tokens vary in what kind of value they deliver investors, but Lawrence took the view that they are probably financial instruments; they should be regulated; everyone would know where they stood and fraud could be avoided.
Pamela Taylor, Innovation Link, Ofgem talked about the possibilities of using blockchain in a changing energy sector. The sector was set up for big power stations to operate over centralised networks with energy supplier as intermediaries. But the growth of solar panels and wind farms is creating local hubs which produce their own energy and where peer-to-peer selling is growing. They are likely to also start selling into the national grid. Yet alternative energy hubs will never be wholly self-sufficient and will still rely on the national grid. Smart meters also offer greater scope to simplify cumbersome processes and tariffs. How to manage this changing environment is a challenge for Ofgem, given that the provision of energy is both a commercial activity and a mandated utility. Ofgem is therefore looking at DLT as a way to enable connectivity and mediate trading.Last year Ofgem created its own sandbox, with 100 participants in its first cohort.
Pamela felt that energy was still far behind financial services, but could learn a great deal from it.
Summary and Panel
The Panel session, which followed the individual speakers, reiterated many of these issues and focused on the possible path of regulation to support innovative, safe DLT ecosystems. Variations in regulatory approaches might actually hinder advances in blockchain/DLT. There was consensus that both the industry and regulators should keep a watchful eye, but resist the regulation and - unintended - restriction of technological innovation. It would be better to regulate the desired market outcomes.
Future DLT meetings will continue to focus on and delve into these issues. In 2018, techUK will also organise an event on identity, pursuing and developing many of the themes explored in the session.