Blockchain Adoption Faces Regulatory Hurdles In The EU

Blockchain Adoption Faces Regulatory Hurdles In The EU

August 13, 2020

Blockchain technology really is a two-sided coin.

On one side, blockchain shows its colossal disruptive power. It is an energy that can, and will, topple the status quo and transform the very fabric of industries such as banking, entertainment, healthcare, energy provision, and many others. Blockchain can do this because it is designed as a disruptive force that is making very significant in-roads in changing the reality of many businesses, and probably society itself.

The other side presents a novel range of issues and challenges for the very same organizations, agencies, and governments that strive to adopt blockchain technology. These challenges stem from the fact that blockchain, by design, represents a decentralized entity that goes directly in opposition to long-established principles and protocols in banking, healthcare, etc. These industries have long enjoyed complete control over how things are done through a single, centralized authority. Consequently, most sets of laws and legal governance principles are designed around the purpose of retaining and perpetuating such grip. Any attempt to deviate from this established norm is perceived as a ‘threat’ to this artificially created imbalance – irrespective of how society at large might think about change, and therefore discouraged with punitive measures.

This piece delves into this particular conundrum, focusing on the hurdles that blockchain faces for its widespread adoption across the European Union (EU).

Unraveling the blockchain paradox: barriers to adoption

In simple terms, a Blockchain is a peer-to-peer (P2P) network of computer nodes that maintain a decentralized database of records. All transactions carried out on the network are broadcast to all nodes that are part of the chain. The nodes then use a consensus mechanism to decide whether or not these transactions are valid. If the nodes agree that a transaction is genuine, a new block is added to the chain. This action is permanent, immutable, and visible to all nodes in the network, which makes tampering virtually impossible.

For the longest time, banking institutions have wielded centralization as a staff of power over all. Central banks use this cloak to maintain the status quo of self-governance. Blockchain defies this state of affairs through decentralization. In a blockchain environment, there is no system core. No central entity orchestrating financial machinations, hidden away from view.

Regulators regard blockchain with a wary eye, yet at the same time, entrepreneurs embrace it as the key to unlock a decentralized – and thus, free – reality, creating a sort of paradox.

Blockchain technology has been getting attention across many different jurisdictions, and the EU is no different. In fact, the EU recently promoted its Blockchain Horizon Prize program, offering a €1M fund for up to five blockchain projects that address social innovation challenges through Distributed Ledger Technology (DLT).

This initiative and others notwithstanding, blockchain adoption at a wide-scale faces several obstacles: multi-jurisdictional nodes, protection of data, and crypto regulations, to name just three.

Multi-jurisdictional nodes

The EU is made up of several countries that, more or less, abide by the rules issued by the European Commission, headquartered in Brussels.

This is an oversimplification of the truth, however, as EU member states still have their own governments and ruling bodies. This creates a fragmentation in the legal framework, which makes suitably unified decisions and regulations very hard to agree upon.

Blockchain bows to no boundaries or geographical borders. Blockchain nodes might span two, three, or fifteen countries, and because of this very multi-geographical spread and the fragmented nature of the European continent, Blockchain faces a significant challenge in terms of its legal framework.

Cross-border financial transactions are nothing new. People use their credit or debit cards in other countries while on holidays, business, trips, etc. But these transactions are channeled through the countries’ central banks, and therefore, monitored and controlled centrally.

Blockchain removes this middle man situation, and therefore transactions are no longer subject to existing laws, so a new governance structure will need to be devised to regulate the flow of transactions.

Protection of data

To say that data is the new black gold is somewhat of an understatement. A series of high profile data breaches in recent years have only highlighted the value placed on personal information.

Privacy, whether on- or offline is a chief concern for most people, and to this end, the EU implemented the General Data Protection Regulation (GDPR) in recent times. GDPR aims to provide a robust framework to protect an individual’s personal information.

GDPR works well, in principle, making companies and agencies accountable for their handling of personal data. But once again, GDPR suffers from the centralization trait that belies many organizational weaknesses.

Blockchain and its handling of personal data have been the subject of hot debate, as the technology’s decentralized nature creates a situation where information might be visible and accessible by all nodes. This goes in direct contravention of GDPR principles. Because of this, data governance is hard to implement. Furthermore, different blockchains based on different protocols work in disparate ways, meaning incompatible or, at best, disjointed data configurations only complicating matters more.

Crypto regulations

Blockchain started off as a somewhat niche technology to power cryptocurrencies, Bitcoin specifically. It now is a much more versatile technology that is slowly becoming part of a greater reality.

Still, few issues provoke as much debate as crypto assets. International reaction ranges from wary skepticism to outright banning cryptocurrencies, and everything and anything in between.

The reason for this knee-jerk reaction derives from the fact explained above. Cryptocurrencies, and by extension, blockchain, represents a radical departure from the long-established canon of governance, and by the set of laws supporting it. Perhaps ironically, there is no national or international consensus as to how to deal with crypto assets.

The chief reasons for crypto wariness are taxation, or lack of it, and the inability to clearly define crypto tokens and other such assets in the context of financial liabilities. Are tokens considered investment assets? Are they just a means to a transaction? Is crypto real wealth? These questions generate no easy answers, and the EU has so far struggled to come up with a definite course of governance as far as crypto assets go.

Dealing with regulatory hurdles

Many fear that these incompatibilities between current regulations and the nature of blockchain will prove fatal for this new technology, but blockchain has already proven to be too valuable to be left behind.

These regulatory hurdles have inspired various blockchain companies in the EU to come up with blockchain solutions that do not tamper with the essence of blockchain, yet abide by current regulations. These companies seek to use these regulations to their advantage, and use them as a powerful tool to create privacy-oriented solutions with the many added benefits of using blockchain technology.

After all, many of the key attributes of blockchain technology go both ways. And if carefully applied with compliance in mind, blockchain technology is set to become an integral part of many enterprises.

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