The blockchain ‘hype cycle’ is likely to burst in 2017 as businesses that have invested heavily in understanding the technology will demand practical applications and returns on investment, says Nerushka Bowan, a technology lawyer at Norton Rose Fulbright.
“The potential uses of blockchain go as far as the imagination can stretch. It’s like the internet in the 1990s – we’re just starting to understand the technology and we can take its principles and apply it to any industry. The real use cases will emerge when the bubble bursts, that’s when we’ll see technology with true business cases and plans for potential widespread adoption,” she said.
But the emergence of new blockchain technologies, particularly in financial services, open up a potential legal minefield as no regulatory framework exists.
“From a regulatory standpoint, it doesn’t make sense to try to adopt rules and standards to just to facilitate use cases. Sometimes, technology moves too fast for the regulators. There are cases, globally, where regulation was drafted without seeing the technology in practice and the law became difficult to implement practically,” Bowan said.
She said regulatory bodies should focus on upskilling their staff to understand the technology, track developments and continuously engage with developers in the industry.
Bowan said that companies making of use the technology must ensure that it complies with their own rules as well as existing state regulations. Should issues arise, she said companies can lobby for changes.
She said companies can also include risk mitigation steps in the development of their products and that such a voluntary forward thinking approach can help mould regulation.
According to Bowan, one such blockchain technology that could benefit from voluntary regulation is digital commodity Bitcoin. She said the public perception that bitcoin is “only being used by criminals”, due to its anonymous nature and lack of regulation is an impediment to its largescale adoption.
“Although regulation would take away from some of its initially appealing characteristics such as anonymity, it will also offer users a layer of protection and it won’t take away from the immediate nature of Bitcoin transactions or its appeal as an investment vehicle. If you want to be a big player, voluntary regulation as a risk mitigation tool is something you need to do, it just makes sense,” she said.
She said that there is some debate in South Africa around whether bitcoin traders or deposit takers require licenses. There is also a grey area when it comes to licensed financial advisors recommending Bitcoin as an investment vehicle.
“Bitcoin operates in an unregulated space, so giving advice on it doesn’t fall foul of the law. But human nature means people are less likely to trust advice on unregulated products,” she said.
From a legal and regulatory perspective, there are also privacy debates concerning the permissioned and permissionless blockchain.
The use of a permissioned blockchain, most likely to be adopted by corporates, may give rise to competition issues and so administrators may have to allow participants to see only certain portions of the database, she said.
She said there are also concerns as to whether the anonymous nature of the permissioned blockchain offers individuals too much privacy while public ledger, which allows all participants to see transactions between wallets, doesn’t offer enough privacy.
Bowan said clients are seeking advice on smart contracts, where some obligations of a contract can be written into the blockchain. She explained that insurers may include weather-related contract obligations into the blockchain such that clients can be paid out almost immediately when objective weather data indicating severe, damaging conditions is processed.
She said that there are also concerns about applying consumer protection laws in machine to machine contracts. A combination of blockchain and the internet of things allows appliances to facilitate their own transactions, such as a washing machine ordering washing powder or booking its own maintenance, without the need for human intervention.