Can blockchain regulation keep up with innovation?

2017 has been an year where significant progress has been made in the direction of enterprise blockchain adoption. This has been made possible through concerted innovation efforts of enterprises and IT vendors. There are more than a 120 enterprise blockchain use cases, that are in various stages of their lifeycles. However, what’s not catching-up is the blockchain regulation – a framework to define the rules for the various enterprise applications. This delay can hurt blockchain ecosystem in multiple ways:

• Several large enterprises in various industries are still sitting on the side-lines, waiting for the rules of the game to be defined.
• Even for the enterprises that are experimenting with the technology, it might be difficult to implement it on a meaningful scale unless they are clear about the regulatory framework.
• Unregulated use of the technology by unethical and anti-social organizations, can cause serious economic and social damage to enterprises, consumers, and the governments.

BFSI is where the action is

The BFSI sector currently leads in terms of strategic and technological investments in blockchain. Therefore, the regulators in this sector have also become active and are closely monitoring the progress.

• In United States regulators like SEC, CFTC (The commodity futures trading commission) and FinCEN (The financial crimes enforcement network) are actively studying and monitoring this technology.
• Bank of England has also acknowledged the usefulness of this technology and is testing it for a couple of applications.
• In Canada and Cambodia, central banks are actively involved with financial institutions and technology companies to successfully implement blockchain technology for different applications.
• In India and China, the central banks are embracing this technology and are contemplating ideas of using the technology for digital currencies.

There are also other sectors such as healthcare, food supply chains, and identity management, where regulators and governments are showing keen interest to understand the technology and its impact.

Challenges for the Regulators

Conflicting characteristics: Many characteristics of blockchain, such as transparency, security and immutability, should attract the regulators. However, these same characteristics are not compatible with the current regulatory set-up, and conflict with many regulations such as data protection and right to be forgotten.

Evolving Technology: The technology is still in development stage and there is lack of clear understanding of its impact on various industries and current the regulatory frameworks. With many companies conducting different pilots and proof of concepts there is a possibility that current regulations need to be amended or additional regulation to be introduced.

Public Blockchains: While it is still possible to draft regulation for a private network as number of parties are limited. However, in case of public blockchains it would be difficult to apply jurisdictional laws due to its nature of free access and international distribution.

The way forward

Regulators need to start by acknowledging the aspects of the new technology which can positively impact existing industry dynamics. Next, they need to define a roadmap for creating a regulatory framework. Finally, they should highlight the aspects of blockchain which are difficult to regulate. This would allow other stakeholders to apply their knowledge and innovation efforts towards these ‘tricky aspects’. We are sure, these steps will enthuse the enterprises and IT vendors and will expedite the process of rolling our the blockchain regulation, for various industries.