Research Report | EU Blockchain Observatory: An Overview of the Legal and Regulatory Framework for Blockchains and Smart Contracts

Author: Tom Lyons, Ludovic Courcelas and co-author Ken Timsit

Translation: First.VIP Saline

Source: first class warehouse

Editor's Note: An overview of the original report entitled “The Legal and Regulatory Framework for Blockchains and Smart Contracts”

What is the EU blockchain observatory and forum?

The European Union Blockchain Observatory and Forum was established in 2018 to provide analysis, discussion, and popularization of meaningful recommendations to promote blockchain innovation in European ecosystems.

This article is a summary of the latest paper on the blockchain and smart contract legal and regulatory framework published by the European Union Blockchain Observatory and Forum.

Key points:

· If the blockchain is a catalyst for innovation, employment and economic growth in the EU, as many people hope, one of the key factors is the legal and regulatory framework for blockchains and smart contracts.

However, new paradigms of platforms, applications, protocols, and assets supported by blockchains (not discussed elsewhere) are not necessarily easy to align with existing legal and regulatory specifications.

· But the above paper pointed out that this does not mean that this coordination is impossible.

· The EU is convinced that blockchain technology can play a key role in establishing a single digital market in Europe, thereby driving important market innovations.

• A simple but potentially useful approach for policy makers is to first clearly define what is the blockchain and smart contracts from the European legal level in order to provide the same definition for EU and member state regulators.

· Communicate legal interpretation as widely as possible.

· Choose the right regulatory approach for the immediate problem.

· Coordination of the law and its interpretation.

· Help policy makers deepen their understanding of technology.

• First address high-impact use cases, such as regulatory issues related to digital assets, and provide clear definitions of blockchain and GDPR (General Data Protection Regulations).

• Monitor closely for less mature use case development and encourage self-regulation.

· Use blockchain as a monitoring tool.

Obviously, if we deal with new currencies, new assets, and new organizations, we must deal with new legal issues. But not all issues are clear.

Challenges in the legal and regulatory framework for blockchains and smart contracts:

• The characteristics of blockchain innovation, decentralization, anonymity, immutability, and automation are the root causes of legal and regulatory issues that are difficult to address.

• In a public/de-licensed decentralized blockchain network, it may be difficult to determine the identity, geographic location, and behavior of the network participants.

· This may make it difficult to pursue or determine jurisdiction in the event of a dispute.

• This in turn makes it difficult to perform basic legal and regulatory functions, such as accountability, what laws should be applied under certain circumstances, and enforcement of oversight or rules.

Proposed solution:

· Legal and regulatory “tools” will evolve to accommodate the improved blockchain technology of the authorities.

• The blockchain industry has been developing tools that can assist authorities (and blockchain companies) in implementing regulatory compliance, such as “uncovering the veil of blockchain pseudonyms” and identifying the identity of network participants.

· In addition, the legal and regulatory framework will evolve over time to accommodate the blockchain.

· A number of measures have been taken in the field of digital assets.

• When it comes to general legal issues related to technology, smart contracts, and destructive blockchain use cases, policymakers and regulators have seen significant increases in their understanding of issues, developing solutions, and working with a wide range of communities.

Blockchain technology and law

The following are areas of tension between blockchain technology and the current legal and regulatory framework.

Legal value of blockchain registration

Even if we can mathematically prove that the transaction on the blockchain is valid, knowing who "owns" the data stored in the blockchain book can also prove that the data has not been tampered with, but these cannot represent blockchain-based Trading or ownership registration is legally binding.

Regional

· Most public, licensed blockchain networks (such as Bitcoin) are not rooted in any particular geographic location. This makes it difficult to divide legal responsibilities.

• Each network node may comply with different legal requirements, and there is no “central authority” to manage each distributed ledger, and its nationality may act as an “anchor” for regulation.

· This makes coordination across jurisdictions very important. This in turn requires regulators and legislators to work across borders to coordinate legal and regulatory regimes while managing potential risks including issues such as monopoly and market manipulation.

· Solving these problems requires major legal and organizational changes and a collaborative mechanism to ensure consistency.

• Due to the nature of the blockchain, it is difficult to determine which country or region has been compromised by operations on the blockchain.

• In the field of networking, it may be necessary to use an illegal analysis method to determine which country or region has suffered damage, as can be seen from binding judicial precedents.

Many of the areas of tension stem from the basic characteristics of blockchain protocols, which are based on the decentralized model and are quite different from the more standardized centralization methods.

Executability

· The law can only take effect if it is punished or sanctioned against the offender. To this end, the law must be able to identify the identity of the offender. But as we know, identifying the identity of a network participant on a blockchain platform is not easy.

· The use of pseudonym or full anonymity in the blockchain makes it possible for some people to take the opportunity to use it to create an illegal and criminal area.

· Despite the good ideas, there is still a gap between ideals and reality.

· In the private/enterprise-licensed blockchain, the identity of all participants is identifiable and accountability is easy.

• On the public/de-licensed blockchain, the classification entries in the ledger are immutable and provide evidence of audit trails and illegal conduct.

• Although the identity of both parties to the transaction is not always identifiable at the time of the transaction, many of the parties involved in the transaction can be revealed if there is sufficient time and effort. Therefore, illegal blockchain participants cannot escape punishment.

However, it is undeniable that some privacy-centric blockchains, such as Monroe or Zcash, provide illegal participants with an effective tool to achieve true anonymity. However, it should be noted that the current anonymous transactions are not widely used: Bitcoin and Ethereum are still the most popular platforms, but they do not support anonymity.

· Governments have also tried to prevent the use of anonymous technology in blockchain networks by implementing anti-money laundering laws to regulate gateways between cryptocurrencies and fiat currencies (see next section).

responsibility

• The law includes obligations and prohibitions on specific conduct, and those who do not comply with the law bear the corresponding responsibilities.

• The main purpose of imposing such responsibility is to motivate/guide individual behavior toward the direction the legislator expects. The liability regulations also include compensation functions: their purpose is to provide victims with opportunities and resources for compensation.

· Today, the rules of attribution of responsibilities vary greatly depending on the four aspects of “victims,” “victims,” “causes,” and “what consequences/pain the individual should bear”. The main types of liability in the legal system usually include criminal liability, administrative liability, contractual liability and tort liability.

Core software developer's responsibility

· Core developers provide attractive access points for implementing laws and regulations. Given their role in designing, developing, and maintaining blockchain platforms, they are also an executable target for liability issues.

• For example, should software developers be responsible for the code being used for illegal activities (such as creating and operating illegal transactions)? Are they responsible for the fact that the code does not have the ability to block illegal activities?

· Should they be responsible for creating open source code that supports anonymous?

· But these issues are not new in the blockchain. There are also issues in the Internet domain that define the obligations of various digital domain participants (for example, the distinction between Internet service providers, search engines, application operators, webmasters, and end users).

Data protection

· The EU has long been committed to protecting the rights of its citizens to personal data. In this regard, the latest and most influential work it has done is the General Data Protection Regulation (GDPR), which was fully implemented in 2018.

· Although GDPR is aimed at the significant development of the online world in the past 25 years, it is mainly written for more traditional and more centralized data processing paradigms because it was written before the blockchain emerged.

· This has led many to believe that the relationship between blockchain and GDPR is very tight. For the blockchain industry, this is a problem that needs attention.

Smart contracts and laws

• In the blockchain domain, smart contracts typically refer to computer code stored on a blockchain and allow access by one or more participants. These programs are usually executed automatically and take advantage of blockchain attributes such as tamper resistance and decentralization.

· Obviously, if we are dealing with new currencies, new assets, and new organizations, we have to deal with new legal issues. But not all issues are clear.