Comments | Deng Jianpeng: Legal supervision of blockchain must keep up

Source: Legal Daily, November 6th, "Sound"

Author: Central University of Finance and Law Professor Deng Jianpeng

A blockchain is a chained database that combines data blocks in a chronological order, and cryptographically guarantees a non-tamperable and unforgeable distributed ledger. The characteristics of the blockchain are compared with each other. For example, every time a villager’s village trades, the villager broadcasts the transaction information to all the villagers. After verification by the villagers, the information is recorded in their respective books. This is recorded in chronological order. The chain that comes down is the blockchain. The blockchain can be traced back, extremely difficult to tamper with, and has a high degree of credibility. Therefore, the blockchain has high application value in the field of lack of credit, such as digital asset transfer, data confirmation, bills, securities, deposit certificate or anti-counterfeiting traceability.

At present, the application based on blockchain technology can be divided into three types of scenarios, one is the value transfer class, such as the creation of virtual currency and its transfer between different accounts; the second is the certificate-based identification class, which records information to the zone. On the blockchain, such as electronic contracts and copyright claims; third is the authorization management class, such as using smart contracts to control data access. In addition, as application requirements continue to escalate, there are multiple types of fused scenarios. Because the blockchain has the characteristics of point-to-point, no borders, no sovereignty, and no specific legal responsibility to bear the main body, it brings great risks and brings many risks. At present, the application of blockchain in the financial related field is the most concentrated, and the legal risk involved in the blockchain also occurs mainly in this respect (in other areas, the blockchain is more used as a neutral technology to improve economic efficiency). The current legal risks involved are relatively limited).

The first is the legal risks associated with Bitcoin. Bitcoin is the first mature, large-scale application of the blockchain, with a market capitalization of around $160 billion. In the departmental regulations issued by Chinese financial regulators, the connotation or extension of the virtual currency represented by bitcoin has no explicit provisions or explanations, and there are loopholes and gaps in legislation. First, in specific judicial practice, bitcoin is a legal property or a computer information, and the court's determination is different. Judicial judgments cannot play a guiding role, and even behaviors such as the same case are different. Second, the bitcoin market price is difficult to identify. At present, there is no legally existing virtual currency trading platform in China, and there is no reasonable price reference. The price fluctuation of Bitcoin is fierce. It is difficult for law enforcement and judicial personnel to issue authoritative judgments on the price of Bitcoin in question. It is prone to deviations in conviction and sentencing due to difficulties in determining the price of Bitcoin, which is detrimental to judicial authority. Third, there are difficulties in jurisdiction and law enforcement. Bitcoin, a token-based asset, is different from traditional account-like assets such as bank deposits. Bitcoin can be sent peer-to-peer, easily evading financial regulation in a single sovereign state. In recent years, illegal trading of dark nets has gradually used bitcoin as a means of payment; some criminal suspects use bitcoin as a tool for money laundering. Due to the quasi-anonymity of Bitcoin, it is more difficult to monitor and track illegal crimes. For the cross-border network crimes involving bitcoin, its jurisdiction is subject to further clarification.

Followed by the legal risks associated with ICO. ICO English is called "Initial Coin Offering", which means that the first token is publicly sold. ICO is a way for blockchain startups to issue initial digital tokens for project financing, and is also an important application of blockchain technology in the field of crowdfunding financing. Although since September 2017, ICO financing has been completely banned in China. However, because ICO is difficult to obtain comprehensive and effective supervision, there are many illegal and criminal acts of black-box operation and even pyramid schemes. A large number of overseas ICO project parties exaggerated their opinions, and even completely misfigured the project prospects, defrauding the property of Chinese citizens and suspected of raising funds for fraud.

Third, the legal risks of the blockchain in the non-financial sector will gradually emerge in the future and need to be prepared. The Internet can solve the problem of information transmission, but it cannot solve the problem of physical delivery and physical verification. It is not easy to rely on the blockchain to solve the tracking, anti-counterfeiting and quality assurance in the process of transmission or delivery of various credentials. For example, the current judicial chain deposit through the blockchain, the judicial interpretation issued by the Supreme People's Court in 2018 has already recognized this. However, the judicial deposit based on the blockchain can only ensure the authenticity of the information in the digital world, and it is difficult to ensure the authenticity and accuracy of the information outside the chain at the source and in the blockchain. Therefore, for the blockchain of judicial deposit, the relevant institutions need to certify and strictly examine the nodes of the access blockchain to ensure the reputation of the information source in advance.

Similarly, in the future, when various equity certificates (such as real estate licenses) are put on the chain, and the blockchain is applied to anti-counterfeiting traceability, how to ensure that these uplink information is authentic at the source? This requires the law to regulate in advance. Otherwise, if the negative consequences, such as the equity certificate of the chain transaction, are forged in advance, the loss will be difficult to recover or a very high price. In this regard, it is necessary to formulate corresponding specifications and set basic standards for nodes accessing the blockchain.

Finally, the growing popularity of smart contracts based on blockchain is generating new legal risks. For example, if the subject matter of the smart contract is prohibited by laws and regulations, how can the writer of the code be legally bound? If the civil subject of the smart contract is reached, if the person who does not have full civil capacity can see whether the smart contract is visible Is it a civil contract? Is this contract legally effective? In this regard, future legislation is needed to further clarify. In addition, some personal behavior data or privacy (such as medical information) is on the chain. In order to prevent personal privacy, it is necessary to have complete standards or rules in advance to set the information encryption and authorization prevention mechanism in the personal chain.

In short, the blockchain field requires the state to provide regulatory supervision and even legislation to promote the safe and orderly development of the blockchain industry. First, it would be very difficult to rely solely on a country to regulate under such a ban. For this reason, it is recommended that regulators strengthen international cooperation and strengthen international supervision. In particular, it cooperates with regions with developed virtual currency markets such as the United States, Western Europe, Japan and South Korea.

Second, carry out ICO supervision sandbox park pilot to reduce ICO risk. Regulators can encourage some local governments to carry out ICO supervision sandbox gardens, through local related professional agencies for filing, review and sandbox testing.

Third, promote industry self-discipline to make up for the lack of legislation. The incompleteness of the rule of law is the new normal in the transition era. The development of the blockchain industry is changing with each passing day. The legal risk of the blockchain in specific application areas is difficult for legislation to keep up with the development of the industry. One-by-one legislation is not a perfect solution. The author believes that the regulatory agencies can promote self-discipline in the industry, and the self-regulatory organizations of the industry should formulate self-discipline regulations, industry standards, and internal guidelines for the industry to make up for the inherent lack of legislation.

Finally, promote the integration of blockchain technology and regulatory technology. Blockchain poses challenges to legislation and regulation, requiring regulators and legislators to transform their thinking. Law and contract terms can be translated into simple and deterministic code-based rules with blockchain technology and smart contracts, which are automatically executed by the underlying blockchain network. In the future, technical rules will increasingly assume the same role and function as legal rules. The government can use code to convert some of the laws into technical rules, which are implemented by the underlying technical framework, thereby reducing the need for supervision and ongoing execution, reducing compliance and enforcement costs, and reducing the inherent uncertainty of legal texts. At present, the blockchain technology is still far from mature. Regulators can shape new rules and influence code rules through different forms. Finally, through the automatic operation of the program, some internal management of the blockchain can be realized to save regulatory resources.