The decentralized and transparent nature of blockchain has different benefits but also has some unique legal and regulatory challenges. Many governments are still grappling with issues relating to blockchain. Such problems include the concepts surrounding digital currencies, data privacy, smart contracts, and cybersecurity. We know that there are certain rules put in place to control digital currencies. Some jurisdictions have put in measures such as the requirement to register, know-your-customer (KYC) rules, anti-money laundering, and securities regulations. For many governments, the idea of establishing a balance in allowing for innovation while also ensuring consumer protection is important. This can be supported by the idea that governments are focusing on data privacy. They are mainly concerned with whether data can be removed or modified and how data breaches can be prevented. Additionally, many people are concerned with how blockchain affects the environment. In this case, we are always grappling with the question of whether the impacts blockchain has on the environment can be worth the economic benefits in the long run.
Regulatory and Compliance Issues Related to Blockchain Technology
Even with the legal and regulatory landscape of blockchain technology rapidly evolving, there are still challenges that exist.
The Legal Nature of Blockchain and Shared Distributed Ledgers
Different governments and jurisdictions are always on the lookout for applicable law and liability should something go wrong. Following their meaning, distributed ledger technology (DLT) has no particular area in which it operates. As such, in terms of jurisdiction and applicable law, an issue exists since every node in a blockchain network may be subjected to varying legal requirements. With how the blockchain operates, there is no central authority responsible for every DLT. As such, where it is found, nationality acts as an anchor in terms of regulation. Liability is also a problem since, when things go wrong, for instance, there is a breach of data privacy, there is no single person who may be found responsible for the information contained in them.
The Use of Blockchains as Immutable and Tamper-Proof Nodes
There is a legal framework that requires the recognition of blockchains as immutable, which ensures the veracity of the information contained in them. Therefore, a legal framework is needed when blockchain is used as a unique and trusted source of identity. Before this happens, there should be some standardized regulation on data protection and authenticating the identity of legal persons.
Technology-Neutral Regulatory Regime
Those regimes that draft regulatory licensing and compliance do not do so with the thought of regulating particular technologies. However, they aim their regulations towards the activities that the technology helps facilitate. With neutral drafting, it becomes difficult to establish where and how the regulation should apply. It also becomes difficult to select which participants should be caught. Some regulations need to carefully establish the outlook and the activities relating to blockchain networks and the participants therein. As a result, they need to identify where these platforms and their participants sit within the regulations.
Governance and Legal Documentation
Blockchain has several utilities, making it necessary to document the relationship that exists between the network operator (if any), its participants, and the blockchain network. There is always the need to create a transparent governance model in relation to the interactions among participants in the network. In establishing the model, considerations should be made to set the applicable terms and conditions clearly. Generally, some fair criteria should be used as a way of governing access to the network. The appropriate criteria should also be used to suspend or terminate members from the web. Many have failed in establishing proper legal documentation. This has been a disadvantage tto the legal structures needed when developing a blockchain network.
Decentralized Autonomous Organizations
As the technology highly depends on the jurisdiction, so is the legal status and liability attached to a decentralized autonomous organization (DAO). Most DAOs are run automatically, which means that it may be difficult to establish who is responsible for the DAO if laws are broken or contracts are breached. Most DAOs are not structured as legal entities and instead exist as computer codes. When there is a liability, the extent of responsibility will depend on the different jurisdictions as they take on differing approaches.
Legal Formalities of Digital Contracts
In specific jurisdictions, it may be difficult to duplicate particular types of paper-based legal contracts digitally due to the legal requirements that these types of arrangements have. This consideration is not unique to blockchain but also relates to all digital contracts, including smart contracts. There is also a concern if the signatories to the contract are bound to different laws under their native jurisdictions. Many people are involved in the creation of a smart contract, including the custodian of the contract and the creator of the contract. Based on their locality, the concern remains who would be liable in a situation where a smart contract fails to work as expected.
Final Thoughts
As blockchain technology continues to mature, different regulatory frameworks need to evolve alongside it. As such, it becomes necessary for governments, industry players, and legal experts to collaborate. They must come together to develop comprehensive regulations that foster innovation while safeguarding users against potential risks at the same time. If this dialogue bears fruits, the adaptation of suitable legal structures will eventually unlock the full potential of blockchain technology in a secure and compliant manner.