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Cryptocurrencies first made their appearance on the Internet and in the global financial markets during the global financial crisis of 2008. Cryptocurrencies have virtual monetary value and rely on peer-to-peer cryptographic technology for the validation of transfers. The value of cryptocurrencies is created by users, and financial exchanges are decentralized using an open source software that can be installed on any computer. The most well-known cryptocurrencies are the Bitcoin and the Ethereum, although the world currently knows more than 1,600 virtual currencies.
Bitcoin and the Imperatives of Regulation
The pseudonymous Satoshi Nakamoto invented the Bitcoin with a vision to create a currency that can by-pass banks and other financial intermediaries. Bypassing traditionally trusted third parties raises various technical, macro, and micro-economic risks, such as threats for consumers that are not familiar with the risks of volatility of cryptoassets, possibilities for cyberattacks, potential monetary and financial instability for some national economies, and latent loss of social trust in money. Moreover, there have been instances where cryptocurrencies have been used for illicit or tax avoidance purposes. This has spearheaded a regulatory reaction from many governments all around the world.
Governments around the world have adopted one of two types of responses to the risks posed by the introduction of Bitcoin. The first response involves banning certain uses of cryptocurrencies by prohibiting banks from using them. In the State of Qatar, the Governor of Qatar Central Bank HE Sheikh Abdullah bin Saud Al Thani has requested banks through circular number 6/2018 of 7-2-2018 not to transact in Bitcoin. The circular may be broadly interpreted to also cover other cryptocurrencies beyond the Bitcoin. An alternative response can be seen in countries that have adopted softer approaches such as issuing warnings addressed to consumers dealing in cryptocurrencies, subjecting cryptocurrencies to other regulatory regimes (including anti-money laundering legislation), or imposing taxes on the use of cryptocurrencies.
On the other side, several other countries, including the United Kingdom and Australia, have started elaborating laws and regulations to promote the development and use of the underlying technology serving cryptocurrencies: the blockchain technology. A blockchain is a secure sequence (a “chain”) of blocks that can record transactions among parties in a protected and permanent way using Distributed Ledger Technology (DLT). Blockchain technology offers a secure way to digitize ledgers and allow for their decentralized management. The two most common interventions that regulators have used to facilitate the development of the relevant technology are Innovation Hubs and Regulatory Sandboxes, both of which allow for certain deviations from the mainstream financial regulatory requirements for FinTech companies.
Blockchain: Beyond Cryptocurrencies and the Resultant Constraints
The blockchain technology’s uses go beyond supporting cryptocurrencies, since it makes possible many new applications with a potentially disruptive impact on social life. Some of these include smart contracts, managing registers of assets, and the operation of autonomous agents such as driverless cars. Some countries like Estonia are already basing core governmental operations on the blockchain technology. Even if Bitcoin fails as a currency, some predict that the platform and relevant technology will stay to facilitate digital transactions of conventional currencies. In other parts of the world, the central banks of Sweden and China have been thinking of ways to develop Central Bank Digital Currencies, namely digital fiat currencies with a legal tender status.
Yet, blockchain technology is also subject to certain legal constraints. Data protection laws are nowadays on the rise in many jurisdictions. Qatar became the first member state of the Gulf Cooperation Council to adopt a general data protection law. Law No. 13 of 2016 Concerning Privacy and Protection of Personal Data ensures broad and comprehensive safeguarding of digital rights pertaining to data subjects in the State of Qatar. The inspiration for many newer legislative efforts globally has been the General Data Protection Regulation (GDPR) of the European Union, which protects a series of new digital rights such as the right to data minimization, the right to withdraw consent of data processing, as well as very famously the “right to be forgotten.”
The GDPR has also extraterritorial application, applying under certain conditions even to companies outside of the European Union. While such legislative efforts include very important advances with respect to the right to privacy and data protection, they also pose challenges when it comes to the development and the wide usage of novel technologies such as the blockchain technology, and the legal treatment of the data on the blockchain. Most data protection laws have been developed for the protection of individuals from centralized collection, storage and processing of data by big companies such as companies managing search engines. Data protection regimes are thus difficult to reconcile with decentralized digital ledgers. Their strict application may mean that the blockchain technology may be considered as illegal for data protection purposes.
Regulating Without Inhibiting Innovation
The big question governments will face over the next years will be to find ways to protect national economies and their citizens, without stifling the wave of technological development and innovation that is coming our way. One way to achieve this may be by intervening into the intermediary markets that have started being developed surrounding cryptocurrencies and the blockchain technology. Another way may be to create separate legislative instruments specifically for the new technologies, such as a law specifically on the blockchain, as an example.
Reconciling individual and social protection, on the one side, with innovation, on the other, is one of the greatest challenges of our times for government.
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