Regulating blockchain

INTRODUCTION

MeitY’s strategy report on blockchain consists of India’s vision and objective for promoting blockchain infrastructure. Emphasis being on using blockchain to promote research and development, innovation, digital service delivery to present India as a potential leader in the technology. Although, the deference of the Cryptocurrency Bill leaves things, foggy. The report emphasizes e-governance for citizens, security and regulatory compliance. This in a time when, in one of the GoI’s report, the global blockchain market is valued at $ 3B and is expected to reach $ 39.7B by 2025 at a growth rate of 67.3%.

By now we know, Blockchain is the decentralized secured network which processes public and private transactions, without involving any trusted third party to validate the transaction. It is facilitated on the technology, through developing cryptographic proofs to monitor peer-to-peer, decentralised network and secure transactions between two set of computers. The cryptographic proof is the trustworthy digital network. Essentially, operating as nodes, an individually secured private cryptographic key, transferring information initiated by a user across the system, recording it as a unique cryptographic hash, a ‘virtual block’, which once created cannot be altered. An attempt to change information inside the block, alters the unique cryptographic hash of the virtual block, thereby reseting the entire blockchain. The Digital Ledger Technology (DLT) verifies transactions through a nodal verification process.

Blockchain, your time stamped, verified and unalterable digital ledger.

INDIA’S ADOPTION ROADMAP

Adoption of Blockchain demands, sophisticated laws. North America and Europe have been swifter in adopting the technology, India is preferring a route rather slow.

NASSCOM’s report indicates less than 5% of blockchain projects at the mid and large size service sectors, Banking, financial services, and insurance are venturing into adopting the technology. In the public sector, the government is planning to integrate it for land title registry, vehicle lifecycle management, farm insurance and electronic health record management.

GoI has offered a 5 years horizon to adoption in healthcare, agriculture, education and finance. The idea is to offer a cross-domain application spread on a national level and geographically hinged on shared infrastructure. Relying on startups to come forth, there is an expectation that these will be willing to undergo security audit and assessment and support at the national level at the commencement of this technology.

This vision, demands a change in existing regulations, stronger and synergized laws,  participation of stakeholders to adopt smart contracts and legal sanctity on the admissibility of these in courts.

India has some instances of digital integration through Aadhaar, UPI, tax governance networks like GSTN etc. However, benefits of the technology to a pandemic stricken economy, will require using this technology over supply chains. For eg. eNam, the National Agricultural Market could benefit from audit trail of agricultural production, mitigating the middle-man farmers face. Sophisticated regulations, could result in benefits in the capital markets too, with transfer of securities, payments, reduction in trading cost, eliminating intermediaries.

REGULATORY SOPHISTICATION

Blockchain integration demands, a host of sophisticated laws and India has a few challenges on this count.

  1. Jurisdiction: Nodal connectivity, is the essence of transactions across the world on Blockchain. Absence of trans-national laws restrict this with jurisdictional primacy issues. Decentalised Autonomous Organisation, is a software running on blockchain as per some rules and regulations using smart contracts. However, the DAO mechanism, does not adequately ascertain responsibility and liability of the functionaries. Without territorial jurisdiction and working on  cyberspace, defining of legal obligation of these functionaries is complex and outside the reach of law enforcing bodies.
  2. Dispute Resolution: It is a contestable issue for functionaries to resolve disputes or even approach a legitimate forum. Additionally, poor regulatory and enforcement regime allow programmers and hackers to benefit. This creates more collateral legal issues of  infringement of users privacy, hacking of cryptographic keys of the users, theft, misappropriation, digital robberies etc.  It is a scenario where the willingness to risk exists in isolation from mitigation options.
  3. Data Privacy: Flawed, like all humans, Blockchain too harbours a data security flaw. The distributed ledger, makes each node a custodian of a piece of the  transaction data in the chain. Public blockchains allow users to trace back all transactions in the blockchain which makes for an opportunity for hackers to access transactional records including personal information stored in each block. Public blockchain ledgers are open for enabling regulatory scrutiny, making personal data vulnerable. There is no concrete resolution to this.
  4. Anonymous stakeholders: The nodes of a Blockchain drive this network on ‘consensus mechanism’ carrying out actions through engaging multiple layers of unknown stakeholders, who make it decentralized. Decentralisation is high on authentication matrix but extremely low for identifying and allocating liability. Unknown stakeholders, performing operations increases the risk around malpractices. This compounded with lack of jurisdiction and adequate forums for dispute resolution, stacks the risk, relatively high.

CONCLUSION

Blockchain is, in principle, aimed to building global economic empowerment. It is a hard to reign in technology under a single regime. To benefit, implement and legalise this technology, globally, participation from international trade regulatory bodies like WTO, UNCITRAL etc., may be required. Issues of privacy, security, violation, liability and dispute resolution require harmonisation and macro solutions.

For more on the sector please visit: https://tagbenchassociates.com/category/cryptocurrency/

This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources – InvestIndia and MeitY

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on email
Email

About the Author

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this page

Share on facebook
Share on linkedin
Share on twitter
Share on whatsapp
Share on email