Bitcoin has raised the question of whether computer code, rather than a central bank, should control the money supply. But is it desirable for society to allow a digital money system which enables its users to operate outside the remit of the law, unlike physical cash which is more regulated.
It is true that at the moment in most jurisdictions around the world the use of bitcoin, and cryptocurrencies in general, is not adequately regulated. As a result, a system seems to have been created that runs in parallel to the traditional fiat currency system. This phenomenon in combination with the specific characteristics of cryptocurrencies such as the anonymity in the transactions, the absence of a central authority and its immutability, creates loopholes in sectors like investment protection, taxation law, database protection as well as criminal law while risks related to anti-money laundering and financing of terrorism also need to be tackled.
At the same time, bitcoin and other cryptocurrencies are so widely used that they have become a reality which could change the way the entire financial market works. Considering the function of law as the means of organised societies to control and regulate the actions of their members we believe that it is crucial for legislators to take action and adapt the appropriate regulatory measures. Issues such as the legal nature of cryptocurrencies and their connection to traditional (fiat) currencies, the legal requirements for the setting up and operation of firms investing or trading in cryptocurrencies, and the protection of investors and investments in this field should be adequately addressed. When this happens, the law should provide the necessary security safeguards so that society can be sure that it is protected from the negative side effects of any unlawful use of virtual currencies. The Government of Malta has consistently shown that it wants to be a leader in this sector and has taken active steps to regulate the industry, in consultation with industry stakeholders. Regulators all over the world are currently playing catch-up, however, credit must be given to both the Maltese Government, the regulator and the private sector for their initiatives in ensuring that Malta is at the forefront of this industry.
Unlike bitcoin, which has been running since 2009, use of blockchain in banking remain largely experimental. One vision is for a single database maintained and accessed by the biggest banks to execute and settle trades. Do you see this becoming reality? What immediate use can you envisage for blockchain technology?
The applications of blockchain technology can be numerous. Although at present the use of blockchain in different industries is indeed at an experimental stage, it can have significant effect in the way the markets function and in the way business is conducted. Based on its characteristics blockchain can provide safety, transparency, efficiency and reduce costs whilst reducing the time required for executing transactions.
The potential benefits of blockchain in the banking sector are undoubtedly appealing and it should come as little surprise that huge amounts of resources are invested by major international organisations. Within the next years we will likely see blockchain implemented in very much the same way as the internet pervaded in the nineties.
In this context and taking for granted the impact which a database unification project for the largest banks may have in terms of cost and labour savings, although the process is very complex and needs to be implemented with the cooperation of specialists of many sectors in order to operate smoothly, sooner or later it will become reality.
Naturally, the investment required is immense as security is of paramount importance. Vulnerabilities have been discovered and exploited in the past and was witnessed on a large scale a few years ago with respect to the Distributed Autonomous Organisation. Whilst not related to the banking industry, this case did show that vulnerability in the programming of a smart contract led a hacker to drain the DAO of its cryptocurrency ‘Ether’.
Nonetheless, in the meantime blockchain can be used by and benefit banks in several ways. In KYC procedures blockchain can provide more efficiency and security with respect to the implementation of Anti-Money Laundering legislation on an international level. It can be used to reduce intermediaries and make international payments and transfer of money less expensive, faster and reduce the paperwork needed for the completion of complex transactions. In addition blockchain and especially smart contracts can have significant benefits in side sectors of the banking business such as insurance and the real estate industries.
One of the most radical ideas for blockchain technology is the notion of digitising law. The industry jargon is “smart contracts” — code on a shared database that automatically executes a contract based on the fulfilment of certain real-world conditions, just as a vending machine obeys rules to provide sweets when money is inserted. But is it desirable, or even possible, that contracts become inescapable chains?
As lawyers, the development of smart contracts is one of the most intriguing aspects of blockchain. To begin with we read with more frequency that the role of a lawyer will diminish as a result of smart contracts or, that contracts as we know them will soon become a thing of the past, so naturally this is an area of interest. I am of the opinion that the term ‘smart contract’ may be a bit misleading and is being given more importance than it deserves, from a legal aspect.
Smart contracts in essence will be capable of executing certain instructions based on the criteria in built into the code. This is nothing new in and of itself and would function no different to an automatic pay-out or purchase of shares on a pre-determined trading price of the stock. With respect to a smart contract, we see something similar in relation to the role of an escrow agent in a sale and purchase. In this case, the escrow function could indeed be deemed to be ‘smart’. However, the smart contract should be viewed as a tool that would work in tandem with a contract, in the more traditional sense of the word.
There are various aspects that need to be given serious thought with respect to smart contracts but one point in particular is related to that aspect of Distributed Ledger Technology which is often touted as one of its biggest advantages, that is, its irreversibility of transactions. However, in reality, we have to contend with amendments to the law, a change of intention by the contracting parties, the possibility of a party to a contract acting without authority, etc. Such scenarios require a rectification as the original instructions are no longer aligned with the law or the contracting parties’ intentions. In such cases, the immutability of smart contracts is something that may become a shortcoming unless tackled adequately.
In the short term I believe that the more straightforward and standardised transactions would be serviced well by smart contracts. This should undoubtedly be to the satisfaction of many and have considerable beneficial effects on the market and society in general. The straightforward execution of contracts based on clear-cut terms and conditions, the avoidance of long-term disputes, the facilitation of business, the reduction of cost and time of transactions and even the elimination of bureaucracy are just some of the benefits which cannot be dismissed.
However, for the more complex transactions, the industry needs more time to mature. Humans will be humans, that is to say, they have opinions and are conditioned by various factors that will lead to divergent views and disagreement on interpretation. As long as this is the case, the legal profession will continue to survive.
Is blockchain suitable for any organisation? And, if so, how should Maltese organisations think about applying it and what would this mean organisationally and culturally?
The consultation document on the establishment of the Malta Digital Innovation Authority and the framework for the Certification of Distributed Ledger Technology Platforms and Related Service Providers; and a Virtual Currency Act is indicative of what a cross-sector revolution we are experiencing. The Government of Malta is anticipating an overlap between various competent authorities in Malta and the proposed Media Digital Innovation Authority. This in itself is a clear indication of how far-reaching the effects of blockchain are going to be. Whilst I am a great proponent of less regulation and greater implementation and avoiding additional layers of bureaucracy I firmly believe that at this stage the proposed “Joint Co-Ordination Board” will be extremely beneficial. The effective cooperation between the proposed Media Digital Innovation Authority and the various competent authorities will be crucial. The key point is that all of us, from our respective sectors pull on the same rope.
Organisations should approach blockchain technology in a very similar manner. The personnel concerned in the various departments need to be made aware of what the technology has to offer and how it would be adopted. Transmission of the correct information is key as all too often technology is associated with requiring less manpower and thus leading to redundancies of current employees, which makes implementing the changes that much harder. Blockchain has several benefits to offer any organisation. Transparency, security and integrity of information, high level of trust and public verifiability constitute a few of the key advantages. In addition, it could also provide cost and time savings. However this does not mean that the use of blockchain makes sense for every single organisation no matter what the specific needs and structure of it are.
Organisations that need to store large amounts of data, particularly when the information is distributed among multiple parties/entities, stand to benefit through the use of blockchain. What would otherwise lead to issues of poor communication or confidentiality could help organisations dealing with supply chain management, banks, healthcare units, insurance companies and real estate agencies streamline their procedures. Even the public sector stands to benefit by the use of blockchain and smart contracts applications.
What is your firm doing to prepare itself and its clients for blockchain and its effects?
Ironically enough we have set up a centralised system at our firm to prepare ourselves for the use of blockchain across the various practices in which we are active. A core team have been familiarising themselves with blockchain and virtual currencies and have begun introducing the concepts to the various departments. Adopting this approach was a conscious decision. Blockchain is a culture change that has the potential to sweep across all sectors of our economy. That means that we all need to familiarise ourselves with the pros and cons of blockchain and how it will integrate into our practice. When we achieve this, it is only then that we can move away from our centralised system that we have adopted. A culture change does not happen overnight, cannot be forced (although it must be given a bit of a nudge) and is not always easily accepted.
Our firm was founded on the principle that we can only provide the best service possible if professionals from both the legal and accountancy profession collaborate. Having this at our core helps us understand that we need to accept other professionals into the fold, in this case IT professionals. Their technical knowhow is crucial.
We are naturally keeping abreast of all the developments going on locally and internationally. It is very satisfying to hear that many industry players are contributing to the various consultation papers that are being issued by the Government and the MFSA. This is crucial to the industry and we are pleased to have contributed to the “Supplementary Conditions applicable to Professional Investor Funds (‘PIFs’) investing in Virtual Currencies (‘VCs’)” and the “Discussion Paper on Initial Coin Offerings, Virtual Currencies and related Service Providers”. We likewise intend to provide our feedback to the Consultation Document issued by the Parliamentary Secretary for Financial Services, Digital Economy and Innovation.