Blockchain was first introduced in October 2008 through the white paper released by “Satoshi Nakamoto”, describing how a virtual currency (Bitcoin) could potentially work. Blockchain by design is a decentralised technology, where information held on its network reconciled to the database regularly. The blockchain database isn’t stored in any single location. Instead, it is spread across nodes on the blockchain network.
Similar to a peer-to-peer network, transactions are broadcast, and the database hosted by a network of computers accessible to the public with no centralised storage, making it impossible for hackers to manipulate. Blockchain technology is unique in the way that it brings together existing technology of peer-to-peer networking, cryptography, along with game theory (providing rewards through competition) to establish a secure medium where functions can take place without a centralised entity.
How does it work?
Information is cryptographically signed and timestamped to ensure that transactions are one-of-a-kind to prevent manipulation from taking place. A network of computers is tasked to compete to sign and timestamp every batch of information to avoid a designated party in doing so (which would centralise the network). In order to incentivise these computers (miners) to decrypt codes and add the latest batch of information on the network, the network is programmed to reward miners with newly minted crypto assets (bitcoins, ethereum, etc), plus the transaction fees denominated in similar crypto assets paid by the senders.
The network is transparent and open, and anyone can join as miners to decrypt code in exchange for crypto assets and information moving across the network to traceable publicly.
Decentralisation shifts power to the masses
Decentralisation allows the transfer of powers from institutions to the masses, adopting a bottom-up approach, through collective work on the grassroots level building their own blockchain protocol. This school of thought is particularly attractive to the masses as we’re living through the era of backlash against the authority. Trust in governments, businesses, and media are at an all-time low — an environment in which blockchain fits nicely into the picture.
Empowering people to regain control of activities that were once controlled by centralised entity explains the global movement of the technology. Imagine that Google is not in control of its search algorithm, Federal reserves no longer have a say in the supply of money circulating within the economy or Amazon is losing control over its e-commerce platform. These scenarios seem rather radical, but blockchain technology allows for such potential, but it is nowhere near maturation for such disruption to take place.
As much as I’m a proponent of blockchain technology, there are still huge risks and uncertainties of its long-term impact. The lack of sound policies to regulate the technology brings about instability which hinders mass adoption. In an environment where trust towards the government is at an all-time low, regulating blockchain is seen as the big brother trying to intervene in the very technology that is capable of transferring authority to the community. Contrary to this belief. Adequate regulation is necessary, as stability is key to mass adoption.
Regulating blockchain technology
Democratising a function brings about added uncertainty where anyone can be their own advocate and induce change within a network, which brings about conflict of interests and inconsistency. Decentralisation appeals to the masses — it possesses risks that need to be addressed if blockchain were to scale mainstream.
A simplified analogy can be drawn from the comparison of US political model and China’s political model. The US being democratic (decentralised) vs China (centralised), both systems differ in nature yet functional in their own right.
This is definitely not a like-for-like comparison with democracy and decentralisation. The essence of the comparison is to illustrate a top-down approach (centralised) and a bottom-up approach (decentralised). There are multiple layers to a system, democracy starts from the bottom and being funneled through the system, where voters are to vote with rules already implemented on who they can vote for, what can they vote for, and under what circumstances can a referendum be called.
Likewise in blockchain, protocols are being written as part of the formation to a blockchain where “miners” are expected to adhere to these protocols (a fork may happen, but that’s a whole new issue to talk about).
However the current situation is, protocols (rules) are written by the community (unregulated) and what regulators could potentially do is to provide rules or guidance on what deem to be a legitimate protocol. Ensure that protocols do not provide an unfair or unethical advantage to the wider community adopting it. The invention of blockchain brings us on the verge of moving from a centralised system to a decentralised system. In recent times, we’ve come to appreciate the flaws in a democratic system. If we were to go down the path of decentralising applications in our daily lives, things that matter closely to us, we need to ask ourselves if we are ready to embrace the limitations of decentralisation.
What happens when the community’s agenda changes, how would it affect the users who have based their utility on the protocol. Ethical issues, manipulation, fraud, as these communities have a lesser moral responsibility to maintain as compared to the government or blue-chip companies (Google, Apple).
Challenges in regulating blockchain
Regulations and policies towards blockchain technology are required. However, given the novelty of the technology and the lack of similar comparables to help understand it, policymakers are adopting a wait and see approach.
This is expected, as implemented policies have a lasting impact towards the industry and the wider economy. Rushing to regulate it will bring more downside than upside to the table. Without the benefit of hindsight, the impact of policies can only be felt months or years later, and it will be too late to reverse course where damage control remains the only option available to policymakers.
This situation seems to be a double-edged sword at the moment: the lack of clarity towards regulators’ views towards blockchain technology, resulting in companies adopting a wary stance in adopting blockchain technology to reduce exposure on regulation risks, thereby hindering adoption rate.
We can draw references from how leading economies are reacting towards Blockchain and cryptocurrencies. The Securities and Exchange Commission gave formal guidance on cryptocurrencies and detailing what makes a token a security. China issued an outright ban on ICOs and Bitcoin exchanges as regulators regroup to draft a more comprehensive guideline for the new technology. Japan issues licenses to regulate Bitcoin exchanges and passed a bill in April 2017 recognising BTC as a legal tender. While Singapore does not have plans to regulate cryptocurrencies as regulators adopt a wait and see approach.
As we move towards unchartered waters on blockchain technology and crypto-assets, early movers and opportunists have hopped on the bandwagon and established themselves in this space. Hundreds and even thousands of companies are working on blockchain technology and there are more than 120 hedge funds focused solely on bitcoins and other crypto-assets, while many more have crypto-assets as part of their portfolio allocation strategy.
A new kind of hedge funds have been created through the use of blockchain technology, bringing network effects to capital allocation. For instance: issuing tokens to incentivise data scientists all around the world to “crowdsource” stock price predictions and work together to build the best models. This provides great case studies for regulators to understand how the technology is being used and potential risks involved in using blockchain technology and crypto-assets.
The rise of blockchain has become a global movement, and regulating such a beast may seem an uphill task, noting that the wider community has yet to understand how the technology will impact us.
However, there are inferences that we can draw from. A handful of Fortune 500 companies are more globalised than crypto currently is, yet they are pretty well regulated. The same form of regulation would not apply to blockchain tech as they are decentralised by nature, therefore there’s no one centralised entity to be regulated.
Regulators would need to rethink about traditional regulatory frameworks and how decentralised tech works in order to craft sound policies around it.
There are interaction points along the blockchain process where users engage with the technology, As blockchain 1.0 begins to mature, and legal infrastructure starts to form around the technology, the world awaits for blockchain 2.0, wherein more robust infrastructure will be built, as the technology matures further. This paves the way for a more stable and secure decentralised network as we move towards the new economy.
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