EU – Distributed ledger technology – What happened in 2018

If 2017 was the year of Initial Coin Offerings, 2018 was the year of Blockchain awareness and testing all over the world. From ICO focused guidelines and regulations respectively aimed to alarm and protect investors, we have seen the shift, especially in Europe, to distributed ledger technology (“DLT”) focused guidelines and regulations aimed at protecting citizens on one hand and promote DLT implementations on the other.

Indeed, European Union Member States and the European Parliament started looking deeper into the technology by, for instance, calling for consultations with professionals in order to understand DLT’s potentials for real-world implementations and possible risks.

In this article I am aiming to give a brief snapshot of firstly what are the most notable European initiatives and moves towards promoting Blockchain implementation and secondly current challenges faced by European law makers when dealing with the regulation of distributed ledger technologies.

Europe

Let’s start from the European Blockchain Partnership (“EBP”), a statement made by 25 EU Member States acknowledging the importance of distributed ledger technology for society, in particular when it comes to interoperability, cyber security and efficiency of digital public services. The Partnership is not only an acknowledgement, it is also a commitment from all signatory states to collaborate to build what they envision will be a distributed ledger infrastructure for the delivering of cross-border public services.

Witness of the trust given to the technology is My Health My Data, a EU-backed project that uses DLT to enable patients to efficiently control their digitally recorded health data while securing it from the threat of data breaches. Benefits the EU saw in DLT on this specific project are safety, efficiency but most notably the opportunity that DLT offers data subject to have finally control over their own data, without the need for intermediaries.

Another important initiative proving European interests in testing DLT technologies is the Horizon Prize on “Blockchains for Social Good”, a 5 million Euros worth challenge open to innovators and tech companies to develop scalable, efficient and high-impact decentralized solutions to social innovation challenges.

Moving forward, in December last year, I had the honor to be part of the “ Workshop on Blockchains & Smart Contracts Legal and Regulatory Framework” in Paris, an initiative supported by the EU Blockchain Observatory and Forum (“EUBOF”), a pilot project initiated by the European Parliament. Earlier last year other three workshops were held, the aim of each was to collect knowledge on specific topics from an audience of leading DLT legal and technical professionals. With the knowledge collected, the EUBOF followed up with reports of what was discussed during the workshop and suggest a way forward.

Although not binding, these reports give a reasonably clear guideline to the industry on how existing laws at a European level apply to the technology, or at least should be interpreted, and highlight areas where new regulation is definitely needed. As an example let’s look at the Report on Blockchain & GDPR. If you missed it, the GDPR is the Regulation that protects Europeans personal data and it’s applicable to all companies globally, which are processing data from European citizens. The “right to erasure” embedded in the GDPR, doesn’t allow personal data to be stored on an immutable database, the data subject has to be able to erase data anytime when shared with a service provider and stored somewhere on a database. In the case of Blockchain, the consensus on personal data having to be stored off-chain is therefore unanimous. Storing personal data off-chain and leaving an hash to that data on-chain, is a viable solution if certain precautions are taken in order to avoid the risks of reversibility or linkability of such hash to the personal data stored off-chain, therefore making the hash on-chain personally identifiable information.

However, not all European laws apply to Member States, therefore making it hard to give a EU-wide answer to most DLT compliance challenges in Europe. Member States freedom to legislate is indeed only limited/influenced by two main instruments, Regulations, which are automatically enforceable in each Member State and Directives binding Member States to legislate on specific topics according to a set of specific rules.

Diverging national laws have a great effect on multiple aspects of innovative technologies. Let’s look for instance at the validity of “smart contracts”. When discussing the legal power of automatically enforceable digital contracts, the lack of a European wide legislation on contracts makes it impossible to find an answer applicable to all Member States. For instance, is “offer and acceptance” enough to constitute a contract? What is considered a valid “acceptance”? What is an “obligation”? “Can a digital asset be the object of a legally binding agreement”?

If we try to give a EU-wide answer to the questions such as smart contract validity and enforceability it is apparently not possible since we will need to consider 28 different answers. I, therefore, believe that the future of innovation in Europe will highly depend on the unification of laws.

An example of a unified law that has great benefits on innovation (including DLT) is the Electronic Identification and Trust Services (eIDAS) Regulation, which governs electronic identification including electronic signatures.

The race to regulating DLT in Europe

Let’s now look briefly at a couple of Member States legislations, specifically on Blockchain and cryptocurrencies last year.

EU Member States have been quite creative I would say in regulating the new technology. Let’s start from Malta, which saw a surprising increase of important projects and companies, such as Binance, landing on the beautiful Mediterranean Island thanks to its favorable (or at least felt as such) legislations on DLT. The “Blockchain Island” passed three laws in early July to regulate and supervise Blockchain projects including ICOs, crypto exchanges and DLT, specifically: The Innovative Technology Arrangements and Services Act regulation that aims at recognizing different technology arrangements such as DAOs, smart contracts and in future probably AI machines; The Virtual Financial Assets Act for ICOs and crypto exchanges; The Malta Digital Innovation Authority establishing a new supervisory authority.

Some think the Maltese legislation lacks a comprehensive framework, one that for instance, gives legal personality to Innovative Technology Arrangements. For this reason some are therefore accusing the Maltese lawmakers of rushing into an uncompleted regulatory framework in order to attract business to the island while others seem to positively welcome the laws as a good start for a European wide regulation on DLT and crypto assets.

In December 2018, Malta also initiated a declaration that was then signed by other six Members States, calling for collaboration for the promotion and implementation of DLT on a European level.

France was one of the signatories of such declaration, and it’s worth mentioning since the French Minister for the Economy and Finance approved in September a framework for regulating ICOs and therefore protecting investors’ rights, basically giving the AMF (French Authority for Financial Market) the empowerment to give licenses to companies wanting to raise funds through Initial Coin Offerings.

Last but not least comes Switzerland which although it is not a EU Member State, it has great degree of influence on European and national legislators when it comes to progressive regulations. At the end of December, the Swiss Federal Council released a report on DLT and the law, making a clear statement that the existing Swiss law is sufficient to regulate most matters related to DLT and Blockchain, although some adjustments have to be made. So no new laws but few amendments here and there, which will allow the integration of the specific DLT applications with existing laws in order to ensure legal certainty on certain uncovered matters. Relevant areas of Swiss law that will be amended include the transfer of rights utilizing digital registers, Anti Money Laundering rules specifically for decentralized trading platforms and bankruptcy when that proceeding involves crypto assets.

Conclusions

To summarize, from the approach taken during the past year, it is apparent that there is great interest in Europe to understand the potentials and to soon test implementations of distributed ledger technology. Lawmakers have also an understanding that the technology is in an infant state, it might involve risks, therefore making it complex to set specific rules or to give final answers on the alignment of certain technology applications with existing European or national laws.

To achieve European wide results, however, acknowledgments, guidelines and reports are not enough. The setting of standards for lawmakers applicable to all Member States or even unification of laws in crucial sectors influencing directly or indirectly new technologies, will be the only solution for any innovative technology to be adopted at a European level.

The author of this post is Alessandro Mazzi.