Blockchain rules: regulating a game-changing new technology

Blockchain rules: regulating a game-changing new technology

Blockchain - the technology powering Bitcoin and other cryptocurrencies - is poised to transform the way we buy things, do business, and many other areas of everyday life. As banks and governments around the world grapple with how to harness this rising disruptive force, a team of legal and banking experts is taking the first step toward developing a framework for regulating them in New Zealand and Australia.

At the moment, cryptocurrencies are highly volatile and speculative, mostly operating on the economy’s fringe. But rapid technological developments mean they are set to go mainstream. Their disruptive power arises partly from the way they allow people and businesses to transact value directly from payer to payee, either locally or across the globe, bypassing banks and other traditional third parties.

“We’re on the cusp of radical and disruptive change, and this poses challenges for lawmakers and regulators around the world,” says Associate Professor Alex Sims from the University of Auckland, who is leading the team tasked with developing the Trans-Tasman framework thanks to a $50,000 Law Foundation grant.

“With major companies such as Microsoft now accepting virtual currency payments, it’s feasible that blockchain technology will become ubiquitous within the next decade.

“Currently, there is no law regulating cryptocurrencies in New Zealand, however people have had their bank accounts closed because their bank suspected them of dealing in cryptocurrencies,” she says.

A core element of these digital currencies – called “cryptocurrencies” because they rely on extremely strong cryptography - is the blockchain. Invented in 2008 with the birth of Bitcoin, a blockchain is a list or digital ledger that records transactions and stores them in secure “blocks”. Each block is then “chained” to the next with a cryptographic signature. The names of parties who make the transactions never appear on the blockchain, instead public keys are used, allowing for confidentiality.

Copies of blockchains are stored across thousands of computers within a network. This makes them more secure than conventional bank accounts, as a hacker would have to hack into thousands of computers at the same time to change more than 50 percent of the copies, and anomalous transactions not replicated throughout the majority of the network would be ignored or effectively rejected. The blockchain also allows for “smart contracts”, which could be game-changing in many areas of life.

Associate Professor Sims, who is head of Commercial Law at the University of Business School, says banks and credit card companies realise their role as gate-keepers and middle-people in financial transactions is under threat.

“If cryptocurrencies become widespread, it could slash banks’ profits. Banks are trying to use the new technology between themselves because the benefits are massive, but they are going to try to limit how others use it. There is a real danger that if the banks get their way, the benefits of cryptocurrencies may be reduced or even lost,” she says.

“There are, though, risks associated with cryptocurrencies, some not yet known, which is why this work is important. Currently, cryptocurrency transactions cannot be reversed and most new transaction technology relates to small sums. What happens when a consumer’s life savings are sent to the wrong person by accident or a person’s private key is compromised? Then there are issues of privacy. How are a person’s financial details kept private when the information is accessible by those that have access to a particular blockchain?”

Associate Professor Sims and her co-researchers, Professor of Banking and Finance David Mayes from the Business School, and Dr Kanchana Kariyawasam of Australia’s Griffith University Business School, are focussed on striking the best balance between the interests of blockchain stakeholders – consumers, businesses, other parties – and the interests of regulators.

“The danger is if you regulate too much, you won’t get the full benefits, but if you regulate too lightly, you could see problems such as money laundering,” says Associate Professor Sims.

The grant for the project is the first from a new $2 million Information Law and Policy Project (ILAPP) that the Law Foundation established to develop law and policy around IT, data, information, artificial intelligence and cyber-security.

Law Foundation Executive Director, Lynda Hagen, says, “Digital currencies are likely to revolutionise the finance world and beyond, creating significant challenges for law and regulation. This important new research is the first work approved under our Information Law and Policy Project that will better prepare New Zealand for the challenges ahead and help build New Zealand’s future digital competence.”

Associate Professor Sims: “This is a critical first step towards streamlining the regulatory framework in the Asia-Pacific region, as well as globally.”

Over the next year, the researchers will investigate:

• how blockchain technology emerged, and the issues, risks and opportunities it brings

• how much blockchain technology falls within existing regulation and how outmoded law will be reformed to benefit this promising technology sector

• Examples from other countries such as the United States, the United Kingdom and Estonia, who are further down the track in exploring new policy models for the blockchain age

ENDS

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