Working on a chain gang

Arguably, Kevin O’Brien of the Central Bank of Ireland hit the nail on the head for blockchain when he said: “If we cannot understand it, we cannot supervise it, and if we cannot supervise it, we cannot authorise it.”

Kevin is head of division of Consumer Protection – Policy and Authorisations at the Central Bank. He was speaking at the Law Society of Ireland FinTech Symposium, and his blunt statement will echo through the corridors of blockchain.

Befuddled

Blockchain is a technology that has only been around for the past five years, and it is befuddled by terminological difficulties. It has been used in maintaining asset registers for smart contracts, shares, property and other titles to ownership and documentation, all making such fraud more difficult.

However, it should not be forgotten that technology is equally an enabler of fraud, and thus in need of close regulatory attention.

Regulators indeed sat up and took notice when initial coin offerings (ICOs) led to a feeding frenzy after their introduction. What boomed inevitably busted, with some seven out of ten ICOs now operating at a loss  from their initial offering.

Traded

There has also been a proliferation of ‘pump-and-dump’ schemes, and over a third of tokens released in 2017 have not traded on any exchange. Such stories perpetuate the impression that cryptocurrencies are unfettered – and blockchain is tarred with the same brush.

Andrew Tzialli, a partner at commercial law firm Philip Lee (specialising in corporate and technology matters), heads up the firm’s cryptocurrency and blockchain group, and jests: “I’ve been in this space since 2013, which, after five years, makes me a veteran!”

He comments that, in cryptocurrency, there was a very rapid boom and bust, with many firms dabbling in the space, of which he is critical. Clients were “paying a fortune for advice on the back of doing very little, with advisors not doing a lot, caveating their advice, and many not having an understanding of it, and then turning to other lawyers because they were out of their depth.

“Compared to traditional businesses, blockchain is still a ‘Wild West’ but, compared with 12 months ago, we are a million miles away from that,” he says. As for lawyers operating in this space, “It’s still a learning curve for us.” 

Claire Fitzpatrick (strategic operations director at ConsenSys, a global blockchain technology company) says: “Legal firms have a great appetite to understand the technology, and are crying out for regulation and guidance on regulation as a starting point.”

The problem is not so much the technology itself, as it is the acceptance of that technology, with much of blockchain still at the R&D stage or in nascent product. Tzialli says: “Terminology is hindering development, making regulation more challenging. However, we are still very, very early in this journey.”

Agreement

Dr Noel McGrath (lecturer and assistant professor at UCD Sutherland School of Law) explains: “This is a very new development – new to the point where there is no common agreement on what blockchain is.”

Ireland has a number of blockchain businesses, and has long been involved, globally, in payment and innovative financial services businesses. Blockchain and cryptocurrency would seem a natural development.

Mai Santamaria (Department of Finance) says: “The Irish Government has taken several steps to encourage innovation in this sector.

Namely, the creation of a €500 million Disruptive Technologies Innovation Fund; recently hosting a blockchain ‘hackathon’ to identify public-services business problems that can be solved using blockchain technology; and the creation of Blockchain Ireland, a combined effort of Government and Irish-based companies, led by the IDA’s Blockchain Expert Group, to help promote and share information on blockchain in Ireland.”

Mission

The month of May saw a major initiative styled ‘Blockchain Ireland Week’ (24-31 May) – a celebration of the blockchain community around Ireland, which is on a mission to bring together and grow the blockchain ecosystem on the island.

Claire Fitzpatrick says that Blockchain Ireland Week adds to the momentum and education, but it always comes back to “more awareness”, she says. “Much of what we do is educational – 80% of my time is spent on educating people.”

Among law firms in Ireland, Fitzpatrick says there are a number of people proficient enough in technology to have the discussion. “I wouldn’t go as far to say there is a lot of expertise.”

Game changer

However, she adds: “For the legal fraternity, blockchain is a game-changer for their business model.”

Clients are seeking to be educated about the technology, and lawyers need to understand both the positives and negatives to advise their clients.

Says Fitzpatrick: “Even in smart contracts, blockchain doesn’t take into account ‘good faith’, for instance, so there is always an element of the human legal piece on top of the smart contract.”

Fitzpatrick adds: “The biggest blocker for adoption is the lack of regulatory certainty. Regulation is always catching up with technology. What we saw with telco and the internet is the same here.”

Speed

She says that the blockchain community “would welcome speed and a quickening by regulatory bodies to tackle the ambiguity”.

Tzialli counters, however, saying that “we are nowhere near a uniform way of dealing with blockchain. We are light-years away”.

For Ireland, there is an opportunity to become a leader in blockchain regulation, rather than simply looking to follow the lead of the EU and elsewhere – but there still needs to be caution, as ‘first-mover advantage’ is not necessarily the best move.

McGrath says: “With a technology that is moving as quickly as blockchain, there are difficulties. It is hard to regulate effectively, and what is drafted into a regulation can be out of date by the time it is being signed into law.”

Cautious

He suggests that “regulators are taking a ‘softly, softly’ and very cautious approach, partly because of the usual problem for technology and regulation of defining what it is; and partly because they don’t want to strangle innovation at birth and put in place stuff that stops it from becoming a pot of gold”.

“Everybody is in learning mode at the moment,” he says. There are a lot of prior questions: exactly what is it we are trying to regulate? Who are we trying to regulate? How can we best regulate? Things are still up in the air.”

Paper

Last year, a significant step was taken when Finance Minister Paschal Donohoe published a discussion paper prepared by his department on virtual currencies and blockchain technology. He announced the subsequent creation of an internal working group to monitor further developments in this area.

The discussion paper remains useful as an overview of virtual currencies and the blockchain technology supporting them, with detail on responses by selected countries around the world and an overview of the key risks and opportunities these technologies present.

Mai Santamaria says: “The Department of Finance supports the foundation of a predictable and safe blockchain ecosystem in Ireland. This is in line with the Government’s IFS2020 vision of building on the nation’s innate ability to innovate and adapt to emerging trends across finance and technology.”

However, she explains, “No isolated policy measure or State agency can singlehandedly address all the risks and opportunities in the area of blockchain.”

Working group

The Government’s intradepartmental working group, Santamaria explains, constitutes key representatives of relevant divisions across the department. For example, Emily King (senior legal advisor from the Shareholding and Financial Advisory Division) is a member of the working group.

Over the last 12 months, the financial advisory team, acting as lead outreach for the working group, has collectively met over 400 people related to blockchain in Ireland and abroad.

Santamaria says: “It has been essential to connect with private sector companies, technologists, and regulators in order to be able to assess the relevance of developments in the technology, and the type of policy responses adapted in other jurisdictions.

“Active collaboration and support of initiatives, such as Blockchain Ireland and Blockchain Women Ireland, have been fundamental to the building and support of the Irish blockchain ecosystem. The working group has also met its initial objective of increasing clarity to business, consumers and investors.

"However, much work has yet to be completed, particularly in relation to the impact of continuous technological developments and the potential policy responses to crypto-assets that fall outside the current regulatory perimeter,” says Santamaria. 

Jurisdiction

A major regulatory perimeter is jurisdiction, with problems in defining jurisdiction in blockchain potentially leading to a new revolution.

Physical shares may be traded on a specific exchange, a government can issue currency, and companies can have a geographically registered office and premises, but Fitzpatrick explains that the technology is decentralised in nature, with no fixed jurisdiction or overall regulation for participants, which makes blockchain “very difficult to understand”. 

McGrath adds: “There are aspects inherent in the technology that make it very difficult to regulate.” Blockchain can coalesce around a universe of participants who have the ability to produce a consensus without the involvement of law or regulation, and the legal certainty that comes from this, creating what McGrath calls “a kind of bureaucratic truth”.

He complains: “One of my bugbears with blockchain is that it is very often trying to displace the State’s role as a certifier of truth.” He explains that there are a lot of legal systems in place in society, with stamps, recording systems, documents and the like, “from which legal consequences flow”.

Milestones

Looking forward, when asked about the timeframe and milestones we can expect, McGrath says: “That’s the hardest question.”

He suspects that taxation may be the first area where we will start to see more pressure to regulate, as companies using blockchain start to ask for clarification on the tax position of a blockchain that is, by its very nature, hard to pin down. He draws comparisons with past emerging technologies that have seen the tax authorities being the first to act.

Claire Fitzpatrick believes that “Ireland will look to the European Commission,” though when asked if Ireland could go further and be more of a leader, she agreed: “The ingredients are here. Blockchain Ireland and industry participants see the opportunity to become the blockchain hub in the same way that Tel Aviv is the cybersecurity hub. Why not be known for that