IGF 2017 Substantive Paper (DC on Blockchain Technologies)

I. Introduction to the Dynamic Coalition on Blockchain Technologies

The Dynamic Coalition on Blockchain Technologies endeavors to bring clarity to governance approaches for blockchain technologies, smart contracts and decentralized autonomous applications. The Dynamic Coalition strives to bring together diverse stakeholders, from diverse experts to global institutions, to facilitate the development and deployment of blockchain-based applications alongside governance policies that enable innovation. The hope is that the Dynamic Coalition can contribute to the conversation around blockchain technology policy, technical development, and next-generation applications at a global scale.

II. Governance Issues and Trends in Blockchain Technologies

Since the December 2016 IGF meeting in Guadalajara, Mexico, several new governance issues and trends emerged in blockchain technologies: governance mechanisms related to hard forks in open source blockchain technologies, government adoption of blockchain-based systems for use in their own processes, the growing popularity of “Initial Coin Offerings” or “ICOs” and the resulting regulatory response, and the ever present concern for appropriate regulation of blockchain-based applications and activities.

Blockchain Governance Challenges

In March 2017, Business Insider ran a story called “A Bitcoin civil war is threatening to tear the digital currency in 2 – here’s what you need to know.”1 The authors described “[d]evelopers, miners, and other stakeholders [] locked in a heated debate over how best to scale the network, with chances steadily rising of irreconcilable differences causing a so-called ‘hard fork’ that would split Bitcoin in two.”2 The authors describe the situation in stark terms as a “crisis,” and warned that terrible things, including a steady price drop and battered reputation, would result from a hard fork.3 Commentators also predicted a loss of trust for the Ethereum protocol after its hard fork in early 2017.4 The Bitcoin blockchain and the Ethereum protocol have now each undergone a hard fork. Some view the hard forks as failure of the system and use them as an opportunity to criticize the technology. Others argue that hard forks represent one of the most democratic elements of the built-in governance mechanisms of public blockchains. Even for those who view hard forks positively, questions remain about whether and to what extent limits on hard forks should exist, and how to create those limits endogenously to mirror the core values of the public blockchains.

Government Adoption of Blockchain-Based Systems

Governments all over the world launched blockchain initiatives in 2017 with the aim of using

blockchain-based systems to make their administrative processes more efficient, transparent and

accountable. For example, Delaware launched its Blockchain Initiative in May 2016 to begin

moving certain Delaware government processes to blockchain-based systems. Delaware’s project

is three-fold: (1) moving records in the Delaware archives to a blockchain-based archival system,

(2) enabling the issuance of corporate shares on blockchain-based systems, and (3) enabling

participants in the secured credit system to file notices of liens in a blockchain-based filing system.

Elsewhere, Sweden is building a real property recording system for the blockchain, Dubai

launched a significant government blockchain effort, Malta is developing a broad national strategy

to allow the government to embrace bitcoin and blockchain innovation, and the EU Commission

works to streamline anti-money laundering compliance through blockchain-based systems. Other

similar government efforts abound. The questions for government blockchain-based initiatives

such as these are two-fold: (1) when should an administrative legal function be moved to a

blockchain-based system, and (2) what impact will doing so have on related law?

The Rise of Initial Coin Offerings

A wave of very successful Initial Coin Offerings (“ICOs”) occurred in 2017. ICOs are viewed as

an innovative method for raising business capital, using smart contract enabled by blockchain

technology. By the end of May 2017, twenty-five (25) ICOs raised just over $163 million, whereas

in all of 2016, sixty-four (64) ICOs raised $103 million total. Regulatory bodies were slow to move

on the ICO phenomena, but by the end of July 2017, the United States Securities Exchange

Commission (“SEC”) issued a ruling explaining that some ICOs would be considered securities

under the U.S. analysis of an “investment contract.” Before the end of August 2017, the SEC would

follow-up with a consumer investor alert, warning consumers to be cautious when considering

whether to invest in an ICO. Meanwhile, the Government of China issued an order banning ICOs

as a method of corporate fundraising. As a result, the field remains rife with unanswered

governance questions, including how to coordinate national policies that affect an activity based

on a borderless technology, and whether and to what extent the application of existing laws in the

name of consumer protection is preferable to allowing an ICO market to develop and test the waters

for new and innovative methods of economic and financial order.

Continued Debate Over Appropriate Regulation

The debate over appropriate regulation of blockchain-based activities remains a heavy focus of

advocacy efforts, academic investigation, and government interest. Discussions in the United

States in 2017 centered around the Uniform Law Commission’s Uniform Regulation of Virtual

Currency Businesses Act (a model law to guide state measures in the future), finding a path toward

federal, uniform regulation, and tax relief. China remained uniformly contrarian towards

cryptocurrencies, prohibiting financial institutions and third-party payment providers from

accepting, using, or selling virtual currencies. This tightened control impacted bitcoin exchanges

in China directly, forcing them to impose trading fees beginning in January 2017. The National

Bank of Hungary issued a public statement just after the 2016 IGF meeting warning consumers

about the unregulated nature of cryptocurrencies and their related risks. In January of 2017, the

Israeli central bank and Finance Ministry followed suit, issuing warnings to the public about the

risks associated with cryptocurrencies.

Meanwhile, on April 1, 2017, Japan’s Financial Services Agency enacted a new law authorizing

the use of digital currency as a method of payment. To do so, Japan essentially categorized bitcoin

as a form of prepaid access and subjected participants in the prepaid ecosystem to the same kind

of anti-money laundering and consumer protection requirements as those dealing in prepaid access.

Other countries also took action in 2017, most of which was along similar lines: exhibiting overarching

concern for protecting consumers and enabling tight compliance with anti-money

laundering regulations.

In France, pursuant to the law of 9 December 2016 on Transparency, Anti-Corruption and

Economic Modernisation, and following the adoption of the legislation on mini-bonds, the

Government has been granted powers until 9 December 2017 to reform securities laws so that

securities that are not traded via a central securities depository (CDS) or a securities settlement

system (SSS) could be represented and transmitted using distributed ledger technology. The list of

securities potentially covered by the French initiative is as follows: (a) equity securities which are

not traded on a trading venue and are not transferred following a financial guarantee contract; (b)

debt securities which are not traded on a trading venue and are not transferred following a financial

guarantee contract; (c) short term debt securities; and (d) units in collective investment

undertakings. The driving force behind such legislation is that the French authorities are convinced

that a robust legislative framework is needed to ensure the legal certainty of the financial

transactions conducted using this technology. Thus, the French Treasury launched a consultation

on the representation and transmission of certain securities via “distributed ledger technology”

before proposing a draft ordinance that has now been submitted to stake-holder consultation by

the Treasury.

The consultation process was very interesting, as it underlined the frictions between blockchain

and regulation regarding securities laws, especially in the fields of compliance, know-yourcustomer,

data protection law, and supervision issues. Moreover, some stakeholders emphasized

that the references to distributed ledger technology should be more precise (i.e., private or public

blockchains) in order to build a solid legislation or consider new kinds of supervision based on the

inherent characteristics of such a technology.

The question moving forward is whether and to what extent such measures inhibit adoption of the

technology, and how much of the regulatory approach to cryptocurrency will spill over to the

underlying protocol technology, which can be used for a myriad of other use cases. Furthermore,

it will be important to consider ways to ensure the positive effect of “technology neutral”

legislation.

III. Current Efforts of the Dynamic Coalition on Blockchain Technologies in These

Areas

The Dynamic Coalition carries out its work through its email list-serve and through organically

formed working groups, which are composed of academics, lawyers, economists, programmers,

protocol architects, cryptographers, security experts, technologists, and entrepreneurs, amongst

other disciplines. Of the ten (10) active working groups, several focus directly on the issues that

emerged as preeminent since the 2016 IGF meeting: Identity & Privacy, Blockchain Governance,

Regulation & Compliance, Institutional Governance, Smart Contracts, and Crypto-Equity.

The Identity & Privacy working group focuses on the fundamental problem of trust on a trustless

Internet. It aims at identifying the various challenges and opportunities of blockchain technologies

to the identity/privacy dilemma, elaborating potential interim solutions (e.g., federated KYC), and

sketching out a variety of issues related to the developing world (e.g., persistent identity and secure

land records) which may require distinct treatment. In addition, the working group explores ways

in which blockchain technologies may be applied to existing AML/CTF frameworks. To that end,

the group has conducted an exhaustive survey and impact assessment of current AMF/CTF

policies, as applied to emergent blockchain technologies. Specific attention should also be paid

regarding the entry into force of the Data Protection Regulation in Europe by the 18th of May,

2018. The economic consequences of the GDPR, its standards on privacy and the possible

interactions with any regulation on blockchain could be particularly useful.

The Blockchain Governance working group investigates the intersection of law and blockchain

governance, asking whether and how law can provide guideposts for blockchain governance.

Inversely, the Regulation & Compliance working group aims at investigating (and elaborating)

specific regulatory and policy frameworks for blockchain technology that will promote innovation

and growth while preventing systemic risk, ensuring financial stability and protecting consumers

and entrepreneurs against economic harm and illegal activity. These efforts are increasingly

important in light of the significant and fast-pace growth of blockchain and other distributed ledger

technologies. The number and variances of protocols is rapidly growing, as are the number of

significantly different use cases.

Relatedly, the Institutional Governance working group explores the spectrum of ways in which we

can leverage blockchain technologies to address the growing deficit of accountability and trust in

both public and private institutions. This can be done in two ways: (1) using blockchain

technologies as a means to improve existing governance structures within an institution by

improving the transparency, auditability, and accountability of its operators; and (2) leveraging

new opportunities that blockchain technologies provide for the establishment of a new operational

layer for human interaction that can support, complement, and perhaps replace, current governance

structures. The working group addresses these questions by investigating the use of blockchain

technology and smart contracts for enhanced information security and institutional governance,

with particular focus on the new opportunities for technological due process and institutional

accountability that these technologies provide.

The Smart Contracts working group investigates the legal validity and enforceability of smart

contracts and the need for alternative enforcement or adjudication mechanisms. Relatedly, the

Crypto-equity working group investigates the technical implementation and legal viability of new

governance structures based on the issuance and distribution of digital tokens (often done through

smart contracts). Blockchain technologies provide new ways of issuing secure and tradable digital

tokens on a distributed network. Although these tokens are often described as cryptocurrency, they

have many other potential applications, ranging from traditional stocks and securities, claims to an

underlying property title, proof of ownership over specific assets, voting rights or other privileges

within an organization, and many other use-cases. The purpose of the Crypto-equity working group

is to examine the benefits and drawbacks of blockchain-based applications from the standpoint of

existing legal infrastructure.

The Ethics working group works to inculcate a culture of healthy social and ethical norms that

foster individual and collective responsibility. The working group asks what kind of values can be

baked into a blockchain-based system, and queries whether those involved in developing the

technologies can ensure they empower people, as opposed to replicating or exacerbating prevailing

societal inequalities and power dynamics.

IV. Issues and Questions Calling for Further Exploration

The Dynamic Coalition on Blockchain Technologies sees many governance policy issues

emerging as a result of the trends discussed above, which its working groups will continue to

explore, including:

 How does the dichotomous move of some governments, on the one hand, adopting

blockchain technologies for use in government processes, and other governments, on the

other hand, criminalizing certain uses of cryptocurrencies, impact the future of the

technologies’ use and the trajectory of governance mechanisms?

 What social changes could Blockchain put in effect in a community in order to foster

social goods?

 Is there a role for Blockchain in reducing inequalities?

 How can Blockchain developments be allied to sustainable development?

 Should developers build solutions to these questions with the over-arching governmental

concerns with consumer protection and anti-money laundering in mind? If so, how do

they achieve that? If not, how do developers prevent walking into a regulatory

conundrum like that faced by ICOs?