THE IMPACT OF BLOCKCHAIN TECHNOLOGY ON INDUSTRY
A. A General Overview on the Impact of Blockchain
Blockchain is a mere technology, but it is beyond than cryptocurrency. Despite so, blockchain has emerged as a new phase of technological innovation in this new century and impacting almost all industries in the world.
The blockchain technology contains several influential products associated with its widely adopted application in the society, such as e-wallet, smart contracts and of course the issuance of cryptocurrency. Due to its decentralised and transparent features, the application of blockchain in the society will definitely attract legal consequences and complications. Such impact could no longer be ignored by the regulator and must be addressed positively.
In view that blockchain is able to introduce disruptive or destructive changes into numerous economic sectors including but not limited to finance, investment, logistic, biomedical and etc, the legal impact has therefore become a highly contentious issue among the blockchain industry especially on the infamous cryptocurrency. Although on another point of view, blockchain as a technology should not be regulated.
B. The Disruptive ICOs
Strictly speaking, the cryptocurrency ought not to be a focus point in the application of blockchain. However, the occurrence and adoption of cryptocurrency have progressively become an inevitable subject matter in our daily life. The borne of blockchain has fortunately (or unfortunately) produced the cryptocurrency. Thus, people has creatively innovated and started to use cryptocurrency as an alternative source of funding mechanism other than existing traditional financial products, which is commonly known as the “Initial Coin Offering” (ICO).
By the name of ICO, it carries a similar operating terminology with Initial Pre-Offering (IPO), which is a crowdfunding activity via pre-offering and placement of shares before a corporate entity goes for public listing in the stock exchange market. The mere difference that draws a distinction between an ICO and IPO is the medium that uses for the crowdfunding, which is the cryptocurrency instead of shares.
As a new medium of crowdfunding, the cryptocurrency carries two important controversial features, to be known as utility-based token or security-based token. The main difference between them is whether the issuance of such coin for crowdfunding purpose would fall under the securities or capital market laws and therefore ought to be regulated.
The US Securities and Exchange Commission (SEC) issued an investigative report on 25.7.2017 and concluded that not every digital token sale amount to security-based offering. However, two months later, the People’s Bank of China issued a regulatory blanket ban on all ICO activities citing that ICO has seriously disrupted the economic and financial order of China.
Despite the ICO has received much criticisms, a fresh form of fundraising through an ICO 2.0 known as Security Token Offering (STO) has emerged in US. STO is a new fundraising framework based on the ICO but will be regulated by the US SEC, as STO will be backed by assets and would form as a legally binding investment contract. As such, STO is no more than an ICO approved by the regulator.
It is reported numerously that AirAsia is considering an ICO and to issue a cryptocurrency to be known as BigCoin which to be utilised in AirAsia’s business ecosystem. Another public listed company Country Heights Holdings Bhd also wants to issue its own cryptocurrency but to be meant as a utility-based token and the company is seeking for shareholders’ approval on 8.11.2018.
C. Blockchain Affects Your Privacy
In Malaysia, the rights to privacy has not been firmly stated in the Federal Constitution but rather through case laws until the enforcement of Personal Data Protection Act 2010 (PDPA) on 15.11.2013. PDPA is a penal statute. It means that any person who has violated the PDPA could be subjected to criminal liability such as imprisonment and fine.
A closer review on the compatibility between the blockchain technology and PDPA would reveal that the blockchain is unable to safeguard the personal data safely under the scope of law.
Generally, our local PDPA or even the latest EU General Data Protection Regulation (GDPR) deal with several important principles, for example, the data retention principle and right to rectification.
The retention principle uttered in the PDPA simply means that the personal data would have to be destroyed in the event the data is no longer necessary to be retained or used. A centralised data storage controller could easily update or delete the relevant personal data. However, this is not the case in blockchain.
The blockchain technology adopts an entirely different storage model which entails the “Append and Burn” model. In this decentralised model, the data could not be “replaced” or “updated” but rather to be “appended” and summing up all the transactions. As such, blockchain is an “appended-only” large database that would keep expanding and any data appended on the chain will perpetually remain on it. This feature is entirely incompatible with the retention principle under the law.
On the other hand, if there is any inaccuracy or discrepancy on the personal data, the blockchain technology offers no room for rectification. The immutability of blockchain makes any correction or editing of data technically impossible, although there is an argument that a continuous appendage of new data onto the chain could effectively amend the sum of all transactions and equivalent to rectification.
As the role of data controller under the law arguably does not fit into the scope of blockchain as blockchain does not have any “data controller” but rather nodes that create the blocks and run on the combined operations of all nodes which would be out of the developer or creator’s control.
It seems that the nodes and blockchain developers lack of the legal requirements to be made as a person liable under the existing law.
D. Conclusion
The creative adoption and utilisation of blockchain technology will nonetheless attracts transformative potential and opportunity especially into the economic and financial landscape.
However, due to its rapid development and continuous embracement by the people, the regulators could no longer stay behind the curtain by taking a “watch now, decide later” approach. The pre-requisite in adopting blockchain technology in a jurisdiction must be first addressed by legal clarity and certainty.
A relaxed but effective regulatory environment must be created and nurtured by the regulator in order to encourage a positive development and change to the growth of the blockchain technology and its associated products and services, especially on the regulation of the use of cryptocurrency in the financial market and society.
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