As technology advances at an unprecedented pace, it is crucial for laws and regulations to keep up, ensuring both the progress of technological innovations and the protection of individuals who use them. One of the most popular technologies being adopted is Blockchain technology, which has encountered considerable obstacles because of outmoded legislation and disparate regulatory frameworks. This situation has led to confusion about compliance requirements within companies. However, projects involving blockchain technology must consider legal and regulatory factors, such as legislation particular to a given region or industry and consult with local attorneys for guidance.
What is Blockchain Technology?
Blockchain is based on a decentralized ledger technology that offers speedy, secure, and transparent transactions. Blockchain technology is an enhanced database mechanism that allows transparent information sharing within a specified business network. A blockchain database typically stores data in blocks that are linked together in a chain and helps streamline data storage seamlessly.
Blockchain technology has witnessed a surge in its usage in the past few years. However, the technology remains unregulated but has been encouraged in its usage. Due to this, companies are forced to make risky decisions about how much to engage in blockchain networks to keep up with the constantly shifting regulatory landscape.
Issues with Blockchain
While some regulators struggle to understand the blockchain, others embrace the technology. Also, blockchain is more reliant on its users to get the tasks done through the use of technology. Due to this, users self-assess the risks & rewards and accordingly indulge in blockchain. The following are some of the most significant compliance issues that arise while using blockchain technology.
1. Jurisdictional Issues Leading to Conflicting Legal Regime
Since blockchain is decentralized, nodes are cross-border and not restricted by territorial boundaries. Due to these issues, a rigorous examination is required, especially about the platform’s contractual duties, participant roles, and functions. However, there are a few cyber-security regulations that impose few restrictions on the flow of data but since blockchain is intractable, there is no meaning of such regulatory restrictions in a true sense. Further, different states have laws that impact basic contractual and ownership rights principles. A clear corporate governance framework is required to reduce the ambiguity of diverse laws. It will provide a framework to determine the legality of such contracts and associated rights.
2. Data Security
Although blockchain’s immutability ensures data security and integrity, it also concerns data protection compliance. It vitiates the “right to be forgotten” or “right to erasure” under the EU-GDPR and India’s DPDP Act, respectively. The concept of anonymity offered by blockchain technology gets nullified if authorities can trace it to specific individuals, which raises privacy concerns.
3. Establishing Liability and Accountability
Undermining accountability for legal violations is a significant issue in a decentralized system. Decentralized Autonomous Organizations (DAOs) operate autonomously and without direct human oversight. This leads to questions such as: How should DAOs be legally classified? Are they mere automated contracts or legal entities similar to corporations, with rights such as the capacity to sue and be sued? Who should be accountable for legal violations? This dilemma resembles past challenges in determining liability for corporate actions, which were addressed by the doctrine of piercing the corporate veil. Should similar legal principles be developed for DAOs and their creators? Due to its unregulated nature, regulatory bodies should be careful of adopting blockchain technology.
4. Smart Contracts
Smart contracts are pre-programmed code designed to execute automatically upon fulfilling specific conditions. They operate on a conditional “if-then” basis. However, their legal validity depends on whether they fulfil the essential elements of a traditional contract. Despite their efficiency and automation, their enforceability under regional contract laws still needs to be investigated. They automate legal aspects but are not legally binding. Specific smart contracts are legally binding, but it is essential to understand and comprehend the laws governing them.
5. Cryptocurrency
As of 2024, Cryptocurrencies are not regulated by any centralised authority in India as a medium of payment. While not illegal, their trading is subject to the investor’s own risk. In 2021, The Cryptocurrency Bill was introduced in the Lok Sabha by the government to regulate the thriving cryptocurrency market in India. While a step forward, the bill is still under embargo.
6. Unknown Exit Formalities
As the blockchain offers permanent storage, the question of how a data owner can exit from the blockchain network and avail of the right to erasure remains unanswered. This discussion addresses only a partial list of all regulatory and legal considerations. It is also advisable to consider data localization regulations and industry-specific laws, wherever applicable.
Key Takeaways and Best Practices
Blockchain technology offers numerous applications across various industries and sectors. Despite its advantages, such as faster transactions and lower processing costs, the broader application will lead to several challenges, particularly legal.
A crucial aspect to bear in mind is the cost and inefficiency associated with each participant in a network maintaining a complete record of all transaction data. Businesses should weigh these costs against the value blockchain offers. A blockchain’s reliability depends on data accuracy. Errors must be avoided so that the chain’s integrity is not compromised.
Despite blockchain hype, it’s not a straight-jacket formula for every industry. Nevertheless, businesses must address customer expectations as blockchain adoption expands for more efficient and secure transactions. Blockchain could emerge as an attractive solution for these challenges.
