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The Blockchain system between future prospects and regulatory uncertainty

When the relationship between Law and Technological Innovation meets national strategic interest

It has been many years since the term Blockchain began to circulate on the internet. Since 2008 there have been numerous applications of this system that have entered commerce, and more and more private companies have invested a large part of their budgets in this technological innovation. Profit margins are growing exponentially, so much so that many economists doubt whether this uncontrolled growth will actually hold up; despite this, we continue to invest in research and development to understand how far the positive effects of this technology can be pushed. However, an international debate has only recently begun on the lack of ad hoc regulations on the subject and on the risks associated with this lack.

Why has interest on the part of various national legislators in the Blockchain system intensified since 2018?

Although the technological evolution of the Blockchain system seems to open up new possibilities of application in various strategic sectors both in the economic and public service sectors, an important Public-Private debate has recently opened on the current state of the rules that should govern and assist this evolutionary and experimental process. At the moment there is widespread regulatory uncertainty on the subject, which on the one hand it worries the nation states about the need to respect the secrecy and security of certain strategic data of public interest, and on the other hand it worries citizens, private entities and associations of category regarding the protection of their digital rights.

What are the pros and cons?

From an operational point of view, the great potential of this technology lies in its IT structure, capable of ‘reducing the cost of trust necessary for the completion of a transaction, understood as an exchange of information or value, while ensuring the certainty of its execution’ [1]. In fact, this technological innovation proposes an effective improvement of data transmission, combining a lower impact on costs (relative to the lack of intermediation of system managers), with greater certainty and immutability of the data, as well as a more effective time validation.

From a legal point of view, however, there are still strong doubts about the security provided by the Blockchain system: the lack of adequate regulation, the lack of information and training on the opportunities/risks of this technology and the lack of specific jurisdictional protections on the subject have led the various national legislators to interact with each other to study common regulatory solutions. Guaranteeing greater security of the data processed and an effective protection of the public-private interest in matters of digital rights [2] represent mandatory principles from which all national legislators seem to want to start in the process of inserting the Blockchain system into the legal system of the Rule of Law.

A general mistrust of data security

Let's start by observing the Simplification Decree 2019, which defines DLT technology as an ‘IT protocol based on a shared, distributed, replicable, simultaneously accessible, architecturally decentralized on cryptographic basis, such as to allow registration, validation, updating and archiving of data both in clear text and further protected by cryptography verifiable by each participant, which cannot be altered and cannot be modified [3]. Although this definition describes the characteristics and potential of this innovation, it is essential to focus on the following aspects:

- the data transmission system is based on the principle of disintermediation. In the absence of a third regulatory entity, the control of the correct execution of the operations would therefore be attributed to the IT protocol itself;

- the data are entered and stored in decentralized and immutable registers, so that each individual user corresponds to a single electronic register. This technical configuration is in open contrast to the G.D.P.R. both in terms of data ownership and the right to cancel them [4].

The combination of these two characteristics can produce concrete risks when the data in question is sensitive or of national strategic interest. There is no doubt that Blockchain technology could greatly improve the storage and transmission of data between Public Administrations and private companies, but given the current state of technological advancement, there are still strong doubts about the 'infallibility' of these IT protocols in the security management of the data connected to them.

The IT Protocol of the Blockchain system: from ‘Guarantor outside the System’ to ‘risks of fallibility due to bugs’

The Blockchain system was born as a 'separate computer system', as it lacks a supervisory authority or a private intermediary (such as banks in the economic system). It is indeed the IT protocol itself that governs the system and its operation through pre-inserted rules. At the beginning there was talk of 'democratization of the system': it is technology that dictates the rules and users validate the choices of the information system together. We all know that a computer program executes commands given through machine language, but what if there is an error in it? This is the rationale that has prompted various national governments to seek adequate regulatory solutions to safeguard the secrecy and security of certain strategic data; it is indeed necessary to avoid that computer errors, which are called bugs, often caused by technical problems, other times included in the program with intent, can lead to the loss or leakage of data of national public interest. Many countries believe that the main problem lies in the lack of central control over the security of the system's computer protocols, and in the lack of technical-authorization rules for the processing of such shared registers. Most countries consider it legally essential to subject Blockchain systems to the regulatory and judicial control of public authorities. The problems deriving from the possible insertion of bugs can be calculated and solved more and more effectively thanks to the progress of technological and IT research, but this has however turned the spotlight on the need to insert the Blockchain system within the legal system to protect both citizens' rights and national security.

The state of the international debate on Blockchain

There are many initiatives open at the international level regarding the legal debate on the subject of Blockchain. With regard to the European context, we note the participation of Italy in the 'European debate on the implementation of legislation on the Blockchain', within the EBP (European Blockchain Partnership), with which we try to find a common European response. The Ministry of Economic Development itself has in fact opened a public consultation on the subject which ended on 20 July, in which Mondo Internazionale participated, in order to collect useful ideas and suggestions from the business and association world. In the European context, we already observe the presence in Estonia of a 2017 legislation on Blockchain in terms of anti-money laundering and anti-terrorism [5], while overseas the United States has recently issued the Crypto-Currency Act 2020, which will most likely be evaluated with interest internationally, as its main objective is to attribute to a state authority, the Security and Exchange Commission (SEC), the power of control over all financial instruments linked to cryptocurrencies [6]. Therefore, the common supervisory interest in a technology characterized by a high profit potential, but also by significant risks from a national strategic point of view, appears clear.

Translated by Veronica Giustiniani

Sources:

[1] Riferimenti su “Sintesi della Strategia Nazionale Blockchain” consultabili su https://www.mise.gov.it/index.php/it/consultazione-blockchain

[2] Riferimenti su studi condotti dalla Organization for Economic Cooperation and Development (O.E.C.D.)

[3] Vedi Decreto Legge Semplificazioni 2019 convertito in Legge 11 febbraio 2019, n.12;

[4] vedi art. 16-17 Regolamento UE 2016/679 (G.D.P.R.) su https://eur-lex.europa.eu/legal-content/IT/TXT/?uri=CELEX%3A32016R0679 ;

[5] Vedi la Money Laundering and Terrorist Finincing Prevention Act estone del 2017 su https://www.riigiteataja.ee/en/eli/517112017003/consolide

[6] Vedi Crypto-Currency Act 2020 su https://www.congress.gov/bill/116th-congress/house-bill/6154/text?r=10&s=1


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Blockchain+ Digital Rights National Interest new technologies data security

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