Jade Fenech

Legal Associate, E&S Group

Jade joined E&S Group as a legal associate in 2018. Before joining E&S Group she practised with a litigation firm for two years. She holds a Bachelor of Laws Degree and a Masters of Advocacy from the University of Malta and was admitted to the bar in 2019. Her primary areas of practice are corporate and commercial law, financial services and fintech.


To regulate or not to regulate

Thursday 11th July 2019

From the Merkle trees in 1992, to the birth of the first blockchain in 2008, and to today’s widespread adoption of blockchain and other forms of DLT technology, it is clear that technological innovation has picked up momentum. New technologies are being developed, deployed, and replicated faster than ever. During this wave of innovation, how is the regulator expected to react? And what challenges does it face?

With one of the most exciting aspects of DLT technology being decentralisation, meaning that no central authority controls the system, having a regulator imposing controls and limitations appears to be contradictory to the spirit of the technology itself.

The challenge currently being faced by the regulator is how to strike the right balance between the extent of the regulation, maintaining the spirit of DLT technology and promoting innovation; and between how passive or proactive the regulator should be. While regulation is needed to enable innovation, it can also be slow at managing its downsides.

Regulation of DLT technology is not keeping up with the fast pace of innovation, as evident in many jurisdictions in the case of ICOs, STOs and crypto exchanges.

The case for regulation:

Legal certainty – This would lead to the furthering of public trust in the technology and would encourage a more widespread use of it;

Determining the issue of liability – Where loss is incurred by fault of the technology, who is to be held liable? What if the creator of the software is unknown?

Protection of rights – Different key players require protection of their rights, including users and creators of the technology, as well as investors;

Economic stability – Lack of regulation had a direct link to the 2018 crypto winter, where unregulated scam ICOs resulted in investors losing a fortune, pushing them to sell their crypto assets out of fear, and causing the bear market which saw the free-fall of the price of crypto.

There are several issues which may hinder the regulatory process and acceptance thereof. Due to blockchain’s immutable nature, Uber’s approach of ‘do this first, apologise later’ does not work. Waiting too long means risking losing the opportunity to regulate it before it becomes widespread and potentially harms consumers or markets in the interim, with no possibility to regulate later. This necessitates regulation at the outset.

On the other hand, as blockchain enthusiast Ferdinando Ametrano believes, “Regulating in advance will be a risk that may hamper innovation”. Since regulators cannot regulate something that doesn’t exist, we should “see how it (blockchain) works, because otherwise we cannot regulate it”

The challenges to regulation:

The fast pace of innovation and the risk of stifling it – If regulation is too specific, it risks becoming obsolete before even being implemented. It must be wide enough to remain effective, notwithstanding constant developments, without having adverse effects on the pace of innovation itself;

Impossibility to regulate retrospectively – This is a challenge in itself with regards to those technological arrangements are already in existence, especially where the creators are anonymous or unknown. In the case of open source protocols, if they are unregulated at the outset, they may remain unregulated with the possibility of there being further forks and developments therefrom in an unregulated manner. In this case, the evolution of law suddenly becomes ineffective;

Who to regulate and at which point? Like the internet, blockchain can be used both beneficially and maliciously. Therefore, is it the manner in which it is used that needs to be regulated or the technology itself? However, since a smart contract may be malicious from inception, regulation may be required at development stage. An issue still remains in the case of anonymous developers. Moreover, we are still unaware of all the legal implications and any unwanted consequences, failure scenarios and the possible extent of its misuse.

Jurisdictional challenges - As the technology specifically relies on being distributed worldwide, regulatory harmonisation is necessary. A technological arrangement may have an impact in multiple jurisdictions. Therefore, since such technology may have worldwide implications, intercountry or regional regulations will likely be insufficient.

No precedent or jurisprudence– Jurisprudence is considered a source of law in most jurisdictions. Since the law is not always clear, to resolve the grey areas and avoid discrepancies, judges refer to previous judgements to maintain a streamlined interpretation. At this stage, this cannot be done with emerging regulations on DLT technology and this may very well lead to different interpretations of such laws - and possibly conflicting judgements;

The need to have a well-informed and competent judiciary to enforce regulations both at national and international level.

Therefore, whilst there are several challenges to overcome, it is clear that some level of regulation is required. To allow innovation to thrive, it is important to set the right environment. Clearly, regulation comes at a cost to potential industry growth so a sensible balance is vital.