The policy dilemmas of blockchain
Judith Clifton, Leslie A. Pal · Policy and Society · 2022
Blockchain is a new, emerging technology that is expected to have deep and “disruptive” effects on our economies and societies. It offers a new paradigm for the way in which information is registered, stored, and transacted. Blockchain is actually only one example of distributed ledger technology, which constitutes a physically decentralized and secure database, in the sense data are not held in one central site, rather they are held and updated simultaneously across several sites, theoretically making it more difficult to hack (Weiss and Biermann, 2020). Blockchain allows generated information to be stored in “blocks,” each of which is “stamped” and linked to the previous one, creating an unchangeable record of transactions (Cagigas et al., 2021). The process is conducted and verified via a predefined network protocol or “consensus mechanism” that specifies how the system is ruled. This permissions architecture can be used to determine whether, and to what extent, the blockchain itself will be largely left under the control of a centralized entity or authority or whether access and control of the blockchain will be shared among all those interested in participating. For example, depending on the permissions granted, participation in the verification process can be open and free or restricted to a group of users. In addition, the information registered in the blockchain can be more or less openly shared. At the most general level, then, blockchains are secure, immutable, anonymous, and decentralized digital records (or ledgers) of user-verified digital transactions. The first well-known blockchain product to emerge was Bitcoin, in 2008, which utilizes the technology for its most familiar usage—“cryptocurrency.” Today, there are thousands of cryptocurrencies that have been launched with different degrees of success.1 Since cryptocurrency became well known, there has been a second spike in public consciousness about blockchain around non-fungible tokens (NFTs), where one-of-a-kind digital assets are bought and sold every day. These NFTs can be as trivial as a “signed Tweet,” one of which was sold via auction in March 2021 for almost US$3 million.2 Yet, only 1 year later, the same product was put up for sale again, the highest bid being only US$280, inevitably questioning its intrinsic price.3 As a result, blockchain is sometimes associated with crypto-criminality, money laundering, or questionable frivolities in the digital art market. Despite these better-known commercial applications, blockchain can also be applied to the public sphere: government, public policy, and public services. Indeed, in recent years, governments and international organizations around the world have started to deploy blockchain in a growing number of services, including digital identity management, health, food and agriculture, land registry, public procurement, defense, aviation, value chains, logistics, and more.4 So, while the early hype and possibilities of blockchain were grossly inflated (Tapscott & Tapscott, 2016) and the “blockchain revolution” is still to come in the way that the portable computing, the internet, and cell phones did, there are significant implications to the technology, both as a target and as a tool of public policy and indeed as a possible new form of governance (Campbell-Verduyn, 2018). Among these implications are higher-order questions on the nature of money, law, and democracy—and even the state itself (Atzori, 2015). Cryptocurrencies such as Bitcoin have been issued outside of the traditional financial sector and have become a means of financial exchange and wealth-storage beyond the reach of governments—and among their more radical proponents, that is a feature, not a bug. Hence, states are already examining the issue of regulating cryptocurrencies not only because of their potential for being used in illegal transactions and money laundering but also for their potential threat to financial stability (FSB, 2021). It may be attractive too for financial interests to “tame” crypto and turn it into just another investment vehicle. The implications for the nature of law were first forcefully put forward by Lawrence Lessig: “code is law” (Lessig, 1999, 2006). This refers to a species of “algorithmic governance” where the routines and assumptions embedded in computer codes “govern” human behavior (Noble, 2018; Pasquale, 2015). More importantly, the code, for example, in the form of a smart contract, can trump the “law” in the sense of legislation or rules determined by state authorities. For example, remote services can be contracted in one part of the world, paid for through an app such as Satoshipay, and governed by a smart contract. The legal and taxation regimes within which those contracting parties reside become irrelevant. In both the arch-examples of currency and law, we see the potentially radical disintermediation that is either lamented or celebrated by promotors of blockchain technologies. Blockchain can go further and deeper in upending our conventional concepts of democracy and the state. For example, for most purposes, government-issued ID (passports, driver’s licenses, and birth certificates) are considered the foundation of one’s formal and legal identity. Indeed, a pioneer public case is currently being developed in the European Union (EU) within the realm of self-sovereign identity (SSI), namely the European Self-Sovereign Identity Framework (ESSIF).5 Moreover, there are also private initiatives: through Blockchain Helix, people can establish digital identities that give them an immutable record of who they are. The “national” passport could be eclipsed by the digital ID, which can then be used for borderless transactions. The point of these innovations is sometimes difficult to grasp since they seem to be only “added layers” to existing, secure, and accepted forms of ID. All current forms of ID can be counterfeited, hence the lengths that governments go to protect the security, for example, of a passport. We can see the problem more clearly in the case of academic or professional credentials. As labor markets go global, the barriers to “proving” one’s university or training qualifications (e.g., degrees, certificates, and CVs) rise considerably with requirements for attestation from various “official” bodies. Blockchain potentially upends this. The upending is moderate, a mere tilt, if governments (e.g., the ESSIF above) build the blockchain architecture. The upending is radical if individuals no longer need government and if their digital ID is blockchain-solid and accepted anywhere. The digital ID would supplant the government passport or other state-sanctioned ID. The current value of “citizenship” would be further debased. Another example is governance processes, in both private and public spheres. The LiquidFeedback platform promises a “unique democracy software” to promote self-organization of units as small as an association or company or as large as municipalities. Bitnation goes further still and promises “a blockchain jurisdiction in which communities can be built, contracts made, disputes resolved, and agreements positively enforced through reputation. Within this jurisdiction, governance services such as peer-to-peer security, insurance and education can be accessed via third-party dapps.” You can even start your own “nation” if you like. Of course, this seems absurd—until we interrogate the core functionalities of the modern nation-state and consequently of “citizenship.” A contract between two parties who reside in the same “jurisdiction” is subject to adjudication and enforcement by that jurisdiction. When the parties are from different jurisdictions, the contract usually specifies which of the legal frameworks govern the agreement. Alternatively, there are provisions in international commercial law or treaties that will govern such agreements. Once again, blockchain upends this. A contract between parties in Montreal and Mumbai can be forged in blockchain, with its own self-executing provisions that have nothing to do with the jurisdictions within which the parties reside. Some analysts believe blockchain has libertarian and autarkic disintermediation in its DNA,6 but this has not stopped some governments from embracing the technology as the “next big thing” in governance and policy platforms; Dubai, for example, has a blockchain strategy that it claims will make it the “happiest city on earth.”7 This is part of the United Arab Emirates (UAE) Emirates Blockchain Strategy 2021, which aims to transform 50% of government transactions to blockchain.8 Its plan comprises a national system built around a unique digital ID for each citizen/resident, which they can then use to access government documents and services. The EU has a blockchain strategy, which includes the European Blockchain Services Infrastructure that is a joint effort of the EU states, Norway, Liechtenstein, and the European Commission.9 The overarching intent is to provide “legal certainty” and avoid “regulatory fragmentation.” Estonia has been the pioneer in digital governance, embracing e-government as early as 1997. It was the first government to use blockchain technology in 2012 with its Succession Registry, maintained by the Ministry of Justice. The blockchain platform now includes the following registries: health care, property, business, succession, digital court system, surveillance tracking information system: official state announcements, and the state gazette. Anarchists, drug cartels,10 financial institutions, and some governments (from the Baltics to Arab emirates) have embraced blockchain, but the policy research community is alarmingly late to the party. Debate and analysis on blockchain have been dominated by computing science and fintech, and more recently by legal scholars, even though the implications for policy science and public policy are potentially staggering. Even if we think of the implications only in terms of blockchain as a “tool” (something to be used in the delivery of public services) for public policy or as a “target” (threats to be managed), the list of services that could be disrupted by blockchain is significant. It is only in the recent period that the lack of attention to blockchain from the policy research community has started to change. This attention to blockchain can be quantified: a systematic review of the academic literature on blockchain in the public sector shows a sharp increase from 2015 onward (Cagigas et al., 2021). In parallel, there has been a significant increase in the number of policy documents on blockchain produced by international policy organizations, including the EU,11 the OECD,12 the United Nations (United Nations International Children’s Emergency Fund (UNICEF), United Nations Development Programme (UNDP), and UNWOMAN), and the World Bank.13 From the perspective of government and policy, blockchain is being used as a tool, for example, in the following activities: Record-keeping (health records, land registries, and vehicle registration); identity attestation (passports, ID cards, birth certificates, marriage, and divorce) Payments and remittances (Rodima‐Taylor & Grimes, 2019) Central Bank Digital Currencies, mostly known by their acronym CBDCs (although very few are currently considering using blockchain in their final pilots14) Secure and transparent delivery of cash benefits and tokens Smart contracts Supply chain management (tracking) Traceability systems (food safety and conflict minerals) (Muirhead & Porter, 2019) Insurance contracts And, as regards policy targets (threats) associated with blockchain, the following lead the concern: Money laundering (e.g., Financial Action Task Force) Financial services regulation (and experimentation) Carbon footprint of cryptocurrency “mining” Cyber-threats and cyber-warfare Tax evasion It is now timely to bring together a collection of articles by leading international experts that focus on what blockchain might mean for the economy and society, the regulatory dilemmas it presents, and possible policy solutions. The articles selected for this special issue all focus on core characteristics or promises of blockchain technology from a societal perspective and contemplate the regulatory challenges and dilemmas therein. For example, at the most generic level, blockchain technology is expected to be disruptive, meaning it is expected that, after initially taking root in simple, specific applications, it will increasingly replace previous technologies and bring about profound changes in the ways in which processes are completed, bringing about increased efficiencies and greater transparency and data security. However, these potential advantages must be considered alongside blockchain’s high-energy consumption needs, processing speed and cost. Blockchain thus presents trade-off dilemmas for policymakers seeking to promote economic growth, innovation, and sustainability. At higher and more abstract levels, we should also contemplate the potential impact of blockchain on our received notions of state sovereignty, citizenship, and governance. A key question for policymakers today is how can and should blockchain be regulated? De Filippi et al. (2022) pose the question of how policy can be designed to regulate and legalize a technology like blockchain that is “alegal” by design. The public, permissionless version of blockchain was explicitly designed to be decentralized, anonymous, and beyond the control of government. Some of the uses to which it was consequently put were clearly illegal, but many are “alegal” in the sense that they are simply beyond the scope of government to regulate or even “see” and have a self-regulatory, non-state bounded character of simple facticity. Blockchain is neither legal nor illegal, it just is or at least it “just was” in the moment of its creation/design by Satoshi Nakamoto (possibly a person, possibly a pseudonym). It was a completely new economic and payment system that had not existed before and thus was beyond law. The article shows, with a brief example of the attack on The DAO (a decentralized investment fund deployed as a smart contract on Ethereum in 2016), how far beyond normal legal or governmental interventions it was. However, policymakers are not entirely impotent—they can still regulate intermediaries, commercial operators, or mining pools and establish arbitration regimes, and indeed governments in the USA and in Europe have imposed anti-money laundering regulations and blacklists. De Filippi et al. 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