Unleashing the blockchain
Although action on the state level may have been limited, 2016 saw regulators begin exploring and learning about the technology. Both the Federal Reserve and the SEC, for example, have indicated a willingness to pursue distributed ledger products and have formed working groups to investigate integrations with the technology.
This interest in using blockchains as an alternative to the current system of interconnected, incompatible databases emerged from two relatively recent developments in blockchain technology: the use of smart contracts to automate business processes and the ability to conduct transactions between different blockchains.
Looking forward to 2017, Lewis Cohen, a partner in the intellectual property practice at Hogan Lovells, shared his thoughts on this issue, noting that interconnected blockchains offer regulators the potential to be involved directly in this new wave of innovation. "The biggest surprise of 2017 may be the rise of ‘interconnecting’ blockchains," Cohen said. "The inability to deliver this type of blockchain integration will otherwise prove to be a major pain point for the industry."
Cross-blockchain technologies, such as Polkadot, IBM’s HyperLedger, Overstock's tØ and Ripple, create the possibility of nodes from one blockchain conducting transactions with nodes from another blockchain – potentially those operated by regulators – in real time. This, coupled with privacy-insuring technologies such as R3’s Corda, which allows a node to choose the information it wants to decentralize while protecting the rest, allows for a new way to think about public ledgers.
The DAO's wake
With bitcoin values likely to keep climbing in the short term and ethereum set to continue growing, it may be safe to say that the states will continue to consider legislation and regulations that will make the taxation and the tracking of this new form of wealth easier to manage. However, the impetus for the rule-making of the future may shift towards engineering a proof-of-concept on how this technology can work in real-governance situations, rather than experimenting with ways to track money transfers to and from fiat currencies.
"If 2016 was the year that the blockchain burst into public view, 2017 is the year that blockchain pilots and proofs-of-concept begin to permeate the mainstream of industry,” said Alan Cohn, co-author of the Steptoe Blockchain blog and former Department of Homeland Security assistant secretary.As highlighted by The DAO, while blockchain tech can help to solve some of the administrative problems associated with large-scale data management, it creates new potential problems that must be closely monitored by regulators.
The 18th June hack on The DAO revealed that smart contracts can – if not implemented correctly – be used to drain value from the system, putting consumers at risk. Finding solutions to mitigate the problems that may arise from a blockchain failure may be a priority in 2017. Unlike cryptocurrency networks, a loss on a data-bearing distributed ledger may not just result in loss wealth. Yet, the potential loss of personally identifiable information, the unauthorized access to critical data and the potential for violations of existing security laws all are areas that must be resolved should a public sector blockchain solution be pursued.
Standards as a hedge
2016 saw cryptographic transaction technology emerge from its adolescence and take its first steps as a mature mode of operations. Accordingly, the government has reacted and has taken steps to both understand the technology and come up to speed with it regulation-wise. Yet, there is still the question of incoming president Donald Trump.
With both cryptocurrency advocates and opponents named to his cabinet, it is unclear how the new administration will approach cryptocurrency and distributed ledger legislation. Uncertainty, it seems, is now the biggest roadblock preventing further public experimentation with blockchains.
Mike Massaro, CEO of cross-border startup Flywire, for example, told CoinDesk that he believes regulatory uncertainty will be the largest roadblock against moving past proofs-of-concept forward and that industry-led work on standards may have to take its place.
"I expect there to be some real progress in this area."