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  • Writer's pictureP Xenos and M Bacina

The EU Legal and Regulatory Framework of Blockchains and Smart Contracts

Updated: May 2

The European Union Blockchain Observatory & Forum recently published a lengthy report on the 'Legal and Regulatory Framework of Blockchains and Smart Contracts.'

The EU Blockchain Observatory and Forum was founded in 2018, and is designed to provide analysis, discussion, education, and meaningful recommendations to foster blockchain innovation within Europe.

Synchronisation of regulatory treatment for blockchain and standards are critical for technology like blockchain, and unsurprisingly, the report reinforces the need for Europe to move swiftly to a predictable legal and regulatory framework in order for blockchain to become a catalyst for innovation, jobs and economic growth within the EU.

The report notes:

History shows that disruptive tech and the law always find each other in the end. We see no reason why a similar process will not enfold for blockchain.

(and yes, that is the correct usage for 'enfold'). The report outlined two ways in which this could be achieved. We are calling these the "RegTech" and "Proactive" approachs.

The RegTech Approach

The first is an evolution of legal and regulatory “tools” to assist authorities with some of the novel aspects of blockchain technology, a RegTech deployment using blockchain, if you will.

Many of these resources already exist. Using the internet as a key example, the report notes:

authorities have recourse to various access points (exchanges for example) to help them monitor and enforce legal and regulatory requirements even in highly decentralised, permissionless environments.

The blockchain industry has also been developing tools that can assist authorities (and blockchain companies) in meeting compliance – for example methods to “pierce the veil” of pseudonymity on blockchains and identify network participants.

This is a piecemeal and reactive way to respond to blockchain and is likely to result in many bumps and challenges as bad actors find ways to avoid tools and a technological "arms race" continues.

Proactive Approach

The second method proposed by the report was considered to be the natural evolution of the legal and regulatory framework to take account of blockchain as a disruptive technology.

The report noted that there has already been a great deal of activity in this regard in the area of digital assets, and took into account the more general legal issues around the technology, smart contracts and disruptive blockchain use cases.

The report strongly encouraged that:

Regulators should provide guiding principles to attract private-sector investors, ensure consumer protection and citizens’ rights, and provide safeguards against anti-competitive practices.

The EU is adamant that blockchain technology will play a key role in building Europe’s Single Digital Market if blockchain-enabled markets are to mature, and if policy makers and businesses correspond and create the rules of engagement together.

We will consider further parts of the report in a later update.


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