While we live in an age of exponential technological innovation, true black-swan breakthroughs are still rare. Most of our technological development is either incremental, or developing along predictable lines. But blockchain is one of those rare breakthroughs that are as innovative as they are unexpected, as timely as they are revolutionary.
Blockchain was first deployed in 2009 as part of the Bitcoin peer-to-peer electronic cash system that was invented by the pseudonymous Satoshi Nakamoto during the height of the financial crisis on 2007-2009.
It is essentially a distributed ledger that is cryptographically distributed across a number of nodes that cooperate using game theory to guarantee the integrity of the records. As a result, the value recorded on this distributed ledger can be transmitted in minutes across the globe, from one person to another, without the need of any central authority to regulate and guarantee the asset and its transaction.
It is difficult to understate the revolutionary potential of decentralised ledgers of electronic value and its implications for every industry imaginable, above all for financial services.
For this reason, blockchain is posing a conundrum to governments and regulatory bodies. It comes with such obvious potential that everybody is falling over himself to adopt it.
At the same time, the infrastructure of blockchain shrugs off many of the regulatory checks and balances governments and organisations have developed over the years to keep in check money laundering, tax evasion, fraud, and crime of all sorts.
It has become obvious that regulation and compliance are essential to allow the growth of this new technology without creating avenues for rampant abuse. Doing nothing is not an option
It is therefore not surprising that governments globally are looking very carefully at the sector and working to find the means of regulating it in a way that limits the potential for crime without hindering the potential of this new industry. It is here that Malta has blazed a trail of innovation.
For unlike many jurisdictions, whose approach appears to be to draft new regulations within the existing infrastructure, Malta has built a new legislative framework for this new technology from the ground up. The framework consists of three Acts, the Malta Digital Innovation Authority Act (MDIAA), the Innovative Technology Arrangements and Services Act (ITASA), and the Virtual Financial Assets Act (VFAA).
Of these three Acts, which passed into law in 2018, the MDIAA established a regulatory authority to oversee innovative technology arrangements and services, the ITASA established a voluntary regime for such arrangements to seek certification from the Malta Digital Innovation Authority, and the VFAA allows for the provision of virtual financial assets that are not covered by any other Maltese law, as well as services thereof.
The remarkable thing about the Maltese framework is that it is sufficiently flexible to allow for future developments of the technology, and can be applied with a minimum fuss, while being adjustable on the fly. This is the advantage of a jurisdiction that passes bespoke legislation for a revolutionary technology. It clearly comes with risks and evidently the main centre of risk lies with the manner in which the law, designed in a pre-blockchain era, is to be applied to DLT and smart contracts.
When it is not clear how laws, like the ones on the prevention of money laundering or mandatory regulation, which are criminal in nature, apply, it is the intermediary who is bound by compliance obligations who is the one most at risk. Service providers cannot be complacent about compliance.
With Malta's innovative legislation in place, only one element remains outstanding. We need to build the expertise required to implement the laws in the best possible way. The laws and the resources are developing, and there is plenty of knowledge and expertise too. But it is essential that this knowledge be as widely disseminated as possible, for the good of the technology, the industry and the jurisdiction.
Without adequate training, the reputational risk to both the blockchain industry and to Malta will not be allayed. Ultimately, it is incumbent on all practitioners, who are operators in the field, to acquire the knowledge that allows them to act with the highest integrity and effectiveness for the good of all.
It is for this reason that the Institute of Legal Studies Malta, a non-profit educational institute focusing on specialist topics (www.ils.com.mt), is offering an intensive course on the latest compliance techniques in the field: Compliance in Blockchain.
For this course, which starts tomorrow, the institute has arranged for US expert Lynn Connolly, partner and founder of Harbor Peak LLC (www.harborpeak.com), to train participants in the latest expertise in compliance, cybersecurity and risk mitigation and so on.
The institute will also be offering a preliminary course for those who require an introduction to blockchain legislation in Malta in preparation for the Compliance in Blockchain course.
Goodwill alone cannot ensure high standards of compliance. At the end of the day, the only thing that will preserve the reputation of the technology, the industry, and the jurisdiction, is the will and the ability of our professionals to achieve these high standards.
This article was first published in the Times of Malta, 24 April 2019.
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