WORKING PAPER

Regulatory Trends in Blockchain Technologies

Oleksii Konashevych (Ph.D.1) 0000-0003-0068-5962

Abstract. The blockchain is a technology that was initially designed as an alternative to the banking
system aimed to decentralize money circulation. It has become apparent that the invention has a vast
potential to improve various industries and fields of human activities. The blockchain industry generated
a variety of ideas of how to use this technology: to crowdfund business with Initial Coin Offerings (ICO),
to tokenize and manage assets online, to improve public administration and state-owned registries, or
even to use it for electronic voting. Multiple applications of this technology became possible since the
industry started experimenting with overlay technologies on blockchains, for example, Colored Coins,
known as tokens on Bitcoin; Namecoin, a blockchain as a decentralized infrastructure for Top-Level
Domain “.bit,” but the significant step forward happened when Ethereum proposed their concept of smart
contracts on blockchain. There are several platforms that offer users the ability to design their own
private and public distributed ledgers (Hyperledger, Azure). It is not easy to mention all of the projects
in the field of blockchain industry; however, at this stage, it has become clear that the technology (along
with some other innovations, like Artificial Intelligence) is penetrating spheres that are traditionally
highly regulated and centralized with a high level of human participation: securities and exchanges,
public registries (notary, real estate, business entities and other registries), public finances, elections, etc.
This discussion is devoted to the issues of regulations for the activities that arise from the blockchain.

Keywords: blockchain, distributed ledger technology, electronic governance, electronic democracy

1 About blockchain

The blockchain is a comparatively new technology presented in 2008/2009. Before

any kind of regulation, it is necessary to develop a mutual language with a common
terminology.
Originally, the notion “chain of blocks” appeared in a white paper authored
under the name of Satoshi Nakamoto “Bitcoin: A Peer-to-Peer Electronic Cash
System” (Nakamoto, 2008), then in conversations on the developers’ forum it
transformed into “blockchain” as we know it now. The next year after the
publication, Bitcoin, the first decentralized cryptocurrency appeared. It was
purposely designed as electronic cash. However, soon it became clear that it had a
disruptive potential for many other spheres.
The blockchain is a ledger that keeps track of transactions with a native
token, called “cryptocurrency.” The transactions are organized in blocks. All blocks
are stored in chronological order and cryptographically connected, so it is
practically impossible to counterfeit, re-order or alter them. Users can make peer-
to-peer transactions without authorization from a third party, just by having their
own private cryptographic keys, which guarantee exclusive access to the address
(wallet) that keeps records of cryptocurrency balance. Anyone can share their

1
Independent researcher, oleksii.konashevych.com

Electronic copy available at: https://ssrn.com/abstract=3749708

Regulatory trends in blockchain technologies 2

computing resources to the network and compete to create new blocks of

transactions.
In the first version of the technology, computers had to solve complicated
mathematical tasks in order to gain the right to add a new block of transactions. This
protocol is called “Proof-of-work.” Other nodes verify a new block and accept it if
it complies with the initially designed protocol, also called “consensus mechanism,”
The winning node includes a record of its revenue in the presented block. So,
cryptocurrency does not appear from nowhere, it is a product of “mining.” A copy
of the archive of blocks with transactions is stored on each node, which is also called
a “shared ledger.” Transactions are transparent; anyone can have a copy of the
whole database of transactions.
“Coins” can be traced, so each unit can be treated as unique. Also, within
a transaction, a user can insert some arbitrary data using various methods (Sward et
al., 2018). It is usually called “to hash data” or “to anchor data” (if not hashes are
published) on blockchain (Konashevych, 2019). The published data in blockchain
remains immutable and public, as transaction data as well. Moreover, it can be
traced to its originator as it is published within the transaction from/to an address
using the relevant private key.
This prompted an idea to develop software on top of the original
blockchain protocol to represent some values and property rights, which are now
mostly called “tokens” or “cryptotokens.” There are different types of tokens,
basically depending on where they are used:
• Equity tokens are an alternative to corporate shares.
• Utility tokens are internal units of different commercial services
(points, discounts);
• Asset-backed tokens represent some promises to deliver property
rights on some real-world goods and services;
• Security tokens reflect relationships around debts and other
financial obligations.
• Title tokens as a unit of account for title rights in a new generation
of public property registries based on blockchain (Oleksii
Konashevych, 2020a).
A concept of the Ethereum blockchain led to a new wave of development
of this technology. This is a cryptocurrency and a platform that has its own
programming language to create decentralized applications. The foundation of this
system is the concept of “smart contracts.”2
A smart contract is a programming algorithm developed to manage
cryptoassets (cryptocurrency, tokens) in an automated way. For example, if
someone buys a token for cryptocurrency, the algorithm excludes the possibility of
fraud: during the exchange, a seller will get a cryptocurrency, a buyer – a token.
This is just a very simple example of how a business can become more efficient and
reduce costs on mediators (banks, escrows, brokers, notaries, governments, etc.)
which is a usual party in conventional trusted (non-blockchain) relationships.

2
The concept of “smart contracts” was initially proposed by Nick Szabo (1994).

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Regulatory trends in blockchain technologies 3

Contrary to the Ethereum concept, some other projects developed end-user

services as overlay services on the blockchain protocol, so there is no need to
develop new software, but rather to download the application that combines a wallet
and platform for such blockchain-based services and adjust it to the user’s needs.
There are possibly hundreds of them; Emercoin3, NEM4 and NXT/Ardor5 would be
just randomly picked examples in their variety.
Another trend is a set of technologies that allows businesses to create their
own standalone shared ledger. They have received a general name of “distributed
ledger technologies” (DLT). There are known different DLT frameworks with
diverse features (Hyperledger6, R37, Corda8, Tendermint9, etc.). In applying the
framework, one can develop their network. Though the distinguishing feature of the
blockchain is to remain decentralized and open for competition, as Satoshi
Nakamoto initially invented. Alternative ledgers with centralized consensus are
known under a variety of names depending on their specifics, e.g., permissioned,
private, federated, enterprise DLTs, etc. Immutability is not their feature, as their
“consensus”10 usually is controlled by an actor or a group of defined actors in the
network with the right to create/validate blocks (super nodes, master nodes, etc.).
Typically, such DLT networks rely on the will of a group of designated actors who
on the contrary to other users have the right to create and validate
transactions/blocks; in such a network a transaction might be censored; the history
can be altered. Whilst the cornerstone idea of Bitcoin’s protocol was an absence of
a trusted third party in performing transactions and storing them.

2 Issues of Blockchain Regulation

The use of the blockchain is based on the idea of decentralization and the creation
of an electronic, trustless, transboundary environment that enables an automated
transfer of values. Bitcoin is the first example of how people can become highly
self-organized on a large scale without middlemen (managers, governments) to
satisfy their needs for circulation of electronic currency. Recently, the second
generation of technologies built within the paradigm of the blockchain have made
possible the use of this innovation in different fields such as ICO11 and securities,

3
https://emercoin.com/
4
https://nem.io/
5
https://www.jelurida.com/
6
https://www.hyperledger.org/
7
https://www.r3.com/
8
https://www.corda.net/
9
https://tendermint.com/
10
The word “consensus” in the blockchain technology means the way how nodes
synchronize and validate transactions/blocks.
11
Initial Coin Offer – the concept which similar to Initial Public Offer (IPO), the
way to crowdfund a project.

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Regulatory trends in blockchain technologies 4

real estate, notary, business registration, public administration and governance,

democracy and voting, the legislative process and constitutional law, as well as
international cooperation level.
Regulation of cryptocurrencies has become a widely discussed issue in the
world. There are two basic positions about the nature of cryptocurrency:
1. Cryptocurrency is money. This position can be found in the decision of
the European Court of Justice in 201512, where the court body ruled bitcoin as
“virtual currency.” Such recognition released the buying of goods for
cryptocurrency from value added tax (VAT) in the EU. Also, the U.S. Treasury
classified bitcoin as a convertible decentralized virtual currency in 2013 (Carper et
al., 2013).
2. Cryptocurrency is a commodity. This idea was supported by Commodity
Futures Trading Commission (CFTC), which classified bitcoin as a commodity in
September 201513. In the theory of money, goods can be money. For example, in
ancient times, wheat played the role of money, which means that a cryptocurrency
can be both a commodity and money. Nevertheless, the question remains: what kind
of use value does a cryptocurrency have per se?
A systematic analysis (Oleksii Konashevych, 2020a) shows that
cryptocurrency is value itself being created as the result of an open competition in
a blockchain network. The blockchain technology having its decentralized nature,
helps to perform peer-to-peer transactions, without the involvement of a trusted
third party, preventing double-spending, and at the same time keeping the archive
of all transactions in chronologically ordered blocks. The resulting immutability of
the ledger of transaction gives a platform where users can create useful applications.
Using the method of data insertion, a user with coin spending transactions can insert
data and so publish some arbitrary data, create tokens and smart contracts (insertion
of an executable program code). Therefore, the role of the cryptocurrency cannot
be underestimated, it is:
• a medium of exchange, i.e., users can buy and sell with cryptocurrency
borderless,
• a reward in the mining competition for sharing computing resources, and
hence it is
• a pillar of a self-organized and self-governed network, i.e., no defined entity
has the authority to maintain the network, and, therefore, it is a driving
gear of decentralized infrastructure,
• the blood of the system of an immutable repository and timestamping, and
so a platform for useful applications beyond cryptocurrency themselves.
There are four different positions of governments towards cryptocurrencies:
1. Cryptocurrencies are allowed and should not be regulated whatsoever.
This is a popular concept among crypto enthusiasts but not among governments.
The internet contains plenty of information about legal status of cryptocurrency

12
Judgement of European Court of Justice in the case № C-264/14,
http://curia.europa.eu/juris/documents.jsf?num=C-264/14
13
https://www.cftc.gov/Bitcoin/index.htm, accessed 27 November 2020

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Regulatory trends in blockchain technologies 5

across countries, for example, the wiki page “Legality of bitcoin by country or
territory”14 presents a consolidated data. The label “legal” has those countries where
governments have stated that cryptocurrency has “no legal status or regulatory
framework” like in South Africa or Brazil (Chohan, 2017). However, for example,
in the EU, where it is not prohibited, in July 2014, the European Banking Authority
advised European banks not to deal in virtual currencies such as bitcoin until a
regulatory regime is in place15, which places restraints on the use of
cryptocurrencies.
2. Cryptocurrencies are not prohibited, but the government keeps its finger
on the pulse and regulates when it is necessary. This is the most popular position
now supported by the EU countries, USA, Australia, South Korea, etc. (Chohan,
2017).
3. Cryptocurrencies are prohibited. This position can be found in Algeria,
Ecuador, Bangladesh, Nepal, Cambodia, and other places (Chohan, 2017).
4. Cryptocurrencies are not prohibited, and the government has introduced
some regulations to legitimize it. A noticeable example of legalization through
novel regulation is Japan, where they adopted a statute law for crypto assets (Arora,
2020). Among all variety of approaches in regulating cryptocurrency, useful
applications (beyond cryptocurrency) are possible only if cryptocurrency is allowed
and its decentralized nature is not compromised. Cryptocurrency, as we concluded,
is the blood of a blockchain system, blockchain cannot exist without
cryptocurrency.

What does it mean “to regulate” a crypto-industry and blockchain?

If we consider any kind of regulation, we need to distinguish the subject and the
reason for regulation. Authorities and banks provide money creation and circulation
and, thus, is centralized and regulated by laws. The blockchain offers an alternative.
With this technology, there is no need for centralized institutions. It is based on the
programming code, so there is no reason to create a regulation in this sense. “Code
is law”16 — the rules are not written on paper to be executed manually but are
developed in the form of an electronic program with self-executing algorithms. The
Bitcoin network is a sustainable self-organized and self-governed community, no
one, including Bitcoin Foundation, has any specific legal rights towards this
network, therefore cannot legally leverage any policy.
The opposite example would be shareholders. If someone challenges a
shareholder’s right, they will protect their right in a court. Neither node holders, nor
any foundation around, can legally enforce any decision within the Bitcoin network,
there is no legal mechanism, and even if it was a case, there is no practical way to
enforce any judicial decision as there are no technical means for that due to
decentralized and competitive nature of the technology.

14
Please be advised, Wikipedia not always provides for accurate and academically
verified data. Explore the page here:
https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country_or_territory
15
https://eba.europa.eu/eba-reports-on-crypto-assets
16
The expression belongs to a legal scholar Lawrence Lessig, PhD (Lessig, 2002)

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Since 2009, we have seen critical bugs, attempts to hack and compromise
Bitcoin, pools’ centralization, scalability and hardfork issues. Each time, the
community found solutions for these hardships and the network survived without
the intervention of an authority. Here we conclude, blockchain is not perfect,
problems appear from time to time, but the technology has been showing that it is
well balanced to cope them remaining decentralized.
Having understood the structure and principles of Bitcoin, it becomes clear
that many of the traditional regulatory methods do not work here. For example, a
government cannot demand the registration of cryptocurrencies. This is not a
company to register. Bitcoin does not have one exclusive beneficiary in common
sense; there is no legal entity that could represent it and be responsible before the
government and the society. The Bitcoin Foundation cannot be treated as the right
legal person, nor can any other institutions technically have the ability to control the
system. Attempts to establish legal control over the system are unworkable as
control cannot be enforced on the technological level.
Within a theoretical method to control the network exist only one – the
majority of nodes can act together to influence (censor) the transactions, change and
upgrade the network protocol, etc. And this happens in real life, it is observed how
networks are developed and upgraded. A credible team of developers proposes the
network community their upgrade to the system. Nodes owners independently
decide to accept it or not. Minority of nodes can create their “hardfork” (if not
agreed with others), which will cause a split of the network into two and more
networks. Till the moment of split, the networks have the same history of
transactions but from the moment of the hardfork, they develop their own chain of
new blocks. In the result of a hardfork all assets are duplicated, i.e., a user that had
some coins, gets the same in the parallel network, but then newly created coins in
hardforked networks will be different.

51% attack and Antitrust

Academia and industry have been discussing one of the possible threats to the
network. “50%+1” attack is a hostile takeover of nodes or a cartel that pursues a
malicious goal (Eyal and Sirer, 2018). There are different scenarios, for example
nodes will become a part of a malicious segment of the network in the result of
hack, so node owners will not know when they become a part of a large conspiracy.
Of course, discussed scenarios are purely theoretical with regard to large networks,
as none of such networks (Bitcoin, Ethereum and dozens of other top-ranked
cryptocurrencies on Coinmarketcap.com, etc.) have been ever compromised. It is
unrealistic mainly because of the cost of the attack, for example crypto51.app17
shows that one-hour attack cost on Bitcoin is more than half a million U.S. dollars,
whilst deep and disrupting attack might require hours or even days. Taking into
account that cryptocurrency exchange price is a pure market mechanism, based first
of all on believe of people that this blockchain would remain secure and
decentralized to keep transaction protected from anyone, such an attack will disrupt
the credibility and hence its capitalization will dramatically decrease. Therefore,

17
https://www.crypto51.app/

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Regulatory trends in blockchain technologies 7

greed in such attack would be unlikely the major factor. Benefits from such attack
must outweigh the losses which the attacker might bear, including due to dramatic
price drop.
While the questions of incentives of disrupting large networks remain
unaddressed, the decade showed how new or small networks can become hacked.
It happened, for instance with VeriCoin and many others even less know (Higgins,
2014). All this undoubtfully contribute to the knowledge base about the blockchain
technology and understanding of its vulnerability and benefits.
One possible scenario of an attack would be a threat to node owners and a
physical takeover of nodes. It is not easy to hide large amount of computing
resources if they run a network with Proof-of-work protocol, because they consume
substantial amount of electricity. Usually, they are called “mining farms.”
The role of the governments in supporting decentralization in a blockchain
network, would imply not only abstaining from overregulating cryptocurrencies,
but protecting the rules of fair competition, including antitrust and prevention of
crimes against the members of a network, that can undermine network
decentralization. As it presented in one analysis, decentralization of open public
networks that run blockchain is not a static position, it is a constant struggle of
“good and evil” where the law of economic competition always wins at least
meanwhile. At any moment a blockchain network theoretically has a potential to
shift to centralization, if balance is broken.
Alternatively, much computing resources can be accumulated in a fair
competition. This can be treated as a natural monopoly, and it is up to a government
which policy will be developed in response, as centralization itself is not a threat,
but a risk and a source of problems, i.e. corruption, abuse of power, manipulation,
censorship, etc. The natural monopoly seems unlikely for such large-scaled systems
as Bitcoin, while they are open and competitive. Small networks on the other hand
do not constitute serious implications to the economy, hence unlikely should be
challenged for having a monopolized blockchain protocol.

Anti-Money Laundering and Counter-Terrorist Financing

Cryptocurrency can be exchanged for goods and services as an open business
activity on the market, where cryptocurrency would play here the role of money. A
legal bottleneck occurs when the cryptocurrency is exchanged for fiduciary money,
precious metals, jewelry, and other valuable assets with high liquidity, that can be
used for illegal purposes. Even though cryptocurrencies can be deanonymized
(under some circumstances), they are still one of the most effective ways to veil
criminal activities and ensure circulation of prohibited products and services
(drugs, weapons, contract killing, etc.). From the perspective of Anti-Money
Laundering (AML) and Counter-Terrorist Financing (CTF) regulations, this is
meant to be the subject of high government attention and financial monitoring.
KYC18 principles seem to be the most reasonable solution for money exchange
transactions regarding AML/CTF.

18
Know-your-customer (KYC) is a process of business identifying and verifying
the identity of clients.

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The Financial Action Task Force (FATF) recommendations operate with

two notions “virtual asset” (VA) and “virtual asset provider” (VASP) under which
fall cryptocurrencies and tokens, and institutions which create (tokens) and provide
their exchange or circulation. FATF’s guidance suggests VASPs performing due
diligence (Recommendation 10) for transactions beyond USD/EUR 1.000 threshold
for occasional transactions; and the obligation to obtain, hold, and transmit required
originator and beneficiary information, immediately and securely, when conducting
VA transfers (Recommendation 16), whilst VASPs themselves are to be registered
or licensed, meaning that FAFT countries are recommended to impose a relevant
regulative framework (FATF, 2019).

Taxation
Governments consider different approaches to taxation of crypto assets. For
example, through the Internal Revenue System (IRS) bitcoin is taxed as a
property19. In Israel, as of 2017-2018, the tax authority issued statements that
bitcoin and other cryptocurrencies would not fall under the legal definition of
currency or a financial security but would be defined as a taxable asset. Each time
a bitcoin is sold, the seller would have to pay a capital gains tax of 20-25%. Miners
and traders of bitcoins would be treated as businesses and would have to pay
corporate income tax as well as 17% VAT20.
The complexity of taxation lies in the definition of a taxable event.
Cryptocurrency is not based on any property obligations, meaning that no one owes
anything to the holder of a crypto coin, no one is obliged by a law or a contract to
give any value in exchange of cryptocurrency. Moreover, it is extremely volatile in
exchange markets. The one who owned one bitcoin in September 2017 and in
January of 2019, had an equivalent of 3500 U.S. dollars, while the same coin would
cost 18000 U.S. dollars in December of 2018 and December of 2020. The market
value of cryptocurrency is based on demand and supply. Therefore, the holder of
cryptocurrencies will be unlikely fairly taxed, if for example, the regulator applies
similar approach as in real estate tax, where owners pay taxes just for owning the
property. In the case with cryptocurrency, the owner might pay any tax based on the
current price but the next day the coin will cost nothing. The market value of a
cryptocurrency creates right at the moment of exchange, when the seller and the
buyer come to an agreement of the exchange rate of the asset. Therefore, the most
reasonable approach is to tax the profit which the miner or cryptocurrency owner
acquire when selling cryptocurrency.
Tokens have different economic nature. Tokens are not produced in
competition of nodes but can be created at any moment by any user. And the user
decides (announces) if the token represents some property rights, obligations, legal
promises, debts, etc. Hence, the taxation of asset-backed and security (debt) tokens
should align with general policy of taxation of relevant property rights.
Tokens that represent a flock of sheep must be treated not as a value itself
but as record of ownership in electronic form. There is no logic in taxation of a

19
https://www.irs.gov/newsroom/irs-virtual-currency-guidance
20
https://www.loc.gov/law/help/cryptocurrency/israel.php

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token as a record of ownership, if a similar record in a paper registry is not taxed.

As to utility tokens, a user is limited within the online application and it
services. It should be treated as a unite of account for this service, e.g., a video game
money for example where users buy swords or tanks for their game characters, are
not a matter of taxation while these tokens themselves have no speculative nature
and circulate internally in the online application.

Tokenization of economy
A business in general might be interested in tokenization of assets for a variety of
reasons. The aim of an asset-backed token is to represent goods and services for a
remote online trade, whilst a security token can represent some dept or another legal
promise. This is one of the cases when a third party is needed to certify the
compliance of tokens, or to be an escrow in trade contracts. The trusted party
certifies the existence of a physical asset and in this way legally confirms that this
token represents declared value and is responsible for this fact.
In the U.S., a legal precedent subsequently named “Howey test” (Murphy,
1946), now is also used in cryptoindustry to distinguish features of an investment
contract among which is “an expectation of profits predominantly from the efforts
of others.” Tokens that meet these criteria are considered to be a subject of the
federal securities laws and require registration and other procedures. This is how
normally security are distinguished from asset-backed tokens. Other jurisdictions
may have similar approaches. For example, Australian security and exchange
authorities, issues a broad explanation, when a token is subject to federal law and
must be registered21.
Another direction where existing regulations limit “wild west” tokenization
is real estate. Deeds with real estate require an official acknowledgement and
registration, i.e., by a notary, a registrar, a town clerk, a court registry, or another
authority as per variety of approaches found in countries around the world. Similar
might be needed with corporate rights, vehicles (cars, boats, aircraft) in different
countries and states. Therefore, free trade of tokens pegged with property that have
some specific regulation (registration, acknowledgment by authorities, etc.)
unlikely to happen, unless old-fashioned regulations are changed.

Title tokens
As to real estate, in academic literature can be found a Ph.D. thesis by publication
consisted of five peer-reviewed journal papers (Oleksii Konashevych, 2020b) that
present a theoretical basis of a new generation of public property registry based on
blockchain as an alternative to the existing central-server system with closed
cadastral (property) database.
The concept of consist of an idea of title tokens, which on the contrary to
asset-backed tokens are not someone’s promise of something but are actual records
of ownership. Users create their tokens and the [land] authorities validate them, so
it is not a unilaterally claimed value, but recognized rights by a public body. In the

21
https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-
offerings-and-crypto-assets/

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traditional estate registry, a proprietor is detached from his or her record in the
property database and can perform a transaction only through a registrar. With
blockchain the user directly interacts with his or her record in a form of a token and
can perform a peer-to-peer transaction, applying smart contracts at his or her
discretion. Once created and duly recognized (registered) by the land authority, then
the token does not require subsequent transaction registrations with the registry,
because blockchain is the registry itself.
The government can impose regulations and introduce model (standard)
smart contracts allowed for free use, or other ways regulate the domain. But this
will not happen at the level of blockchain protocol consensus, because as we
discussed above, an interference with the blockchain protocol can break the balance
and lead to centralization of the network, and hence blockchain will lose all its major
advantages as an immutable repository for peer-to-peer transactions with
cryptocurrency and storage of other data. For the same reason so-called
“permissioned” or “private” DLT do not suit these purposes as well, why would
anyone want to use another centralized system, if governments have been running
centralized property registries for decades.
The use of blockchain for registered property rights required rethinking of
the architecture of the system. The research showed that such often speculated ideas
as the problem of data quality inserted in the blockchain and correcting mistakes in
the blockchain, or law enforcement are not actual problems. It is a matter of a proper
system architecture design, which was discussed in two papers (O. Konashevych,
2020; Oleksii Konashevych, 2020a).
The proposed research advised a two-layer system: bundle of blockchains
that underpin an overlay database. It was clear that blockchain itself can play the
role a public repository of transactions but does not address the problem of
governance and law enforcement. Therefore, the concept presented two other
elements of the system, i.e., “smart laws” and “digital authorities” in the two-
layered architecture: (1) a credible public blockchains, for example Bitcoin,
Ethereum, among others; and (2) an overlay database which is running over the
bundle of blockchains, collecting legally valid transactions across this bundle.
While the bundle of blockchains is a layer where blockchains still have their own
original decentralized consensus protocols, for example Proof-of-Work,
Prof-of-Stake, etc. The second layer is a social consensus (social contract) above
blockchains. A level where transactions that happen on blockchain are then being
interpreted through the jurisdictional norms of the state where these norms are
applied. Therefore, the blockchain remain immutable repository which stores
everything that happens in the real world, be it legal or not, valid or not, but on the
second step legal transactions are recognized and stored in the public overlay
database. Invalid transactions are filtered out through the mechanism of smart laws
and acts of digital authorities (which also publish their decisions in blockchains).
Thus, filtered (invalid, illegal, void) transitions are not deleted from blockchain, it
is impossible and not needed by a matter of fact, in this two-layered system. The
concept also presented a Cross-Blockchain Protocol to support the use of multiple
blockchains in one bundle (O. Konashevych, 2020), so not the government decides
which blockchain is to be applied in real estate transactions but users based on their

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Regulatory trends in blockchain technologies 11

choice on the free market of competing blockchain technologies.

Initial Coin Offer

An Initial Coin Offer (ICO) or a “tokensale” is a promising way to crowdfund a
commercial project. There are different ICO practices: from granting tokenholders
the rights equivalent to shareholders, to having practice of no legal promises for
investors and denying any legal rights. Within the variety of economic forms of
cryptobusiness, the economic interest in ICO boom in 2016/2017 was mere
speculation, i.e., after a tokensale investors waited for the best market price and sold
their tokens. Hence, the capitalization of such projects skyrocketed and fell in a very
short time, sometimes in months or even weeks. Many of such projects bankrupted
or were just abandoned (Ahmad et al., 2020), as no promises were delivered to the
token holders.
The main risk for investors from the point of view of regulators was the fraud
and the failure to comply with formalities and obligations. While such formalities
where not clear, some countries decided to treat ICOs as if a company issues
securities, hence they apply the existing laws on securities and exchanges. Some
other countries have developed regulations for the new industry.
Malta was among the first to define in their legislation a notion of a token.
As per the island’s law22, “virtual token” means “a form of digital medium
recordation that has no utility, value or application outside of the DLT platform on
which it was issued and may only be redeemed for funds on such platform directly
by the issuer of such DLT asset.” The legislative act distinguished tokens from
electronic money. Lichtenstein introduced their vision on what is token which is “a
piece of information on a TT System [DLT] which can represent claims or rights of
memberships against a person, rights to property or other absolute or relative rights;
and is assigned to one or more TT Identifiers (addresses).”23
In academic legal literature, tokens are defined as “cryptographically-
secured coupons which embody a bundle of rights and obligations” (Hacker and
Thomale, 2018). In Economics, Potts et al. emphasize the distinction of ownership
and possession, using the following example. Possession of a banknote token
indicates ownership. In the nineteenth century, the possessor — ‘bearer’ — of a
banknote had a right to draw on the issuing bank the value of the note. These
banknotes were direct liabilities for the issuing bank and were recorded on the
banks’ ledger (Berg, Davidson and Potts, 2019).
Why are conventional regulations on securities and exchanges might be
outdated? Regulations and authorities are needed in this domain to address legal
disputes and fraud. For example, the role of the U.S. Securities and Exchange
Commission is to maintain efficient, transparent, and effective markets24. SEC
oversees the involvement and operations of organizations and individual investors.
The Commission monitors securities companies, self-regulatory organizations, and
the stock markets.

22
https://legislation.mt/eli/bill/2018/44/eng/pdf
23
https://www.regierung.li/media/medienarchiv/950_6_08_01_2020.pdf?t=2
24
https://www.sec.gov/about/what-we-do

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Regulatory trends in blockchain technologies 12

If we drill down to the SEC’s practices, they have not been changed in
principle since the creation in 1934. Market players must disclose specific
information when they issue securities (the registration statement and prospectus),
and regularly file company information with the SEC or if something significantly
happens with the company, i.e., change of CEO, change of auditing firm,
destruction of a significant number of company assets. The main difference from
1934 is that SEC keeps the registry in electronic form, i.e., EDGAR25. The main
SEC’s function is to keep the registry, and so when legal conflicts arise, the federal
body becomes a source of evidence of “who promised what.”
With transactions on blockchain, some of the registry functions may appear
outdated, because blockchain is the registry itself. Why would anyone need a third
party to keep information about a transaction if blockchain can do it better? At least
in terms of credibility of the blockchain as an immutable public repository.
Therefore, it is obvious that the traditional bureaucracy is reasonably challenged
with new technologies. Old-fashioned regulations can restrain innovations in the
markets if not re-thought and re-introduced with new roles and functions for
governments.

Internet jurisdiction
A registration of businesses is a matter of state regulation and performed by a public
body and/or agents whom the government delegated this role (for example, notaries
in some countries). Tokens can represent corporate rights and play the role of shares
for business. Smart contracts and decentralized applications can be designed in the
way to provide corporate rights for shareholders (tokenholders), e.g., voting,
distribution of dividends, etc. It gives reasons to re-think the role of the state and
bureaucracy in registering and regulating businesses.
The registration of an entity makes no sense in the way it is traditionally
done because tokens are based on an irrevocable mechanism that makes it possible
to trace the process of incorporation and all subsequent transactions. Many of the
conventional paper formalities can be automated and performed without a public
servant (registrar). Though by 2021 no government has adopted yet self-regulative
blockchain-based tools for business.
Flexibility of free markets in developing new forms of business activity and
government inertia create a visible gap between the existing legal regulation with
reality. In the decade of 2010-2020 we could observe how digital businesses started
experimenting with new forms of cross-jurisdictional activities on the Internet using
blockchain (Oleksii Konashevych, 2020c, 2020d).
In the reality the main reason why a business might need to settle down in
any specific jurisdiction is when it receives revenues or investments in fiduciary
money26 (cash or bank transfers). For example, customers would like to pay fiat

25
https://www.sec.gov/edgar.shtml
26
“Fiat” or “fiduciary” money is a currency without intrinsic value that has been
established as money, often by government regulation. Fiat money does not have
use value, and has value only because a government maintains its value, or because
parties engaging in exchange agree on its value (Goldberg, 2016).

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Regulatory trends in blockchain technologies 13

money for a product or service, hence, the business needs a bank account. To open
it, a bank inquires a company registration, and so the company selects a jurisdiction
to register their business. If a company works only with cryptoassets, the
registration loses sense.
Bitcoin is an example of a cross-jurisdiction and supernational business,
without a headquarter and a dedicated jurisdiction. Bitcoin is still a kind of business
in its essence, i.e., miners spend resources to produce cryptocurrency, while others
buy it and use, what is it if not a product? Other examples are also eloquent.
Ethereum, for instance, appeared virtually as a crowdfunded project, one of
examples of the first well-known ICOs, in the first investment round they raised
funds in bitcoins27.
As new forms of business spread, initial coin offerings (ICO), initial
exchange offerings (IEO), security token offerings (STO), decentralized
autonomous organizations (DAO), decentralized finance (DeFi) and others, the
phenomenon of the “Internet jurisdiction” requires more research and observation,
as brings not only benefits but problems as well. One of the controversial events in
the cryptoindustry was the project “The DAO.”

Decentralized Autonomous Organizations, The Crisis of “The DAO” and a

hardfork of Ethereum
Decentralized Autonomous Organization (DAO) is the concept that describes a type
of virtual communities that build blockchain, smart contracts and decentralize
application to arrange their relationships. It is not clear where or when DAO the
first appeared as a notion. However, the ideas on automation of legal relations were
developed by Szabo (Szabo, 1994), Susskind (Susskind, 1998) and other scholars.
Bitcoin and similar networks are kinds of DAO. The second generation of
blockchain network being as DAO themselves provide a technology to host other
DAOs. The main idea of DAO is that such institutions have a potential to a
sustainable self-governance without managerial component. They rely on a program
that facilitates their relationship, a so-called principle “code is law.” Nevertheless,
this field is on an early stage of development and requires further research.
A company “The “DAO” appeared to be one of unsuccessfully embodiments
of the DAO idea as it is known as a crashed online service. The DAO was an
application for investors designed as a smart contract on Ethereum. An unexpected
transaction of Ethers from their fund, that many called a theft, led to the crisis in
Ethereum which resulted in a split of the network, i.e., a hardfork.
These dramatic for Ethereum events happened in 2016, when an unknown
person found a flaw in the project’s smart contract and exploited it to drain the funds
of investors, Ethers28 worth of 50 million U.S. dollars out of 168 million U.S. dollars
invested (Mehar et al., 2019). A retroactive action is only a theoretically possibility
in blockchain, because many independent members on the network must act in
concert to make it happen. Nevertheless, it happened with Ethereum, when the

27
https://bitcointalk.org/index.php?topic=428589.0
28
Ether is a unit of account of Ethereum, a cryptocurrency or a native token of this
blockchain.

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Regulatory trends in blockchain technologies 14

majority of miners, led by Buterin’s team29, first blocked the stolen funds and then
released them, so investors could get them back. This led to the hardfork, because a
part of the community shared an idea that blockchain should never work backward
and reconsider transactions.
This is an interesting case which still have a lot of questions to answer, by
philosophers of blockchain, by governments, by investors and communities. With
this case the world saw how retroactivity can happen, when the majority supports
it. Is it a weak point of the technology which multiplies all its merits by zero? Is it
a new democracy, that yet to be explored? Should we draw parallels to find answers
or consider it as a unique phenomenon?
Parallel from governance and laws. — Statute laws, adopted in a democratic
way (for example, by elected legislators) reflect the consensus of the majority.
Normally, the minority must obey, they cannot violate the law. If code is law, the
blockchain is a “statute” where this law is written and executed, in a form of a smart
contract, then what is a hardfork? Is it a disobedience? Unlikely, because in
blockchain a retroactivity and a hardfork even if rare and practically difficult, yet
still possible. So, the hardfork is the way for the minority to protect their interest
and split apart if the ledger is altered or other unwanted for them changes occur.
Hardforks and retroactivity are not a breaches or malicious acts, they might be
absolutely normal in this technology.
Parallel from business. — If we think Ethereum is a business, similar to what
we discussed about Bitcoin above, then how is it possible that a part of the business
legitimately falls apart? A department of the company cannot become a sperate from
the company just by the will of such a department. This can happen upon a decision
of the shareholders or an authority.
Parallel from criminal law and justice. — Another group of questions around
The DAO touched the field of justice and criminal law. First, there opposite
opinions whether the attacker committed a crime or legitimately exploited an
undeclared possibility of the code. The DAO has never declared terms and
conditions in a human spoken language, i.e., there is no contract in a traditional
sense to define if someone breached this contract. The DAO’s website declared code
is law as their principle and referenced that the contractual terms are defined in their
smart contract. Any human spoken words to describe that code, would be just
someone’s interpretation, but not a source of knowledge about their relationships.
Those who do not support that funds leakage was a crime, emphasize that nobody
“put a notice of trespass” and a poor design of the smart contract, actually could not
ensure, that the fund was actually private. Users were free to act at their discretion
and will, while there were no legal prohibitions. People are not punished for
drinking from a creek if there is no sign of a private property. Hence, contractual
and private law did not protect this private property. Interestingly, in the report 30
SEC used words “attacker”, and “steal,” but no criminal investigation was found
throughout the government’s reports.
Parallel from a mob law. — If it was a crime, i.e., the system was attacked

29
Vitalik Buterin, an inventor and an a frontperson of Ethereum
30
https://www.sec.gov/litigation/investreport/34-81207.pdf

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Regulatory trends in blockchain technologies 15

and funds were stolen, then what was the hardfork? Was it a mob law? Stealing
back is not a legitimate way of justice and return of property. In a civilized society
it is a crime as well. There are police, prosecutor, court, marshal for that. Was it a
new phenomenon of new blockchain justice, based on a specific form of digital
democracy?
Parallel from anarchism. — If it was neither a crime nor an act of justice,
then what? A pure form of market competition? Where no authorities and state
power exist. Then there is word for that to describe, i.e., an anarchy as “the state of
a society being freely constituted without authorities or a governing body” (Franks
et al., 2018), or specifically here - a cryptoanarchy.
All these questions are yet to be explored and reflected to develop a better
public policy towards the blockchain technology.

Blockchain in Public Administration

Blockchain technologies open new possibilities for interaction between people and
businesses thus creating new demands for legislation in case it becomes obsolete
and obstructs new forms of cooperation. There is a growing potential for conflicts
of different scales with governments and new forms of business, unless
governments will find a way to legitimize emerging practices and institutions.
But being competitive through the application of new technologies in order
to be effective, is not only an essential demand for businesses, but also for
governments. New technologies create possibilities for a significant improvement
in public administration.
The blockchain technology can help fight corruption, reduce costs for public
administration by making governance automated. Also, an interactive participation
of citizens in making decisions allows for a rapid identification of needs of the
society and various marginalized groups whose voices are sometimes not heard.
On the other hand, governments should consider the growing level of
unknown threats. Abrogating old norms can be a reckless decision and probably the
best course is to pilot new projects in parallel to the existing procedures. In this
approach government will require not to change the whole branch of legislation, but
only to adopt normative acts that are focused on legitimizing certain projects in
some use cases or in some territories. For example, the growing demand for property
tokenization and management of title rights online can be treated in this way.
Technologies make it possible to introduce electronic systems using smart
contracts, where notaries, brokers, insurance companies and state registrars less
required or not required at all. Such experiments in free economic zones, in
industrial parks, or other kinds of regulative sandboxes, can give more knowledge
about the potential and pitfalls of such technologies.
In the future, new forms of legal relationships can exist in parallel with new
ones, thereby giving citizens the right to choose. For example, a citizen can register
a real estate deed in a town clerk’s office or transfer the title to the blockchain
system and manage their property rights online without intermediaries.

Detachment of a Government?
It may seem at first glance that with this development the traditional public bodies

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Regulatory trends in blockchain technologies 16

are detached from governance. Although automation reduces the role and number
of public servants maintaining the system, the regulatory role of the state as a trusted
party does not diminish.
For example, it is clearly necessary to approve new technical standards. This
is the only way to speak in the same language. There are some projects that claim
to be “cryptocurrency” or “blockchain-based” but have nothing to do with these
technologies31. Standardization will help to distinguish decentralized blockchain
and other distributed ledger technologies, i.e., centralized, permissioned, private,
etc.
The compliance with standards will ensure high quality of services. The first
initiative in standardization succeed in 2019, when the International Organization
for Standardization adopted ISO/TC 307 - Blockchain and distributed ledger
technologies32, which presents some general aspects of the emerging technology.
Another important task is that the state and it public bodies must play the
role of “oracle” 33 (Buterin, 2014; Poblet et al., 2020). Since smart systems require
information from the real world that trigger an execution of algorithms, a trusted
third party (an oracle) is needed to digitize and supply information, e.g., data of
births, deaths, marital status, lists of trusted (licensed) parties such as notaries,
judges (arbitrators), and other real-world facts that have legal consequences for
smart contracts execution.
Although not in all cases the infrastructure must be maintained by a public
body. Instead, the government can issue licenses and establish rules (laws,
standards), so professional players on the market will perform such tasks.

Notary
Latin notaries play an important role in civil-law countries. Notary public is also a
component of the legal system in common law countries. Although notary functions
differ across systems and countries, many functions are typical, such as,
acknowledgment of a deed, identification of a person and verification of a civil
capacity, timestamping, making entries in different public registries, etc.
The blockchain makes some basic notaries’ functions obsolete. For example,
a checksum of a document can be stored on blockchain. The chronological and
irrevocable nature of blockchain transactions ensures an integrity of the document
and credibility of its timestamp.
Identification by a notary can be replaced with eIDAS34 and the notary
expertise is not necessary when parties use standardized “models” of smart

31
For example, Ripple has centralized emission and cannot be called
“cryptocurrency” see, https://bitcointalk.org/index.php?topic=2605109.0
32
https://www.iso.org/committee/6266604.html
33
Here we can consider both Turing Oracle Machine, known also as "black box"
or Buterin’s oracle for smart contracts in Ethereum.
34
eIDAS (electronic IDentification, Authentication and trust Services) is an EU
regulation on electronic identification and trust services for electronic transactions
in the European Single Market. It was established in EU Regulation 910/2014 of
23 July 2014 on electronic identification.

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Regulatory trends in blockchain technologies 17

contracts. For example, in Ukraine in 2010, in the result of legislative changes, a

mandatory notarization of company statutes was abolished35. At the same time, the
government adopted a Model Statute for companies, so when founders register their
company, they are not required to write a document from scratch, but just refer to
the model document. Similar reforms happened in many European countries in the
last few decades.
Of course, for today it is not possible to replace all forms and functions of a
manual notary’s work, but business tends to reduce transaction costs. With
COVID-19 virus outbreak, remote business appeared in a new reality of massive
lockdowns around the world, thus, automation and digitization trends are highly
expected.

International cooperation
Cooperation between countries is accompanied by international agreements
(conventions, memorandums). Participating states create superstructures –
international organizations, - and delegate their representatives to the governing
bodies to facilitate relationships of the international cooperation.
At the practical level, supernational bodies are necessary as no state will
allow another one to solely govern a cooperation, as it would mean the loss of the
sovereignty. As a result, the aim of such institutions is to add a trust component.
For example, the Convention Abolishing the Requirement of Legalisation
for Foreign Public Documents, 1961 (Apostille Convention) can be a use case for
public blockchain. One country may decide to hash documents, say, in Bitcoin. This
decision must be supported only by a relevant national state regulation. Citizens of
this country will create records, while their public bodies will digitally certify these
records (apostille) on blockchain as per the regulation. Governments of other
countries can recognize such records at their discretion, and it does not require any
international agreement. It would not be possible in a central-server system, when
one country unilaterally controls their system and can arbitrarily change it. With
blockchain the public repository neither stoppable nor revocable. Hence does not
require a supernational body.
Another example is an agreement of European Conference of Ministers of
Transport (1963). Each member state issues quotes on transport services to other
member states which gives the right to companies from other states to provide
transport services on the territory of such a state. The government that receives
quotes from a foreign government then allocates it to national transport companies.
The tokenization of quotas solves the following problems:
1) countries and businesses will be able to verify more effectively who has
got the right to perform transportation and to identify violators on roads. For
instance, the road police would check not the paper certificate but a blockchain
record. Normally, the authorities do not check with the records that retrieved
directly from electronic systems of other governments, unless there is a specific
regulation for that. Instead, such electronic records would be officially shared with

35
https://www.contactukraine.com/company-law/ukraine-llc-model-company-
charter

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Regulatory trends in blockchain technologies 18

another country as per procedures to ensure their authenticity; and then another
country can publish it on their servers so their local public bodies can inspect and
perform other tasks based on this information.
2) governments can allocate tokenized quotes through transparent and fair
auctions developed with smart contracts.

eVoting, Elections and Legislative process

There are three main components that can secure online voting, replacing the
existing centralized electronic voting and discredited paper ballot voting:
1) zero-knowledge proof provides for a mathematically proven
anonymous transaction (Jean-Jacques Quisquater et al., 1990);
2) electronic identification that helps to authenticate online (smart cards,
secure tokens, eMobile, eBanking and other solutions can be used);
3) blockchain that makes transactions irrevocable and transparent.
To illustrate this, a very simple voting transaction can be performed with any
cryptowallet. Users agree which address is “yes” and “no” and then transfer their
“coins,” one coin from one user to certify the decision. However, a voting on
elections and referendums is comprehensive process that involves many actors, and
creation of such systems is a challenge for future development. There are different
opinions whether it is possible. For example, in the draft report (Park et al., n.d.)
authors expressed their opinion that blockchain would not possible to use in voting.
Nevertheless, in one or another form voting is the reality of any public
blockchain, as their protocols are based on independent interaction of network
members, who decide each transaction if they agree with it or not. Even though it is
automated and does not look like a voting, at any moment any node owner can
interfere with the node and impose another behaviour.
eVoting opens new possibilities in a collective decision-making and
experimentation in democracy and governance. First, more public offices can be
elected, as it may become much cheaper. Direct voting of all citizens can happen
not only with regard to some new law, but also as a vote of no confidence to a public
office or veto a government decision, denounce any existing law, or even establish
justice - as we saw on the example of The DAO crisis. Many revolutions would not
happen if citizens could express their “no” much beforehand the situation explode.
At the same time, in a digital world where code is law, the legislative process
must be different. A code of a program, not paper statutes, are to be discussed and
voted on. And there is no need for an authorized public body (an election
commission, etc.) to implement it. The code can be deployed in the system
automatically as the results of voting.
For example, there an electronic smart system automatically distributes tax
revenues between the state and local budgets, say 70% to 30%, there is only a code
that runs in the system and redistributes funds. A legislative initiative might look as
follows. A group of citizens (a political party, etc.) proposes that budget revenues
will be distributed equally. They develop an open source code that redistributes the
funds 50/50. Different independent professionals verify and test it and then citizens
adopt it on e-voting. The system automatically updates the algorithm by changing
70/30 settings to 50/50. Thus, the state system of public finances can work without

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Regulatory trends in blockchain technologies 19

a manual control. The advantage of the blockchain, as it was shown in the example
with the new generation of public property registries, is that it can be implemented
step-by-step, without dropping the existing practices of legal governance (Oleksii
Konashevych, 2020a).

Conclusion

It is difficult to solve specific regulatory tasks if there is a lack of conceptual, high

level vision for a future. Currently, the use of blockchain technologies in both the
private and public sectors in many cases is much speculated, that discredits the
technology.
There is a statement that any concept should be above technological
solutions, that is technologically neutral. However, this is not quite true. It should
be, but before the blockchain emerged, a conceptualization of the existing paradigm
could not go beyond centralized solutions. There were no practical means for that,
anything else would be purely hypothetical. Only after the invention of blockchain,
the society has a new fundamentally different technology that may lay down as the
basis for a new paradigm of legal governance.
An important thought that should be kept in mind is that cryptocurrencies,
even without taking into account the second-generation of platforms, have already
demonstrated their disruptive potential for states. An independent currency can
threaten the government’s control over national monetary policy. The lack of public
confidence in the government and other factors can lead problems with public funds,
in other words, people will stop paying taxes. These processes on a large scale are
likely to lead to serious changes in what we are used to calling the state.

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