How might blockchain technology influence businesses from a regulatory perspective?
Blockchain Technology Applications Blog Series
From cryptocurrencies to smart contracts: blockchain technology already has a variety of applications. Even though it might not yet be on the agenda of your organisation, your stakeholders may already be working with the technology. In this blog we explore some of the regulatory and compliance challenges organisations might face when it comes to blockchain.
By Jacob Boersma, Jasper Verwaal & Inger Bijloo | 22-12-2017
Given the fact that blockchain is more than just a hype, it will affect your organisation sooner or later. Even if your organisation is not exploring blockchain technology itself, you might still be confronted with stakeholders pushing the use of blockchain. Within the field of blockchain we see two main developments: cryptocurrencies and distributed computing platforms. Both use cases shall have a different impact on your organisation. What do they mean for compliancy?
We do not yet see large scale adoption of cryptocurrencies within business operations in the Netherlands. However, compliance officers should think proactively about how cryptocurrencies will affect their internal control environment. Note that cryptocurrencies will have an impact on multiple stakeholders inside and outside your organisation.
Within a business environment cryptocurrencies can be obtained by either buying them from an exchange, or receiving them as a means of payment for goods or services provided. From a compliance perspective compliance officers should consider the impact on their business’ internal control environment. One of the processes that will be affected is the Know Your Customer (KYC) process. As cryptocurrencies are (pseudo) anonymous, you cannot verify the identity of the counterparty. As a consequence changes have to be made to the internal control environment to verify the identity of the counterparty and make sure that the cryptocurrencies that are being used for payment do not origin from criminal activities. An example of the changes compliance officers could consider is reflecting cryptocurrencies as a means of payment in the general terms and conditions of their company.
Distributed computing platforms
Another use case of blockchain technology is a distributed computing platform. Distributed computing platforms can be used for timestamping, asset registry and running smart contracts. For the purpose of this blog we focus on smart contracts. A smart contract is not a contract in the traditional legal sense. It can be seen as a computer program running on the distributed network of a blockchain.
Smart contracts have at least one common element: they execute automatically based upon predetermined parameters. This application of blockchain raises several legal questions, such as: who is liable for the execution of the contract, how will privacy be ensured – especially since the GDPR will be implemented in May 2018 – and what law is applicable to the contract?
Within the Netherlands there is no mature legal framework for blockchain yet, due to the fact that legislation and regulations have not yet been interpreted or adapted for blockchain solutions.
However, a solid legal framework for blockchain is currently being developed by legislators in cooperation with several private parties. It is expected that a solid legal framework will enable standardisation of blockchain development, increase trust in the technology and ultimately enable large scale adoption of blockchain technology in all business environments.
Based upon the review of the current legal environment we conclude that there are no best practices yet. However, compliance officers can always review their perspectives on:
- The consequences for the internal control environment;
- The consequences for the external reporting;
- The consequences for its business transactions.
When your company is experimenting with blockchain applications or is confronted with them through other stakeholders, we recommend to take the compliance aspect into account from an early stage. Not from a limiting perspective, but from the perspective to enable the improvement of current business processes on a faster pace than the competition.
For more information about blockchain applications, please contact Jacob Boersma, Jasper Verwaal or Inger Bijloo via the contact details below.