Government intervention and regulation is perceived by many as a threat to blockchain innovation and the proliferation of the technology. However, it is almost universally recognised as a necessity to mass adoption, especially when considering certain financial use cases and blockchain ventures such as ICOs.
Whilst it is likely that hyper-economies such as the US and China will ultimately generate the investment needed for large scale innovation and adoption, smaller countries will play a significant leadership role.* The Dubai and Estonia governments in particular were cited in the Global Leaders Exchange as being a model for how to provide vision and direction for this complex technology problem. We highlight several of the more effective opportunities as identified during the Exchange:
Many private organisations are not organised effectively to deal with the significant business change and increased complexity that form the basis of consortia governance, with many industry leaders unwilling to relinquish control of their core processes and products to competitors. Governments can help overcome this challenge by establishing industry specific advisory bodies as well as providing incentivised collaborative investment to help organisations better adapt to the large-scale disruption that blockchain will bring by mitigating some of the risk. Smart Dubai is a prime example of this type of positive government incentivisation and collaboration with the enterprise. Many private companies are actively participating and benefiting from the guidance and governance that Smart Dubai are providing, in particular those within the real estate, financial services and healthcare sectors.
In many cases, private organisations are still struggling to justify major investment beyond attempts to gain a critical understanding of how blockchain may impact their industry. Following the success and expansion of the cloud model, governments may be in a position to provide a common ‘blockchain as a service’ platform which will help reduce the cost of infrastructure and other up front expenses, and provide tools to accelerate use case development for enterprise.
The establishment of regulatory sandboxes by some governments and jurisdictions has been seen as a positive step in fostering blockchain innovation. The benefits of working in a regulatory sandbox is twofold. Firstly, they provide organisations with an opportunity to foster ideas and develop blockchain solutions without the burden of uncertainty that exists in many the entrepreneurial endeavors in progress across the globe. Secondly, they allow regulators to be heavily involved throughout the entire process, offering an opportunity for both parties to learn and develop, and seek guidance on the relevant regulatory controls. This approach has been especially useful when looking to apply blockchain solutions to already heavily regulated industries such as finance, manufacturing, energy, transport and health. The Abu Dhabi Global Market, for example, has established a Fintech sandbox.
As we’ve highlighted previously, there is a need for open source collaboration to drive innovation and adoption of blockchain technology. Governments are in a position to drive this level of transparency and some are already embracing this movement. The State of New York in the US has passed a recent bill to open data and open code in 2017. In addition, the Dubai government has also put in place the Dubai Data Law which seeks to classify and make available government data for better decision-making and innovation.
It seems clear that governments will play a pivotal role in order to foster innovation, collaboration and investment in blockchain technology adoption. However, this also creates a potential conflict of interest with its additional role as a regulator, because of the required independence of the latter.
For regulation to achieve positive results for both private and public organisations, it needs to be approached carefully.
Putting that risk aside for one moment, PwC estimates that a lack of policy normalisation is the largest factor impeding blockchain development (with nearly half of respondents to the recent PwC survey highlighting regulatory uncertainty as one of their top three barriers to implementation).* Therefore it seems equally important to introduce some sort of regulation. However, there is some concern among leaders that unnecessarily regulating blockchain technology will end up stifling innovation. Therefore for regulation to achieve positive results for both private and public organisations, it needs to be approached carefully.
The nature of blockchain technology itself creates a further challenge. The borderless applications of the technology may make traditional approaches to regulation ineffective and so a cautious approach is probably wise.
There are however, heavily regulated industries such as financial services that may require immediate attention. The lack of regulation is preventing investment into valuable blockchain use cases because investors do not trust the legitimacy of projects and are wary of the potential for their investments to be wasted in the event of a change in regulation. This is not just true of cryptocurrency projects but of wider blockchain applications such as the provision of Know Your Customer or Anti Money Laundering services.
Partner, Digital Trust Leader, PwC Middle East
Tel: +971 (0) 56 113 4205
Partner, Digital Trust, PwC Middle East
Tel: +971 (0) 56 480 2447