The global need for
Distributed Ledger Technology (DLT) Regulations

There are two primary reasons behind the governments around
the world being rather coy about establishing legally binding regulations for
distributed ledger technology and the resulting debate as to the legitimacy of
such regulations: a lack of knowledge concerning the function, application, and
potential of the new industry; the perception that regulations negate the goals
of the blockchain.

Many governing bodies have taken the ‘wait and see’ approach
to distributed ledger technology, allowing more data to be revealed before they fully analyse what needs to be regulated
and how they will go about applying regulation. However, this has left the
affected businesses in a state of limbo, not knowing if they are acting
illegally, or if their activities will soon be deemed illegal, in certain
countries where the topic is debated but not regulated. The problem for many
blockchain purists with the regulation of distributed ledger technology is that
it contradicts the original purpose of the technology. The Bitcoin blockchain
was designed and implemented to be self-governing and eradicate the need for
government control and regulations, leaving hesitance within the community to
submit themselves to laws and regulations enacted.

Creating the legal framework and regulations for distributed
ledger technology presents many unique challenges, including establishing
accountability; the application of contract law to smart contracts; the area of
regulation; and the security of personal data in the case that blockchains can be decrypted in the future. Due to the rapid
growth and application of the still budding technology, there has not been
enough time to see all of the main issues emerge. On the 11th of May
2017, members of the European Parliament met to discuss the future of
blockchain regulation and if governments should begin to intervene. Due to the
lack of clarity as to the consequences of the new technology, possible issues
that may arise, and a need for it to have the freedom
to develop, governments quelled their desire to apply regulation.

On the 4th of July 2018, Malta became the pioneer
of Distributed Ledger Technology Regulation, dismissing the ambiguity that
blockchain companies had been coping with in the years prior.

Malta becomes the
‘Blockchain Island’

Malta made history by enacting regulatory bills concerning
distributed ledger technology, blockchain-based businesses, cryptocurrencies
and initial coin offerings, and blockchain-based service providers. The Maltese
Parliament brought three laws into power in
order to establish a governing body, create a system of registration and
certification of distributed ledger technologies, and to regulate initial coin
offerings.

The Malta Digital Innovation
Authority Act established the Malta Digital Innovation Authority (MDIA) as the
governing body to
support the development and implementation of the guiding principles  described 
in the  Act and to promote consistent  principles 
for  the  development 
of  visions,  skills, 
and  other  qualities relating   to  
technology   innovation, including
distributed or decentralized technology, and to exercise regulatory functions
regarding innovative technology, arrangements and related services and to make
provision with respect to matters ancillary thereto. The primary aim of the MDIA is to promote the new technology and its innovations
by developing and implementing key guiding principles. Regarding the regulation
of such technologies, the Innovative Technology Arrangements and Services Act
provides the MDIA with its regulatory functions, which includes providing
technological arrangements for distributed ledger technology companies, as well
as, the methods of certification and registration of such companies. The
Virtual Financial Assets Act governs cryptocurrency wallets, cryptocurrency
exchanges, and lays out clear criteria regarding the requirements for an initial
coin offering.

The three acts established by Malta created the benchmark for
governing bodies all over the world to follow, allowing for the expression of
innovation while presenting clear regulations for the use of the developing
technology. Many companies utilising distributed ledger technology were seeking
legal clarification, which made Malta’s newly established regulations very
desirable. Soon after the bills were enacted,
a slew of high-profile companies announced their move to Malta. Binance is one such example, which opted to
escape Asia’s purge on virtual currencies and move to the more open-minded
regulations of the European island nation. Other cryptocurrency exchanges
including OKEx and ZBX have followed suit.

Malta’s desire to adopt
and grow the distributed ledger technology industry was demonstrated by their willingness to establish themselves as
the ‘Blockchain Island’ in July 2018. However, the nation has surpassed this
creation of the legal framework, with its
other authorities integrating blockchain-friendly regulations into their
respective industries. In March 2018, it was
reported that the Malta Gaming Authority (MGA) aimed to create a
licensing system for game developers seeking to accept cryptocurrency as a form
of payment, establish a method of calculating exchange rates, and the use of
digital currency wallets with games. To do this,
the Authority was to engineer a sandbox testing environment to allow game
developers to see if their games were in line with their new regulations of the
use of cryptocurrencies.

Other distributed
ledger technology authorities emerging

Malta made headlines by becoming the first official regulator
of distributed ledger technology to forge the ‘Blockchain Island’. In December
2017, Gibraltar, announced its intention to launch the world’s first licensing
procedure and regulations structure for firms using the new technology. On the
1st of January 2018, the Gibraltar Financial Services Commission was
established to be the nation’s authority on distributed ledger technology,
applying to all businesses using the technology in or from Gibraltar. On the 17th
of October 2018, leading Bitcoin exchange Coinfloor became fully compliant with
the regulations of the Gibraltar Financial Services Commission, meeting the
standards required by their nine regulatory principles.

The European Parliament has recently begun to move towards
establishing regulations for distributed ledger technologies by publishing a
non-binding resolution. The resolution details an innovation-friendly approach
to the new technology, and that instead of regulating the technology, the
European Union should remove barriers currently restricting the implementation
of distributed ledgers. A focus of any regulation to come from European Parliament
will be towards standing European Union legislation, specifically the General
Data Protection Regulation (GDPR), with the composition and process of current
distributed ledger technology and blockchains seemingly making it difficult for
someone to have their personal data and
records removed. They stand by their previous comments concerning a lack of
understanding as to the potential problems that can be associated with the technology, and so they will require more
time to establish measures to counter the major issues that may arise. It is
apparent that general understanding of the technology needs to be improved through the education of relevant
parties and that doing so could help the European Union to become a world
leader in the field of distributed ledger technology: a route that European
Parliament intends to pursue. Resolutions set out by the European Parliament
are often used as a tool to express intent to create regulations, but
resolutions are not legally binding.