Establishing Policies for Blockchain Technology
Blockchain can be considered as a breakaway technology and is currently a hot topic that has been the subject of numerous studies across various industries. Blockchain is briefly defined as a shared ledger database that records and shares every transaction that occurs in the network of users. Initially devised for the digital currency Bitcoin, the applications of Blockchain are multifold.
In a conventional sales transaction, a user makes a purchase and any payment made towards such purchase is marked as a debit in the user's financial records whereas the seller records the sale as well as the payment in his records as a credit. Both parties have to maintain individual records of the transaction and have to ensure accuracy and confidentiality of such records. This is essentially how the system of double-entry bookkeeping functions. With blockchain technology in the picture, these transactions are radically transformed.
In a blockchain transaction, a user sets in motion a purchase, known as the block. This contains transaction data like the date, time and the purchase amount. This information can be seen by both the purchaser as well as the seller, thereby providing confirmation on the fact that the payment was initiated, sent and received. Such a data block is stored and shared in an online accounting ledger involving multiple buyers and sellers within a particular network. Any new transaction automatically gets attached to the previous one forming a chain that documents the transaction history and hence the name, blockchain technology.
The nature of blockchain technology can be illustrated as follows:
- All data is distributed and not transferred or copied.
- The data is decentralized and not stored in one place. Centralized databases are highly prone to attacks by potential hackers.
- Any data once recorded and stored is permanent and cannot be altered. This will effectively enable companies to tackle the pressing issue of misappropriation of funds.
- The data is cryptographically stored yet it is transparent. Personal information of the user is kept confidential and hidden. However, any and all transactions are made available publicly.
- There is no extra transaction cost. Only an initial infrastructural cost to set up the blockchain technology.
- Faster processing of transactions as third-party verification and processing is eliminated.
Blockchain technology seeks to eliminate or rather replace all processes/business models that charge a small fee for transactions. For example, the business model of Apple Music or Spotify. Users have to pay a small fee to purchase/listen to an artist's song. This is essentially a profit cut for the artist and can be avoided with the use of blockchain technology. The music can be encoded and stored in a public database, and any user wishing to buy such music can do so, and the proceeds from such purchase will go directly to the music artist thereby avoiding all intermediaries.
This very article is being written on Google Docs, which has properties similar to that of blockchain technology. A document shared with multiple users can be modified by all of them, and any such changes will be visible in real-time to the other users thereby obliterating the ordeal of saving the document, sending it across to multiple users, receiving modified documents from the other user, sending across corrections to such modifications, etc.
In the world of finance, blockchains will completely change the way stock exchanges work or even how insurances are contracted. Financial institutions are modelled on the premise of taking a cut for facilitating a transaction. This will turn Banks into bare advisers as opposed to their long-standing role as the gate-keeper of public money.
Blockchain technology finds its primary use in the financial sector. However, there are several alternative business applications for it.
- Supply chain auditing
The primary concern for any consumer is whether a company's products match up to the claims made by the company. The Distributed Ledger Technology (DLT) or blockchain technology is an effortless way for any consumer to certify that any/all claims made by a company with respect to their product are true. The use of such technology provides users with the time, date and location of every step in the production process of a consumer good.
- File Storage
Distribution of data throughout the network ensures protection from potential hackers or from getting lost. InterPlanetary File System (IPFS) eliminates the need for centralized client-server relationships. This will enable faster file transfer and quicken streaming times. In a time where the content delivery system of the web is being overloaded, blockchain technology provides an easy solution.
- Smart Contracts
Coding of simple contracts that will execute when the required conditions are met is a technology that is the need of the hour. Smart Contract can be defined as a computer program that is stored and executed in a Blockchain Network, containing business logic which is composed of self-executing functions and has, either partially or fully, the terms and conditions of an agreement between parties written into its lines of code, thereby enabling the digital performance and execution thereof. Ethereum is an open-source blockchain project that was released to satisfy this need. It features a smart contract functionality.
- Protection of intellectual property
The internet has, in recent times, become a gold mine for free content. Any information can be reproduced and made available to users on the internet. Copyright holders are in agony at the loss of control over an item of their creation and the consequential financial losses. Smart contracts can protect copyright, and automate the sale of such works online, extinguishing the risk of file copying and redistribution.
- AML and KYC
Anti-money Laundering and Know Your Customer applications are highly potential blockchain technology projects. Presently, financial institutions carry out a strenuous multi-step process for every new customer. Use of Blockchain can cut costs exponentially and make monitoring and analysis of data a highly effective process.
A company can make its governance completely transparent and verifiable, especially with respect to the management of assets, equity or any pertinent information. Information made publicly accessible increases the trust that users have in a company which is highly beneficial in the long run. An application called Boardroom enables organizational decision-making to take place on the Blockchain.
In the United States, federal agencies are gauging the efficiency of distributed ledger technologies like Blockchain to improve transparency, efficiency and trust in government information sharing. The Department of Agriculture oversees the use of Blockchain in particular food supply chains; the Food and Drug Administration supervises its use in drug supply chains and so on. However, there are numerous legal bodies that will have serious policy implications for a business that is developing and utilizing blockchain technology.
In India, there is seen to be a clash in the ideologies of two major laws. While blockchain technology is primarily based on transparency (which requires data to be exposed) and immutability of data (which requires the data to be permanent and non-erasable), these requirements are in a major conflict with the data privacy laws prevalent in the nation. The Personal Data Protection Bill, 2019 provides extensive rights to the person from whom data is being collected (Data Principal) with respect to the privacy of their personal data and sensitive personal data. It also states that the person collecting the data cannot retain any personal data beyond the period necessary for processing the data and must then erase the data so collected once the purpose is satisfied.
Blockchain technology and regulation in the UAE
The UAE government has viewed Blockchain as the stepping stone for enhancing productivity and increasing payment efficiency. It strongly backs the use of this technology and in lieu of that has launched the Emirates Blockchain Strategy 2021 and Dubai Blockchain Strategy. The former seeks to maximize the benefits of blockchain technology to transform 50% of government transactions into the blockchain platform by 2021. This initiative has been taken by the Government to make an annual savings of more than AED 10 billion, around 400 million printed documents and almost 77 working hours per week.
His Highness Sheikh Hamdan Bin Mohammad Bin Rashid Al Maktoum launched Dubai's blockchain strategy in October 2016. This initiative was to function as a partnership between the Smart Dubai Office and the Dubai Future Foundation. The Dubai Blockchain Strategy will enable Dubai to become the first city to be fully powered by Blockchain. Three strategic pillars are sought to be used — government efficiency, industry creation, and international leadership.
To aid adoption of latest technologies and innovative practices at the global level, Dubai Future Foundation established the Global Blockchain Council with the aim to assess and analyze, current and future applications of the technology as well as organize transactions through the blockchain platform. The Council will assist transactions within the various financial and non-financial sectors as well as increase the degree of productivity and authenticity. The Council consists of 46 members, which include government entities, international companies, leading UAE banks, free zones, and international blockchain technology firms.
With regard to digital transactions, the UAE would use blockchain technology, giving each customer a unique identification number that points to their details on a safety chain. Information
and data on a blockchain cannot be compromised or altered, ensuring the digital security of national documents and transactions and consequently reducing operating costs and speeding up decision-making.
Taking note from the Dubai Blockchain Strategy, the Dubai Land Department (DLD) is establishing its own blockchain system to record all real estate contracts and seeks to liaison with utility companies like Dubai Electricity and Water Authority (DEWA). This system will allow tenants to make payments electronically, thereby making transactions paperless and cost-efficient. The DLD wants to completely eliminate the requirement of parties to be physically present before any government entity for the completion of certain transactions.
The Roads and Transport Authority (RTA) is working on a project using blockchain technology to build a vehicle lifecycle management system. The program intends to provide a comprehensive and transparent record of the vehicle's past from the manufacturer to the scrap yard for car makers, dealers, regulators, insurance firms, buyers, sellers and garages. This blockchain-based system will enhance transparency and accountability in vehicle transactions, avoid conflicts and reduce service costs.
The sale of cryptocurrencies in the UAE is mainly regulated by the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Markets (ADGM). Dubai Financial Regulatory Authority (DFSA), the official regulator of the DIFC states that licenses are not granted to any company to issue cryptocurrencies in the DIFC. In ADGM, a regulatory framework for cryptocurrencies was recently introduced called Operating a Crypto Asset Business (OCAB). With respect to other emirates, there are no express regulations that prohibit or control the sale of cryptocurrencies except the e-payment regulations.
Value Added Tax (VAT) was introduced in the UAE only in 2018, and hence virtual currencies have not yet come under the purview of the VAT system. The Federal Tax Authority (FTA) of UAE determines the applicability of tax on cryptocurrencies. This is governed by UAE's Federal Law Number 8 of 2017. If virtual currencies are to be deemed as "goods" or "services" for the purpose of VAT law, it will result in the value of the purchase is taxable under VAT. At present, an individual's personal income tax or any other taxes are not in force in the UAE.
Dubai Blockchain Policy
This Policy lays down the rules that are applicable to Dubai Government Entities, Blockchain Networks and Private Sector Participants with respect to the utilization of Blockchain in government transactions.
The Policy applies to Dubai Government Entities that intend to use Blockchain or form a new Blockchain Network or join an already existing one, Private Sector Participants that are looking to join a Dubai Government Blockchain Network or a Government-hosted Blockchain Platform, and Blockchain Networks and Platforms that are formed or hosted or joined by a Dubai Government Entity.
All relevant stakeholders are required to comply with the provision of this Policy. The Smart Dubai city Office (SDO) has to mandatorily coordinate with the Emirate's Blockchain Strategy in order to extend support to implement the Blockchain policy successfully throughout the Emirates.
Government Blockchain Networks that are formed in Dubai must be approved by the SDO, who will, in turn, ensure that the Blockchain Networks so created are effective and efficient across the Government.
The SDO has the authority to perform various functions:
- Approve the formation of a new Blockchain Network after assessing the supporting documents required to be submitted and provided by such entities.
- Supervise the compliance of prevailing Blockchain Networks that fall under the ambit of this Policy.
- Assign and re-assign, network operators to lead Government Blockchain Networks.
- Appoint a committee or more of particular sector regulators and important stakeholders to head Government Blockchain Network formation and governance decisions.
Intellectual Property Rights
Dubai Government Entities and Blockchain Network Operators are urged to address and clearly define ownership, and other IP Rights shared or associated or developed in relation to Blockchain. Data ownership and other data-related IP rights will further be identified and handled in line with the Dubai Data Law and Dubai Data Policies.
Data Privacy and Confidentiality
All blockchain networks that are subject to this Policy and their members must uphold the data privacy and confidentiality regulations as prescribed by the Dubai Data Law and other relevant policies. They are required to classify all data that is shared through Blockchain networks in accordance with Dubai Data Establishment's (DDE) Data Classification Framework. Data privacy rules should be strictly observed at all times, and no personally identifiable information should be recorded directly on the Blockchain network. Mechanisms to ensure secure storage of data on these networks should be applied efficiently. Consent must be sought from individuals and private entities in order to share their data through the Blockchain network, which must be done in compliance with DDE's Dubai Data Policies.
Communication & Adoption
All blockchain networks subject to this Policy must publish and maintain a communication plan detailing the Blockchain network services provided, roadmap and future plans. Dubai Government Entities are recommended to build internal capacity and skill-set for Blockchain and other related technology in order to steer adoption.
Blockchain networks subject to this Policy making use of Smart Contracts for legal application or for automating legal obligations are mandatorily required to ensure that all such Smart Contracts are technically sound and legally reviewed so that they are in compliance with the requirements under the existing laws and regulations. A Smart Contract must be accessible by all the parties to the contract. It must be convertible to Arabic or English and should be readable in exactly the same way by all the parties to the contract. Digital signatures of all the parties must be affixed after identification using Digital Identity, and the parties have explicitly agreed to all the terms and conditions in the Smart Contract.
The SDO, Dubai Government Entities, Private entities, stakeholders and other members that are governed by this Policy must take into consideration public interest and public security while employing Blockchain in general and particularly seek to:
- Uphold accountability and transparency;
- Safeguard public health and safety;
- Safeguard consumers and other beneficiaries;
- Nurture the provision of better and efficient government services;
- Protect public security;
- Enable inter-government collaboration;
- Support and protect crucial economic, academic, and technology sectors from achieving stability, safety and welfare;
- Prevent crime and protect the safety of individuals; and
- Maintain the UAE infrastructure as well as tactical and vital services.
In light of technological developments, UAE has strived to be at the forefront globally to achieve the same. Having recognized the potential of such newly discovered technological formats, it can be noted that the country has been quick to pass mandatory regulations in requisite of the same. While an innovative and transparent mode of ledger keeping, blockchain technology is still in its early stages and yet to be implemented as a mainstream source, but having regulations at this stage requires the users to be mindful of the laws and conduct its proceedings with heed.