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Blockchain Technology - The Basics

1. INTRODUCTION
Technology innovations are swiftly changing the face of global economy as we know it, and they are affecting every aspect of our lives, in the way transactions are being completed, how data is being recorded etc. These innovations are moving fast, and it is necessary for regulations and policies to keep up, in order to create certainty for businesses. All sectors affected by such advancements must adapt or create legal framework to supervise and regulate the happenings of these innovations.
 
One of such innovations is the Blockchain technology . Blockchain is a global, decentralization and distributed ledger technology – it is a platform- supported by millions of computers that records, stores, exchange and manage every type of assets in a digital form which, validates and relay transactions concurrently, and is cryptographically secured making such information retroactively unchangeable. There are no intermediary and it is available to everyone via the internet. The platform allows for open visibility and transparency on transactions, this is achieved by allowing digital information to be distributed, there is high availability of data, there is robust data integrity and network-wide consensus on every transaction. 
 
Blockchain technology was designed for the financial sector specifically to resolve the double spend attack on the platform and the first digital currency developed to resolve the challenge was Bitcoin. Since the initial concept of eliminating core payment facilitators and the double spend issue blockchain technology has evolved into several areas such as healthcare, insurance, government, legal , manufacturing and tourism. 
 
2. DIGITAL CURRENCY OR CRYPTOCURRENCY 
Digital currency or Cryptocurrency is a digital asset from block chain technology designed to work as a medium of exchange using cryptography to secure transactions and to control the creation of additional units of a currency. They differ from applications built on top of blockchain technology which relates to financial services such as the use of blockchain to synchronise payments. Some of the major applications of blockchain are: Records, including records of contracts, transactions, asset holdings and proof of identity .
 
3. TO REGULATE OR NOT TO REGULATE 
There is a widespread debate as to whether there is a need to regulate blockchain technology to enable safe and stable environment for the innovation to excel, and to provide protection for consumers from unsafe implementations. There is also the question of whether the technology poses serious risks rather than opportunities to the global and national financial community?
The questions are genuine in the light of the trust that has been built over time by the traditional financial sector. It is therefore essential that we ascertain the opportunities of this technology and associated risks. This will give a starting point to determine the answers to these questions.
 
4. OPPORTUNITIES, RISKS AND LEGAL FRAMEWORK 
4.1 Opportunities
The starting point would be to mention that the technology allows for visibility of transaction thereby be very transparent. Transparency is achieved with the assistance of the following characteristics of the technology:
a. Availability of date on the blockchain,
b. data are duplicated many times and copies maintained across world-wide network of systems, this ensures that data will be available at all times,
c. Data stored in the Blockchain ledger is digitally secured and cannot be manipulated to an extent,
d. Consumers of the Blockchain services can own and control the digital assets associated with them.
e. The process is standardised, simplified and faster at executing complex transaction processes.
f. Operational costs are reduced for Banks and other participants who use Blockchain arrangement and increase revenue by eliminating intermediaries.
2. Blockchain-based technology is opening new opportunities, including machine-to-machine payments, one-click online commerce, and decentralized autonomous organizations.
To alleviate security concerns the following may be considered:
3. Anti-Money Laundering (AML) and Know Your Customer (KYC) practices can be adapted to increasing monitoring and analysis effectiveness, this should counter cyber-attack and fraud risks.
4. Regulators and relevant government agencies could have direct online real-time access to Blockchain-based transactions, increasing the effectiveness of their supervisory function. For example, a regulator may choose to vet all contracts centrally before allowing to trade. For non-banking transactions, policies can be put in place to regulate the services being provided.
 
4.2 RISKS 
The risks associated with the Blockchain innovations are:
1. Inherent problems with database – databases are susceptible to various issues such as data corruption, hardware failures, data inconsistences.
2. Given the structure of the blockchain it may not be possible for integration between different consortia working on same business design.
3. Customers are locked into each vendor’s platform, this does not allow for competition amongst vendors and may lead to customer having difficulty changing vendors at a great-costs.
4. Blockchain platforms are constantly attacked and are subject to security exploits. For example, Ethereum was attacked by cybercriminals resulting in the loss of $60 million USD.
5. Denial of service attacks could threaten the blockchain infrastructure by overwhelming it with excessive data, thus, preventing the normal transaction processing process.
6. Blockchain technologies are still pretty much experimental and untested, this creates uncertainty and instability which may discourage investments.
7. In a Private Blockchain arrangement, consensus is needed among members of the consortium to make changes or adjustments. The time spent to reach an agreement could be spent implementing the decision and responding quickly to business exigency.
 
4.3 FRAMEWORK 
Innovations add value, therefore should be embraced, it can be concluded that this type of innovation will make the traditional financial sector rethink the manner in which transactions are being carried out and change to provide better services to their customers.
There are currently no legislations, or policies for blockchain technology in Nigeria and the regulatory authorities seem to have shy away. But perhaps it is important to state the obvious that there is a need for regulatory certainty for businesses and without such, businesses cannot thrive. It must be remembered that there is a duty to protect customers and not just locally but across boarder, therefore regulations must function locally and globally.
An option would be for the CBN to work closely with national and international regulatory bodies to shape regulatory developments and standards that will work for the Nigerian economy. Given that this technology is still developing our suggestion is that a regulatory approach similar to that used for the internet should be considered meaning that the technology itself should not be regulated but the services provided on it for example cryptocurrency dealings, and smart contracts should be regulated. This will allow for the thriving of the innovation as well as giving businesses the opportunity to protect their customers.
However, the regulators need to fully understand the technology this will enable regulations to evolve organically. It may be an idea for new policy instruments to be drafted to promote wealth creation for Nigeria but at the same time achieve standards in customer service, security, risk management, privacy issues etc.
5. THE FIRST REGULATIONS ON DISTRIBUTED LEDGER TECHNOLOGY
In 2018, the Maltese Parliament provide 3 regulation for users of cryptocurrencies and Distributed Ledger Technology (DLT), such as blockchain. The laws were described as first of their kind in the world.
The first provides for the establishment of the Malta Digital Innovation Authority. One of the Authority’s key functions will be to certify platforms that use DLT, such as blockchain and cryptocurrency platforms. Certified surveyors within the Authority will be responsible for verifying that information being logged on such platforms, such as transfers of currency to individuals or companies, is genuine. This will provide legal certainty to users and establish a wider sense of trust in the system.
The second establishes a system for the registration of Technology Service Providers and the certification of Technology Arrangements through system administrators and system auditors.
The third which is the Virtual Financial Assets lays out a framework for Initial Coin Offerings (ICOs) and regulations regarding the provision of services in relation to virtual currencies. Intermediaries subject to the virtual currency provisions include brokers, exchanges, wallet providers, asset managers, investment advisors and market makers dealing in virtual currencies.
Major players in the global blockchain market have already announced their plans to establish operations in Malta.
Malta has been at the forefront of introducing legislation that is aimed at fostering technological innovation, whilst at the same time providing legal certainty in a sector that is complex, ever-changing, and open to abuse if left un-checked.
Nigeria should consider how it can attract investments by following suite.
 
6. CONCLUSION 
A fair conclusion is that every innovation will have its opportunities and risks, it must be determined whether the benefits out weights the risks. Opportunities should be capitalised while risks should be reduced to a minimum by introducing policies and regulations. Technology is dynamic and ever changing the best advice would be for regulators, stakeholders and interested parties in Nigeria to get on board the bandwagon and do the needful in ensuring that innovations continue to thrive in our ecosystem and at the same time that there is protection for consumers.  However, as blockchain technology is still developing, regulators must tread carefully to ensure that the creativity is not stifled, it must be permitted to plateau, at which point, everything else will settle and a balance will emerge.
Innovations must not be ignored, rather embraced and the regulators should take the time and invest the necessary resources to ensure that they know how the system works so that regulations and policies can be put in place to protect consumers. We do not want to be left behind!
The world’s legal systems must evolve alongside technological innovation. To this extent Worrington & Co. provides assistance in the fields of ICOs, ITOs, and blockchain businesses, offering advice on structuring, mandatory regulation, voluntary recognition, and related tax, legal & business advisory.
For further information or advice regarding blockchain, cryptocurrencies, or ICOs, please contact: us via email: admin@worrington.com 
 

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