Category: Blockchain

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Legal Challenges of Blockchain Technology: What Are the Most Common Problems?

legal challenges of blockchain

In all honesty, Blockchain technology is powerful, exciting, and has multiple uses. The first use case of blockchain was with cryptocurrency, other use cases range from online transactions to decentralized apps and common supply chain processes. As good as blockchain technology is, there are some legal challenges. 

Before institutions begin to utilize blockchain technology for their needs, they need to understand the legal challenges that blockchain has to overcome. Let’s dive a bit deeper into how blockchain works and what legal challenges of blockchain.

How does Blockchain Works?

Blockchain technology is a ledger, a decentralized ledger of information that is publicly owned. The information stored on the ledger can be shared and viewed by anyone. Once any information has been added to the ledger, it can’t be changed, that’s what makes blockchain so secure. That’s why blockchain is used in online document verification, online ID verification, and data management.

The immutability and the transparency of the blockchain make it extremely crucial for decentralization, privacy, security, and eliminating the need for ledgers. Cryptocurrency is supported by blockchain technology, as it offers a huge level of privacy and anonymity that centralized currency can’t compete with. But because of the uncertainty and lack of education around blockchain technology, not all the top institutions want to rely on it. Thus, causing numerous blockchain legal challenges.

Legal Challenges Faced by Blockchain

KYC and AML compliance regulators make sure that criminals don’t exploit blockchain and cryptocurrency for money laundering. The extreme level of privacy offered by blockchain-based cryptocurrency makes it easier for fraudsters to exchange money anonymously. This feature can be exploited by criminals who want to hide their fraudulent activities from governments and regulatory bodies. legal challenges of blockchain

This is one of the major reasons why a lot of countries don’t allow cryptocurrency transactions. Countries that do allow it is trying to make cryptocurrency transactions less private. Companies that offer blockchain services may be pressured to find a balance between privacy and anonymity. They also have to follow a strict level of regulations to reduce or eliminate the risk of crime. Some of the most common legal challenges of blockchain technology are:

1. Privacy Issues

The fight around blockchain privacy and the legality of this don’t seem to settle down anytime soon. As lawmakers are trying their best to prevent crime by removing the tools that can assist fraudsters in moving money from one place to another without being caught. While the cryptocurrency companies are pointing out that every individual has the right to privacy. The cryptocurrency community makes a fair point, but unfortunately, this also works in the favor of money launderers and other criminals. 

2. Regulatory Challenges

One of the biggest regulatory issues revolving around blockchain technologies is if the cryptocurrencies are considered securities, they’ll be bound by the SEC regulatory rules. That’s not an ideal situation for cryptocurrency companies as they will need to follow a wide range of legal obligations that they currently don’t.

The biggest example of this situation is Telegram. In 2019, they launched an ICO, which was shut down by the SEC because they claimed the tokens were sold unlawfully. In June 2020, Telegram finally settled with the SEC and had to return more than $1.2 Billion to investors. 

3. Federal Laws

When it comes to federal laws, a lot of organizations govern how cryptocurrency is regulated. These organizations include:

  • The Securities and Exchange Commission (SEC)
  • The Commodities and Futures Trading Commission (CFTC)
  • The Federal Trade Commission (FTC)
  • The Department of Treasury
  • Internal Revenue Service (IRS)
  • The Financial Crimes Enforcement Network (FinCEN)

Although, regardless of this spade of organizations, there’s very little federal lawmaking on this issue. State laws on the other hand are a completely different deal.

4. State Laws

While there aren’t a lot of federal laws regarding cryptocurrencies, there are a lot of state laws. There’s a big difference in how the technology is treated on a state level as opposed to a federal level. Some states have a favorable stance and others are much tougher. 

Wyoming is one such example of a crypto-friendly state. Just recently, Wyoming passed a law where cryptocurrencies are exempted from property taxation. Arizona and Georgia have also legalized Bitcoin as a type of payment method for taxes. State laws are one of the biggest blockchain legal challenges.

However, there are more than a dozen states that have issued warnings for investors regarding cryptocurrencies. New York is probably the biggest example of a state that’s highly restrictive with its crypto laws. 

5. Anti-Money Laundering and KYC 

One huge legal challenge for crypto and blockchain companies is following anti-money laundering laws. There are other laws that crypto companies and blockchain companies have to vary as well. American residents aren’t allowed to do business with foreign nationals who are on the blocked entities list.

And of course, companies that fail to follow the regulation laws can suffer from huge penalties. The new AML directive 5 included some laws regarding cryptocurrency that some cryptocurrency exchanges have to follow. 

How to Fix Blockchain Legal Issues?

Solving the legal challenges around blockchain and crypto isn’t easy at all. In upcoming years, a lot of changes will be made which will probably change the environment around crypto. Cryptocurrency exchange and blockchain companies are trying hard to find a way around the legal complications.

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What is Blockchain Technology and How Blockchain Works?

What is blockchain technology

Blockchain technology, also known as Distributed Ledger Technology (DLT), helps in maintaining the history of any digital asset immutable and transparent. The technology uses decentralization and cryptographic hashing to make the data unchangeable and transparent. While blockchain is widely popular in the cryptocurrency industry, other industries don’t know what is blockchain technology or how blockchain works?

A simple way to define blockchain technology is like Google Doc. Let’s say that you create a Google Doc and share it with a bunch of people, the document is distributed instead of transferred. This sharing of documents creates a decentralized distribution chain, which gives everyone access to the same information at the same time. Everyone can access the information and data at any given time, not a single person is in charge of changing and sharing the information.

As all the involved parties can see the changes being made in real-time, transparency of data is ensured. If you’re wondering how does blockchain secure data, then you should know the technology follows certain protocols that make the data extremely secure. Using blockchain for fraud prevention is an idea that’s been thought over a lot in recent times. 

While blockchain technology is much more complicated than a simple Google Docs file, it does help in giving an idea to users how blockchain works in banking. Sooner or later, blockchain technology will be integrated into almost every industry.

How Does Blockchain Work?

The main purpose of having blockchain technology is to let people share data, share data in a secure and immutable way. Blockchain technology works on three fundamental principles including blocks, nodes, and miners. 

  1. Blocks

The term blockchain consists of two things, blocks, and chains. Every chain consists of several blocks and it contains 3 main elements:

  • The data in the block.
  • A 32-bit whole number called a nonce, the nonce is randomly generated whenever a new block is created, which then leads to the generation of a block header hash. 
  • The hash is a 256-bit number embedded into the nonce, it has to start with a number of zeroes. 

When a new chain is created, a nonce generates the cryptographic hash. The data in the block is signed and tied to the nonce and has unless it is mined. 

  1. Miners

Miners keep creating new blocks on the chains using a process called mining. In a blockchain every block contains its own nonce and hash, it also contains the hash of the previous block in the chain. Mining for new blocks isn’t easy, especially on large chains. Because the nonce is only 32 bits and the hash is 256, there are billions of combinations till the right combination is found. Whenever the miners find the right combination, a new block is created and added to the chain. 

Making changes to previous blocks in the chain requires re-mining, not just the block with the change but all of the blocks that come after. This is why it is highly complex to manipulate any data on the blockchain. This is how blockchain works in banking, and it is crucial for banks to employ the technology to ensure the safety of data. 

  1. Nodes

One of the most important concepts in blockchain technology is decentralization. Not a single computer or organization owns the chain which makes the information on it transparent. It is an online ledger via nodes that are connected to the chain. Nodes are any type of electronic device that keeps the copies of the blockchain and keeps the network under operating health. 

Combining publicly available information with a variety of checks and balances helps the blockchain maintain integrity and creates user trust among users.

The Rise of Blockchain’s Technology

Most people define blockchain technology as its use in cryptocurrencies. Cryptocurrencies are a type of online currency or online tokens such as Bitcoin, Ethereum, or Dogecoin that can be used to buy goods and services. Just like any digital type of cash, crypto can be used to buy anything from as small as a lunch to as big as a car. Cryptocurrency is not like cash, crypto uses blockchain to operate as a public ledger and as an enhanced security system, so all the online transactions are recorded and secured. 

As of right now, there are around 8,000 types of cryptocurrencies in the world and they have a market value of $1.6 trillion, with Bitcoin being the market leader. Cryptocurrencies are slowly becoming more popular over the years among investors. Here are some of the reason why investors are becoming more and more interested in cryptocurrencies:

  • Blockchain’s security makes the theft of data and information almost impossible as almost all cryptocurrencies have their own indisputable and identifiable number which is attached to one owner. 
  • Cryptocurrencies don’t operate under individualized currencies and central banks. With blockchain, crypto can be sent anywhere in the world without the need for currency exchange or without the interference of central banks. 
  • More and more firms are coming around to the idea of blockchain-based technologies. In February 2021, Tesla announced that they would invest 1.5 billion into Bitcoin and accept Bitcoin as payment of its cars.

How Blockchain Works In Banking?

Apart from cryptocurrency, blockchain technology can also be implied in other industries. Not a lot of people know how blockchain works in banking. Banks and financial institutions can store customer data on blockchain to make sure the confidential customer information stays secure. 

DIRO’s online document verification technology can verify documents instantly. Banks can use the technology and verify customer identity and improve the overall customer experience during remote customer onboarding. DIRO’s technology places verified customer documents on the blockchain to make the information secure and immutable.