Blockchain

Regulation is welcome, but don’t block blockchain entirely

Kai-Lung Hui says recent stern actions by China and South Korea are understandable – the threat of criminal activity or bubbles means blockchain needs the hand of regulators. Along the way, though, we should not forget blockchain’s advantages, and the problems it is uniquely able to solve

PUBLISHED : Monday, 12 February, 2018, 3:58pm
UPDATED : Monday, 12 February, 2018, 3:58pm

The Chinese government has banned initial coin offering (ICO) and blocked all websites related to cryptocurrency exchange and trading. The South Korean government stopped domestic companies from participating in ICO last September. The Securities and Futures Commission of Hong Kong has warned local cryptocurrency exchanges that it would not tolerate listings of digital currencies that are structured like “securities” or “futures”.

The situation now is similar to the dot-com boom (and subsequent crash) in the late 1990s, when people started to promote new business ideas and innovations because of the proliferation of the internet. Back then, the key word advocated was “disintermediation”. Today, the underlying technology is blockchain. The key word becomes “decentralisation”.

Rampant speculation in the cryptocurrency and ICO space is inevitable, with some tokens having multifold gains in value overnight without sound economic basis. Cryptocurrency can also be designed to support anonymous transactions, which makes it an ideal instrument for money laundering and computer crimes such as cyber extortion. With this backdrop, it is reasonable for the government to step in and curb the irrational or illegal selling, trading and use of cryptocurrencies.

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However, we must recognise that some cryptocurrencies are intended to solve real problems. The underlying technology behind cryptocurrency, blockchain, has much more to offer than bitcoin or ICO. It represents a new way of recording information and processing transactions. The data recorded in a blockchain is tamper-proof and traceable. The block-creation process involves distributed processing in a trustless environment. Hence, it can be used to support any collaborative transactions requiring high availability and integrity.

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In fact, the Hong Kong Monetary Authority has published two white papers discussing the potential use of blockchain. For example, many banks today perform know-your-customer checks individually, which creates many redundant operations when the same customer opens multiple accounts in different banks. The implementation of such checks using blockchain can eliminate most of these redundant operations. We can envision the benefits in other applications such as product certification, supply-chain coordination and general tracking and goods exchanges.

What is less visible is that blockchain may also facilitate novel applications. One company I advised sought to use cryptocurrency to address the no-show and overbooking problem that has plagued the container shipping industry. Its idea would not have been feasible without an enforceable digital contract backed by a blockchain-based cryptocurrency. Excessive regulation of ICO would kill such novel (and potentially valuable) applications.

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We must recognise that blockchain is essentially a distributed database technology and so in itself needs little regulation. Its applications in cryptocurrencies, financial services and fundraising may invite regulation, but the focus should be on the applications instead of the technology. A cryptocurrency of a securities nature should be subject to securities regulation. If a blockchain solution is used to support gambling, it should be regulated by gambling laws.

By nature, ICO is like the “Kickstarter of services”, where people contribute funds to support the development of a new idea and service. Many crowdfunding projects fail and the contributors lose all their money. The same could happen to ICOs. The only difference is the scale – in crowdfunding projects, the loss is well-contained, often much less than a million dollars. In an ICO, it could be hundreds of millions. Still, this comparison with crowdfunding is illuminating – why should we target ICO but not crowdfunding projects?

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At the end of the day, investors should be aware of the nature of blockchain and its strengths and weaknesses before jumping in to invest in its associated products such as cryptocurrencies. Regulation can remind people of the nature of the products that they are developing/investing in, but education is more important in aligning the technology with the applications. Some of the internet giants would not have existed today if we stopped all dot-com initial public offering during the dot-com boom. We may not see the future Amazon or Yahoo if we ban all ICOs now.

Kai-Lung Hui is a chair professor in the HKUST Business School. The views expressed here are his own