The Commission Launches the EU Blockchain Observatory and Forum

By Nikolaos Theodorakis

The European Commission (“Commission”) recently launched the EU Blockchain Observatory and Forum (“Observatory”) with the support of the European Parliament. The Observatory aims to highlight relevant developments and facilitate collaboration between the EU and involved stakeholders.

 

What is the blockchain technology? What are its benefits?

Blockchain is a distributed ledger technology. In essence, it is a database that keeps a final and definitive record of transactions that no one can penetrate or alter. As a result, Blockchain technology increases trust, traceability and security.

Distributed Ledger Technology (“DLT”), which is the backbone of blockchain technology, was introduced about a decade ago, aiming to develop new financial applications and facilitate decentralized data storage and management. The decentralization of the Internet has been an idea discussed for several decades since it allows for user freedom and democracy in the web. The implementation effort in practice involves avoiding one centralized location, and the need for intermediaries to perform transactions. Blockchain information is shared, verifiable, public, and accessible.

The abovementioned traits can increase accountability. Blockchain has the potential to lead this technological breakthrough. The enhanced trust that it creates can be used for legal services (e.g. smart contracts), financial services, transportation services (e.g. bill of lading disputes), energy, or healthcare issues.

Naturally, the European Commission wishes to further investigate blockchain’s potential, consolidate expertise, and address the challenges created by new blockchain paradigms. To achieve this, it created the Observatory within the Financial Technology pillar, and plans to further help develop the single market, Banking Union, the Capital Markets Union and retail financial services.

As an example of blockchain’s game-changing potential, 10% of global GDP could be stored, via digital assets, through this technology in less than 10 years.[1] This means that governments can take advantage of blockchain to issue IDs that cannot be replicated, or monitor taxation reporting in a unique and transparent way. Insurance companies can utilize automatic execution of contracts, financial bodies can secure money and financial asset transfers, and the intellectual property sector can distribute IP rights pertinent to music, videos or other protected content.

 

Next Steps

Even if only a fraction of the above benefits materializes, blockchain can significantly change the way digital services are communicated. The European Commission needs to assess, in the form of a feasibility study, whether this technology is fully compliant, particularly with EU law (more on this below). Despite recognizing blockchain as a key emerging trend, it is equally important to manage it in a compliant way.

In essence, the Commission wants to build on existing initiatives launched by the EU members that relate to offering blockchain-based solutions. The broader role of the Observatory is to help Europe fully grasp and exploit the opportunities that this technology offers and allow the continent to remain on the forefront of technological developments. The blockchain will enable cross border cooperation and regulator to discuss and develop new ideas to learn, engage and contribute in an open way.

In a nutshell, the Observatory aims to:

  • map key existing initiatives in Europe and beyond;
  • monitor developments, analyze trends and address emerging issues;
  • become a knowledge hub on blockchain;
  • promote European actors and reinforce European engagement with multiple stakeholders;
  • represent a major communication opportunity for Europe to set out its vision and ambition on the international scene;
  • inspire common actions based on specific use-cases of European interest.

 

Smooth sailing?

Despite the multiple benefits of blockchain, and its use for cryptocurrencies and multiple other options, this technology comes with a number of drawbacks. For instance, blockchain is in direct conflict with an upcoming EU privacy legislation (the General Data Protection Regulation), which has strict privacy requirements (including privacy by design and by default, encryption, enhanced subject rights etc.). Blockchain makes it more difficult to attribute liability, due to its decentralized nature, and practically impossible to comply with certain privacy rights, like the right to be forgotten (since the blocks cannot be erased, once generated). This direct conflict with EU regulatory standards may cause some bumps in the future development of this technology.

Further, other concerns pertinent to the use of blockchain relate to broader skepticism about security – and whether this technology can remain immune to attacks in the long-run, lack of regulation that leads to unsafe exchange environments particularly regarding cryptocurrencies, and funding of illicit activities and circumvention of international sanctions.

[1] World Economic Forum Surbey on Technological Tipping Points

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