Beware of the policy traps when using blockchain

BLOCKCHAIN isn’t just used for cryptocurrency transactions. Increasingly, businesses are looking at building enterprise applications on the distributed ledger.

However, a recent EY report highlighted that many companies don’t understand how regulations will affect their businesses if they use blockchain.

‎Policies are important because a huge part of blockchain implementation centers around payments, which is a highly regulated industry.

Currently, a lot of enterprise implementations of blockchain are private networks, established between known and trusted parties. These uses are often centered around improving operations and almost never around payments.

It makes sense, as these closed environments don’t require much regulatory approvals.

However, as Paul Brody, Global Blockchain Innovation Leader in ‎EY said, the most efficient use of blockchain is on a public network.

“The next phase of blockchain usage will involve fully digital online contracts and payments being made across public networks,” he wrote in a post.

This involves a shift to tokenization. With private networks, companies wanting to tap into the public network would have to synchronize all their data onto the network.

Tokenization involves a product being represented as a token. That token allows companies to assign a value, with which they can buy, sell, insure, and transfer in a consistent manner.

That’s a lot of risks because that means your assets are in the public network, not just a copy.

‎It’s not currently feasible to move onto a public transaction, due to the lack of privacy. Although, Brody expects improved cryptography tools to be more widely available.

He believes we will see secure, private transactions over the public network as early as 2019.

Once companies put their assets on the public network for transactions, they will be held accountable to the same rules as a bank does. This includes policies around Know-Your-Customer (KYC) and Anti-Money-Laundering (AML).

Most companies currently are performing transactions in cryptocurrencies. However, most would prefer traditional fiat currencies like dollar or euro.

Some blockchains like Ethereum allows for digital tokens to represent fiat currencies. As this becomes more commonplace, it will make it easier and less risky for companies to do business on the public blockchain.

Brody sees the appetite for risk to be higher in startups compared to large enterprises.

“While startups routinely deal with regulatory uncertainty when they pioneer new technologies and business models, large enterprises are much more likely to see the same landscape and decide that the level of risk and complexity is too high to proceed at this time,” he observed.

Thus, sussing out clear details on policies and regulations, such as rules on fiat currency tokens, or validity of digital smart contracts, can help steer enterprises to make full use of blockchain technology.

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