Governments around the world have begun to express a keen interest in the various applications of blockchain. In countries of the Global South, this interest has ranged from adopting Bitcoin as legal tender in El Salvador to rolling out a digital identity system for refugees in Jordan. Land registries have also been prototyped in Ghana and Honduras. In all these contexts, blockchain technologies are seen as providing security from cyber-attacks and data manipulation. Moreover, by adopting blockchain, these countries have signalled to the world that they are embracing the Fourth Industrial Revolution.

In March 2020, Bangladesh published its first National Blockchain Strategy (NBS 2020). The strategy’s overarching aim is to transform Bangladesh into a ‘blockchain-enabled nation.’ The strategy frames blockchain as a technology that can help Bangladesh to achieve the Sustainable Development Goals (SDGs), more specifically SDG 9 which encompasses industry, innovation and infrastructure. In other words, blockchain technology is seen as part of the Government of Bangladesh’s agenda to build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation. The NBS 2020 specifically mentions formulating blockchain-friendly legal and policy frameworks as one of its main goals, with particular consideration for cryptocurrencies.

It is also important to consider what use cases are well-suited to a country of the Global South that is reaching a new tier of development in the next decade.

Bangladesh’s NBS is an intriguing document for people who observe the technology landscape of the Global South. When considering a legal framework, it is necessary to first distinguish between permissioned and permissionless. It is also important to consider what use cases are well-suited to a country of the Global South that is reaching a new tier of development in the next decade.

 

What challenges will countries like Bangladesh face? This article will not rehearse what blockchain technology is, but rather provide some advice on its legal framework and case specific usage.

Permissioned vs. permissionless blockchains

A blockchain blends existing technologies to create tamper-resistant distributed ledgers on which data can be safely stored. Some of these existing technologies include public-private key cryptography, peer-to-peer networks and distributed consensus mechanisms. Blockchains can ensure the transparency and incorruptibility of the ledger, while maintaining the pseudonymity of its users. While the NBS 2020 brands the technology as having ‘exciting properties,’ it blurs the properties of permissioned and permissionless blockchains.

A paper on blockchain mutability in 2019 by informatics researchers Eugenia Politou and her colleagues at the University of Piraeus in Greece clearly explains that unlike with permissionless blockchains, the lack of a trusted third party is not a given property of permissioned blockchains. With permissioned blockchains, the number of nodes is limited and they are whitelisted to join a network.[1] It also means that there is a possibility for the majority of nodes to vote for their version of truth and to manipulate the ledger.

Critics of prominent permissioned blockchains, like IBM’s Hyperledger Fabric, argue that the absence of a distributed consensus mechanism means that there is a risk of tampering by the organisations responsible the blockchain’s operation. That would also mean there may not be a shared source of truth. Due to an increased risk of tampering and the need to trust third parties, the value-addition of using a permissioned blockchain may be limited.

Due to an increased risk of tampering and the need to trust third parties, the value-addition of using a permissioned blockchain may be limited.

Permissionless blockchains are blockchains that are open to anyone joining the network. They rely on users having confidence in the blockchain’s technical operation and the economic incentives for participation. Researchers at the University of Oxford’s Centre for Technology & Global Affairs have shown that permissionless blockchains rely on an ‘authority of trusted peers.’ These peers may be governments or banks, and these institutions essentially determine the security of the blockchain and the integrity of its data. In other words, trust in permissioned blockchains is underwritten by trust in these institutions.

Benefits of permissioned blockchains

Despite the criticisms, increased speed and resilience from cyber-attacks are some of the advantages of permissioned blockchains. Permissioned blockchains can also be designed to allow a wider public of users to make queries about the state of transactions on a blockchain. These properties of permissioned blockchains can lend themselves to use in government services.

Notably, Estonia has used a private permissioned blockchain, the Keyless Signature Infrastructure (KSI), to ensure the data integrity of the country’s digital court system, healthcare and land registries. In this example, the data’s hash values are placed on the blockchain rather than the sensitive data of citizens.[2] This not only prevents data from accidentally being exposed, but also immediately notifies the operators and users of the blockchain if the data is being accessed.

A permissioned blockchain also does not use the intensive proof-of-work consensus mechanism of permissionless blockchains. This means a greater number of transactions can be executed with a permissioned blockchain.[3] Being able to execute a large number of transactions per second is essential for any decentralised application that requires the rapid processing of transactions. Consequently, even major permissionless blockchains like Ethereum have been moving towards consensus mechanisms.

Bearing these technical characteristics of permissioned and permissionless technologies in mind, we can turn to some of the use-cases of blockchain technology stipulated in the NBS 2020.

Use-cases and legal challenges

A popular use-case is building a blockchain-based land registry. Like Georgia, Ghana and Honduras, Bangladesh has expressed an interest in building such a registry. This would involve storing the hash values of documents―such as a title deed for land―on a permissioned blockchain. It would be nearly impossible to tamper with a land ownership document without it being noticed because an alteration of the document would immediately alter the hash value.

This is seen as a boon for countries with a track record of inefficient land record management. It is also a way to improve a country’s ranking in the World Bank’s Doing Business rankings which takes into account the costs and processes of property registration. Furthermore, it would alleviate concerns about maintaining paper-based registers and the risk of accidents.[4]

A fundamental challenge posed by a blockchain-based land registry is the problem of ‘garbage-in, garbage-out.’

A fundamental challenge posed by a blockchain-based land registry is the problem of ‘garbage-in, garbage-out.’ In other words, if there is a mistake in the inputting of land ownership data, then the non-manipulable nature of the blockchain would leave no option for reversion. There would need to be coordination with other nodes to reverse the transactions, and therefore the blockchain’s identity as an immutable ledger would be compromised. As a result, these land registries risk losing their authority as record-keepers of land ownership.

Moreover, since the land ownership data is not placed on-chain, securely storing the land ownership documents will be challenging. In Bangladesh, while amendments to the land registration laws can allow for a new medium to be used for land ownership records, the risk of ‘garbage-in, garbage-out’ remains central.[5]

Another proposed use case of Bangladesh’s NBS 2020 is in the stock market. It is said to reduce the costs of market intermediaries and increase the speed of clearing and settling transactions. In advanced corporate law jurisdictions, such as in the US state of Delaware, the benefits of using blockchains in stock markets became clear after high-profile cases like In re Dole Food Co., Inc in 2016.

In this case, accounting discrepancies occurred prior to the Dole Food Company’s go-private merger. The discrepancies were the consequence of a clearing lag of 3 days. In other words, shares that were traded during those three days were not accounted for in the ledger of the clearing intermediary. After the merger, there were far more beneficial claimants than outstanding shareholders on the intermediary’s ledger. Double counting took place, and it was a Herculean task to actually trace who the true owners were at the time. Ultimately, when the shareholder class action was settled, it was the intermediary’s ledger that was used to determine settlement sums. This unfortunately meant that some true owners of shares were excluded.

The use of a blockchain would have allowed stakeholders to know the true ownership of shares, without the long clearing lag. Achieving such a reform in the clearing and settling of transactions in Bangladesh’s stock market would require revisiting the country’s Securities and Exchange Rules, 1987, as well as changing the requirements on how securities transactions should be recorded.

An ambitious utility

With the existing impetus to use blockchains in capital markets, there is room for more ambition when thinking of use-cases. For instance, it is possible for a company to consider using blockchain for proxy voting at the annual general meetings (AGMs) of their shareholders. The problems of proxy voting can be seen in another influential case from Delaware: In re Appraisal of Dell, Inc. In that case from 2017, dissenting shareholders lost their right of appraisal of the fair value of shares after a go-private merger concerning Dell Inc. The problems arose because of a clerical error in the proxy voting instructions. Put simply, the representative casting a proxy vote mistakenly thought he had to vote for the merger, rather than against it!

The use of blockchains in proxy voting could not only ensure that the votes are recorded immutably, but it could also better corporate governance. After these cases took place, Delaware reformed its corporate law to accommodate record keeping on blockchain-based systems. Effecting a similar change in Bangladesh would require amending The Companies Act, 1994, especially its provisions relating to the maintenance of members’ registers and the use of a card index system.

Where is Bangladesh going wrong?

The two examples of land registration and the stock market are widely discussed applications of blockchain technology. However, some of the other use-cases in the NBS 2020 are either described perfunctorily or simply do not convince readers about the value added by blockchain. One example of the former is the deployment of blockchains in the healthcare sector; whereas an example of the latter is the development of a blockchain-based reputation system to address malicious activities in e-commerce.

Creating a system for storing health data from a blockchain can ensure that this data is preserved securely and privately, while being available to a doctor when needed.

Creating a system for storing health data from a blockchain can ensure that this data is preserved securely and privately, while being available to a doctor when needed. However, this proposal of NBS 2020 does not discuss how the privacy of patients’ personal data will be maintained. It only mentions the importance of privacy preservation in generic terms. It therefore misses the opportunity to discuss how patients can be given greater control over their data and voluntarily authorise its use in, for example, medical research projects.

NBS 2020’s proposal to use blockchain-based reputation systems to address malicious activities raises questions about whether blockchains can actually mitigate these problems. Such malicious activities include posting fake customer ratings and creating ‘unique digital identities for all users’ by aggregating reputation data from across the web. Can reputation systems truly benefit from using this technology? There is no clear mention of what the added benefit of using blockchain is in this use case compared with other reputation systems.

Potential for decentralised autonomous organisations

There is a use-case which will add real value that the NBS 2020 leaves out: the formation of decentralised autonomous organisations (DAOs). DAOs are blockchain-based systems that enable people to coordinate and govern themselves.[6] They are mediated by a set of self-executing rules deployed on a public blockchain, and whose governance is decentralised. In any functional DAO, there would need to be an adequate, distributed reputation system as it serves to signal the quality of its members to third parties.

In some DAOs, such as dOrg, reputation systems are being used to create transnational business organisations that practice a form of economic democracy. This means the reputation of an individual is based on the quality of work rather than the amount of equity they hold or the managerial position they occupy. This reputation in turn determines the weight of a person’s say in the governance of the DAO, something particularly relevant for Bangladesh because it is home to one of the world’s largest online freelance workforces. Such a reputation system can help create conditions in which these workers receive a voice in their workplace.

That said, forming DAOs presents complex legal questions. As an unincorporated business entity engaged with a fluctuating, globally-dispersed membership, there are questions about whether the members have any liability for faults or fraud committed by the DAO. If a DAO was to issue a token as a form of investment contract, without due permission from a country’s securities regulator, it could be in violation of securities law. Only a few regulations have actively engaged with the question of classifying these assets, so their legal status remains unclear. Moreover, the lack of legal personality of DAOs severely undermines their effectiveness as business organisations.

Consequently, there is still considerable uncertainty about how unregistered DAOs will be treated by a country’s legal system.[7] Local policymakers should therefore determine what investments qualify as an unregistered security and pass legislation to recognise DAOs as separate legal entities.

Inculcating self-sovereign identity

A variety of identity applications are mentioned in Bangladesh’s blockchain strategy. It includes the use of electronic know your customer (KYC) procedures and the provision of citizen services. In short, establishing a blockchain-based, ‘self-sovereign’ digital identity system could be beneficial for public policy goals such as financial inclusion. A self-sovereign system is one where identifiers,[8] such as biometric data, and attributes,[9] such as gender, are stored on a person’s device or on a distributed network. Only authorised people can access this information without requiring third party approval or verification. These systems are valuable as they can reliably verify whether people are eligible for certain benefits―even if those people lack personal identification documents.

Meanwhile, no single authority can tamper with the collected data because there is no single controlling body. This feature helps to preserve the privacy of users. Early examples include the Kiva Protocol’s identity platform built on Hyperledger Indy and co-developed by Kiva, a San Francisco-based NGO, and the Government of Sierra Leone. The system allows the citizens of Sierra Leone to form portable credit profiles and choose what information they want to provide to lenders.

The Kiva Protocol is an example where specific attributes of a citizen are disclosed and verified. It is part of the creditworthiness check. Generally, self-sovereign systems are more useful in verifying attributes than identities. This is because decentralised systems struggle to guarantee that a single, unique identifier (e.g. a voter ID number) is attached to a single individual in a specific context without a centralised authority ensuring that this has taken place. This is especially important in contexts like voting in national elections as people should be prevented from casting multiple votes.

…Bangladesh could consider integrating self-sovereign identity systems in identity applications in order to advance its financial inclusion agenda.

However, occasions where a sole authoritative identifier is required are relatively rare. Instead, an identity system where specific attributes are verified based on specific contexts would suffice on most occasions. With this in mind, Bangladesh could consider integrating self-sovereign identity systems in identity applications in order to advance its financial inclusion agenda.

Conclusion

The use-cases of NBS 2020 are illustrative of what Bangladesh has in mind about blockchain. The use cases also point to the gaps in the legal framework for addressing the particularities of this technology. As an initiative led by the state, there will naturally be a predisposition towards using permissioned, rather than permissionless, blockchains.

Although a number of legal questions have been discussed above, most of the challenges will ultimately turn on the decisions of policymakers. In the case of cryptocurrencies, the immediate question is whether their purchase and holding will continue to be criminally sanctioned or not. Another related question is whether cryptocurrencies should be treated as intangible property or not. If certain cryptocurrencies are ever made legal, their determination as property will have consequences for how they are taxed. Even if Bangladesh maintains its blanket ban on cryptocurrencies, there should still be rules to dispose of them once they have been confiscated.

Alongside this are the infrastructural matters involved in the operation of permissionless blockchains, such as the granting of licenses to miners and to crypto exchanges. Relevant considerations may include the energy consumption of miners and the possibility of exercising jurisdiction over intermediaries like crypto exchanges that are registered within a country.

Bangladesh has announced the establishment of a ‘regulatory sandbox’ to experiment with blockchain technologies without causing harm to the public or investors. This is a welcome approach; however, addressing the aforementioned questions will be central in forming a legal framework for blockchain technology in the years ahead.

 

 

[1] Nodes are essentially small servers in which stores, spreads and preserves blockchain data. They provide the infrastructure on which blockchains run. A full node stores a full copy of the blockchain.

[2] A hash value is a unique number that can be derived from data using a mathematical function.

[3] Unless a permissionless blockchain system is using a proof-of-stake consensus mechanism. A proof-of-stake consensus mechanism allows people to validate new blocks based on their relative holdings of an associated cryptocurrency.

[4] For example, Bangladesh’s Registration Act, 1908 requires the government to protect every registrar with a fireproof box, which means there are risks of accident.

[5] For example, The Registration Act, 1908 and The Transfer of Property Act, 1882.

[6] Defined by the Glossary of Decentralised Technosocial Systems.

[7] Despite recent developments such as the US state of Vermont’s creation of a Blockchain-Based Limited Liability Company, and the US state of Wyoming allowing DAOs to use the Limited Liability Company structure.

[8] An identifier is used as a reference to a real-world identity or specific persona. Identifiers include iris scans, legal names and usernames.

[9] An attribute is a property of a person that qualifies them to be a member of a given group or class. Attributes include date of birth, place of birth and citizenship.

 

References

    • Primavera de Filippi & Aaron Wright, Blockchain and the Law. Harvard University Press: Cambridge MA, 2018.
    • Information and Communication Technology Division, National Blockchain Strategy: Bangladesh – Pathway to be a Blockchain-enabled Nation, March 2020
    • Ivan Martinovic, Lucas Kello & Ivo Sluganovic, ‘Blockchains for Governmental Services: Design Principles, Applications, and Case Studies’, Centre for Technology & Global Affairs Working Paper Series No. 7, University of Oxford, December 2017.
    • Fennie Wang & Primavera de Filippi, ‘Self-Sovereign Identity in a Globalized World: Credentials-Based Identity Systems as a Driver for Economic Inclusion’, Frontiers in Blockchain 2, 2020

 

 

Photo ©️ Mahmud Hossain Opu

Primavera De Filippi
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Primavera De Filippi is a permanent researcher at the National Centre of Scientific Research (CNRS) in Paris and a faculty associate at the Berkman Klein Centre for Internet & Society at Harvard University. She is a legal researcher. She specialises in the legalities of blockchain technology, artificial intelligence and digital governance. She was a founding member of the Global Future Council on Blockchain Technologies at the World Economic Forum, and the co-founder of the Internet Governance Forum’s Dynamic Coalition on Blockchain Technology. She is a visiting fellow at the European University Institute. She pursued her doctoral studies in law at the European University Institute in Florence.
Morshed Mannan
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Morshed Mannan is a research associate on blockchain governance at the Robert Schuman Centre for Advanced Studies at the European University Institute in Florence. He is a legal researcher. His specialises in emergent technologies, comparative corporate law, platform cooperatives and international insolvency law. He is a research affiliate at the Institute for the Cooperative Digital Economy at The New School and a working group member on platform cooperatives at Harvard University’s Berkman Klein Centre for Internet & Society. He pursued his doctoral studies in law at Leiden University in the Netherlands and was called to the Bar of England and Wales by Lincoln’s Inn.