Regulatory uncertainty in Britain’s blockchain sector has emerged as one of the biggest concerns for distributed ledger technology firms in the country.
According to research conducted by digital innovation agency Digital Catapult, 74% of blockchain firms in the United Kingdom cited regulatory issues as being one of their key concerns, surpassing other issues such as access to technical, business or legal expertise.
These regulatory challenges include the European Union’s General Data Protection Regulation (GDPR). As the GDPR unifies Europe’s regulatory landscape regarding the use and storage of personal data, the legislation has become a sticking point for firms which use permissionless blockchains since the storage of data is not limited to any one particular geographical location.
“This legislation raised concerns for companies using permissionless, public blockchains, which are open to anyone regardless of location, and where full copies of the database are replicated across all of the nodes participating in the network, making it impossible to selectively limit where the data goes,” Digital Catapult wrote in the report titled ‘Blockchain in Action: State of the UK Market’.
Right to Erasure
Additionally, the GDPR empowers citizens to delete their personal data at any point and this is in conflict with the nature of permissionless public blockchains where data becomes immutable once recorded.
The regulatory uncertainty surrounding the raising of funds via Initial Coin Offerings was also another cause of concern. The report noted that the UK Financial Conduct Authority had indicated in April this year that it would regulate ICOs but has yet to issue formal guidance as at the publication date of the survey. Per the firms that were surveyed, the delay in issuing guidance has further heightened the uncertainty and consequently hampering the ICO plans some projects may have had:
“This uncertainty was raised many times by the companies consulted, as they were unsure whether they should conduct an ICO in the UK or allow UK citizens to participate given the current regulatory landscape.”
The regulatory uncertainty has also affected relationships between blockchain firms and traditional financial institutions. In the survey which polled 264 DLT firms, 54% of the blockchain companies indicated that they faced difficulties opening a bank account with the firms which were particularly hard hit being those dealing with cryptocurrencies.
Additionally, the survey found that firms which had raised funds in crypto-assets found it particularly hard to obtain a traditional bank account despite the necessary Anti-Money Laundering and Know Your Customer checks being undertaken on investors.
Despite the regulatory challenges, the report noted that the DLT sector in the UK is on a growth path with investments in the sector continuing to balloon:
“…investments rose from just over US$50m in Q3 of 2016, to US$150m by Q2 of 2018 (with ICO-related investments topping US$100m in Q4 of 2017 and fiat investments climbing to over US$100m in Q2 of 2018).”