Future Proofing the Blockchain Industry in Malta
Steve Muscat Azzopardi is the Senior Manager of Corporate & Fintech at Chetcuti Cauchi Advocates. Vide Schedules of the ITAS set out the parameters of an Innovative Technology Arrangement, Muscat Azzopardi writes about Malta’s decision to launch groundbreaking regulation.
The Innovative Technology Arrangements and Services Act, one of the three recent and significant legislative developments in Malta and the blockchain industry as a whole, was approved in Parliament by the Maltese Government and will take force of law on the 1st November 2018. The Bill aims to promulgate a framework for Innovative Technology Arrangements and Services (ITAS) and will be governed by the newly established Malta Digital Innovation Authority (MDIA) and is designed to support the Virtual Financial Assets Act (VFAA).
The ITAS Bill aims to establish regulation for innovative technology arrangements (ITA) and innovative technology services (ITS). Designated innovative technology arrangements are defined as the intrinsic elements including software, codes, computer protocols and other architectures which are used in the context of Distributed Ledger Technologies, smart contracts and related applications – as well as other arrangements consisting of:
- Software and architectures which are used in designing and delivering DLT which ordinarily, but not necessarily:
- uses a distributed, decentralised, shared and, or replicated ledger;
- may be public or private or hybrids thereof;
- is permissioned or permission-less or hybrids thereof;
- is immutable;
- is protected with cryptography; and
- is auditable
- Smart contracts and related applications, including decentralised autonomous organisations, as well as other similar arrangements
- Any other innovative technology arrangement which may be designated by the Minister, on the recommendation of the Authority, by notice from time to time.
Why does technology law need to be future proof?
Not all ledgers are made equal
Blockchain technology is driving innovation, reducing costs and improving security across industries such as finance, insurance, retail as well as manufacturing. It has helped solve a multitude of problems in these industries – double spending, for example, is one of them. A blockchain is defined as a distributed ledger; through which transactions are recorded and verified by the users of the networks, in nodes which are distributed within the network.
Double spending is a challenge posed by digital currencies that being at heart simply electronic files could potentially be copied, allowing a person to use the same currency to make multiple transactions, lowering of the value of the currency being used. Digital currencies built on a blockchain and transactions therein are verified by multiple users – essentially an audit – before they are validated.
Several solutions have been introduced to combat double spending and other common headaches in the business world. Amongst these are;
- The Digital Signature;
- Proof of Work;
- Proof of Stake
- Hash function;
- Effectively combating identity management.
The Digital Signature
A digital signature prevents persons from replicating transactions on the blockchain. It is created using cryptographical and mathematical processes, which are considered to be more secure than a handwritten signature, which can easily be forged. A digital signature, therefore, is a way to prove that a message originates from a specific person and no one else.
Proof of Work
Proof of Work (PoW) is a consensus protocol introduced through the advent of Bitcoin. Other cryptocurrencies, nevertheless, have taken to adopting such a process.PoW is known as mining – the nodes on the blockchain network are known as miners. The ‘proof of work’ therefore, comes in the form of an answer to a mathematical problem, one which requires considerable work to arrive at, but is easily verified to be correct once the answer has been reached.
Proof of Stake
Proof of Stake (POS) is an alternative to PoW that uses much less energy and time and is consequently far cheaper than Proof of Work.
The Hash Function
The hash function is said to ensure immutability. The word ‘immutable’ denotes something which can never be modified or changed. In a blockchain, it refers to the global log of transactions that is created by a consensus between the chain’s participants. Once a blockchain transaction has received a sufficient level of validation it can never be replaced or reversed.
Most online transactions require that individuals disclose specific personal information before they can proceed to access services. Thus, inevitably, every time a person discloses information, this information gets stored on numerous internet databases. Digital clones of one and the same individual spring into existence across these platforms, exposing them to multiple security issues. Blockchain can be used to create a platform which protects individuals’ identities from theft. In turn, it would also massively reduce fraudulent activities.
The design of the earlier blockchain platforms have certain inherent limitations, amongst which are a relatively slow transaction processing time. Newer blockchain platformssurpassthese limitations; Whilst Bitcoin is slow at processing only 7 transactions per second (tps), Ethereum handles 20tps, Ripple achieves 1,500 tps whilst EOS claims to be scalable up to over one million tps.
Newer distributed ledger technologies technologies are also being launched such ashashgraph. The hashgraphalgorithm is a consensus mechanism based on a virtual voting algorithm to achieve consensus quickly, fairly, efficiently and securely. Hashgraph aims to provide the benefits of blockchain as a distributed ledger technology without the limitations of the blockchain.
Hashgraph uses a gossip protocol; every node in a hashgraph can spread signed information (also known as events) on newly-created transactions,as well as transactions received from others, to its randomly chosen neighbours. These neighbours will aggregate received events with information received from other notes into a new event, and then send it on to other randomly chosen neighbours. The process continues until all the nodes are aware of the information created or received at the beginning. The main benefits of hashgraph are claimed to be speed, fairness, security and efficiency.
While the new ITAS law currently covers DLT and smart contracts, it has been designed to extend to other forms of innovative technology very easily which is a critical consideration in a world where society are increasingly dependent on, and have their personal information stored on technology.
Combining Artificial Intelligence & Blockchain
Artificial Intelligence (AI) is the theory and practice of building machines, capable of performing tasks that seem to require intelligence. Future cutting-edge technology promises to include machine learning, as well as artificial neural networks and deep learning, to make this a reality. Moreover, AI systems also denote specialised expert systems which use a database of knowledge to make decisions. Researchers, in fact, are currently trying to build an AI which can apply truly intelligent decision making to a restricted set of problems.
Blockchain has the potential to democratise AI, making the latter a more viable product to the public, as well as going on to enhance the use of such decentralised intelligence. There could be some major benefits in amalgamating blockchain technology with AI technology. By their very design, DLTs collect and process massive amounts of encrypted information – all of which could be piped through to AI as raw data for processing. The potential benefits for health systems, to pick just one example, are enormous. Blockchain can help in tracking, understanding and explaining decisions made by AI. Moreover, AIs can assess several variables independently of each other, increasing efficiency and decreasing costs. AI would be able to manage blockchains more efficiently than humans or a conventional, non-thinking computer.
The Convergence of Blockchain & Virtual Reality
‘Virtual reality’ (VR)is defined as augmented reality. VR technology blends what the user sees in their real surroundings with digital content generated by computer software. Digital objects would be able to develop an identity through the convergence of a blockchain with VR technology, as it would allow for a deeper immersive experience.
Integrating blockchain and VR technology will allow the image of a uniquely tokenized digital object to be 3D modelled into a virtual world. In VR, users can interact with their tokenized objects, on a first-person virtual reality interface.
Can they be symbiotic?
If people start living in VR, its rules & systems will be just as important as the real world’s. Therefore, people’s jobs, social lives and assets will be tied up in this world
Blockchain is one means to decentralise such assets amongst different CLT platforms that are able to interact with one another in a virtual reality. In a world in which people’s lives are increasingly lived on technology platforms, the power in the hands of technology operators becomes immense. In this light, Malta’s decision to launch groundbreaking regulation which provides a legal framework for technology arrangements is critically important.
Author: Steve Muscat Azzopardi is the Senior Manager of Corporate & Fintech at Chetcuti Cauchi Advocates. Steve and his team advise International clients on setting up their wealth structure or business operations and licensing requirements in different jurisdictions and continue to support them thereafter. Steve brings to the table over fifteen years of international experience in the financial services industry which led to his expertise in advising blockchain-based businesses, including ICO, STO, crypto exchanges and other crypto service providers. For more information, contact Steve via email on [email protected] or visit cclex.com/fintech.