Lack of regulation towards illegal transactions and delay blocks widespread adoption of blockchain.

Blockchain technology has existed for less than a decade and can be considered still to be in its infancy. Therefore, talking about blockchain's future at this very early stage is almost like speculating about the future of the internet back in 1980s. Just as one wouldn't be able to conceive of or talk about Facebook, Airbnb or even internet banking in their current forms back in the Reagan era, it is not very easy to predict where blockchain technology might take us in the next 20 or 30 years. However, we can already foresee that blockchain technology will face various challenges from at least four different aspects, namely: (i) technical, (ii) marketing/business, (iii) behavioral/educational, and (iv) legal/regulatory.18 For the purposes of this paper, our main focus will be the potential legal and regulatory challenges to this emerging technology.

One of the most significant challenges currently facing blockchain technology, which should be of crucial interest to any legal practitioner, arises from the use of blockchain as a transaction platform. This is because “[a] blockchain network can validate a variety of value-related transactions relating to digital money or assets that have been digitized.”19 Value-related transactions encompass, besides monetary transactions, transactions relating to land, debt, or intellectual property.

The fundamental problem currently facing blockchain concerns the speed with which these transactions can be processed through blockchain technology. Compared to traditional transaction platforms, such as VISA or PayPal, blockchain is significantly slower at this time. For example, if we examine the transaction processing capacity of the Bitcoin blockchain (which is the most widely adopted and heavily used blockchain), we observe that it can handle 2–5 transactions-per-second (“TPS”), whereas VISA can handle 56,000 TPS and PayPal can process 155 TPS.20 However, it is worth noting that “some other blockchains are faster than Bitcoin's. For example, Ethereum started with 10 TPS in 2015, edging towards 50–100 TPS in 2017, and targeting 50,000–100,000 TPS by 2019.”21 In addition, it should be noted that numerous alternatives have been introduced to overcome this challenge through second-layer technologies.22 The second layer technologies are built on the technologies constructing the base-layer blockchains such as Bitcoin or Ethereum blockchains. As an example of a second-layer technology, SegWit update to Bitcoin can be mentioned as an improvement on the block size and thus on the cost and speed of Bitcoin blockchain.23 Further, the upcoming update about the Lightning Network also aims to speed up the transactions in Bitcoin blockchain.24

As to the legal challenges ahead, the primary obstacle worth discussing is clearly the lack of adequate regulations and the absence of a proper legal framework with regard to blockchains. In recent years, blockchain technology has emerged and developed much more quickly than anticipated and we observe numerous applications of this technology that are creating new grey areas in light of the existing and inadequate regulations. For instance, the use of various cryptocurrencies to carry out illegal transactions on the Darknet25 markets was the first regulatory challenge posed by blockchain technology. Such unlawful behavior forced regulators swiftly to implement certain regulations in this field in order to combat money laundering.26 Furthermore, a second wave of regulatory uncertainty arose from Initial Coin Offerings (“ICO”), which were adopted as a crowdfunding method using cryptocurrencies. While countless scams have unfortunately occurred in recent years regarding ICOs,27 the declarations from regulatory authorities (such as the Securities and Exchange Commission in the United States (SEC))28 have also played a significant role in a market that has reached a market cap of around 58 billion USD.29 The involvement of regulatory authorities (especially securities authorities) aimed to clarify the situation surrounding ICOs and try to protect the investors from the scams, but yet in a timid way. Since the underlying technology is still young and rapidly evolving (and has not been completely understood by the regulatory bodies), it is difficult and risky to impose regulations without fully understanding the consequences of such regulation. However, as could be expected, the lack of comprehensive regulation creates uncertainty regarding the future of blockchain technology and slows down the rate of adoption of this promising technology by global companies in their daily operations.

Another important legal challenge is the lack of planning concerning the legal requirements in the early blockchain platforms. Most of these platforms were focused on transactions and not nearly as much on their reporting obligations.30 This lack of foresight has now forced these platforms conducting value transfers to devise new solutions with respect to the reporting problem. Even though the lack of smooth and efficient reporting processes now may seem likely to cause problems in terms of taxation, it should be remembered that blockchain technology also holds great promise in terms of alleviating today's reporting problems and significantly improving current reporting processes, since such transactions are traceable and irreversible.