EU sets its sights on huge potential of blockchain

Blockchain, the technology behind bitcoin and other cryptocurrencies, has the potential to transform the way we exchange a much wider range of assets, according to a new report from the EU's research centre.

The report, entitled Blockchain now and tomorrow: Assessing multidimensional impacts of distributed ledger technologies, published on 8 October by the Joint Research Centre, the Commission's science and knowledge service, says blockchain could enable the secure transfer of money, contracts, land titles, data, services and other assets digitally, with few or no intermediaries.

However, the JRC at the same time warns of complex challenges of applying in this way a technology which is still in its infancy.

For example, the processing power required to run a blockchain raises questions over its energy efficiency. Policymakers also need to assess whether current legal frameworks are up to the task of protecting people as they exchange data and assets, says the report.

The report offers an in-depth and practical understanding of blockchain and its possible applications, moving beyond the hype and debunking controversies.

It identifies ongoing and upcoming transformations and sets out an anticipatory approach for applying blockchain technology in finance, industry, trade and public sectors.

While cryptocurrencies and digital tokens have been capturing most of the attention when it comes to blockchain's applications, it also has potential in many other sectors, such as trade and supply chains, manufacturing, energy, creative industries, healthcare and government, public and third sectors. Some features of blockchain technology that can be applied in these sectors include:

• What is recorded on a blockchain stays as a single record, agreed and shared by all. A manufacturer can make a "digital twin" of a product on a blockchain to record its full history. This enables the tracking and tracing of how a product is built, stored, inspected and transported throughout its whole value chain. It can provide proof of ownership rights, helping to prevent unauthorised use, theft and infringements.

• Blockchain enables smart contracts that could help to manage supply-and-demand flows of available energy. Working together with other technologies, like smart meters or sensors, smart contracts could automatically check prices and execute buy and sell orders. For a local producer of renewable energy, this could mean that they can trade energy with others in their communities more quickly and effectively. In the future this could support the development of peer-to-peer and energy communities.

• It can be easy for everyone to check available data on a blockchain in a secure and transparent way. When checking public benefits like pension rights, a citizen could access their complete funds and contributions along his or her life. A tax authority could also have access to this information for every citizen, which can reduce processing time and administrative costs for all involved.

A global ecosystem is on the rise from start-ups to capital investment, says the report.

We can see the rise of blockchain technology both in the sharp growth in blockchain start-ups and by the volume of their funding. International players in the United States are taking the lead, followed by China and the European Union.

Funding reached over €7.4bn in 2018 due to the explosion of venture capital investments and “initial coin offerings”.

Blockchain does not follow a onesize-fits-all model, finds the report. The potential opportunities and challenges of deploying blockchain technology are strongly related to context, application or sectorial issues.

That is why organisations should not develop solutions looking for problems, but find existing or foreseeable problems in their operations or business, and then look for possible blockchain solutions.

The JRC does warn of bottlenecks and complex challenges ahead. Blockchain technology is still at the embryonic stage and facing many challenges, such as performance and scalability, energy consumption, data privacy, integration with legacy infrastructures or interoperability between different blockchains.

Still based on a limited set of proven use cases, blockchain often entails additional risks and barriers for firms, businesses and organisations piloting it or interested in its deployment.

However, despite widespread misconceptions, blockchain does not imply the total elimination of intermediaries or third parties.

Some intermediaries may disappear but new ones will appear and traditional ones, like governments, will continue to play a long-term role, not least to guarantee equal conditions for participation, check the quality and validity of data, decide on responsibility and liability, or settle disputes and enforce rules.

In a message to policymakers, the report makes clear that regulators need to progress in assessing whether existing policies and laws are fit for purpose or if new frameworks will be required.

Pressing discussions include, for instance, the legal classification of tokens and coins, validity of smart contracts, applicable jurisdictions, consumer and investor protection, enforcement of anti-money laundering requirements and data protection and privacy safeguards.

Blockchains will be complementary or will work together with other key digital technologies, such as artificial intelligence, the internet of things, data analytics, cloud computing, robotics and additive manufacturing.

The development of blockchain should be connected to existing digitisation initiatives and programmes to avoid overlaps and to maximise impact.

Capacity building and knowledge sharing will be decisive, says the report. Environments such as regulatory sandboxes and other experimentation spaces can promote more direct exchanges between policymakers, regulators and supervisors, on the one hand, and blockchain companies, start-ups and entrepreneurs, on the other. Key benefits can include testing new solutions and business models and improving the quality and speed of policy guidance.

The report ends by stressing that blockchain applications can have far-reaching implications for policy, the economy, society, technology, the law and the environment.

But potential changes, for example, in economic and business models, governance mechanisms or trust between parties, can only be grasped through a mix of different areas of knowledge, including computer science, economics, law, public finance, environmental sciences and social and political sciences.

Policy dilemmas involve a balance between adequate enforcement of existing regulations from day one and the flexibility to accommodate an evolving technology with both foreseeable and unforeseeable implications.

This balance, the report says, can be grounded in a foresight and trend monitoring approach to enable preparedness and adaptation to an increasingly rapid pace of change.