Both the UK and EU are sharing the benefits of distributed ledger technology
By Joshua Taggart, Junior Consultant
This week, the European Commission announced that they will be launching a regulatory sandbox for the use of distributed ledger technologies following the UK’s decision to do the same as announced in the Edinburgh Reforms of December 2022. The decision to welcome, rather than shun, this new technology will help both the UK and EU to promote innovation and attract economic growth in tech.
Distributed ledger technologies (DLT) are a foundational element of blockchain technology, which is in turn used for cryptocurrencies and cryptoassets. This includes Bitcoin and the non-fungible tokens (NFTs) which you’ve probably heard about. While NFTs and Dogecoin may seem a bit niche, or only relevant to those with enough cash to spend $4000 on digital toilet paper, the technology behind these technologies is of particular interest to governments.
DLT is simple on the surface, but incredibly complicated at a granular level. DLT is a platform which uses ledgers stored on separate devices to ensure accuracy and security. It’s being used in more and more industries as the benefits of the technology become more apparent: preventing fraud, ensuring accuracy, reducing the time and cost requirements of managing data and securing valuable, private information. DLT will have various applications in life and business which are only beginning to be explored.
This technology is no longer being used by the stereotypical computer geek with too much time on his hands. Major companies are adopting the technology, testing its application in various fields to see whether their operations can be faster, more secure or more cost-efficient. This started with money, with alternative currencies like Bitcoin and Ethereum being headline examples, but now extends to any asset that can be digitised and transferred from one owner to another. Your university degree can be digitised and uniquely coded so it can’t be replicated. Your vaccine passport can be encrypted and shared to those who request the information. To take a single example, blockchain-stored identity information is now a billion-dollar industry, expected to be worth $18bn by 2030.
It’s clear, therefore, why both the UK Government and the EU would want to not only understand this technology, but compete to allow companies to use it legally for an increasing number of purposes. This is the purpose of the regulatory sandbox – a confined and controlled ‘area’ of the law where DLT can be used in experiments, and transparently assessed for its pros and cons.
This approach is gaining traction because of its open-mindedness: if these technologies are going to become more widespread, it only makes sense for governments to accept this reality, and to watch closely how the technology is used and evolves as individuals and companies expand their horizons. The EU’s response is prompted by that of the UK in a direct and competitive move to attract foreign businesses to their nation: “You can come here and experiment with this new technology, and so long as you do so transparently and within the legal confines we have allowed, we would love to benefit from the potential ingenuity you can discover.”
Of course, there are risks to any emerging technology. It might not be as secure as previously imagined, or there may be a loophole which exposes consumers to fraud, as demonstrated by the ongoing FTX case. But the potential rewards of the technology and its use in the wider market are great. It was only fair that Henry Ford succeeded in developing the motorcar after pouring so many resources into making a better mode of transportation – the same principles apply to the proliferation of DLT. Investment into R&D as well as experimentation with new ways of working could benefit society greatly – we need only look at the emergence of hybrid working from the pandemic as an example.
London is looking to cement its status as a financial superpower post-Brexit, and the Treasury’s reforms (along with lengthy consultation processes) will help to shape the UK’s philosophy of competition and innovation. In the wake of last week’s reshuffle and the creation of a Department for Science, Innovation and Technology, it is only right that DSIT and the Treasury work together to explore the potential gains from DLT and other web3 technologies. DG Connect and the Markets in Crypto-Assets regulation will look to do the same, creating a foundation for the adoption of web3 while ensuring baseline levels of oversight, transparency and accountability to build consumer confidence.
Both London and Brussels are making the correct decision – nothing is so certain as death, taxes and the proliferation of technology. If both the UK and EU can get on the train early, managing risks appropriately while reaping the benefits of enterprise and innovation, we could see benefits across both public and private life from a more private, decentralised and efficient world.