While individual states, such as Wyoming and Delaware, are making progress in regulating the blockchain space, the United States at the federal level still lacks any law or regulation that comprehensively governs the use of blockchain and other DLTs. However, federal agencies have been actively exploring blockchain technology and its opportunities and risks, in areas such as supply chain management, digital identity and device authentication, customs compliance, and provenance of goods. These agencies are evaluating this new technology to determine whether it can improve existing government activities and whether new regulations should be implemented or existing regulations should be modified.
Intragovernmental Emerging Citizen Technology Office (ECTO)
The General Services Administration (GSA), the agency that develops government-wide cost-minimising policies and other management tasks, set up the Emerging Citizen Technology Office (ECTO). ECTO evaluates, tests and implements IT modernisation initiatives with emerging technologies. It is currently consulting, gathering and making sense of agencies’ experience with blockchains and ways in which the technology could be better understood within the federal public sector. Following a successful forum in July 2017, ECTO gathered potential use cases from across the federal public service and triggered the launch of a government-wide community of practice on blockchain technology. Further it is actively working with concerned stakeholders to introduce blockchain to public servants and citizens-at-large in new, practical and easily-accessible ways.
There have been a number of regulatory responses at the federal level in respect of crypto-assets. In order to support innovation in the blockchain industry, legislators introduced two bills: the Token Taxonomy Act and the Digital Taxonomy Act. The bills aim to specifically exclude digital tokens from being defined as securities and “provide regulatory certainty for businesses, entrepreneurs, and regulators in the U.S.’s blockchain economy.” The bipartisan pair of Congressmen behind the Bills, Warren Davidson and Darren Soto, argue that US regulators must expressly define this new asset class in order to compete with rapidly growing blockchain economies such as Singapore and Switzerland. They believe that excluding digital tokens from securities-based requirements may prevent them from being over-regulated and foster innovation in this new space. The Bills also seeks to better protect consumers and modify the IRS code to exclude the trading and acquisition of virtual currencies from taxable gains.
Following up on this, the bipartisan pair also introduced the Virtual Currency Consumer Protection Act and the U.S. Virtual Currency Market and Regulatory Competitiveness Act . The former would require the Chairman of the Commodity Futures Trading Commission (CFTC) to submit a report examining the potential for virtual currency price manipulation to certain House and Senate committees within one year of its enactment. It defines “virtual currency” as a “digital representation of value that does not have legal tender status and that functions as a medium of exchange, a unit of account, or a store of value.” The latter would require an additional report from the CFTC Chairman, in consultation with the heads of the SEC and other relevant federal agencies as he deems necessary, on the state of virtual markets and ways to promote American competitiveness. It would also request that regulators evaluate the feasibility of a new regulatory structure for virtual currency exchanges that would include federal licensure, market supervision, consumer protection and federal preemption of state money transmitter obligations.
Strategic Hub for Innovation and Financial Technology (FinHub)
While the U.S. Securities and Exchange Commission (SEC) has taken a seemingly negative approach to crypto-assets, it has launched a Strategic Hub for Innovation and Financial Technology (FinHub) (October 2018). The FinHub will serve as a resource for public engagement on the SEC’s FinTech-related issues and initiatives, such as distributed ledger technology (including digital assets), automated investment advice, digital marketplace financing, and artificial intelligence/machine learning.
Framework for “Investment Contract” Analysis of Digital Assets
On 3 April 2019, the U.S’ Security and Exchange Commission (SEC) FinHub published a framework for “Investment Contract” Analysis of Digital Assets. While this framework represents Staff views and is not a rule, regulation, or statement of the Commission, it does provide some legal clarity as to whether a digital asset constitute a security. This depends on the nature of the asset, including what rights it purports to convey and how it is offered and sold. The framework is not intended to be an exhaustive overview of the law, but rather, an analytical tool to help market participants assess whether the federal securities laws apply to the offer, sale, or resale of a particular digital asset.
U.S. Food & Drug Administration (FDA)
The U.S. Food & Drug Administration (FDA) recently launched a new pilot project in which participants representing the drug supply chain (e.g., manufacturers, repackagers and other stakeholders) can pilot the use of innovative and emerging approaches for enhanced tracing and verification of prescription drugs in the U.S. to ensure suspect and illegitimate products do not enter the supply chain (February 2019). FDA Commissioner Scott Gottlieb, M.D, stated “We’re invested in exploring new ways to improve traceability, in some cases using the same technologies that can enhance drug supply chain security, like the use of blockchain. To advance these efforts, the FDA recently recruited Frank Yiannas, an expert on the use of traceability technologies in global food supply chains. He’ll be working closely with me on ways for the FDA to facilitate the expansion of such methods, such as blockchain technology, to further strengthen the U.S. food supply.”
In a surprising turn of events, Facebook has entered the blockchain space by announcing the creation of permissioned blockchain digital currency known as ‘Libra’. The currency will be a so-called ‘stablecoin’ i.e. backed by tangible assets in order to avoid price volatility. The currency will be governed by a nonprofit group based in Switzerland consisting of 28 founding members, which includes Facebook’s Calibra unit, Visa, Mastercard, Uber, PayPal, venture capitalists and others. They can each control a validator node by investing at least $10 million through the purchase of Libra Investment Tokens, which grant rights to a share of future interest earned by the reserves. The Libra blockchain will also be open to anyone who wants to build applications on it. Facebook plans to create a digital wallet, named ‘Calibra’, available on WhatsApp and Facebook Messenger to store Libra coins.
Facebook sees Libra as a new decentralised global payments platform that could help the 1.7 billion ‘unbanked’ people get access to financial systems.
Unsurprisingly, the announcement was met with calls for tough scrutiny from regulators and skepticism from technologists and the cryptocurrency community.
US regulatory concerns
US regulators and politicians have expressed concerns at the announcement. The cryptocurrency market has been criticised as lacking “a clear regulatory framework“. The U.S. House Committee on Financial Services Democrats went as far as demanding that Facebook halts all developments until “regulators and Congress have an opportunity to examine these issues and take action”. Further supervisors, such as the Federal Reserve, are calling into question Libra’s effects on money laundering, consumer protection and financial stability. Finally, Facebook’s shaky reputation when it comes to data privacy has also been a cause for concern.
Interview with Eric Fish, Senior Vice President, Legal Services, Federation of State Medical Boards
Which specific use cases/applications are being implemented by you and, more widely, in your country’s public sector?
Within the United States you are beginning to see various industries trying to zealously rush towards embracing blockchain, or a database mislabeled as a blockchain, and apply it as the remedy for multitude of problems that exist. There has been no shortage of interest in applying blockchain to use cases related to supply chain management and procurement, as well as harnessing it for use in, and regulation of, the financial industry. Many others see promise in utilizing blockchain in healthcare, specifically to address payments, electronic medical records, and sector specific supply chain management such as tracking pharmaceutical use and diversion. But the discussions and pilots that use blockchain to create and manage identity, and which construct new trust frameworks should receive greater attention and are where the public sector could ultimately see the greatest gains from implementation. The Department of Homeland Security is testing the use of blockchain for identity verification, tracking human movement, and preventing forgery. There is a growing interest is the best use case for blockchain within the United States has yet to emerge.
What benefits do you see blockchain technology having on the healthcare sector?
Identity and credentials management, in way that responds to the needs of a modern healthcare system, is an area being explored by the Federation of State Medical Board (FSMB) and other groups; and although under the radar, it may be one of the most easily obtainable implementations of blockchain technology. The current system of credentials verification requires the presentation of specific identity elements required by statute or regulations at different points in lifetime of a physician. This process, based on a paper-based chain of custody, is proving to be redundant and inefficient. There is also a growing interest moving towards a system that allows for recipient ownership of credentials.
Blockchain could empower patients to own and better control their medical records as well as provide enhanced ownership of credentials for the physicians.
Blockchain also allows the professionals and the regulators to be better connected, which will ultimately improve care. One the things that is stifling adoption in the United States is how the healthcare regulatory system has developed over time to create institutional custody of vital records and credentials. Thus, important information and the management of this information has become siloed. This has made moving information from one provider to another, or from one state to another, very difficult and not because of technological limitations, but limitations of a system based on paper-based chain of custody processes. It adds further costs to the sector and limits the patient experience. It also creates fail points as regulators cannot do their job as effectively in securing public safety. So if blockchain is going to be a successful tool within healthcare, we must first address the larger construct, which is creation of a more efficient flow of information that is critical for regulation, and design the system to overcome some of the administrative burdens that physicians often site as contributing to burnout and that critics point to as outdated or ineffective in protecting the public.
Rather than ushering in a revolution, use of blockchain represents an evolutionary approach to designing how trusted, verifiable information should flow through the healthcare system.
What is the challenges in sustaining POCs and use cases. What is preventing them from becoming more widely used?
The real issue here is that government, and healthcare in particular, is very risk averse, and often rightfully so. There is a lot more at stake in these fields, as the costs of failed innovation and failed POCs within healthcare aren’t just born out in loss of investment funds, but possible loss of human life and ultimately public trust in government. Since the risk of the unknown creates avoidance, maintaining momentum after a successful POC is at times difficult. Even though the technology may be proven to be valid on issues such as authenticity and validity, there are numerous systems requirements and structural elements that you have to overcome in order to succeed. This contributes to the slow, methodical approach seen within the public sector and some reluctance for more to try new approaches.
But, is important to stress that for public sector, especially in healthcare, the costs of not doing something can be just as high.
While one focus should be on the technology and its ability to improve the system, there must also be a focus on the understanding and explaining the intrinsic motivation behind using the innovation.
At a technical level, it has already been proven that the POCs have viability, as they bring efficiency to transaction validation, can create authentic credentials and allow for improved auditability. However, not enough is being done to explain the motivation aspect – convincing people that there is a better way and that there is a pressing need to move towards it, even if it is characterized by others as disruptive.
The key for lasting and wide-spread adoption is being able to explain how a blockchain tool allows you to better perform the essential tasks for which you or your agency are responsible. Retention of legacy systems just because they are familiar could ultimately be damaging the system and sacrificing public protection in the long-run. This is why the FSMB started looking at how digital credentials will change healthcare regulation, from the digital signing of documents through badges to the use of blockchain. It is important that we studied the application of new technologies, educated our members, and suggested how it could be utilized to further patient safety and improve regulation.
My hope is that early healthcare POCs show that blockchain solutions are not necessarily disruptive and therefore should not to be trusted or experimented with, but are nothing more the application of available technology to address key regulatory issues.
Do you find the US’s current regulatory framework and approach suitable for blockchain technology?
There is certainly interest in making sure the framework supports innovations like blockchain. And while some nations have already implemented regulatory systems for blockchain, some of the key questions are still unanswered within the United States and implementation of blockchain may be a challenge. This is not to say that the regulatory system is the United States is not suited to address blockchain, but its complexity demands careful study and a measured approach before a definitive answer on suitability can be given. Implementation will touch upon a combination of federal and state laws, regulations, licensing systems, all of which may require new interpretations or modifications, if the opportunities that blockchain offers are to be fully realized.
In Congress, several interested members have created a Blockchain Caucus to studying this issue. However much of the interest has been initially tied to the regulation and use of blockchain within the financial services industry. As noted, there is also an agency by agency approach, tweaking regulations to address the questions that use of a blockchain presents within individual use cases.
Because many blockchain concepts relate back to contract law and electronic transactions law, which are state based laws, many of the use cases of blockchain start within areas of state law regulation leading to states approach the use of blockchain in different ways. But there are disagreements on whether the uniform laws related to electronic transactions are enough to address blockchain issues or could be used incorporate some of issues presented by smart contracts. In response, some states, such as Wyoming, have passed laws that treat blockchain smart contracts a little differently to traditional commercial contracts. The members of the Uniform Law Commission who drafted the original electronic transactions laws disagreed and opined that there is no need to change the traditional laws to accommodate blockchain. These disagreements have created grey areas, which will need to be clarified over the next few years.
So while the United States does not yet have true national approach yet or clear answers about the suitability of the regulatory system, there may be a short-term benefit to this, as it allows for creation of different approaches to using blockchain and seeing where it may be most viable. Sometimes, early government action to regulate or legislate with too much specificity in a fluidly developing field like technology tends to calcify initial ideas and perceptions, and you end up with little openness moving forward, stifling innovation. But long-term there may be a need for improved coordination to identify and address key concepts associated with blockchain throughout the country if progress is to be made and retained.
Should there one particular government department or minister appointed to lead on this issue?
I do not think appointing a specific blockchain minister or blockchain department is the best approach, but in necessary is that someone within Government is solely focused on a strategy of coordinating regulatory reform and championing government regulatory innovations – basically a chief regulatory innovation officer position that could review the different technologies that can improve public trust in government, coordinate the roles and responsibilities of different state and federal agencies, and mix and match and play approaches, ultimately see how to best structure the regulatory system. Currently regulatory innovation is occurring, but is being done agency by agency. The FDA Innovation Initiative is representative of an agency’s willingness to look at all aspects of the regulatory process and implement new ideas aimed at delivering on the mission while responding to changing public needs. But this willingness to innovate is not a constant across the regulatory landscape. A logical place for this position that drives innovations, such as the use of blockchain, may be in the Office of Information and Regulatory Affairs (OIRA) which has a role in reviewing and assessing administrative rules and guidance documents and an agency which has become increasingly important part of policymaking.
Ideally, it would not be the responsibility of this role to implementing just one solution or technology, but shepherding progress towards the very ambitious goal of improving public trust in government. The first question should be “how do we respond to what the public needs now and while using technology to deliver what it needs in the future.”
Are there specific states you believe are taking the right approach to blockchain?
States, such as Illinois and Rhode Island have created an government task forces to looking at blockchain. The goal of these taskforces are to convene different departments, different industries and creates a forum that allows a partnership between public and private actors figure out just what to do with blockchain.
These efforts are commendable approaches towards government-led innovation and blockchain growth that could be replicated, not just in the U.S. but globally. Fostering innovation within government is a very tough thing, but the presumed difficulty should not stop us from trying to identify areas of change and harness the potential of technology to help bring it about.
What approach is specifically needed for the medical industry to thrive and innovate?
We just need clarity. For example, whether digital credentials and the use of blockchain meets the standards for reimbursement and hospital accreditation, is currently unclear. This is because those standards are very broadly defined yet interpreted somewhat narrowly based on allegiance to legacy processes . We need more pilots to show that the technology complies with these standards and avoid future regulations that regulate at technology, rather than with it
Creating some clarity on the applicability of technology, like blockchain, and the requirements of the current regulatory system is why the FSMB did the digital credentials report. We looked at the technical specifications for badges, digital signature, blockchain and assessed whether these could meet the standards we have now. And they do for the most part, because key issues such validity and authenticity can be verified. If we get clarity on the regulatory and legal analysis, that is really going to help foster a lot more innovation.
This goes back to Government and healthcare being risk averse. Lack of regulatory clarity in healthcare is why innovators often hold back. Clarification is certainly more necessary than coming up with an entirely new framework for use of blockchain in healthcare.
What do you consider to be key factors in successfully implementing widespread blockchain/DLT adoption?
I consider the key factors to be:
- Do not use the term blockchain — Explain what you are trying to do, to prove or to meet an end goal that is understandable. Especially at this early stage, the term blockchain can hamper growth. You go on the news and the term is often linked with illicit activity. But if you take blockchain out of it and simply explain what you are trying to do, then that is a much better starting point.
- Be open to the different approaches that are out there but avoid vendor lock-in. If you go to what the technology can do, and again focus on the big picture, that is key.
- Look for use cases that are doable — I think we were a little different at the FSMB in that we took the blockchain solution to a very nuanced area of healthcare regulation. We did not go right to payments or patient health record. We went in an area that is solvable, that is data driven, where you have got multiple different parties and it therefore looked like the right use case. Figuring out your use case and where blockchain can be effective is therefore critical.
- Tell the story of why you are doing this — i.e. what you are trying to achieve. If you keep it at a high level, you will keep many more people interested in what you are doing. But people will also appreciate that you are doing it for the right reasons i.e. not trying to mine coins, for example.
What do you see as the major challenges, such as political and ethical, around the use of blockchain?
I think that the biggest challenge is the fear of the unknown. When you are trying to prove this and use it in areas that are highly regulated with traditional legacy regulation structures, there is a reluctance to step away from what is comfortable and what is known. In finance or healthcare, there are so many different invested interests that stepping away from that and implementing a new structure is going to be a challenge. Getting away from the hysteria or hype or financial incentives will be a critical challenge.
From the legal perspective, one of the areas within blockchain that was appealing to me as anin-house counsel to an organization that deals with processing large amounts of data is the costs and risk of data management. If you could access the data but not have to be a custodian, this would greatly mitigate risks for companies and the burdens of complying with the varying privacy standards that are out there, and reduce the cost associated with heavy investment in data security.
Practically, getting everyone to use the same terminology and use the same common language is going to be key so that we can all look at the same thing and rely on the same principles. You must also make sure that public chain is secure and that, if it is compromised, you would have the ability to audit and hold accountable those who impacted the validity of that chain and clearly establish the associate legal and ethical duties associate with user of that chain. However, these foundational issues are also present with paper, and you are always going to have these foundational questions, no matter what medium you use.
What is the plan in the short to medium term (next 5 years)? How do you see the space evolving in the next 5 years?
The FSMB was one of the first groups in healthcare to successfully produce a blockchain pilot, which was completed in 2017. Some of our members and partners were impressed with the FSMB’s willingness to be on the cutting edge, test new technologies, and our openness about both the potential, possibly disruptive, upside we saw as well as the drive towards additional projects and partnerships that would answer the unanswered questions we had about blockchain. This deliberate and pressing approach has created growing interest in additional blockchain use cases which has further potential to increase acceptance of the technology throughout the industry. I see potential in areas of graduate medical education and continuing medical education records, as well as enhancements to hospital staff management.
Within the public sector, use and management of regulatory data is a key area where government could use blockchain as I see regulation becoming much more data centric. Regulation will no longer a point in time check on certain compliance factors or a point in time check where the regulatory checks to see if certain statutory criteria are met.
Harnessing data through the blockchain may allow government to become more responsive, as regulatory efforts could become focused on the qualitative aspects, of the services that are regulated.
What lessons or transferable experiences can you share to help other countries follow your lead?
Within in any regulated industry, look to pain points for both the people that are part of the system, but also the people who rely upon the system. And in general, governments interested in using blockchain should look to where its services, viewed through the eye of both the regulator and regulated, could be improved if blockchain is used to improve the information infrastructure. The goal should be to create a system that allows the same trusted and verified data to flow between departments, who use it for their specific roles and responsibilities, and deliver improved services, all without creating new bureaucracy.
In healthcare for example, the medical licensing and credential system incurs high costs to manage that data. You see comments from physicians that show frustration with the requirement of filling out forms with the same information over and over again. Patients also hate waiting for days forms to be sent, often in hard copy or via fax, or filling out their medical histories over and over again. Hospitals have large systems and large departments created to manage, process and analyse that data that are expensive to run. It is evident that there are multiple pain points created by inefficient information flows, and multiple information channels that are not able to provide the data management, security and analysis required in a modern system. And that is where blockchain has promise to deliver real change.
Are there other jurisdictions you look up to in terms of their blockchain policies?
I think that the willingness within the UK health service to innovative with blockchain is very impressive. UK Secretary of State for Health, Matt Hancock MP is known for challenging the system to rethink how it uses technology and be better at delivering for those it serves and these efforts could be instructive for projects within the United States. Malta has placed the entire nation’s educational credentials on the blockchain, seeing the use of blockchain as net economic positive because liberation of the data from institutional ownerships reduces compliance costs and enhances mobility of workers.
But ultimately, it is not so much that we should look up to a country but we should look to other countries to see how they are approaching things and how they are trying to solve the big picture questions and look to work together. The healthcare sector has great potential to foster global collaboration on blockchain projects because ultimately health and healthcare is universal, and the same questions and issues with information are omnipresent. Making sure that quality physicians get to patients, provide care, and do no harm is a universal construct. And globally, there are different approaches to creating and managing data, but technologies like blockchain could be the great translator. And if we do can solve questions of governance and infrastructure in healthcare, we can do it anywhere else.
What are your views on international harmonised standards and approach to this space?
Global harmonization on fundamental issues is essential. You are seeing industry work with governments and regulators in not creating a government-centric or industry-specific standard but looking at what is behind the issue that we are trying to solve. The development of W3C credentials, is an example of this collaboaritve approach.. It comes down to focusing what are we trying to do as a community and asking the right questions, such as Is the idea of institutional ownership outdated? How can we access and use data in an ethical and legal way?
Should the US government put more focus on the technologies of tomorrow?
Generally, fostering an environment for technological advancement in any form confers economic and strategic benefits and is vital to the health of the nation. But putting focus on technology and innovation within government is of utmost importance to the strength of the country. If you acknowledge shortcomings of the current system, show a willingness to innovate and be creative, support innovation with the right personnel and adequate funding, and ultimately deliver solutions that work, public trust that is essential for tomorrow is secured.