Blockchain evolution: from origins to MiCAR

Evolution of Blockchain, from its origins as a technological tool to MiCAR (Market in Crypto Asset Regulation).

Introduction

Blockchain. This term entered my life suddenly in 2017 when a financial advisor proposed an investment in these new technologies. I researched, but it took a few years before I became passionate. Much has been said and written about it, but what I find interesting to examine is a temporal overview that allows us to organize ideas about the intrinsic value of this technology, its architecture, and the enormous potential it would have in its application in daily processes (not just in business). The purpose of this article will be to grasp the necessary aspects for the constitution of a valid DLT project, highlighting the differences between the previous Italian regulations and the subsequent MiCAR.

Origins ¹

The concept of blockchain postulated by Nakamoto 2 on October 31, 2008, with the white paper, tends to qualify it as a database, not centralized, meaning not present within a single computer but across multiple machines that share it through information recorded on nodes via immutable cryptographic processes.
From the first reading of the definition, it is clear that there are two fundamental concepts in the economy of blockchain architecture:

• Decentralization, meaning the presence of non-centralized information but shared through DLT;
  
  
• Immutable cryptographic processes, which constitute an essential element for the transmission of information to nodes.

The acronym DLT (Distributed Ledger Technology) defines a decentralized network system, based on a geographically distributed register, where all nodes of the network possess the same copy of the database. To ensure the validity of transactions, network nodes (i.e., their participants) use a consensus mechanism, which is a collective process through which an agreement on transaction ³ validation is reached.

Collective processes generally refer to the principle of “code is law”; programming rules replace absent norms. One of the reasons we could easily suppose to support this is that, necessarily, in an embryonic state or rapid technological development, the law follows technology, so it is the users themselves who, by participating in the same community, define the rules of the game. Reflecting on what has been said so far and associating it with Bitcoin, for example, immediately clarifies that it is a democratic economic system; it is, in fact, envisaged to establish an alternative currency to fiat, calibrated on the possibility of free and direct capital movement.

That being said, what are the main characteristics of blockchain?

• Security: Decentralization offers greater guarantees against attacks; furthermore, the indispensable connection between nodes increases its resilience;
  
  
• Transparency: Every data exchange is tracked and visible;
  
  
• Immutability: The majority of nodes are required to intervene and modify;
  
  
• Efficiency: There are no intermediaries;
  
  
• Trustless System: It does not require trust in a particular entity;
  
  
• Transfer of digital values: The transferred file is the original, not a copy; defining the uniqueness of an asset with mathematical certainty, mapping it, is the process that allows the existence of cryptocurrencies.
  

Regulatory Aspects

June 9, 2023, is a historic date for the world of crypto-assets in the European Union. The EU Regulation 2023/1114 of the European Parliament and of the Council of May 31, 2023, on crypto-asset markets, amending EU Regulations No. 1093/2010 and 1095/2010, EU Directives 2013/36/EU and 2019/1937, known as MiCAR or Market in Crypto Asset Regulation, is published in the Official Journal of the Union (L.150/40).
The regulation came into force on June 29, 2023, twenty days after its publication in the Official Journal of the Union. Most of its rules will only be fully applicable after the subsequent 12/18 months, depending on the type of subject matter.

What was the need of the European legislator? Clearly, it was for a regulatory standardization of a topic that, increasingly addressed individually by the Member States, was leading to contradictions and creating difficulties, or potential frictions within the framework of the free movement of goods and services, thus giving rise to possible “legislative shopping” ⁴ that would have shortly led to significant discriminations between EU countries.

MiCAR comes to Europe at a historical time when the rest of the world is either watching or initiating disjointed legal actions; this measure standardizes the rules of the Union member countries, resetting those national norms that could, as previously explained, create frictions and disturbances between countries of the same union.
For the first time, we are faced with regulations that offer a technical definition of blockchain.

To understand this latter statement, let’s take a step back:
In Italy, blockchains are defined, in Article 8 of Legislative Decree 14 December 2018, No. 135 converted with Law No. 11 February 2019, No. 12, as “Technologies based on distributed ledgers,” the technologies and computer protocols that use a shared, distributed, replicable register, simultaneously accessible, architecturally decentralized on cryptographic bases, allowing the recording, validation, updating, and storage of data both in the clear and further protected by encryption verifiable by each participant, unalterable and non-modifiable.

Given this precedent, let’s analyze the effort of the EU legislator, which, in Article 3 of MiCAR, defines distributed ledger technologies, thus managing to give continuity and completeness to the previous colleagues of European countries. The technique to define the Distributed Ledger Technology (DLT) is a decidedly sophisticated architecture ⁵: each definition is completed by a subsequent one with an analytical reconstruction of the entire terminological chain, as follows:

• Distributed ledger technology (DLT): a technology that enables the operation and use of distributed ledgers;
  
  
• Distributed ledger: a record of information in which operations are recorded and which is shared by a series of DLT network nodes and is synchronized among them, using a consensus mechanism;
  
  
• Consensus mechanis : the rules and procedures by which an agreement is reached, among DLT network nodes, on the validation of an operation;
  
  
• DLT network node: a device or computer application that is part of a network and holds a complete or partial copy of the records of all operations performed through the distributed ledger.

In the completeness of the definitional framework, there is an evident lack of mention of cryptography, the fundamental element of blockchain technology.
As Attorney Simbula observes ⁶, all the regulations regarding the various types of tokens considered by MiCAR start from the essential premise that tokens must be built on DLT. If this definitional framework is not adequately circumscribed, it risks also including technically less reliable blockchains since the cryptographic principle or the prohibition of violating domain-specific rules is not specified.

Conclusions

From the analysis of the previous and subsequent definitions, we can affirm that it appears increasingly urgent for the Italian legislator to intervene, standardizing the definition referred to in Article 8 of the MiCAR to Article 3, especially considering that many public tender notices related to significant financing or financial concessions in favor of DLT-based projects specifically refer to the aforementioned Article 8 of the simplification decree. It would be appropriate to describe, in each specific tender, the technical characteristics that a “blockchain-based” project must have with a high level of detail.

¹ Most of the information cited comes from attending the “Digital Lawyer” master’s program promoted by Giuffrè Francis Lefebvre.

² To be precise, Nakamoto never mentions this term, but he presents his precept of egalitarian finance, with a peer-to-peer structure, non-hierarchical but based on modifiable and traceable nodes.

³ The MiCAR guides to the European regulation on crypto markets, 2023, Giuffrè Francis Lefebvre, edited by Nicotra, Sarzana, Ippolito, Simbula – pg 25
Analysis of crypto-assets: classification and application in Mica by Miroddi.

⁴ The MiCAR guides to the European regulation on crypto markets, 2023, Giuffrè Francis Lefebvre, edited by Nicotra, Sarzana, Ippolito, Simbula – pg 7
Overview of the MICA regulation by Simbula;

⁵ The MiCAR guides to the European regulation on crypto markets, 2023, Giuffrè Francis Lefebvre, edited by Nicotra, Sarzana, Ippolito, Simbula – pg 18
Overview of the MICA regulation by Simbula

⁶ The MiCAR guides to the European regulation on crypto markets, 2023, Giuffrè Francis Lefebvre, edited by Nicotra, Sarzana, Ippolito, Simbula – pg 20
Overview of the MICA regulation by Simbula;