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National Blockchain Strategy At Odds With Data Localisation and Privacy says Ikigai Law

Law and policy firm, Ikigai Law says that the government’s Draft National Strategy for Blockchain is at odds with its approach on data localisation norms and privacy. In its response to the government’s draft strategy, which seeks to centralise blockchain development, Ikigai said that the government should pursue a more collaborative approach with domestic and international organisations, rather than focus on creating an India-centric model.

In its report, the the Ministry of Electronics and Information Technology (MEITY) recommended that the government create a National Level Blockchain Framework (NLBF) which could first, create uniform blockchain systems across various use-cases and second, implement a number of public services on such systems. In theory, blockchain is meant to decentralise computer networks, allowing equal access and power to the same set of electronic files and software. However, the MEITY’s draft strategy envisages a centralised model for blockchain development and access.

Since Blockchain systems can be global, including thousands of users and computer nodes, India’s policy on data localisation may hamper the ability to tap this opportunity. “The Draft Strategy correctly identifies that since data is automatically stored across all nodes on a blockchain network, data localisation would be a challenge to blockchain adoption. In general, data localisation requirements may have unintended consequences on the Indian economy. This is because restrictions on cross-border flows of data will deprive the Indian economy of the significant contribution of data-led economic growth,” the submission said.

Ikigai says the government should revisit its stance on data localization and should consider an exemption from localisation since blockchain is premised on “distributed storage as a security enhancing feature.”

Blockchain can be a privacy-enhancing tool

While the government’s draft wishes to shift multiple personal information services—land records, identity, education, health—to a blockchain platform over time, it raises multiple privacy concerns if citizens and users do not have the power to set the rules for access, control, consent, and security, particularly since each of these services will be developed on centralised standard.

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Ikigai said that the government should view blockchain as a tool to enhance privacy particular in terms of consent mechanisms, security and verification. “For instance, consent taken from individuals can be taken before personal data is stored on a blockchain. Further, consents can be bundled into data structures stored on the blockchain. Data structures are then in one-to-one correspondence with consents and its revisions, which accounts for robust proof of their existence,” the submission said.

“The Draft Strategy highlights that individuals may not be able to exercise ‘right to be forgotten’ as data is perpetually stored on a blockchain network. Data protection authorities across the world are aware of the challenges that the interaction of data protection laws (which were designed for world with centralised storage) and blockchain. However, several solutions have been suggested which meet the spirit of the laws, including some which have been proposed by the French Data Protection Authority. For instance, the data stored on a blockchain can be made practically inaccessible by deleting the private key which is used to access the data on the blockchain.”—Ikigai Law

Crypto policy at odds with strategy on blockchain adoption

“There is an inherent contradiction in promoting the use of blockchain while at the same time seeking to ban crypto-currencies. This dichotomy will inhibit blockchain innovation in India and will dissuade Indian companies from participating in developing blockchain solutions,” the legal firm said. Blockchains are designed to accommodate public access and they function through mathematical equations based on cryptography called tokens. As per the government’s policy on cryptocurrencies permission-less public blockchains would not develop withouth an incentive mechanism, Ikigai said.

“Permission-less blockchains are not run by a central authority, and there may not be an incentive for peers in a blockchain network to verify the information to execute a transaction on the network, or to maintain the computers or nodes in a blockchain network. To resolve this issue, cryptocurrency issued to incentivize the persons who support blockchain transactions and maintain the nodes. If India places a ban on private cryptocurrencies, then only permissioned models of blockchain can be explored. Without a cryptocurrency-based incentive system, maintenance of a permissionless blockchain network may not be possible.”—Ikigai Law

In a public permissionless blockchain network, private developers can build any application and software they want just like on the internet today. However, the government’s strategy to centralise blockchains would restrict access similar to a “local area network or home wi-fi,” the submission said.

Harmonise policies with RBI

Ikigai says that MEITY should work with the Reserve Bank of India and other regulators to develop a regulatory regime that encourages the development of all types blockchain applications. “A harmonised approach from all regulators will instill confidence in the private sector and encourage widespread adoption of blockchain based solutions which harness the full potential of the technology,” it said.

“At the same time, the government has welcomed blockchain based initiatives for governance. For instance, the RBI has launched a regulatory sandbox programme, which includes FinTech companies that use blockchain. Similarly, the Telecom Regulatory Authority of India notified the Telecom Commercial Communications Customer Preference Regulations, 2018 which requires the adoption of blockchain by access providers, i.e., cell/landline network providers to keep unsolicited commercial communication in check. As described in the Draft Strategy, some state governments have also made huge strides in the use of blockchain”—Ikigai Law

Other Recommendations

  • More clarity is required on the role startups and industry will play in developing National Level Blockchain Framework
  • MEITY should adopt a more consultative approach when creating the national framework and regulatory regime for blockchain
  • Work with International Standards Organization and European Union which is developing standards for blockchain

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