Regulated
blockchain FAQ

You might have heard about the concept of regulated blockchain.
With L3COS, this concept is finally becoming a reality. Read on for
answers to some of the most common questions about regulated
blockchain.
What is a regulated blockchain?

A regulated blockchain is a distributed network of nodes with an authority at its top. These nodes, in different contexts, could be devices, individuals and/or organizations. By setting and executing rules, the authority regulates relationships between the nodes.

UK pound

Politically centralized:

Regulated by a financial authority which could be a government or a central bank

Bitcoin

Politically decentralized:

Regulated by no organization or person

L3COS

Politically centralized:

Regulated by a government

What is a regulated blockchain?

Is ‘regulated’ the same as ‘centralized’?

No. A regulated blockchain does have a central authority that manages permissions and participant roles. In this sense, it is politically centralized. But it is still built on a distributed structure, the core engineering solution behind blockchain decentralization. In other words, it is architecturally decentralized.

A regulated blockchain enjoys all the benefits of decentralization:

Transparency
Transparency
Stability
Stability
P2P-connection
P2P-connection
Attack resistance
Resistance to attack
Collusion resistance
Resistance to collusion

Is ‘regulated’ the same as ‘permissioned’?

The two terms are very close in meaning. However, they are not the same thing.

Permissioned blockchain

A permissioned blockchain operates on a permission basis. Unlike public blockchains (e.g. Bitcoin and Ethereum), it doesn’t let in unauthorized users. A top authority regulates permissions in such a blockchain.

Regulated blockchain

A regulated blockchain provides its superseding authority with more power over the system. Apart from managing permissions, the authority can create new entities, rules and regulations.

How can you regulate a decentralized system?

What makes L3COS unique is that it solves this dilemma.

It does that by organizing the distributed network of participants into three levels: government, business and society (individuals). At each of these levels, a respective consensus mechanism logically unifies the participants. These mechanisms are proof of government (PoGvt), Delegated Proof of Stake (DLPoS) and Proof of Storage (PoST).

Participants at each level can communicate with each other without intermediaries and have their system of permissions and hierarchies. It is the government that sets fundamental rules for the relationships between the different- and same-level participants. In turn, level 3 participants regulate the government.

Consensus level 1
Proof of Government (PoGvt)
Proof of Government (PoGvt)
Consensus level 2
Delegated Proof of Stake (DLPoS)
Delegated Proof of Stake (DLPoS)
Consensus level 3
Proof of Storage (PoST)
Proof of Storage (PoST)
Why should blockchain be regulated?

Although blockchain technology has some fantastic advantages, it comes with caveats.

Blockchain is strongly associated with cryptocurrencies. The reputation of these digital coins hasn’t been shiny, to say the least. Since Bitcoin’s debut in 2009, cryptocurrencies have been used to finance terrorism and cybercrime, for blackmail, to launder money, and for other illegal activities. All this has been possible due to the unregulated nature of blockchain.

Another concern is the emergence of stablecoins.

The stablecoin (e.g. Libra by Facebook) is a new form of blockchain-based currency that is backed by a real-life value (e.g. fiat money or commodity). It’s less volatile and can be used very much like fiat money.

However, stablecoins pose a threat to national financial stability for the following reasons:

  1. They are regulated privately, not by a government that is accountable to voters.
  2. They are backed by a concrete physical asset, which might cause high volatility.
  3. They may not be interoperable with each other and all payment systems.

Central bank digital currency (CBDC) is a viable alternative. The only way in which it differs from fiat money is that it’s a digital, not physical, asset. With L3COS, national financial authorities are able to create their CBDC and all relevant digital infrastructure.

UK pound

  • Physical
  • Regulated by the Bank of England, a national financial authority
  • Less volatile
  • Used for all monetary purposes

Bitcoin

  • Digital
  • Regulated by all and no one
  • Highly volatile
  • Mostly used for trading and exchange

Libra

  • Digital
  • Regulated by Facebook
  • Less volatile
  • Used for all monetary purposes

CBDC

  • Digital
  • Regulated by a government
  • Less volatile
  • Used for all monetary purposes
Is regulation inevitable in blockchain?

There are many types of blockchains out there. The introduction of a regulated blockchain will not automatically make all other blockchains obsolete.

Yet regulation is likely to make free-flowing cryptocurrencies less popular in the future. Financial institutions worldwide are increasingly pushing towards the creation of robust regulatory mechanisms for digital coins. With those in place, the benefits of public blockchains might decrease.

“I believe that [the regulation of cryptocurrencies] is inevitable. We have had an entity-based regulation over the course of the last ten years, after the financial crisis. We clearly need to move into an activity-based regulation. Forget about the entities, work on the activities themselves, and who does what, and who is licensed to do what, and who is properly regulated and supervised.”

Christine Lagarde, President of the European Central Banks

Source: CNN Business

“In order to create a regulatory framework quickly and with minimal risk, governments should collaborate with innovators, implement mechanisms such as regulatory sandboxes, and consider international approaches – particularly to work together on use cases.”

2019 OECD Global Blockchain Policy Forum Summary Report

Source: OECD

What are the advantages of a regulated blockchain?

Unlike other blockchains, a regulated blockchain is:

  • сontrolled by a single authority such as a democratically elected government;
  • suitable for curated nationwide and global adoption;
  • effective in fighting the illegal use of funds;
  • able to digitize national economies using CBDC;
  • capable of automating compliance and significantly reducing bureaucracy.

As for L3COS, it provides specific benefits to participants at each of the three levels.

Government — Level 1
  • Saving public money L3COS automates a variety of operations, cutting bureaucracy and removing intermediaries.
  • Ensuring voter trust Citizens can trace their government’s decisions and actions.
  • Protecting sensitive data Due to architectural decentralization, L3COS has no single point of failure, which makes it technically unhackable.
  • Reducing corruption and fraud All actions taken by the participants of the system leave a digital footprint available for regulatory review.
Business — Level 2
  • Reducing costs L3COS automates compliance and similar procedures, saving businesses a lot of money on fines and consultancy.
  • Protecting reputation By automating compliance, L3COS protects companies from participating in illegal activities, which could ruin their reputation.
  • International trade When introduced by multiple countries, L3COS saves businesses the trouble of ensuring compliance with international regulations.
  • Fast financing L3COS cuts the time required to prove eligibility for loans and credits.
Society — Level 3
  • Enhancing democracy Every citizen can influence their country’s decision-making process directly.
  • Simplifying taxes and benefits Citizens no longer need to visit offices or file numerous forms.
  • Streamlining travel No need to prove eligibility to enter (from) another country, with the internationally unified ID system.
  • Reducing consumer prices Compliance and processing costs do not add to consumer goods and services prices.