Regulated
blockchain FAQ

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

A regulated blockchain is a distributed network of nodes with an authority at its top. Elsewhere in technology, these nodes could be devices, individuals and/or organizations. But by setting up a series of rules and allowing them to be executed, the authority is able to regulate the relationships between each of 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 has a central authority that manages permissions and the roles of the participant. In this sense, it is politically centralized. But since it is built on a distributed structure, the core engineering solution behind blockchain decentralization, it is therefore 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 quite the same thing.

Permissioned blockchain

A permissioned blockchain operates on a permission basis and unlike public blockchains (such as Bitcoin and Ethereum), it doesn’t let in any unauthorized users. A top authority regulates the permissions in a regulated blockchain.

Regulated blockchain

A regulated blockchain provides its superseding or controlling power with full authority 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 the dilemma of being able to regulate a decentralized system.

L3COS organises 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 having to go through intermediaries and have their own system of permissions and hierarchies. It is therefore government that sets fundamental rules for the relationships between the different- and same-level participants. In turn, level 3 participants can regulate the government through democratic elections.

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 wonderful advantages, it comes with a number of caveats.

For many, blockchain is strongly associated with cryptocurrencies. The reputation of these digital coins doesn’t shine the way it should. Since Bitcoin’s debut in 2009, cryptocurrencies have been known to finance terrorism and cybercrime, for blackmail, money laundering and a host of other illegal activities. All this has been possible because of the unregulated nature of blockchain.

Another concern is the more recent emergence of stablecoins.

The stablecoin, such as Libra by Facebook, is a new form of blockchain-based currency that is backed by a real-life value (such as notes and coins or fiat money). It’s less volatile and can be used just as if it were fiat money.

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

  1. They are regulated by private corporations and not by a government that is accountable to its electorate and citizenry.
  2. They are backed by a concrete physical asset, which itself be volatile and so pass on that volatility.
  3. They may not be interoperable with other stablecoins or any other payment systems.

A Central bank digital currency (CBDC) however 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, a nation’s financial authority is able to create their own CBDC which comes with all the relevant and required 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 however not automatically make all other blockchains obsolete.

Yet introducing a regulated blockchain currency may well make free-flowing cryptocurrencies less popular or needed in the future. Financial institutions worldwide are increasingly pushing towards the creation of robust regulatory mechanisms for digital coins. Once in place, many of the perceived benefits of public blockchains and stable coins will likely 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 the democratically elected government;
  • suitable for nationwide use and even global adoption;
  • effective in fighting the illegal use of money;
  • able to digitalise national economies using a CBDC;
  • capable of automating much of the compliance function and significantly reducing costly bureaucracy.

L3COS provides specific benefits to participants at each of the three levels.

Government — Level 1
  • Reduced expenses Simplified, faster and quantum-safe exchange of information within government;
  • Increased trust Everyone can access their own unalterable data records securely, in a fully auditable and transparent way;
  • Protection of sensitive data L3COS’ quantum-safe technology makes governmental databases impossible to hack;
  • Eliminate corruption and fraud Simplified monitoring removes the risk of corruption and fraud
Business — Level 2
  • Efficiency Reduce inefficiencies by lessening reliance upon intermediaries and implementing interoperability across different systems
  • Traceability Adopt secure tracking of assets and goods with every transaction being immutably recorded
  • Security Implement quantum-safe blockchain-based record keeping to prevent falsified information
  • Transparency Fully-audited access to all information
Society — Level 3
  • Enhanced democracy Ensure every citizen’s vote and voice counts
  • Smoother border crossings Prove eligibility to cross borders with an internationally agreed ID system
  • Automated tax and benefits payments Reduce bureaucracy and administration of taxes and the receipt of benefits
  • Lowers prices for consumers By reducing compliance and processing costs, the prices for goods and services are kept lower