Blockchain Interoperability
Blockchain Interoperability
Blockchain
Interoperability
Abstract
This paper summarizes the initial exploration
and findings of the World Bank Group Technology &
Innovation Lab, in partnership with the IMF’s Digital
Advisory Unit, on blockchain interoperability and
some of the related approaches and efforts being
carried out by blockchain innovators and other
institutions. It covers the use cases and technical
approaches of the different blockchain platforms
used to exchange information and assets, as well
as the experimentation the group conducted in the
area of interoperability. The paper further identifies
2
interoperability issues which needs more attention
and provides guidance to practitioners.
1 https://www.ft.com/content/1cfb6d46-5d5a-11e9-939a-341f5ada9d40
IBRD Legal
Patricia Miranda, Menaka Kalaskar
This is a Working Paper that describe research in progress by the contributor(s) and
are published to elicit comments and to encourage debate. The views expressed in are
those of the contributors(s) and do not necessarily represent the views of the IMF/WB, 3
its Executive Board, or IMF/WB management.
Glossary 47
Endnotes 49
Appendices 51
Project Jasper (Bank of Canada) 52
Project Ubin. Monetary Authority of Singapore (MAS) 53
Project Stella 55
Executive Summary
Blockchain technology has been a core element of the so-called “digital revolution” for the
last 10 years. As the COVID-19 crisis accelerates the digitalization of finance, commerce and
trade, it is likely that blockchain-related projects will continue to grow in number. The technol-
ogy is often praised for providing distinct advantages over traditional centralized databases,
notably due to blockchain’s distributed architecture, involving many public or private partici-
pants (or nodes), which is thought to offer superior resilience, as well its security-by-design,
tamper-proof protocol, which its supporters believe guarantees the protection of its users’
personal data and other hosted assets. As more solutions are beginning to rely on blockchain
technology, it is becoming increasingly evident that the evolution of this technology is being
held back by the lack of interoperability across blockchain solutions, other systems such as
traditional IT solutions, or other emerging technology.
This paper reviews blockchain interoperability through the lenses of business, technol-
ogy, security and risk, as well as legal considerations, and can be used as a reference
to support further work on blockchain interoperability. We summarize our exploration agen-
da to date, along with key lessons learned from experimenting with interoperability across
several blockchain platforms, e.g. Ethereum, Hyperledger Fabric, Corda and Quorum.
Our intent is to share knowledge and promote awareness of blockchain interoperability.
We identify areas where further technical development, standards and architecture pat-
terns are needed, and provide guidance to practitioners in building open and sustainable 5
blockchain solutions.
The ability to exchange data with other platforms, including those running different
types of blockchains, as well as with the off-chain world (EU Blockchain Observatory
and Forum, 2019).
This definition has to be understood not only at the application and technology levels, but
also with respect to its business, security, and legal considerations (see Part III). Realizing
the potential of Distributed Ledger Technologies (DLT) will require focusing on interoperabil-
ity. Breaking siloes and walled gardens of data and applications are some of the many ben-
efits presented by this emerging technology. However, these benefits will not materialize in
the absence of interoperability among different blockchain protocols, blockchain and other
emerging and legacy technologies, which may well leave us with the same original problems.
Blockchain or distributed ledger interoperability is a complex and complicated challenge to
tackle. As we move towards the operationalization of this emerging technology, interopera-
bility will come to the fore as issue of pressing importance. The different types and designs
7
of the core shared distributed ledger can be broadly classified as being either permissioned
and permissionless blockchain networks. Institutions and organizations have been exploring
DLT technology protocols on the basis of their respective needs and the requirements of the
challenge statement at hand. And since multiple blockchain networks are evolving, it is now
critical for these different systems not just be able to interoperate with legacy systems but
also be able to communicate across different distributed ledgers. This could be more easily
understood through the presentation of a few examples:
Central Banking and Digital Payments: Several central banks have begun to trial block-
chain for practical interoperability experiments. In 2019, the Monetary Authority of Singa-
pore and Bank of Canada collaborated on a project to demonstrate the interoperability of
two major blockchain networks – Corda and Quorum – using Hashed Time-Locked Con-
tracts (HTLC).2 Project Stella (more information on the project is available in the Annex),
conducted by the European Central Bank (ECB) and Bank of Japan (BoJ), explored how
cross-ledger Delivery versus Payment (DvP) can work between two individual ledgers with-
out a direct connection. Thailand’s central bank also worked with the Hong Kong Monetary
2 “ Jasper–Ubin Design Paper Enabling Cross-Border High Value Transfer Using Distributed Ledger
Technologies,” May 2, 2019.
3 Shen, Alice. 2019. “Thai Central Bank to Work with HKMA on Cross-Border Blockchain.” Central Bank-
ing, August 6. Available at: https://www.centralbanking.com/central-banks/financial-market-infrastruc-
ture/4359381/thai-central-bank-to-work-with-hkma-on-cross-border-blockchain.
4 “Web3 - The Decentralized Web.” BlockchainHub, August 29, 2019. http://blockchainhub.net/web3-decen-
tralized-web/.
5 h
ttps://mneguidelines.oecd.org/Is-there-a-role-for-blockchain-in-responsible-supply-chains.pdf
6 "Interoperability: Why and How Providers Should Pursue It.” CGAP, September 2019. https://www.cgap.org/
research/publication/interoperability-why-and-how-providers-should-pursue-it.
7 LACChain Alliance. “What Is the LACChain Global Alliance?” Medium. Medium, March 5, 2020. https://
medium.com/@lacchain.official/what-is-the-lacchain-global-alliance-and-what-does-it-consist-of-
861cb76257b1.
8 INATBA Convenes Global Conversation on Standards, Governance and Interoperability (2020, May 30). Re-
trieved July 01, 2020, from https://medium.com/@INATBA/inatba-convenes-global-conversation-on-stan-
dards-governance-and-interoperability-cacd898a60e1.
9 Sung, Michael. “Michael Sung: China’s National Blockchain Will Change the World.” CoinDesk, April 27,
2020. https://www.coindesk.com/chinas-national-blockchain-will-change-the-world.
10 “Blockchain: The India Strategy Towards Enabling Ease of Business, Ease of Living, and Ease of Gover-
nance.” NITI Aayog, January 2020.
11 “German Government Adopts Blockchain Strategy - Federal Ministry of Finance - Issues.” Bundesministe-
rium der Finanzen, September 18, 2019. http://www.bundesfinanzministerium.de/Content/EN/Standardar-
tikel/Topics/Financial_markets/Articles/2019-09-18-Blockchain.html.
12 World Economic Forum (WEF). 2020. “Redesigning Trust: Blockchain Deployment Toolkit.” Available at:
https://widgets.weforum.org/blockchain-toolkit/.
Country-Based SDO
Global SDO
DLT/Blockchain Generic Framework Standards Focused on Refer-
ence Guide, Reference Frameworks, Architectures, Terminologies,
Interfaces, Ontology, Classification, and So Forth
12
15 h
ttps://www.weforum.org/whitepapers/global-standards-mapping-initiative-an-overview-of-block-
chain-technical-standards
IEEE USA The purpose of the Institute of Electrical and Internet of things
Electronics Engineers (IEEE) is promoting the (loT); cryptocurrency
development and application of electrotech- exchange and pay-
nology and allied sciences for the benefit of ment; tokens; energy;
humanity, the advancement of the profession, digital assets
and the well-being of its members
Source: World Economic Forum Global Blockchain Council – Overview of Blockchain Technical Standards
National Blockchain and China This is a group of organizations that DLT requirements
Distributed Accounting have joined a national committee fo- DLT terminology
Technology Standardiza- cused on creating standards for block-
tion Technical Committee chain technology
Source: World Economic Forum Global Blockchain Council – Overview of Blockchain Technical Standards
Project Stella – a joint research project undertaken by the ECB and the BOJ – aims to con-
tribute to the experimentation of blockchain technology, and evaluate the opportunities
and challenges for financial market infrastructure to support payments and securities set-
tlement. Reports on Phase II indicate that cross-ledger DvP could function, even without
connections between individual ledgers. HTLCs and digital signature “would be used to
achieve interoperability between ledgers.” 19
16 https://www.itu.int/en/ITU-T/ipr/Pages/open.aspx
17 “ Project Ubin: Central Bank Digital Money Using Distributed Ledger Technology.” Monetary
Authority of Singapore, November 20, 2019. https://www.mas.gov.sg/schemes-and-initiatives/
Project-Ubin.
18 See Annex for an overview of the context in which the other phases took place.
19 ishi, Michinobu. 2019. “Project Stella and the Impacts of Fintech on Financial Infrastructures in
K
Japan.” Asian Development Bank, October 24. Available at: https://www.adb.org/publications/
project-stella-impacts-fintech-financial-infrastructures-japan.
20 https://ec.europa.eu/isa2/sites/isa/files/eif_brochure_final.pdf
21 https://cyber.harvard.edu/interop/pdfs/interop-breaking-barriers.pdf
22 https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/03/kpmg-blockchain-kyc-utility.pdf
23 Inclusive Deployment of Blockchain for Supply Chains: Part 6 – A Framework for Blockchain Interoperability:
http://www3.weforum.org/docs/WEF_A_Framework_for_Blockchain_Interoperability_2020.pdf
24 Ripple. 2019. “The Internet of Value: What It Means and How It Benefits Everyone.” October 25. Available at :
https://ripple.com/insights/the-internet-of-value-what-it-means-and-how-it-benefits-everyone/.
In a notary scheme, one or more trusted nodes agree to carry out an action on chain B
when some event on chain A happens (Buterin, 2016). Trusted nodes are the key to no-
tary schemes. One important feature of the notary scheme is its atomicity, meaning that
a transaction needs to be all or nothing for all participants. The notary scheme has been
implemented in the Atomic mode of the Interledger Protocol25 , whereby an ad hoc group
of notaries are selected to support the execution of each payment by confirming the suc-
cess or failure of the payment.
25 Stefa Thomas & Evan Schwartz. A protocol for Interledger Payments. http://interledger.org/interledger.pdf
2.Blockchains A and B both lock their asset into a smart contract with the following rules
(A locks first, B locks after seeing A’s asset successfully locked).
a. On A’s side, if the secret is provided by B within 2X seconds, then the asset is trans-
ferred to B; otherwise, it is sent back to A.
b. On B’s side, if the correct secret (i.e., the value whose hash is h) is provided within X
seconds, then the asset is transferred to A; otherwise, it is sent back to B.
3. Blockchain A reveals the secret within X seconds to claim the asset from B’s contract.
However, this also ensures that B learns the secret allowing B to claim the asset from
A’s contract.
Unlike in the notary scheme, hash locking does not require a pre-existing trust relationship
between the two blockchains or with a third party.
3. Sidechains/Relays
Another approach to allow different blockchains to interoperate is to have an “integra-
tion” blockchain to support the exchange of value and information between different par-
20 ticipating blockchains.
In the sidechains-relay model, the relay chain is the integration layer. It can issue a token
to be used for value exchange by all sidechains. The relay chain can offer smart contracts
for different sidechains to interact with and exchange information. In addition, it generally
provides a larger number of validation nodes than any of the sidechains, thereby provid-
ing more robust security as it ensures that no double-spend is made on value exchanges.
The information integrity is preserved as long as that information is part of the overall
“block header” that is: (i) generated in some cryptographically authenticated way, most
likely using Merkle trees; and (ii) recorded on the relay chain.
Regarding information exchange, a smart contract on the relay chain can function as a
light client for a specific sidechain, thus leveraging the sidechain’s standard verification
procedure to verify any block headers that have been fed into the contract. Relays are
very powerful as they can be used for asset portability, atomic swaps, and many other
more complex uses.
For example, Polkadot uses a relay chain to connect multiple sidechains known as para-
chains, with each parachain being a blockchain. The Polkadot architecture is described in
detail in the latter part of this paper.
Technical framework
The technical methods for interoperability can be categorized across two dimensions: just-
in-time vs. on-going interoperability, and direct vs. third-party interoperability. In the sec-
ond dimension, third-party can be an independent entity, e.g. a notary or oracle service
provider, or a blockchain network to which the interoperating parties must belong, such as
a sidechain or relay chain.
JUST-IN-TIME ON-GOING
Ethereum/ Value: HTLC Value: HTLC Value: Value & Value & Information:
Quorum Infor.: Oracle Infor.: oracle26 Application Information: Application
layer adapter Application layer adaptor27
layer adapter
Corda Value & Infor- N/A Value & Informa- Value & Informa-
mation: Corda tion: Application tion: Application
Network as the layer adapter (to layer adaptor
22 relay chain. be developed)
Note: The shaded cells repeat the same information as in the right side of the diagonal line of the matrix(table).
26 Wan, Clemens. 2019. “Unlocking Corda Ethereum Interoperability Pt 3.” Medium. March 15. Available at:
https://medium.com/@clemens_wan/unlocking-corda-ethereum-interoperability-pt-3-15aa4de97e40.
27 Ledger Insights. 2019. “Hyperledger Fabric Integrates Ethereum Smart Contracts.” October 29. Available at :
https://www.ledgerinsights.com/hyperledger-fabric-integrates-ethereum-smart-contracts-evm-blockchain/.
Note: The shaded cells repeat the same information as in the right side of the diagonal line of the matrix (table).
28 “ Hyperledger Fabric Now Supports Ethereum” Hyperledgger, October 26,2018. Available at:
https ://www.hyperledger.org/blog/2018/10/26/hyperledger-fabric-now-supports-ethereum/.
29 A
merican Crypto Association. 2020. “Kadena Collaborates with Chainlink in Hybrid Blockchain Oracle Integra-
tion.”, May 19. https://www.americancryptoassociation.com/2020/05/19/kadena-chainlink-blockchain-oracle/.
30 M
edium. 2019. “Stronghold Platform Integrates with Interledger Payments Protocol.” Medium. Stronghold, May
16. https://medium.com/strongholdpay/stronghold-platform-integrates-with-interledger-payments-proto-
col-cbdd5477e0f0.
31 “ [email protected]: Multiple Fabric Networks.” [email protected] | Multiple fabric net-
works. Accessed June 23, 2020. https://lists.hyperledger.org/g/fabric/topic/17549956.
32 D
esrosiers, Luc, and Ricardo Olivieri. 2019. “Oracles: Common Architectural Patterns for Hyperledger Fabric.”
IBM Developer. IBM, March 11. Available at : https://developer.ibm.com/technologies/blockchain/articles/ora-
cles-common-architectural-patterns-for-fabric/.
33 Todd, Ryan. 2019. “Synthetix Suffers Oracle Attack, More than 37 Million Synthetic Ether Exposed.” Yahoo!
Finance. Yahoo!, June 25. Available at : https://finance.yahoo.com/news/synthetix-suffers-oracle-at-
tack-potentially-224737187.html.
Identity Some entity may have different DIDs, proof of identity ownership.
identities on different blockchain.
Level of decentralization Number of nodes and consensus Risk/reward analysis; make adjust-
algorithms often vary between dif- ment to participating blockchains
ferent blockchains. when feasible.
Legal Considerations
This report highlights selected legal considerations of our exploration on blockchain in- 25
teroperability. Current legal frameworks for blockchain cover both the inputs and the out-
comes of the technology but not the technology itself. Blockchain interoperability could
yield additional layers of regulatory scrutiny as it will inevitably involve different jurisdic-
tions; explorations will assist regulators better understand the technology.
Interoperability describes the ability of computer systems or software to exchange and
make use of information.
The two main aspects to take into account in blockchain interoperability are the technolo-
gies involved and the legal dimensions. The technological aspects may be easier to over-
come. This can be illustrated by how emails evolved from once being limited to exchang-
ing messages within the same email network to now being able to exchange messages
across different email networks. Overcoming the technological gap to bridge interop-
erability is inevitable. It is already moving forward in the realm of cryptocurrencies.34
The legal aspects might be more challenging as the many existing legal frameworks reg-
ulating the same or similar purposes are already giving rise to conflicts, without adding
technology in the mix. It is not necessarily the medium of technology but its purpose and
implications which has surfaced the tensions with existing frameworks.
34 See Magas, Julia, “Crypto interoperability evolves: From blockchain bridges to DeFi transfers”, at https://
cointelegraph.com/news/crypto-interoperability-evolves-from-blockchain-bridges-to-defi-transfers
35 The panelists included Gary DeWaal, Special Counsel, Chair, Financial Markets and Regulator; Katten
Muchin Rosenman LLP; and Lee Schneider, General Counsel, block.one.
43 Ibid.
44 Forbes. 2018. Maltese Parliament Passes Laws That Set Regulatory Framework For Blockchain, Cryp-
tocurrency And DLT, July 5. Available at https://www.forbes.com/sites/rachelwolfson/2018/07/05/
maltese-parliament-passes-laws-that-set-regulatory-framework-for-blockchain-cryptocurren-
cy-and-dlt/#7540d0e049ed
45 Ibid.
46 The New York Times. 2018. Have a Cryptocurrency Company? Bermuda, Malta or Gibraltar Wants You, July
29. Available at https://www.nytimes.com/2018/07/29/technology/cryptocurrency-bermuda-malta-gi-
braltar.html, and Cointelegraph, Which Countries Are Best to Start Blockchain Projects?, August 9, 2018,
available at https://cointelegraph.com/news/which-countries-are-best-to-start-blockchain-projects
47 C
onsultation launched on Blockchain Act, August 29, 2018, available at http://www.regierung.li/en/
press-releases/212310
48 Ibid.
49 Ibid.
50 Reference to the status of legislation and regulation in some of these and other countries in Appendix 2.
For now, these questions remain mostly unanswered. Courts will have to decide these is-
sues when they come before them at some future date and challenges are mounted against
the blockchain technology itself.
Broadly speaking, identifying the actors is easier in a private and permissioned block-
chain as it is privately owned and those on the blockchain are participating thanks to
someone’s permission to do so. There is control in a private and permissioned blockchain,
which makes it less problematic from a legal point of view. As private and permissioned,
one easily knows who controls the blockchain, who has access, where it is located (even
if in different locations), who acts and makes decisions on the blockchain. Being able to
identify who has control of a blockchain makes it possible to determine which jurisdiction
would have authority over a dispute, which law applies, and who may be responsible. This
is not to say that some of the broader questions disappear if the blockchain is private and
permissioned, rather it may make it easier to identify the actors in a public and permis-
sionless blockchain. Knowing the nature of the blockchain thus helps narrow down the
legal questions one should consider when working with blockchain technology.
51 “As with all such wallets, their transactions and balances are publicly accessible even though the cryptocur-
rency wallet owners remain unknown”, at https://en.wikipedia.org/wiki/WannaCry_ransomware_attack
30
34
2. Interledger
Interledger is an open protocol, originally inspired by the Internet Protocol, for sending
payments across various blockchain networks. It enables the exchange of value across dif-
ferent payment networks. Using Interledger, the XRP can be sent to someone who wants to
receive ETH or USD can be sent to someone who wants to receive EUR. 52 35
Interledger routes packets of value in the same way as the Internet routes packets of in-
formation. Computers on the Interledger network are called nodes. Nodes can take one or
more of the following roles: sender, router, and receiver (see Figure 5).
52 I nterledger. 2020. “Interledger Overview.” Accessed June 23, 2020. Available at: https://in-
terledger.org/overview.html.
36
3. Polkadot
Polkadot is built for a scalable, interoperable and secure blockchain network. It allows partic-
ular blockchains to interact with each other in a secure way. Polkadot uses the Relay Chain to
send message between blockchains in its ecosystem and host a group of parachains which
run their own applications. Below are the high-level architectures,53 which demonstrate the
basic concept of relay chain and parachain (see Figure 7).
Relay Chain is the main chain of the system. Parachains generate blocks for validators on the
Relay Chain before the blocks are validated and added to the finalized chain. Thus, the Relay
Chain provides security guarantees. Different parachains can run parallel transactions with-
out interference, resulting in Polkadot being potentially more scalable than a current PoS
system (see Figure 8).
37
53 P
olkadot. 2020. “An Introduction to Polkadot.” April. Available at: https://polkadot.network/
Polkadot-lightpaper.pdf
38
Polkadot’s parent company, Parity, plans to release the production version in 2020. We
plan to test Polkadot after its release. During the exploration, the team tested Substrate
(a framework to efficiently build different blockchains by Parity) within a four-hour hack-
athon. Substrate was developed to build blockchains which can easily connect to Polkad-
ot. The lessons learnt in this exploration are that Polkadot:
• Gives developers flexible options to do the implementation in a modular way.
• Provides plenty of tools that help develop the blockchains fast.
• I n its current status, even though it makes the development easy, it is still difficult to com-
pare it with Ethereum which already has gained substantial momentum. Substrate re-
quires developers to have specific skills, such as Ink!, smart contract language program-
ming applications, such as the rust programming language.
Multilateral Sovereign Blockchain (Core Chain) This network includes national or sov-
ereign entities. For the purpose of this project, we have simulated the participation of
China, Indonesia and Malaysia in the wider context of an FTA between ASEAN countries
and China. These countries are represented by a node each and leverage the network to
record multilateral agreements. The platform of choice in this case is Corda.
Trade Blockchain (Service Chain) Here, we have simulated participation from the buy-
er (in Indonesia), the supplier (in China), the transit hub (Malaysia), the respective sea-
ports and the freight forwarder. For the sake of simplicity, both the buyer and supplier
operate from two separate member accounts on the first node, the freight forward-
er operates via a member account on the second node and the seaports operate via
member accounts on the third node. The Blockchain platform used here is Ethereum
(private instance).
40
41
The architecture deployed to achieve this can be divided into three logical components:
(i) Corda nodes and API in the core chain; (ii) the Ethereum nodes and API of the service
chain; and (iii) the Orchestrator, which is a Java application. The trigger for validation is
initiated by the supplier on the UI screen, this event makes an API call to the node service
on Ethereum with the relevant PO details. The node service, in turn, makes a call to the
Orchestrator application. Upon receiving the data, the Orchestrator will make an API call
to the web server corresponding to the Corda node that represents China. Next, the Web
server makes an internal RPC (Remote Procedure Calls) to the node’s vault to retrieve
trade and transit agreement for a two-way match with the PO data. The response is car-
ried back via the web server to the Orchestrator, and subsequently to the node service on
the Ethereum chain. Depending upon the response received, the smart contract for the
given PO updates its state to either ‘Accepted’ or ‘Invalid’.
In Phase 2, we employed Verifiable Credentials (VC) to demonstrate direct integration
amongst two different blockchain platforms (see Figure 11). In this context, the client
blockchain platform requests data from the counterpart blockchain platform and re-
42
To use a VC, an issuer issues a verifiable claim to the holder. The holder presents the
verifiable claim to the verifier. The verifier then checks the verifiable claim (see Figure 12).
The issuer issues a VC to the holder. The holder can then present the VC to any verifier
who needs to verify the claim(s) being made by the holder pertaining to the subject of the
VC. The verifier can independently verify the VC.
To use VCs, each network node should have the following capabilities:
1. Accept data in the form of VC;
2. VCs issued by trusted issuers; and
3. Provide output in the form of a VC;
54 W
orld Bank. 2020. “Smart Contract Technology and Financial Inclusion.” Open Knowledge Re-
pository. World Bank, Washington, DC. Accessed June 23, 2020. Available at: https://open-
knowledge.worldbank.org/handle/10986/33723.
55 N
iforos, Marina. 2019. “Bridging the Trust Gap: Blockchain’s Potential to Restore Trust in Artifi-
cial Intelligence in Support of New Business Models.” International Finance Corporation (IFC),
October.
BLOCKCHAIN
A ledger where data is organized into blocks linked by a cryptographic hash
CONSENSUS MECHANISM
A mechanism that verifies that the information that is placed in a blockchain is valid
CRYPTOGRAPHY
Technique for secure communication
DIGITAL SIGNATURES
Mathematical scheme to verify the authenticity of digital messages or documents
ENCRYPTION
Encoding message in such a way that only authorized parties can access it 47
ETHEREUM
Decentralized platform for application that are expected to run exactly as programmed
FORK
A split in a blockchain that results in the formation of a new chain
HASH
Cryptographic hash function used in the verification of the authenticity of data
HYPERLEDGER
A multi-project open source collaborative effort hosted by The Linux Foundation,
created to advance cross-industry blockchain technologies
NODES
A device on a blockchain network
PEER-TO-PEER NETWORK
A network made of computers that are connected to each other whole being
equally privileged
PROOF-OF-WORK
A technique for combatting e-mail spam by requiring proof of computational effort
SMART CONTRACT
Autonomous agent that live within the Ethereum execution environment of virtual
machine. Other platforms do also make use of smart contracts e.g. Hyperledger
48 NOTARY NODE
A notary is a service that provides transaction ordering and timestamping
TOKENS
A token is a symbol whose value does not depend on mining. A token is not a coin.
Lima. IEEE (2019) “Transfer[ing] value, assets, and tokens between…multiple platforms”
https://www.standardsuniversity.org/e-magazine/may-2019-volume-9-issue-1-
blockchain-standards/distributed-ledger-technology-dlt-blockchain-interopera-
bility-standards/
Buterin. R3, (2016) [The capability to] move assets from one platform to another, or payment- ver-
sus-payment and payment-versus-delivery schemes, or access information from
one chain inside another (e.g. “identity chains” and payment systems may be a
plausible link)… without any additional effort required from the operators of the
base blockchain protocols.
https://www.r3.com/wp-content/uploads/2017/06/chain_interoperability_r3.pdf 49
GS1, IBM (2018) Leveraging common standards for identification and for data sharing.
1. Globally unique, persistent identification for organisations, locations, and things
2. A standardised language for supply chain events
3. A scalable network governance model that crosses ecosystems.
https://www.gs1.org/sites/default/files/bridging_blockchains_-_interoperabili-
ty_is_essential_to_the_future_of_da.pdf
EU Blockchain The ability to exchange data with other platforms, including those running
Observatory different types of blockchains, as well as with the off-chain world.
and Forum (2019) https://www.eublockchainforum.eu/sites/default/files/reports/report_scalaibili-
ty_06_03_2019.pdf
The Bank of Canada has also tested digital depository receipts (DDR) as a digital rep-
resentation of Canadian currency in 2016 and 2017. In the context of Project Jasper,
DDRs took the form of “CADcoin” issued by the Bank of Canada to better understand
the potential impacts of blockchain technology on financial market infrastructure (FMI).
Source: Enabling Cross-Border High Value Transfer Using Distributed Ledger Technologies
Regulatory Environment
Blockchain technology has been subject to regulatory scrutiny, part of which seems
to result from what the blockchain application offers as a product and the risks that it
may circumvent applicable laws. Lack of familiarity with the blockchain technology will
certainly lead to heightened scrutiny as we do not know whether the technology fulfills
relevant legal and regulatory requirements. Still, it has also gained enough support to
prompt regulators to either pass new laws, or attempt to fit blockchain technology devel-
opments within existing legal frameworks.
The clearest example of the latter is the way government authorities treat digital assets,
e.g. Bitcoin, under their existing laws. In the United States, early initial coin offerings
(ICOs), which offered retail investors the opportunity to invest in the development of new
blockchain projects, raised the question of whether these fundraising projects could be
56 regulated by established securities laws. The United States Securities and Exchange
Commission (SEC) was slow to act on this question, but eventually took a step toward
answering the question in the affirmative by bringing enforcement actions under existing
securities laws against startup companies offering ICOs.
57
These examples show that regulators will apply existing legal frameworks to regulate
Blockchain based on the nature of the product being offered. Accordingly, developers
and practitioners must consult existing laws in the relevant industry before adopting
blockchain technology solutions.
ARIZONA: In 2017, Arizona passed HB 2417, which allows the use of smart contracts in
commerce and prohibited contracts from being denied legal validity because the con-
tract contains a smart contract term. The bill recognizes records secured using block-
chain as valid records under state law. Tennessee passed similar legislation in 2018.
DELAWARE: Thanks to its business-friendly laws, more than half of publicly traded
companies in the United States are incorporated in Delaware. Accordingly, Delaware
58 took an early interest in incorporating blockchain developments into its existing corpo-
rate laws. In 2017, it amended its general corporation law to allow companies to maintain
their corporate records, including stock ledgers, using blockchain technology.
VERMONT: In 2018, Vermont was the first in the country to allow blockchain-based lim-
ited liability companies (BBLLC). The idea, similar to traditional limited liability compa-
nies, is to allow companies that use blockchain technology as a material part of their
business activities to protect its members from legal liability. A BBLLC may customize
its governance structure using blockchain technology and validate and store records on
a blockchain. The Act also directed Vermont’s Department of Financial Regulation to ex-
plore the use of blockchain technology in different industries and to identify regulatory
changes that would allow blockchain to be adopted in those industries.
WYOMING: In 2019, Wyoming was one of the first states to adopt a series of block-
chain-friendly measures aimed at bringing blockchain business to the nation’s least
populous state. Wyoming laws: (i) create an exception from state securities laws for
blockchain tokens; (ii) make virtual currency exempt from money transmitter rules;
(iii) recognize distributed-ledger-based corporate recordkeeping; (iv) exempt virtual
currency from property taxes; and (v) recognize a form of limited liability company (the
“series” LLC) conducive to blockchain businesses.
MALTA: Also known as “Blockchain Island,” this small island nation in the Mediter-
ranean adopted a “complete regulatory framework” in 2018, which was “designed
to make Malta one of the most desirable locations to set up shop in the blockchain
space.”The laws established the Malta Digital Innovation Authority, certified DLT plat-
forms, set up exchanges and other companies in the cryptocurrency market, and es-
tablished a regulatory regime governing cryptocurrency and ICOs.
SWITZERLAND: This European nation known for its banking and finance industries
recently amended several existing laws to accommodate blockchain technology devel-
opments. Among other things, the amendments establish a legal basis for exchanging
digital securities and for recovering digital assets from bankrupt companies.
LICHTENSTEIN: Lichtenstein passed new laws and amended existing laws in order to
allow rights and assets to become tokenized, thereby allowing the development of the 59
so-called token economy.
UNITED ARAB EMIRATES (UAE): In 2018, the UAE announced the Emirate Block-
chain Strategy 2021, a plan to shift at least 50 percent of government-related trans-
actions to DLT platforms by 2021. The country’s ambitious effort, expected to greatly
increase efficiencies through reduced transaction costs, work hours and resource use,
is a novel approach to incorporating blockchain-based solutions into everyday life.
Specific projects include using blockchain technology for logistics and to record land
ownership. The country was an early leader in regulating businesses operating using
Blockchain technology, issuing guidelines for ICOs in 2017 and establishing an author-
ity to regulate digital assets.
JAPAN: Despite high-profile hacks in Japanese cryptocurrency exchanges, Japan
encourages blockchain technology through constantly evolving laws and regulations.
Since 2016, Japan has officially recognized cryptocurrency as legal tender and there-
by regulates cryptocurrency under its financial regulatory authority. The generally
friendly blockchain environment has encouraged Japanese exchanges to self-regu-
late, which allows them to quickly respond to evolving security threats such as hacks.
Following perhaps inevitable conflict between exchanges and anti-money laundering
policies, however, Japan recently banned privacy coin trading.
The opportunities behind digital inclusion have also created a need for development or-
ganizations with a focus on economic development and trade to establish agile tech-
nology-specialist teams. These teams have become privy to deliver concise advice on
technology matters in various disciplines: business, economics, legal, and technical.
Examples of these teams include the World Bank Group Technology & Innovation Lab,
the IMF’s Digital Advisory Unit, IDB (IDB Lab). Other intergovernmental organizations
working to promote economic cooperation, such as OECD (Blockchain Policy Forum),
WEF (Center for the Fourth Industrial Revolution), as well as the European Commission
(Blockchain Observatory), have dedicated many working groups to research how growth
can flourish through future technological developments. Many of these working groups
strive to produce knowledge pieces for the public to evaluate and inspire the activities of
these innovation teams. In addition, international conferences are regularly to capture
60 the various learnings being carried out in various institutions. Nevertheless, there is no
universal standard for Blockchain applications that could potentially facilitate interop-
erability at the moment. Such a space is open for exploration, development, and in need
of leadership to pave the way.
ENDNOTES
1 A
uthored by the Bank of Canada, the Bank of England, the Monetary Authority of Singapore, HSBC
and a group of other commercial banks in the United Kingdom, Canada, and Singapore https://www.
mas.gov.sg/-/media/MAS/ProjectUbin/Cross-Border-Interbank-Payments-and-Settlements.pdf
2 h
ttps://www.mas.gov.sg/-/media/MAS/ProjectUbin/Jasper-Ubin-Design-Paper.pd-
f?la=en&hash=437222C94FD39314FB4C685EA31FC3AAA5CA5DA1
3 https://www.payments.ca/sites/default/files/29-Sep-17/jasper_report_eng.pdf
4 P
ayments Canada (2017) “A Canadian Experiment with Distributed Ledger Technology for Domestic
Interbank Payments Settlement”
5 I nternational Monetary Fund (2019) “FinTech in Sub-Saharan African Countries: A Game Changer?”
6 h
ttps://www.deloitte.com/content/dam/Deloitte/sg/Documents/financial-services/sg-fsi-project-
ubin-report.pdf
7 https://www.boj.or.jp/en/announcements/release_2018/data/rel180327a1.pdf
8 https://www.boj.or.jp/en/announcements/release_2019/data/rel190604a1.pdf