Blockchain 2021

Last Updated June 17, 2021

Sweden

Trends and Developments


Authors



Delphi has a blockchain team of six specialist lawyers in its Stockholm office. The firm closely monitors the development of blockchain technology and cryptocurrencies, from both a transactional perspective and a compliance perspective, and has advised several clients on blockchain-related issues. The team has expertise in several areas, including anti-money laundering (AML) and know-your-customer (KYC) rules; cryptocurrency – e-wallets, exchanges and transactions; AI; blockchain technology applications; initial coin offerings (ICOs); financial services regulation; and crowdfunding. The team recently advised a major Nordic bank on the implementation of blockchain in trade finance by way of an international network for verification of signatories and documentation authorisation; work included contract drafting, negotiation and conducting legal investigations on certain aspects, including GDPR in a blockchain environment.

Introduction

Technical progress and innovation have been increasingly important aspects of developments in Swedish society in recent years, with established companies and start-ups both contributing to this trend. Swedish investments in research and development (R&D) have remained stable, counting for a high-level percentage of GDP on a global and European comparison. As a result of blockchain and cryptocurrencies proving their relevance beyond hype and buzzwords, it has been pertinent for both the private and public sectors to expand on the technology through new use cases and developments. This article describes some significant current trends and examples of blockchain use in Swedish society.

E-krona

One of the most significant blockchain use cases in Sweden is the “e-krona” project. The Swedish Central Bank is currently investigating whether it is possible and appropriate to issue a digital complement to classic cash, based on blockchain technology. The digital currency, the e-krona (derived from the name of the Swedish currency, the “krona”), would be issued by the Central Bank and available for the public. The e-krona would not be considered a cryptocurrency as it would be provided by the Swedish Central Bank, which warrants the value of the currency. The Central Bank’s initiative relating to the e-krona and the legal and technical challenges related thereto are described briefly below.

Background

One of the Central Bank’s responsibilities is to promote a safe and efficient payment system. As a consequence of the rapid decline of the use of banknotes and coins in Sweden, the Central Bank started its investigation into the possibility of issuing a digital currency to the general public in 2017. Currently, the Central Bank only offers digital money to banks and other participants in the RIX payment system. All other digital/electronic money in Sweden is issued by commercial banks, as referred to by the Central Bank as “private digital money” and regulated by the Swedish Electronic Money Act (2011:755).

Technical structure

In 2020, the Central Bank entered into a more practical phase of the e-krona project. To test how an e-krona might look and function, the Central Bank started a project – the e-krona pilot – together with the company Accenture, to construct a possible technical platform for the e-krona. The objective of the project is for the Central Bank to learn more about how a technical solution for the e-krona could work.

The e-krona pilot

During 2020, the Central Bank carried out the first phase of the pilot project for the e-krona, drawing the following main conclusions.

The technology provides new possibilities, but requires further investigation

The technology gives the possibility to create uniquely identifiable e-kronor, but is untried when it comes to processing retail payments in the magnitude and with the safety level that would be required by a digital currency backed by a central bank.

Different forms of storage for tokens and keys provide different properties

The way the money is stored should ultimately be determined by which functions are given priority in the e-krona. One important question is whether the e-krona will function without access to the internet, known as off-line functionality; this possibility has not yet been tested by the project.

A parallel network makes the payment system more robust

A solution based on blockchain technology and tokens means that one creates an infrastructure that, to a large extent, functions in parallel with today’s payment infrastructure.

Legal implications

There are several legal questions that must be considered in relation to the e-krona, with the first being which legal concept the e-krona would constitute. The Central Bank considers that it could be classified as digital money. However, as the publication of the e-krona would be considered an exercise of public authority, the Swedish Electronic Money Act (2011:755) would not be applicable. Instead, the e-krona could be considered as the equivalent of physical cash or possibly some form of negotiable debt instrument that carries interest. The Central Bank’s own assessment is that legislative action will be necessary regardless of the classification of the e-krona.

Questions relating to the anti-money laundering (AML) regulatory framework are also relevant. The distribution model tested during the pilot would entail the AML regulations being applicable. However, the Central Bank will be the issuer of the e-krona but will not have direct contact with the end users. Thus, responsibility for compliance with the AML regime will likely fall on the distributors (ie, the banks and other financial institutions that offer digital wallets and similar solutions for their customers’ use of the e-krona).

Furthermore, as the transactions are stored on a blockchain, the verification and authentication processes are closely linked with the transaction history, in encrypted or hashed form, and may be available for the recipient of a transaction (ie, the recipient of a transaction may be able to derive information concerning the other party’s previous transactions). This would not meet the bank secrecy requirements set out in the Swedish Banking and Financing Business Act (2004:297). In addition, the Central Bank is continuously evaluating whether the transaction records will include personal data and if the processing thereof could be possible (see below for a more detailed account of the GDPR’s interoperability with blockchain technology).

The Central Bank has communicated that it will continue investigating the need for and effects of an e-krona on the Swedish economy. During 2021, this process will include testing and comparing different technical solutions and further investigating the legal implication of the e-krona.

Personal Data and Blockchain

Trust is a scarce resource in the digital domain, but is an absolute necessity when it comes to all things digital – be it public relations or e-commerce marketing. Customers or individuals need to know that the enterprise they give their personal data to is using it in a lawful way and, more importantly, that they can trust their data will not fall into the wrong hands or be used in a manner of which they have not been informed nor consented to. The data needs to be protected against tampering or being obfuscated, and there needs to be tracking on who has made changes, and when such changes were made.

Blockchain is, undoubtedly, a very secure way to store information. Changes cannot be made without rippling through the entire chain, and also the information will not be lost (provided that the passwords to the blockchain are stored in a secure manner, of course). However, as will be shown, blockchain and the requirements on data controllers under the General Data Protection Regulation (GDPR) are fundamentally incompatible. This particular conflict between technology and legislation is an issue for all EU Member States, and is a concern for the Swedish Central Bank during its e-krona project.

The fundamentals of the GDPR in relation to blockchain technology

The GDPR is based around a traditional top-down structure of responsibility. The Data Controller determines the purposes and means for processing of data and shall safeguard that it is the one and only entity that can control whether and how any stored personal data is used (unless several controllers are jointly responsible). The Data Controller shall determine the purposes, means and types of personal data that are processed, and is also in control of the technical and organisational security measures in place to protect such data. Blockchain, on the other hand, is essentially a distributed trust system. The chain authenticates itself through cryptography – which means that there is no responsibility tree where one entity at all times can be said to be responsible for the processing of data.

That issue can, naturally, be overcome if blockchain is used internally by a company – with no third parties involved. However, there is one more issue that is even more fundamental. The blockchain functions so that each block added is authenticated through the information that is already present. It is a chain, and one of the basic functions of authentication is that any changes done on previous blocks will be apparent in later blocks.

Under the GDPR, an individual not only has rights in relation to the Data Controller to have erroneous information corrected but also has the right to be forgotten under certain circumstances. Furthermore, personal data must be deleted when it is no longer needed for the purpose for which it is processed, or where there is no legal basis for its processing. It goes without saying that any changes or deletion of personal data stored in a blockchain would invalidate and jeopardise the authentication mechanism inherent in the blockchain and, hence, a blockchain is fundamentally not suited (either technically or legally) to the processing of personal data under the framework of the GDPR.

GDPR and blockchain – from a practical perspective

It is important to discuss ways to maintain the benefits of blockchain while still observing the mandatory legal requirements of the GDPR when considering using blockchain in applications concerning personal data. This is obviously an issue of a technical nature, but the answer may be to use a blockchain to authenticate and verify operational data and logging, but have the personal data involved in a separate database where changes and deletions can be made freely. That database can be authenticated and verified by the blockchain.

In general, however, this issue has not been fully clarified within the EU, and the Swedish Supervisory Authority (Integritetsskyddsmyndigheten) has not shared its view on the subject. A general observation is that the current legal lack of clarity regarding blockchain and its relationship with the GDPR is a concern for many Swedish actors who cannot properly assess the risks of using blockchain technology from a legal and regulatory perspective.

Current and Potential Future Use Cases in Sweden

In a world with fast-moving media coverage and phenomenon such as deep fakes, it is apparent that determining whether one may rely on a source or a fact being presented is getting more complicated. As has been touched upon, blockchain technology has the ability to add trust and security to information and data by providing traceability. There is enormous potential in what the blockchain technique may be used for in the future, within both the private and public sectors. Subject to the challenges in relation to the GDPR, the possible use cases are numerous within business areas such as the finance industry (where the example of the e-krona is evident), retailing and logistics, healthcare services and medical registers, real estate registers, voting registers, etc. Let’s dig deeper into a few examples.

Blockchain and the Swedish land registry

The Swedish mapping, cadastral and land registration authority (Lantmäteriet) – has initiated an experiment using blockchain technology together with a number of other actors in the Swedish private and public sectors as partners. Blockchain has been used in a pilot project to verify the transfer of real property between parties by registration in the Swedish land registry, with the goal of saving both time and costs from an administrative perspective, by exploiting the built-in transparency and security of the blockchain technology. The use case is interesting as it can have significant upsides in countries and regions where there is no central land registry of real property ownership, which is a critical element in developing countries and can help counteract corruption and ease administrative burdens for the state. The most significant and notable upside for the Swedish authorities, however, is the security aspects of using blockchain technology.

The project was initiated in 2015 and finalised in 2019. It remains to be seen whether a permanent solution will be built on this experiment but it is a good example of collaboration between the public and private sectors in the blockchain area.

M&A deals – ownership of shares

In an M&A deal, one of the major risks will always be related to the historical and actual ownership of the shares to be transferred. Share registers are generally kept in fairly simple local documents; in some countries they are registered with local company registration offices, but in many countries, including Sweden, they are simply kept by the board, stored on local computers. Using a technique backed by blockchain would add much more security to the parties involved, where a smart contract in the blockchain could be programmed in a way that the shares would be registered in the name of the purchaser as soon as the correct purchase price reached the seller's account.

Logistics and supply chain

Another example where using blockchain technology has huge potential is within logistics and supply chains. Companies are already using blockchain to source and track their goods on their journey from supplier to consumer. The use of blockchain could enable the various parties involved to verify and detect eventual delays, the total number of days for delivery, etc. Almost all of us have at some point encountered problems with packages getting lost on the way to our door, or with delivery notices being delayed in the ordinary mail. Using blockchain and the mechanisms within smart contracts would minimise the intermediaries needed and, hence, the risks for delays and mistakes due to the human factor. One notable use case of this today is IBM Food Trust. There are use cases in Sweden as well, including an idea by the start-up Flype regarding the decentralised delivery of parcels by individuals based on blockchain technology.

Other blockchain/crypto companies in Sweden

In general, Swedish entrepreneurs were quick to jump on the trend when crypto spread over the world. However, initial coin offerings (ICOs) and other crypto-specific investments have not had a similar boom compared to the US, the UK and other parts of Europe and Asia. The Swedish banks are very active within the blockchain field in order to take advantage of the significant upsides of using the technology while at the same time struggling to not fall behind when new and innovative blockchain/crypto companies push innovation forwards at a very fast pace.

One notable Swedish blockchain company is Chromaway AB, which has developed a blockchain platform on which applications can be run, taking advantage of all the benefits of the blockchain technology. Chromaway was one of the Swedish companies that was a partner to Läntmäteriet in the blockchain project regarding the Swedish land registry. It is also one of quite few companies in Sweden that has carried out a successful ICO. Chromaway is in no sense alone – even though there has not been a spike in ICOs, Sweden has a lot of very interesting and rapidly growing companies within the blockchain area.

Conclusion

What the future holds for blockchain integration is yet to be discovered, but it is reasonable to believe that enormous changes may lie ahead, with the potential of minimising the number of intermediaries required for certain transactions and processes and adding traceability and security to data and various registers.

New interesting use cases are expected to emerge in Sweden, together with the current positive trends of innovation.

Delphi

P.O Box 1432
11184
Stockholm
Sweden

+46 7 09 25 25 04

+46 8 20 18 84

Johan.hubner@delphi.se www.delphi.se
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Trends and Development

Authors



Delphi has a blockchain team of six specialist lawyers in its Stockholm office. The firm closely monitors the development of blockchain technology and cryptocurrencies, from both a transactional perspective and a compliance perspective, and has advised several clients on blockchain-related issues. The team has expertise in several areas, including anti-money laundering (AML) and know-your-customer (KYC) rules; cryptocurrency – e-wallets, exchanges and transactions; AI; blockchain technology applications; initial coin offerings (ICOs); financial services regulation; and crowdfunding. The team recently advised a major Nordic bank on the implementation of blockchain in trade finance by way of an international network for verification of signatories and documentation authorisation; work included contract drafting, negotiation and conducting legal investigations on certain aspects, including GDPR in a blockchain environment.

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