The Potential of Blockchain Technology in Georgia

MG Law Office, through the contribution of partners Archil Giorgadze and Nicola Mariani, joined by senior associates Irakli Sokolovski, Ana Kochiashvili, Tamar Jikia and associates Ana Chikovani, Elene Samadbegishvili, and Mariam Kalandadze is partnering with GEORGIA TODAY on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we will highlight significant issues which may impact businesses operating in Georgia.

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Blockchain has become an essential modern technology not only for virtual currencies, but it has also demonstrated high potential for revolutionizing the daily operations of private business as well as state entities.

The technology represents a cryptographically-secured transaction record created without the intervention of a central authority. Due to its technological peculiarities, blockchain is considered a transformational mechanism capable of creating great value for society.

What is Blockchain?

Blockchain was initially introduced to the broader society after release of a whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008 by a pseudonymous person(s) named Satoshi Nakamoto, whose identity is still unknown.

Blockchain, also known as distributed ledger technology (“DLT”), operates through digital ledgers using cryptographic algorithms to verify the creation and transfer of digitally represented assets over a so called “peer-to-peer” network on a decentralized basis. The technology was mainly invented to support the development of virtual currencies in order to avoid intermediaries, such as banks or other financial institutions.

Blockchain consists of two major components: a block and a chain. A block with information consists of a “hash” which converts data (input of letters and numbers) into an encrypted output in order to verify the data has not been tampered with or modified in any way. Every successive block contains the hash of the previous block, creating a chain. Thus, every blockchain-based transaction depends on the previous one, so the ledgers are unalterable and easily traceable. Therefore, it is impossible to modify or erase any data synchronized on blockchain, since every single record is individually encrypted and time-stamped. Consequently, any attempt to alter the information contained in the previous block will provoke a mismatch leading to the break of the chain. Another feature of safety is that the data synchronized on blockchain is being run on thousands of computers worldwide, which significantly reduces the risks of hacking attacks.

Regulatory framework

Nowadays, the regulatory approach towards blockchain, as well as towards virtual currencies, is quite diverse around the globe. Despite the fact that the application of blockchain is expanding rapidly, the majority of states still have not developed a consistent approach to how the industry should be regulated.

However, within the last decade, since blockchain was firstly introduced to the wider public, a number of nations have begun to embrace this innovation. Governments of several states have even initiated incentivizing processes through the expansion of blockchain technology application, and aim to attract investors by offering them preferential regimes. A number of states, such as Australia, Canada, the UAE, Estonia, France, Switzerland and Japan have taken crucial steps towards supporting the industry through creation of a friendly regulatory framework and business environment.

Recently, Belarus became another active supporter of blockchain industry development by approval of the Decree on the Development of the Digital Economy which liberalized the conditions for conducting businesses in the field of high technologies. According to the statements of the Belorussian government, the state decided to focus on creation of a friendly regulatory and business regime in order to stimulate development of IT technologies, including blockchain.

Major advantages of blockchain and areas of application

While it has been a decade since blockchain appeared in the public spotlight, the real potential of this technology was only discovered quite recently. In contrast to traditional operating systems, blockchain-based solutions can simplify and make much more transparent the operations of private corporate, as well as governmental, institutions. In the past few years, it has been repeatedly demonstrated that blockchain can be applied not only to the financial sector, such as virtual currencies, but in any field that needs a fast, secure and accurate record keeping system. The major and most essential feature of this technology is that data “uploaded” on blockchain cannot be easily deteriorated regardless of the social, economic or political powers of the transaction participants.

Apart from efficiency and trustworthiness of blockchain, the technology can considerably reduce transaction and administrative costs. Alongside the representatives of the financial sector, other business entities, including governmental bodies, are exploring the potential of blockchain application in different sectors, such as public sector administration, real estate registry, data maintenance, stock exchange, education, asset holding, contract management, identity proof, insurance and healthcare and even blockchain-based elections. This summer, the Swiss authorities made a ground-breaking announcement to hold a pilot municipal vote in the canton of Zug. The elections were conducted through a blockchain-based system that allowed the citizens of Zug to vote using their digital ID cards.

The Potential of blockchain in Georgia

Over recent years, international practice has demonstrated that the implementation of blockchain can significantly reduce transaction costs, as well as increase citizen access to public services. Georgia is one of the forerunners in the integration of blockchain in the public sector.

The Ministry of Justice of Georgia commenced application of blockchain in the maintenance of land titles on the Bitcoin blockchain. In 2016, the National Agency of Public Registry (the “NAPR”) announced the plan to pilot the first blockchain land-titling registry in the country. The project aimed to integrate public records on real estate into the custom-designed blockchain digital records system of the NAPR. The system is anchored to Bitcoin blockchain through a distributed digital time-stamping. This mechanism allows the NAPR to verify a document comprising of the information on the property ownership. Since 2017, extracts proving ownership or transactions related to real estate are being uploaded onto the blockchain-based platform. This event became one of the first success stories of a national government integrating use of a private blockchain in the authentication and securitization of state operations at the international level.

In light of the successful local and international experience of blockchain application in different fields, there are other potential sectors in which application of blockchain can be expanded. In particular, state authorities can integrate blockchain in the following areas:

• documentation and records management;

• issuance of permits and licenses;

• corporate registries;

• capital markets;

• state procurement;

• customs; and

• tax administration.

Considering the recent reforms related to the creation of accumulative pension reform in Georgia, a special application will be created for administration and accumulation of the pension contributions made to the LEPL Pension Agency. Thus, blockchain, being a safe, transparent and cost-effective technology, can also be potentially used in development of an application for management and monitoring of the accumulative pension system.

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Note: this article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

MG Law is the first full-service law firm in Georgia to be founded by international partners. The firm advises a diverse group of Georgian and foreign companies, financial institutions, investment funds, governments and public enterprises.

Among many other areas, the firm primarily focus on the following sectors: Banking & Finance, Capital Markets, Arbitration & Litigation, Labor & Employment, Infrastructure and Project Finance, Energy Law, Real Estate, Tax and Customs, Investment Law, Corporate Law, Real Estate, Infrastructure & Finance Projects, and Cryptocurrency & Blockchain.

For more information, please visit www.mglaw.ge or contact Archil Giorgadze at archil.giorgadze@mglaw.ge and Nicola Mariani at Nicola.mariani@mglaw.ge

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