As blockchain technology evolves, the power of regulatory authorities becomes limited, as in the context of global business, these digital technologies can circumvent even newly adopted regulation, rendering previous industry norms obsolete. The power of technology and the business philosophy of blockchains based on decentralisation raise the dilemmas of business integrity and ethics. To solve them, close cooperation between business, government and regulators is needed.
Institutional braiding, linkage of formal and informal institutions is the only way to influence the development of a business based on blockchains. The interconnectedness of institutions allows for the combination of emerging regulation, new business practices emerging in the industry, and value market formation. Such synergy ensures that the industry will have an interest in developing business ethically and with a human-interest group in mind, rather than using technological opportunities to circumvent regulatory measures.
These conclusions were reached by researching businesses using blockchain technology in America, China, and Europe. The strategic responses of the studied companies in the presence of imperfect regulation in one country and in global markets show that blockchain technology allows business development by bypassing regulatory measures, no matter how strict they are.
Insights of the study initiated by Lithuanian researchers are described in the recently published monograph
Digital Entrepreneurship and Global Economy in Routledge series Advances in Management and Business Studies.
Creating an innovative business in a constantly changing environment
Businesses based on blockchain technology are able to operate in a constantly changing environment, where not only the regulatory environment, but also the attitude of industry and society towards these innovative businesses is still forming and changing.
“The uniqueness of businesses based on blockchain technology is that they operate globally, operate in the digital world, and rely on the principle of decentralisation to eliminate central organisations that act as intermediaries. However, it is no secret that due to the lack of knowledge and competences in society, the rapid growth of currencies, the initial crypto offerings were often characterised by wilful opportunistic activities and such project failures,” says Jurgita Butkevičienė, a co-author of the
monograph, Associate Professor at School of Economics and Business at Kaunas University of Technology, Lithuania.
However, according to her, even in such an environment, individual innovative and transparent business-oriented entrepreneurs were able to successfully develop innovative and global solutions.
The research, which outcomes are published in the monograph, revealed that thanks to technology and global business models, gaps in legal regulation and the lack of industry norms do not limit, but provide opportunities for business development. On the other hand, this situation does not protect society from the opportunistic activities of market participants. The research surveyed companies that create different value in the industry: they create applications on blockchains, develop blockchain platforms, provide legal advice, or help application developers with sales and other marketing issues.
The results of the survey revealed that the different regulatory approach and regulatory imperfections in different countries affect these companies differently. The companies’ response to the imperfection of values and practices can be divided into four groups: feigned compliance, i.e. window dressing, jurisdictional arbitration, compliance with the power expressed by institutions and reputation-based business legitimisation.
“In other words, only two of the four tactics focused on the power of institutions, the other two tactics were designed to circumvent the regulatory and value power of institutions. This shows that all possibilities allow for the development of successful transnational ethical standards and regulatory measures,” says Butkevičienė.
To protect the consumer, preserve the safety of the market, and ensure the regulation of a well-functioning market, there is need to employ the means that could connect the institutions, and to work with innovative business creators while developing meaningful regulation and good practice in the market.
Moreover, the study also revealed that companies that have chosen a reputation-based business model, excel in such activities and achieve great results, satisfying both regulators and industry.
How to ensure innovation in business without fraud and management bypass?
Aušrinė Šilenskytė, Ph.D. at the University of Vaasa, Finland, a co-author of the study, emphasises that it is important to understand the features and differences of technological blocks and chains in order to understand their impact on industry and consumers.
In this study, a business created using public blockchain technology was surveyed. In the case of a closed blockchain platform type or hybrid model the results should be interpreted quite differently. It is the open blockchain technology and the ecosystems associated with it that allow navigating well between various institutional environments and bypass regulatory shepherdesses.
“The tactic of pretend compliance, which can be used by businesses building on public blockchain, is used when there are no established ethical norms and good practices in the industry. Market players who entered the industry driven by innovation rather than quick profit have developed their own best practices and are looking for opportunities to eliminate unethical entrepreneurs. Thus, a tactic based on reputation building was born,” says Šilenskytė.
Butkevičienė, who has beed analysing the institutional formation of the Fintech environment in Lithuania, notices that during the digital transformation, when the new digital technology-based sectors are developing rapidly, there is a great lack of institutional literacy in the industry, which includes the understanding how formal (legal) and informal (practices and thinking models valid in the industry) work, how their coherence leads to successful and rapid transformation.
According to her, this understanding leads not only to the application of successful strategies, but also to the ability to create institutional innovation in the country, which would allow to implement changes and create a competitive advantage faster.
“Sometimes, policymakers are disturbed by the ambiguity of the word ‘institutions’, since it can be understood as public bodies, but another meaning of this term is ‘formal and informal political rules, traditions, norms and symbols, and public policy means and procedures’, in other words – certain rules of the game of a society,” reminds Butkevičienė.
It is the development of business based on blockchain technology that shows that formal rules are not enough for globally operating digital businesses to develop in a manner that does not harm the society.