Opportunities and Barriers for Application of Distributed Ledgers in the Context of EU Digital Single Market Strategy

European Integration Studies No. 11 / 2017 pp. 160-172 DOI 10.5755/j01.eis.0.11.18134 © Kaunas University of Technology Decentralization, on one hand, brings more transparency and trust to the parties involved in transactions, but on the other hand, it narrows possibilities for central control. Distributed Ledger Technology (DLT) is a recent decentralized innovation in the field of information and communication technology (ICT) that acts as self-sustainable ledger for documenting transactions self-protected against counterfeiting and hacker attacks. The aim of the current research paper is to reveal opportunities and barriers for utilization of distributed ledgers in the context of EU digital single market strategy. The main tasks are (1) to analyze functionality dynamics of existing distributed ledgers, (2) to analyze utilization areas of distributed ledgers, (3) to analyze digital trends related to utilization of distributed ledgers within the EU. The current research paper utilizes methods of content analysis, grounded theory, descriptive statistics, correlation analysis and regression analysis. The research has revealed that half of EU Digital Single Market priorities can be facilitated through distributed ledgers.

Decentralization processes are currently taking place all over the world creating new economic models and supported by modern ICT tools.Since the end of 1990s a trend toward decentralization has been noted all around the world (Dethier, 1999), however since its creation, European integration has been a process of gradual centralization with the Single Market being arguably the most spectacular success of European integration (Wyplosz, 2015).

Introduction
interdisciplinary approach to policy analysis, involving combination of technical knowledge and economic analysis tools.In this paper, authors pay substantial attention to structuring existing knowledge about DLT under comprehensive framework in order to reach indicated research aim.
The aim of the current research paper is to reveal opportunities and barriers for utilization of distributed ledgers in the context of EU digital single market strategy.The main tasks are 1. to analyze functionality dynamics of existing distributed ledgers, 2. to analyze utilization areas of existing distributed ledgers, 3. to analyze digital trends related to utilization of distributed ledgers within the EU.
Qualitative research in ICT can apply various methods, e.g.case study, ethnography, action research, grounded theory and content analysis (Thinagaran, 2014).The current research paper utilizes content analysis method to identify existing DLT applications and analyze their functionality.For the purpose of current research content analysis is defined as a research technique for making replicable and valid inferences from texts (or other meaningful matter) to the context of their use (Krippendorff, 2004).Since there are only a few DLTs apart from crypto-currencies that are currently implemented in public space, no sampling method is applied and all available DLT applications are selected for detailed functionality analysis.
The main sources of information are white papers and web sites of existing DLT applications, expert interviews and official documents of public authorities and think-tanks.The "context of use" of analyzed information is exploration of interconnections between DLT functionalities and priorities of the EU Digital Single Market Strategy.Since DLT is a recent ICT innovation, a proper scientific research has not yet been implemented and a theoretical framework is non-existent.Grounded theory is very useful when current theories about a phenomenon are either inadequate or non-existent (Creswell, 2014).Thus, the current research will also utilize a grounded theory method to identify and analyze areas for DLT application.
Descriptive statistics is used to analyze digital trends related to DLT utilization within the EU.Correlation and regression analysis is used to analyze interconnections between EUR-Bitcoin exchange transactions and components of a digital economy and society index (DESI), a composite index that summarises relevant indicators on Europe's digital performance and tracks the progress of EU Member States in digital competitiveness (European Commission, 2017).DESI components:

Methodology
European Central Bank defines DLT as a record of information, or database, that is shared across the network (European Central Bank, 2016).Federal Reserve defines DLT as a combination of components, including peer-to-peer networking, distributed data storage and cryptography that, among other things can potentially change the way in which the storage, recordkeeping and transfer of a digital asset is done (Badev et al, 2016).
DLT is not the first technological attempt to implement transactions through ICT.The core underlying concepts of such applications include establishment of trust, maintaining confidentiality and ensuring secure data exchange and storage.Previous technologies include such concepts as blind signatures (Chaum, 1982), b-money (Dai, 1998), hash-cash puzzles (Back, 2002), reus-Literature, market and policy review able proofs of work (Finney, 2004), all of them using encryption and consensus protocols, but none of them providing distributed data storage opportunity.In this sense, a distributed nature of DLT is truly a revolutionary concept to ensure transparency, security and immutability.
Researchers (Swan, 2015, Nguyen, 2016, Underwood, 2016), public institutions (Federal Reserve, 2016, European Parliament 2016, European Central Bank, 2016) and think-tanks (European Union Agency for Network and Information Security, 2016, Oliver Wyman, 2016, Deloitte, 2016) conclude that DLT can bring numerous benefits, however certain criticism exists majorly outlining a security concern about a possibility of a 51% attack (Chuen, 2014), slowness of the data adding process to the ledger (Deloitte, 2016), size problem if scaled to mainstream use (Swan, 2015) and wasted energy resources on mining (Swan, 2015).
The first practical application of a distributed ledger technology has been implemented by Satoshi Nakamoto launching a Bitcoin crypto-currency in 2009.In his Whitepaper Sakamoto described a peer-to-peer online payment system that functioned without a financial intermediary.All transactions with Bitcoins are digitally signed and stored in a peer-to-peer network that utilizes a proof-of-work concept (Nakamoto, 2008).
The total market capitalization of all crypto-currencies globally is estimated at approx.EUR 23,14 billion, whilst Bitcoin takes the 1 st place and enjoys a 68,43% market share (fig.1).Current distributed ledger projects are promoted by business and heavily involve fintech.It is no wonder because intermediation being a core issue addressed by DLT is also at a core of financial transactions.Financial markets have developed significantly in the past decades, driven by deregulation, technology and globalization (Genberg, 2008).The evolution of financial intermediation is going to be one of the most important and consequential stories in the coming years for law, finance, and society (Lin, 2015).
Since Bitcoin a few other DLT platforms and initiatives have already been launched: _ 2nd layer Bitcoin projects that run on top of Bitcoin infrastructure and can store any type of transaction in the Bitcoin network For example, Counterparty allows users to create digital tokens that can be traded or exchanged through smart contracts (Counterparty, 2017), Factom offers ready solutions for auditing, compliance, quality control and due diligence (Factom, 2017) With the DLT all systems of involved actors can stay in step with each other without requiring armies of people to reconcile and resolve the issues, thus, increasing the speed of matching transactions, eliminating human error factor and reducing costs.Each file in a ledger consists of blocks that include cryptographic signatures of previous blocks, called hashes that are created by a particular algorithm (fig.2).
A ledger with files is stored in identical copies on devices of network's participants that are synchronized and automatically updated when a new file is added to a ledger.In comparison to traditional transaction networks, distributed ledgers do not require trusted intermediaries for ownership certification and transaction clearing (fig.3).
Many global companies are currently exploring possibilities of DLT within their business processes, i.e. major global banks, Nasdaq, SWIFT, US Depository Trust & Clearing Corporation, etc. because DLT can bring confidence by providing a system with no central control.This means that the system cannot be shut down or changed by any single party.It enables the users of the network to know that they can safely use the network without the rules changing.This DLT func- 1. Better access for consumers and businesses to online goods and services across Europe.
2. Creating the right conditions for digital networks and services to flourish.
3. Maximising the growth potential of European Digital Economy.
The first pillar involves harmonization of online and offline environments to enhance cross-border online activities.The second pillar includes ensuring proper regulatory framework for fair competition, investments and innovation with high-speed secure access to trustworthy content services and infrastructures.The third pillar refers to investments in ICT infrastructures and new technologies (i.e.Cloud, Big Data), supporting research and innovation activities, providing better public services, developing ICT skills and ensuring digital inclusiveness.
12 priorities of the Digital Single Market Strategy (European Commission, 2015) can be summarized as follows: 1. E-commerce:

Research results and discussion
Having analyzed DLT functionalities and opinions of different stakeholders, it is possible to group DLT transaction types under two major categories -Fintech and E-Government, whilst transactions involving government can be also categorized according to Litvack's (2000) identified types of government decentralization (fig.4).
Although technically it is possible for governments to base their DLT projects on Ethereum and 2 nd layer Bitcoin projects, there are however ethical barriers and security concerns impeding public institutions from using those platforms for transactions involving government.European Central Bank notes that the technology is not yet mature, the clarification of critical legal, operational and governance issues will take time and there is a risk of abuse of certain applications for criminal conduct, including money laundering and terrorist financing (Pinna, Ruttenberg, 2016).
On the other hand, Committee on Economic and Monetary Affairs of the European Parliament acknowledges that DLT provides reductions in transaction costs and the ease of use while providing for resilience and varying levels of privacy and foresees emergence of DLT applications in the areas of smart contracts, intellectual property transfers, supply chain management and government services (European Parliament Committee on Economic and Monetary Affairs, 2016).Thus, public institutions at all levels will have an important role in adoption and promotion of     _ Residents of the European Union increasingly utilize Bitcoins for economic transactions between each other.
_ The biggest contributing factors to the growth of Bitcoin-EUR exchange transactions are improving e-government and connectivity levels within the European Union.
_ Digitization of economy and public services within the European Union is happening simultaneously and with high correlation.
_ European Union institutions acknowledge the potential of distributed ledgers to transform different sectors of the economy, but so far, they do not formally participate in the development of distributed ledger initiatives and wait for the technology to mature.
_ The main barriers for utilization of distributed ledgers in transactions involving government include the lack of clarity about legal, operational and governance issues.
_ Half of EU Digital Single Market priorities can be technically facilitated through distributed ledgers.
Based on above listed conclusions authors have put forward the following recommendations: _ EU regulation and supervision authorities (e.g.European Central Bank, European Banking Authority) to create working groups with promoters of distributed ledger initiatives and other stakeholders in order to ensure adequate regulatory responses to technological developments in this field.
_ EU research institutes and other research institutions to explore areas of potential introduction of distributed ledger technology in e-government on EU level with economic and social impact assessment.
_ European Commission to encourage creation of consortiums of public authorities to develop distributed ledger prototypes in e-government area.
_ European Commission to consider developing pan-EU e-government backbone based on distributed ledger technology for interoperability of e-government initiatives of Member States.
_ Authors to analyze in future research exact benefits that can be brought by distributed ledgers to each of the identified priorities of EU Digital Single Market Strategy and to assess them in a view of European Integration theories.
The paper was financially supported by the Latvia National Research programme EKOSOC-LV.

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Connectivity -Fixed Broadband, Mobile Broadband, Broadband speed and Affordability _ Human Capital -Basic Skills and Usage, Advanced skills and Development _ Use of Internet -Content, Communication and Online Transactions _ Integration of Digital Technology -Business digitisation and eCommerce _ Digital Public Services -eGovernment.

Figure 2
Figure 2Data structure of a distributed ledger (Authors')

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Figure 3Distributed ledger network (Author's) Figure 4Groups of transactions facilitated through DLT (Authors') Ethereum is a decentralized platform that runs smart contracts and uses different digital tokens, i.e. crypto-currency, representation of an asset, virtual share, proof of membership, vote, or anything at all.Ethereum is used as a platform for decentralized applications, decentralized autonomous organizations and smart contracts(Ethereum, 2017).Hyperledger is an open source collaborative effort created to advance cross-industry blockchain technologies that incubates and promotes a range of business blockchain technologies, including distributed ledger frameworks, smart contract engines, client libraries, graphical interfaces, utility libraries and sample applications(Hyperledger, 2017)Corda is an open-source distributed ledger platform designed to record, manage and automate legal agreements between businesses; its development is led by R3, a fintech company that heads a consortium of over 70 of the world's largest financial institutions in the establishment of an open, enterprise-grade, shared platform to record financial events and execute smart contract logic(Corda, 2017).
, etc. _ 2012: Ripple is built around Interledger Protocol that allows transactions among different ledgers ensuring real-time settlement of cross-border payments and maintaining privacy of in-volved financial institutions (Ripple, 2017).A protocol for Interledger payments enables anyone with accounts on two ledgers to create connections between them (Thomas S., Schwartz E., 2017)._ 2013: _ 2015: _ 2016:

Table 2
Source: Authors' calculations based on data from Bitcoinity, EC DG CONNECT.Also, stepwise regression analysis proves strong interconnection between Bitcoin-EUR exchange transactions and Digital Public Services (table 3, table4).

Table 3
Source: Authors' calculations based on data from Bitcoinity, EC DG CONNECT.