  Permissionless blockchain consensus protocols have been designed primarily
for defining decentralized economies for the commercial trade of assets, both
virtual and physical, using cryptocurrencies. In most instances, the assets
being traded are regulated, which mandates that the legal right to their trade
and their trade value are determined by the governmental regulator of the
jurisdiction in which the trade occurs. Unfortunately, existing blockchains do
not formally recognise proposal of legal cryptocurrency transactions, as part
of the execution of their respective consensus protocols, resulting in rampant
illegal activities in the associated crypto-economies. In this contribution, we
motivate the need for regulated blockchain consensus protocols with a case
study of the illegal, cryptocurrency based, Silk Road darknet market. We
present a novel regulatory framework for blockchain protocols, for ensuring
legal transaction confirmation as part of the blockchain distributed consensus.
As per our regulatory framework, we derive conditions under which legal
transaction throughput supersedes throughput of traditional transactions, which
are, in the worst case, an indifferentiable mix of legal and illegal
transactions. Finally, we show that with a small change to the standard
blockchain consensus execution policy (appropriately introduced through
regulation), the legal transaction throughput in the blockchain network can be
maximized.
