Possibilities for Blockchain and the Legal Implications
Blockchain technology is a new way of establishing trust in the presence of unreliable parties. Although it owes its current celebrity to Bitcoin, the cryptographic power of blockchain can be harnessed in a variety of different ways, making it capable of revolutionizing a lot more than just how we do business. Along with these new possibilities, however, new complex legal issues are expected to arise.
What is blockchain technology?
Blockchain is best known as the underlying technology that makes Bitcoin possible. Bitcoin’s system of transactions is decentralized, meaning that no central authority tracks, approves, or secures transactions made on the Bitcoin network. Instead, Bitcoin relies on blockchain technology—rooted in cryptography—to achieve a secure and usable system.
For those new to blockchain technology, it is essentially a decentralized public ledger of transactions that works as follows:
- When a user initiates a new transaction, the transaction is grouped with others into “blocks” and consistently added to the ledger.
- The blocks are then redundantly verified by the distributed computing power of the users connected to the network and added to the “block chain.”
- A unique cryptographic “hash” identifies all blocks and transactions and permanently fixes them in chronological order, making it virtually impossible to modify past transactions in the chain.
The result is “trustless” system of transferring assets with no need for a central processor. Every payment is recorded and verifiable by anyone who accesses the public blockchain.
Blockchain is the next big thing.
Blockchain technology is not limited to transfers of virtual currencies. It has far-reaching potential in a wide variety of industries and applications. In brief, blockchain technology makes it possible for a community to manage something that previously required a centralized authority.
A growing number of organizations are beginning to use blockchain technology to build infrastructure to support decentralized peer-to-peer applications, while others are attempting to create decentralized versions of existing internet applications. From regulatory reporting to derivatives settlement, blockchain technology can be utilized to revolutionize many key service industry sectors, yielding increased consumer power, greater personal data ownership, and reduced transaction costs over the long term.
Thus far, regulators and enforcement agencies have focused on the legal issues surrounding the use of virtual currencies in financial transactions. However, the legal landscape gets markedly more complicated when discussing the broad applications of blockchain technology.
As outlined in a recent Bloomberg BNA Banking Report, anticipated legal issues include—but are not limited to—the following:
- Utilizing blockchain in the context of intellectual property would necessitate a doctrinal and legislative shift, as current IP licensing law is based on contractual relationships between parties, not on transferable property rights that could be sold later on.
- In the storage of identity information, legal implications could include privacy concerns and whether a right to privacy would even exist in such applications.
- The use of smart contracts raises several legal concerns. For instance, the automatically enforcing nature of smart contracts would make it difficult to apply some classic contract doctrines (ex. voiding a contract due to coercion), and the contracts may be programmed to be impossible to breach, even efficiently. In addition, these interactions would carry privacy concerns, as contracts between parties would be publicly viewable in the ledger.
- Advanced applications of smart contracts would allow for the existence of decentralized organizations, raising issues of liability and ultimate responsibility. Legal systems would have to determine who to hold responsible if laws are broken, as “management” is conducted automatically. Further, it is possible that existing legal frameworks relating to corporations and other business entities are insufficient, and that new regulations would need to be developed.
- Blockchain can accomplish escrow services utilizing “multi-signature transactions” although the arbiter in the transaction does not actually take possession of the virtual asset. Because existing legal frameworks are designed to regulate escrow agents who assume full control of an asset, they may prove to be incompatible.
- Attempts to offer securities and financial products are likely to increasingly implicate securities laws.
We have already seen virtual currency ‘rock the boat’ and swiftly prompt significant legal and regulatory change. With the potential applications of blockchain technology—capable of completely revolutionizing the way we interact and exchange information and value—we can reasonably expect momentous changes to our legal framework.