For the past decade, blockchain technology hasn’t ceased to expand and raise questions regarding the relation between law and technology. It is seen as the “new technological revolution” of our century. This may be explained by the fact that it offers a wide range of uses such as identity verification, recording of all type of property ownership namely real estate or intellectual property, automation of the contract process or near-instant money transfers. For example, the artist Impogen Heap released a song on blockchain and users paid to listen. The money was split on the blockchain and sent directly to the artist. Blockchain technology can adapt to any, if not all, sectors of business.
Blockchain technology emerged with the cryptocurrency Bitcoin and it was the solution adopted to ensure a secure and accurate record of transactions on a peer-to-peer network. It is a decentralized technology or open ledger of information that is verified and distributed across a peer-to-peer network. Each transaction or block is recorded on the blockchain. A transaction can only be added to the blockchain if it is verified and validated by each participant server or computer, called “nodes”. If a node does not validate the transaction, it will be rejected from the blockchain. The validation process consists of nodes solving a highly complex algorithm.
Such technologies offer a guaranty of security. Indeed, if a transaction has been altered or is fraudulous, the nodes will not validate the transaction and it will not be added. Furthermore, once a block has been added to the blockchain, it cannot be altered and hacking the blockchain technology is highly improbable considering its complex cryptography and the volume of nodes and blocks. The blockchain technology warrants a secure, impregnable and self-maintaining database.
However, the blockchain technology also has some deficiencies. The major concern regards the limited number of transactions which can be processed per hour. Its colossal processing power implies a certain delay which can be a problem for transactions where speed is of essence.
Blockchain and law
Key legal issues arise when considering the development and adoption of blockchain and other open ledger technologies. The main question is: what is the role of the law ?
One of the core legal issues regard jurisdiction and applicable law. Nodes are scattered across the world and the governing law of the contractual relationship may be hard to identify. Including a governing law and jurisdiction clause will avoid this problem.
Another issue is the enforceability of smart contracts which are blockchain contracts automatically executed on the occurrence of an event. They operate as self-execution contracts even though they are not necessarily contract as legally defined. Questions may arise if a dispute must be resolved. Who is competent? How may the conditions of offer and acceptance be qualified? Which law applies? Users of the blockchain technology should anticipate these issues and include adequate clauses.
A whole new set of issues arise with Decentralized Autonomous Organizations (DAOs). These digital entities operate through the implementation of pre-coded rules and the use of smart contracts. They record their activity on the blockchain. As decentralized organizations, what are their status? The DAOs management is conducted automatically. Who is responsible if there is a breach or a violation of the law? Who or what is claimed against in the case of a legal dispute?
Blockchain and data protection
The European Union has other concerns in relation with the coming into effect of the General Data Protection Regulation of 27 April 2016 (regulation n°2016/679) on May 25th, 2018.
For a transaction tacking place on the blockchain technology, can the nodes qualify as data controllers or data processors? How can individuals exercise their right of rectification or their right to be forgotten? Regulation n°2016/679 only allows the transfer of personal data to countries offering a similar level of protection to that in the Union. How can one certify this? A private blockchain network may be a way to ensure compliance with the regulation.
Despite these hurdles and tricky legal implications, blockchain and other open ledger technologies are still growing and are an appealing solution to many businesses. Mathias Avocats is experienced regarding these tricky legal blockchain implications. It will be publishing several articles on the topic.