February 8, 2018

Legal Corner: Transacting on the Blockchain and the related legal issues

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Beyond Bitcoin: Transacting on the Blockchain - Legal Issues

There has been a cryptocurrency gold rush and many commercial organisations and even countries wish to position themselves as the market leaders in the use and deployment of this technology. It is therefore very possible that most people will have heard the term ‘blockchain’ at some point over the last 6-12 months. It is also possible that many organisations looking at using blockchain have not yet fully investigated the legal issues with using the blockchain for contracts in the current legal landscape.
The potential use-cases for blockchain are many and broad ranging, reaching across multiple sectors and industries. The benefits of this technology (including reduced transaction processing times and costs) are clear. However, there are certain practical, legal, and regulatory barriers that organisations should be aware of when seeking to undertake transactions on the blockchain. We highlight a number of these below.

The blockchain

In brief, a blockchain is a digital database (or ledger) distributed across a network of computers containing an increasing number of data records that are protected by powerful cryptography. It is therefore designed to be protected against human error, editing, tampering, removal and revision.
The key thing to remember is that there is no definitive ‘blockchain’. There can be any number of blockchains used and deployed by any number of different organisations for different purposes. Anyone with the necessary coding skills can create a blockchain.
Blockchains can be ‘public‘, allowing anyone to contribute data, with all participants possessing an identical copy of the ledger (the Bitcoin blockchain is the most obvious example). They can also be ‘private‘, allowing only specified people or organisations (e.g. financial institutions, specific individuals etc.) to submit transactions and/or validate them across the network. Whether a blockchain is private or public will determine the individual users that have access to the information on that blockchain.
Distributed Ledger Technology or ‘DLT’ is the key technology underpinning the blockchain and is used as the basis to develop and provide the various blockchain models.  

Smart Contracts

While DLT sits underneath the blockchain, the ‘smart contract’ is the essential component for the use of this technology to record and execute transactions on a blockchain.
Again, there is no universally established and accepted definition of a smart contract. However, they are coded instructions that self-perform when chosen criteria are met. A simple example is a car insurance policy. This could be recorded and executed on a blockchain as a smart contract that automatically pays out to a policyholder if there is an accident.

Legal Issues

As with any new technology in an unregulated landscape, blockchain raises some interesting and unique legal issues and concerns regarding contracts.
Firstly, any smart contract to be entered into must have all the elements of the required ‘traditional contract’ it is seeking to replace. Coders employed by a contracting party to perform this task must therefore be able to recreate certain key legal concepts and principles. These often require a degree of subjectivity or judgement on a case-by-case basis (force majeure events being one example). There are also challenges regarding how to transform key contractual provisions into a set of coded instructions that self-perform. There are issues regarding how preambles and imprecise legal concepts such as “in good faith” can be replicated in computer language. These will need to be overcome to ensure any smart contract becomes a workable legally effective solution.
Together with issues around forming a workable contract on the blockchain, are concerns around how parties will decide which laws apply and which court or tribunal should be used to resolve disputes. Contractual parties in a blockchain system will often be located in different countries, possibly across the world. How the governing law of a smart contract will be decided (will it be by the location of the parties themselves, or perhaps by the location of the relevant computer servers?) and how possible conflicts of law between one country and another can be resolved, will be key to determining issues around liability and the settlement of disputes.
A final question is how flexible the use of a particular blockchain for contracting purposes will be and whether it can be adapted to cope with certain changes in law. Records on a blockchain are intended to be fixed and not changeable. Therefore, if a blockchain holds personal data in a way that complies with the current laws in a particular country and the law then changes, could the blockchain be changed to comply with the new law?

Developing Legal Landscape

Few regulatory bodies have provided much action or guidance on whether this technology is permitted regarding making effective contracts between parties.
It seems most likely that, in the first instance, most countries will try to resolve legal issues using existing principles and laws, although with some guidance. However, because of the speed of development and use of this technology that will occur over the next few years, it is likely that many current laws will quickly fall out of date.  
It is therefore very likely that the laws in many countries will need to be changed, or in some cases entirely new laws written to allow transactions on the blockchain to occur. On that basis we recommend organisations keep up to date with blockchain developments and check out our upcoming notes and insights on our LawNow pages, available at: http://www.cms-lawnow.com/.

 

Rob Flaws
Legal Director, Head of Technology, Media & Communications (Middle East)
CMS

Dubai
M (+971 52 724 3219)
T (+ 971 4   302 2807)
E ( rob.flaws@cms-cmno.com )


Robert is a Technology law specialist with over 10 years of international experience supporting the delivery of projects and providing regulatory advice in respect of the use of Technology across a broad range of industry sectors including: Aviation, Banking and Financial Services, Energy, Hospitality, Oil and Gas and Telecommunications.

Since relocating to the Middle East in 2011, Robert has been involved in the provision of contractual and regulatory advice in relation to the procurement of payment processing systems and solutions, the development of e-payment and mobile money systems, the use of cryptocurrencies for retail transactions and the use of Blockchain in the conduct of the sale of real estate. Robert is a regular speaker at FinTech and Blockchain industry events and enjoys sharing trends, experiences and best practices with clients involved in the development of Fintech and Blockchain innovations.

Topics: Legal Corner

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