Blockchain technology, also known as distributed ledger technology, is billed as ‘trustless’. In other words, it allows the carrying out, monitoring, and crucially enforcement of an exchange for value over a network of computers, without a middle single party empowered with operating and governing the network. This novel structure has the potential to create significant challenges for parties relying on existing laws and regulations. It is therefore important for businesses to learn how blockchain technology works and consider the legal issues associated with deploying it in their organisation.
Our previous series of articles explains what blockchain is and how the technology can be adapted for a number of different uses. In essence, transactions on blockchain can have a three part structure: (a) an offer is sent to the network declaring the transaction; (b) the offer is accepted; and (c) the network verifies the authenticity of that transaction. Further lines could be added to this basic process to make the transaction conditional on the occurrence of certain events, which is effectively creating a ‘smart contract’. Smart contracts are not ‘contracts’ in the traditional sense. Rather they are programmable transactions that can automatically execute the terms of a contract once a defined set of rules are met. Creative solutions will need to be put into practice to deal with the following legal issues that arise as blockchain and smart contracts become a reality.
1. Data protection and privacy
Blockchain technology is about efficiency, transparency and the removal of the requirement for trust in transactions. Blockchain technology records that a transaction happened, when a transaction happened and that the transaction happened correctly. In a public blockchain ledger, all counterparties can access the ledger. Making such a transparent technology comply with the requirements under data protection law and the European General Data Protection Regulation (GDPR) could prove to be tricky, particularly due to the heightened responsibilities and sanctions for infringement under the GDPR.
Contracts for blockchain solutions will need to incorporate appropriate data protection provisions if the blockchain technology is processing transactions involving personal data. Developers creating blockchain software should ensure they follow the requirements of ‘privacy by design’ and ‘privacy by default’ during the development and implementation stage.
2. Regulation and accountability
Control and regulation of the blockchain ledger, its users and all parties in the system is crucial for the technology’s development and uptake. The main challenge is the concept of introducing regulation that holds parties to a de-centralised system accountable. Nevertheless, to gain customer confidence to use the system, certain types of blockchain solutions implemented in certain industries will have to be appropriately regulated. While various European and global think tanks are proposing principles to regulate international blockchain transactions, these are still in the early stages of development.
3. Intellectual property
Intellectual property rights must also be considered. A customer acquiring a blockchain solution may seek exclusivity and appropriate indemnities in the contract to protect against intellectual property claims over the technology they are obtaining. Without appropriate contractual safeguards businesses could risk being subject to claims over intellectual property and suffering financial or reputational damage.
4. Contractual liability and warranties
Smart contracts that use blockchain make possible the automation of remote systems. Connecting smart contracts to the Internet of things (IoT) could increase system efficiency and improve cost monitoring. For example, in a landlord and tenant arrangement, such a solution could unlock the door to an apartment when rent is received. However, the creation of a marketplace of services between devices raises questions over contractual liability and allocation of fault when an IoT device malfunctions. Creative solutions will be required to correctly allocate loss along the chain of liability.
A developer or supplier of blockchain technology will want to ensure that any contract with a customer for a blockchain solution caps their liability and that a strictly limited set of warranties are provided that solely address areas within its control. This is particularly the case when contracts for the supply of blockchain to customers may involve sub-contractors or third party technology.
5. Addressing evolving laws
Blockchain is currently not subject to specific laws or regulations. Existing law is usually applied to new technologies as they emerge and it is rare that a new law is introduced immediately in response to an emerging technology. Lawmakers across Europe are adopting a ‘wait-and-see’ approach to blockchain. as they try to understand more about the technology. This is a sensible approach as implementing rules prematurely may prevent the growth of the industry. Accordingly, a contract involving blockchain technology should assign responsibility to parties with regards to monitoring for changes in laws and regulations, as well as associated costs from implementing resultant changes to the contract.
The next chapter for blockchain
It is likely that 2017 will be the year that blockchain and distributed ledger technology transitions from theory into practice. Blockchain present governments, financial services and the technology industry with a way to facilitate electronic payments, execute contracts and provide secure online registers more efficiently, while helping to reduce fraud, corruption and errors. However, contracting for blockchain services raises familiar contractual issues such as the apportionment of liability, warranties and the protection of intellectual property rights, In addition, disputes and legal remedies arising from ‘smart contracts’ is far from familiar territory for most. Businesses will need to rise to all of these challenges in order to be able to fully harness the power of blockchain as it becomes an every part of the financial and technology global landscape.