A lot is being said and written about blockchain, particularly in the context of virtual currencies like Bitcoin (based on the blockchain technology), as well as the possibilities offered by this technology for changing the face of the financial and insurance sector. But blockchain applications do not end with the finance industry. It is a technology with potential for radical redesign of many spheres of life, first and foremost those whose effective functioning requires the trust that was traditionally provided by third parties like banks, insurers, public registers or platforms. Blockchain enables secure execution of transactions or conclusion of contracts between various people without the need for creation of any additional protections.
While blockchain-based projects realized to date have largely been experimental, in the next few years the first production launches should be expected, which will no doubt make this technology a real game-changer across many sectors.
Assessing the prospects associated with blockchain, including prospects within a given sector or segment of the market, first requires an understanding of the fundamental principles under which this technology functions. On the technological side, blockchain is a decentralized database, or ledger, that exists in numerous identical copies held by specific users, a special feature of which is that each copy contains a complete set of data in the form of interlinking blocks (hence the term “blockchain”). Each person authorized to use the ledger (the group may be restricted or it may be public) has access to the entire ledger and the history of all changes, and may thus verify all entries independently. Meanwhile, changes in the data in the ledger cannot be reversed, because they are inextricably linked with one another; every change links to the previous one, forming a chain of all historical changes in the ledger. If we add to this the peer-to-peer architecture of such a ledger, consisting of communication of changes in the ledger directly between all copies of the ledger, without the involvement of any central module, as well as the possibility of programming the manner in which changes are made in the ledger (occurring automatically and registered in all copies of the ledger), we obtain the basic picture of the elements making up the blockchain technology. This technology can be used first and foremost for recording any types of transactions between users. Each user can also choose whether to remain anonymous or to disclose their identity to other users, as the transactions are conducted between alphanumerical addresses of the users of the ledger.
What will be the most pressing issues in the immediate future?
The appearance of new technological solutions exerting a major impact on the economic system usually carries with it great legal uncertainty. Suffice it to mention the concerns that arose with the spread of the internet, and doubts concerning for example the validity of contracts concluded online, or the tax treatment of online activity. Solutions based on blockchain present comparable issues. This applies firstly to solutions affecting areas regulated in detail by the law, such as payment services, electronic money, and trading in financial instruments. Here the potential of the new solutions is especially vast, but conversely the risk of potential legal violations is great, particularly given the existence of institutions that can to a certain degree authoritatively interpret the existing law. Uncertainty may also arise with respect to taxation of transactions conducted in a blockchain ledger.
This doesn’t mean that implementation of this technology requires the enactment of new legal regulations. Such regulations may be necessary in certain instances, but most often it will be possible to base the new solutions on existing regulations, particularly when the solutions are implemented outside the financial sector, e.g. in logistics or energy.
Proper legal assessment of projects connected with blockchain require first and foremost an understanding of how the technology functions, so it can then be accurately determined which regulations may be applicable. Development of this technology therefore presents great challenges for lawyers, their knowledge of IT, and their skill at translating this knowledge into application of the law in practice, so that legal risks can be properly evaluated.