If you’ve heard of blockchain you’ve most likely heard of cryptocurrencies, such as Bitcoin and Etherum. But do you understand how they work, and do you know the much larger picture of which they form but a small part?
Blockchain is in essence a technology for the decentralised storage of information, involving multiple ledgers, where information is chained together in one continuous stream, made up of blocks. Each block is linked to the previous block, so it becomes impossible to alter one block without unknitting the chain. Security, reliability, information interactivity and depth is at its core.
As mentioned, blockchain applications have become most evident in the financial sector. Cryptocurrencies facilitate financial transactions. Each unit of currency, when created (or mined) is added to the blockchain. It can then be traded, with transactions added to the blockchain. Because decentralised ledger technology, multiple point verification and an authenticity chain is involved, transactional errors are removed, particularly those which arise from human intervention. Currency units can be simply and easily transferred from person to person, irrespective of location and without the intervention of banks. Whilst more outlets are accepting cryptocurrencies, they can be exchanged back into traditional currency units at a number of exchanges. The technology is early stage, but use is increasing.
With respect to the currency applications of the blockchain, the law must be considered. Payment services are highly regulated, both directly, and indirectly through laws relating to financial crime, anti-money laundering (AML) and know your customer (KYC) regulations, and tax evasion. The blockchain already presents means by which funds can be transferred instantaneously between parties throughout the world, armed only with a smartphone.
In building or engaging with payment-related blockchain technologies, one must understand and adhere to regulation relating to customer identification, sanctions and such like. The recently enacted prevention of tax evasion offence in the UK adds significantly to this; financial controllers within business must understand requirements, and appropriate internal policies should be developed if not already addressed, so that directors may enjoy safe harbour provisions.
As noted above, the blockchain presents significant potential for data security improvement, removing single point of access vulnerability through multiple point information validation and chain dependencies, however legislative data gathering and storage obligations need to be considered. The forthcoming changes in the law relating to personal data are the most far reaching in recent times. They include additional obligations for both controllers and processors. Understanding where personal data will be stored, transferred and processed, and ingathering appropriate consents will be key.
Data is key to acting effectively and profitably in the blockchain economy. As such, business should consider, when addressing direct consent requirements, possibilities for additional data commercialisation opportunities arising out of blockchain engagement. The blockchain, like a pack of sheepdogs, can sweep up data and organise it in a reliable, robust and accessible manner, but if mishandled it can also bite.
Blockchain applications are likely to have cross-border elements, whether through user access or IT backbone infrastructure. Users should ensure that those international elements are properly addressed, not least with Brexit imminent. Taxation and transfer pricing, substance and the OECD guidelines on multinational structuring must be properly considered to ensure both legal compliance and reputational risk mitigation.
Infrastructure liability also requires attention. Who is liable for infrastructure failure in a distributed ledger network? Does limiting developer liability to amounts paid actually work in the context of a business with such software dependencies? These are important points to consider.
Perhaps most significantly, from a legal perspective, the blockchain presents an opportunity for minimising legal spend, or rather more efficiently targeting that spend. Whilst the technology is perhaps in its first or second wave in this respect, forthcoming years will see the development of smart contracts sitting on the blockchain. The possibility for automating the implementation and performance of simple procedure-driven transactions is immense, from real estate management to construction and build arrangements, to freighting, distribution and transport, even to advertising, marketing, and the creative arts and royalty payment.
In this context, it is sensible for business to engage with legal advisors who are also technology experts. Learn how to foster an innovation ecosystem. And for lawyers, well, learn how to code.
Jamie Watt is a partner and IP/IT expert with Harper Macleod LLP