What is a Blockchain?
Blockchains are, in many ways the “tamper-proof boxes” that combine many existing technologies, including peer-to-peer networks, public-private key cryptography and consensus mechanisms to form what is ultimately a highly resilient and tamper-resistant database where people can store data in a transparent and immutable manner.
The term “blockchain” comes from the fact that blockchains store data in “blocks”, and “chain” them together to form a cohesive, unbroken record of that information. And because blockchains are widely replicated, any data stored in the blockchain can survive even if a copy of the blockchain is corrupted or if a node on the network fails.
Blockchain Technologies
The possibilities for blockchain are limitless. Applications range from storing client data to handling cross-border transactions, clearing and settling bond or equity trades to smart contracts that are self-executing, such as a credit derivative that pays out automatically if a company does bust or a bond that regularly pays interest to the holder.
Blockchain and its associated technologies allow contractual counter-parties without independent verification to understand that a certain event has happened, and automatically trigger the relevant contractual consequences. By enabling trust between contracting parties, the technology has the disruptive potential to herald a flourishing new pattern of commercial behaviour and relationships. It is this “disintermediation” that has some referring to “distributed ledger technology” as the most disruptive invention since the internet. Hyperbole or not, blockchain and the associated platforms may allow the internet, and in particular the Internet of Things to realise their full potential.
Is Blockchain Regulated?
From the rise of e-commerce in the early 1990s to the current debates around how the world will adapt to the Internet of Things, the adoption of new technology gives rise to complicated regulatory issues. The ability of blockchains to facilitate and support autonomous systems will increasingly create challenges for states and regulators seeking to control, shape or influence the development of blockchain technology. Like many of the emerging technologies, blockchains can be deployed both to support and undercut existing laws and regulations however with blockchains, people can construct their own systems of rules or what has become to be known as “smart contracts”, enforced by the underlying protocol of a blockchain-based network.
Currently, most online services generally either act as an intermediary or rely on other intermediaries, such as cloud-computing providers, search-engines, payment processors, domain-registrars and social networks to support their services. These intermediaries have the power to impose and enforce laws and their own rules, and to the extent that there are easily identifiable and located within a particular jurisdiction, they also serve as central points of control for regulatory authorities. Systems deployed on the blockchain will be much harder to control and regulate. Blockchains reduce the need for intermediaries and create systems governed by protocols and other code-based rules, which are automatically enforced by the blockchain network. Through the use of a blockchain and associated smart contracts, new online applications can be designed to be highly-autonomous and independent of the centralised intermediaries.
Despite the obvious advantages of blockchain-based networks, many of those involved in the development of the technology have expressed concerns over the discrete risks that blockchains could destabilize central banking, financial markets and the administration of commercial agreements. Further, the potential for anonymity on some distributed ledgers may complicate anti-money laundering compliance and taxation regulation.
Legal Issues
Blockchain and its associated technologies are still very much in their infancy they remain very much untested in law, although there have been numerous studies conducted which discuss the potential for future legal complications, they still remain very much academic. Just some of the legal and regulatory issues relating to blockchain technologies include the following:
- Jurisdictional challenges – Blockchains have the ability to cross-jurisdictional boundaries and without a defined jurisdiction clause from the outset, the blockchain may need to comply with the legal and regulatory regimes of every jurisdiction where each node on the network is located.
- Intellectual Property – There is attributable value in the blockchain, and ownership of the Intellectual Property rights should be a major consideration. At the date of this article blockchain patents have been steadily on the rise with many seeking to capitalise on this new technology. Given the amount of investment and potential financial returns, blockchain vendors will have to determine their Intellectual Property strategy from the outset if they want to capitalise on the commercial benefits to be generated from the blockchain.
- Data Protection – Once data is stored on the blockchain it cannot be easily altered, this clearly has implications for data privacy, specifically where the data in question is personal data or metadata sufficient to reveal someone’s personal details. Unfortunately, this new technology is on a collision course with EU privacy laws which are set to undergo their biggest overhaul since being created in 1995. The new framework, entitled the General Data Protection Regulation (‘GDPR’), comes into effect on May 25, 2018 and will drastically change how organisations handle the personal data they collect and use.
- Tax – For the reasons detailed above, blockchains perform in the ether. There may be no obvious place of performance. International allocation of taxing rights has traditionally focused on the place where contracts are concluded. Blockchain technologies will therefore present yet another challenge to traditional tax systems. Questions are already being posed as to how the regulators are to determine who will be receiving fees for operating blockchain technologies for direct tax purposes.
For more information, see the Technology Law and Commercial Law pages. Alternatively contact us by email at info@alstonasquith.com or by call us on: +44(0)20 3950 3538
