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Although most of blockchain’s success over the past decade
has been linked to crypto-currencies, distributed ledger technology
is poised to move into mainstream applications. As we adapt to a
long-term period of social distancing, the paradigm in which
technology evolves has been upended, and every member of society
has had to quickly find new technology-based solutions to
accomplish tasks previously taken for granted. In the coming
decade, technology will shift from automating and replacing manual
labor to replacing routine cognitive work, and blockchain is poised
to be a key driver of the “fourth industrial
revolution.”
The paradigm shift into the “fourth industrial
revolution” was first postulated by Klaus Schwab in a 2015
article published by Foreign Affairs. It references evolution in
the way we live, work and relate to one another, enabled by
extraordinary technology advances. According to Schwab, these
advances are merging the physical, digital and biological worlds.
The social distancing measures required to respond to the global
pandemic has put this fourth industrial revolution into
overdrive.
WHAT IS BLOCKCHAIN?
Simply put, blockchain involves recording information in a way
that creates trust in the data recorded. Blockchain is proof that
you own something digital — whether it is a bitcoin or your
personal health records. Blockchain proves you are the owner of
whatever digital information you have on the distributed,
decentralized public ledger. Estimates suggest that blockchain
technology has been adopted by more than one-third of the
world’s companies.
A mistake can only be corrected by adding another block to the
chain.
A blockchain can be trusted as a source of truth. Suppose
certain information (data) was included in the blockchain sometime
in the past but may not be correct. Records on the blockchain are
immutable and provide an unalterable trail. A mistake can only be
corrected by adding another block to the chain with consent from
all participants. A blockchain records tangible and intangible
assets among a network of peers that use the same software,
algorithms and cryptography to maintain the records.
Currently, there are two types of blockchain: permissionless
(public) and permissioned (private). Participants use pseudonyms to
protect their identity with permissionless blockchains, and there
is no identification of participants. Permissioned blockchains are
protected by access privileges. Participants are authenticated, and
a super-user may control the network.
Permissionless blockchains are considered more reliable because
of the consensus principle. Blockchain currently enables many uses,
including tokenization to protect sensitive data, unalterable
timestamping, transfer of assets through a payment channel, and
facilitation of smart contracts.
By 2023, the global blockchain market is set to reach $20
billion plus. The most prominent and influential companies
worldwide have all turned their attention toward blockchain. Tech
giants are investing billions, and Wall Street wants in, too. What
makes blockchain so attractive to business?
First and foremost, it reduces operational costs by obviating
the need for a centralized authority. Removing intermediaries is
crucial for business because it reduces costs and points of
contact, improving company efficiency and growth. Blockchain’s
adoption will reduce costs of personnel, support, operations, IT,
data breaches and much more.
In addition to blockchain’s efficiencies and security, it
allows for the completion of transactions in seconds rather than
days. Transaction speed is especially important in international
interchanges.
LEGAL ISSUES
Stakeholders in blockchain solutions will need to ensure that
their products comply with a legal and regulatory framework that
was not conceived with this technology in mind. From a commercial
law standpoint, smart contracts must be contemplated for
negotiation, execution and administration on a blockchain, and in a
legal and compliant fashion. Liability needs to be addressed. What
if the contract has been miscoded? What if it does not achieve the
parties’ intent? The parties must also agree on applicable law,
jurisdiction, proper governance, dispute resolution, privacy and
more.
There are public policy concerns that should be taken into
account in shaping new laws, rules and regulations. For example,
permissionless blockchains can be used for illegal purposes such as
money laundering or circumventing competition laws. Also,
participants may be exposed to irresponsible actions on the part of
the “miners” who create new blocks. Unfortunately, there
aren’t any current legal remedies for addressing corrupt
miners.
As lawyers and technologists ponder these issues, several
solutions are being bandied about. One possible remedy involves a
hybrid of permissioned and permissionless blockchains. Some
transactions require intervention by a responsible party, such as
when Know Your Client (KYC) regulations are in play. All
participants in blockchains and smart contracts where data is
exchanged are data controllers. This means participants must comply
with all data protection requirements.
Another consideration is what goes on the chain and what goes in
the smart contract and off-chain. Although it is possible to
include provisions regarding liability, jurisdiction and other
legal aspects in the smart contract, this allows no room for
interpretation because it is based on conditions. A better solution
may be to have a real contract stored off the chain but linked to
it with a hash-secure value for added confidence.
The ongoing regulatory push for more data with trends such as
controlled free trade, increased border security and accreditation
of economic operators leads to higher compliance costs. This means
that parties trading globally need higher supply chain visibility
and security. Data that is both high quality and secure, and trade
compliance systems that can cope with the electronic exchange of
data, are requirements.
Global trade involves many parties beyond the buyer and seller
— customs and regulatory authorities, financial institutions,
shippers, brokers and insurers. There are multiple exchanges of
data among those participants, presenting opportunities for
implementing a blockchain to trigger and record invoices, bills of
lading and customs compliance.
As blockchain technology matures, global trade supply chains
will increasingly use the technology, with the authorities
monitoring transactions and compliance with customs declarations,
duty payments and sanctions rules. Further, combining blockchain
with the Internet of Things (IoT) will give manufacturers the
ability to track products, manage risk in distribution networks and
demonstrate good corporate governance.
Although no one can predict the future, it seems clear that
blockchain will play an important role.
Originally Published by L2 Counsel, December 2020
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.