UK: Blockchain And The Law - An Uncharted Landscape

The financial and technological industries are coming together to explore the possibilities in blockchain, or distributed ledgers, the technology underlying the digital currency bitcoin. Blockchain offers the potential to become an essential component of the infrastructure for the Internet of Things. We explore some of the opportunities and challenges.

What is blockchain?

A blockchain is simply a database or ledger. Given its broad meaning, it can be a database of virtually any recordable information (for instance, the transfer of bitcoins). Simply, blockchains store data in "blocks", and "chain" them together to form a cohesive, unbroken record of that information.

The joint operation of two features in particular makes blockchain revolutionary. First, identical copies of the particular blockchain (or ledger) are stored on and accessed from many computers around the world - sometimes in the thousands or more. Any attempted addition or change to the information is authenticated by the entire network of servers, and any validated change to one ledger automatically updates the others. Second, together with this decentralised ledger system, the cryptographic technology that validates information stored and edited on the blockchain is said to make information kept on it extremely difficult to attack or corrupt.

The development of new trading infrastructure and trading mechanisms over the past 600-700 years has relied on the same broad pattern of technological developments, along with new communication chains leading to an expanse in trade.

Within new communication chains we include both

  1. Direct advances such as developments in maritime navigation allowing transportation of goods and
  2. Advances which go to the ability to widen relationships and communication, such as the development of double-entry ledgers and credit in Venetian banking circles in the 15th and 16th century. Each allowed a leap forward in trade

If the blockchain is indeed the missing link for the Internet of Things and the promise which it holds, the current cycle would be as follows:

Alongside these structural changes, legal developments have fostered and in some cases prompted wider developments:

  • Joint stock companies
  • Limited liability
  • Statutory recognition of insurers

This shared method of validating information largely dispenses with the need for a trusted authenticating third party for many types of transactions. Blockchain and associated technologies allow contractual counter-parties – without independent verification – to know 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.

Smart contracts and decentralised autonomous organisations

Arising out of the blockchain phenomenon are two further concepts.

  • So called smart contracts are coded instructions which execute on the occurrence of an event. These often use blockchain technology to record and execute transactions. While their common name is arguably a misnomer (they are not necessarily contracts in the traditional legal sense), their implementation can enable, for example, insurance monies to be transferred virtually immediately on the occurrence of a verified insured event (such as a delayed plane)
  • Decentralised autonomous organisations (DAOs) are entities which operate through the implementation of pre-coded rules. DAOs operate using smart contracts, and maintain their business records on a blockchain. Theoretically, once it is created and programmed, human input into its operation should be close to zero Why should blockchain interest you?

While these are early days for the wider-use of distributed ledger technology, predictions are that it will revolutionise everything from the operation of the finance industry to the trade of precious gems. Such technology could permeate through and across industries and be used for:

  • Identity verification
  • Near-instant money transfer
  • Recording of all kinds of property ownership (including real estate)
  • Transaction certification
  • Automation of contract performance
  • Verifying authenticity and origins of valuable items such as diamonds and rare musical instruments
  • Secure voting of all kinds, including for national politics

Insurance

The commercial insurance market has been slow to adapt to digitalisation in all forms: perhaps a reflection of its traditionally driven nature.

However, even if (as seems likely) existing structures are embedded the myriad of inter-connected relat ionships involving brokers, reinsurers, third-party coverholders and binding authorities - all sitting on top of or parallel to the central insurer-insured relationship - may become fertile hunting grounds for disintermediation. We see four potential areas of opportunity:

1. Administrative and process functions. The nature of many contracts, with a variety of parties and obligations being impacted by single triggers, is ripe with potential for distributed ledgers.

2. The fundamental transfer of risk from the client to the insurer's balance sheet. This area, involving complex assessments of risk and agreements as to risk transfer may be less suited to a distributed ledger or use of a DAO, but the use of such platforms alongside wrap-around contactual arrangements still offers opportunities.

3. Niches of risk transfer such as parametric insurances (e.g. crop insurance triggered by pre-determined weather data parameters) or Insurance-Linked Securities have obvious potential.

4. Hybrid products which, utilising the Internet of Things, use data through the term of a policy to update premium allocation.

As with the wider picture, if used as an execution tool then the existing legal and regulatory framework could likely be utilised, albeit that care needs to be taken over issues of ownership, responsibility and potentially jurisdiction and dispute resolution.

If a deeper contractual basis or allocation of status is given to the DAO, then any such proposal would need to be carefully structured to fit within the regulatory landscape.

Challenges

Much attention has been paid to the challenges posed to the adoption of blockchain and associated technologies within the existing regulatory framework. These are important considerations certainly, but a creative approach to the fundamental nature and status of the organisms and platforms created by blockchain, DAOs and smart contracts is warranted. Once these have been determined, the detail of the regulatory position will follow (the UK Government has published an extensive report which touches upon these issues prepared by its Chief Scientific Advisor - see Distributed Ledger Technology: beyond block chain). We outline some of the challenges below.

Legal issues

The use of blockchain, DAOs and smart contracts raises significant legal questions, the answers to which cannot be determined with certainty in the abstract. As the technologies become more widely used, legislators, regulators and courts will have to turn their minds to these issues and provide a proper legal framework within which blockchain can be utilised. Some key legal issues are:

  • Jurisdictional and applicable law issues - where servers are decentralised and can be spread around the world, pinpointing where a breach or failure occurred (and taking the appropriate cross-border action) may be complex
  • The legal status of DAOs as entities – where the entity is essentially self-governing software engaging in or facilitating commerce, what legal status will attach to DAOs? Are they simple corporations or something else?
  • What, if any, is the liability of DAOs and their creators? Who or what is claimed against in the case of a legal dispute?
  • The legal enforceability of smart contracts – we consider the wholesale adoption of the phrase to be unhelpful, as the term 'contract' invites the traditional associated concepts such as offer and acceptance, certainty and consideration, which are unlikely to be relevant to many coded programs

For some, such questions miss the point of the technology – rather, DAOs are seen as operating so as to render traditional concepts of ownership and liability redundant. However, we consider that this perhaps more utopian view ignores the reality that coding may suffer from errors, or hosting platforms may fail. It also fails to consider the impacts of fraud at any point in the DAOs creation or operation. Courts and regulators across the world are unlikely to allow the wholesale adoption of technology which bypasses established oversight.

There are a number of possible ways to approach the appropriate structure, dependent on the nature of the transaction.

The easiest solution may be to agree a wrap-around contractual agreement in contractual terms – perhaps a Master Supply Agreement for example – incorporated as the prevailing terms for the linked DAO. Alternatively, a split-contract could be used which incorporates elements of both a codified program and more traditional contracts, thus linking the agreement (established pattern) and the execution (non-established pattern).

In respect of the status of the platform for the DAO itself, the most straightforward option would appear to be for contracting entities to simply adopt a free-to-use platform with an agreed code. Seeking to apply a traditional view, is the DAO itself so very different from a road network used to transport goods? That network does not form part of the contract itself, but it is an implied necessity.

This of course raises questions as to the recourse in the event of technical problems and wider framework. For those wishing to enter into a more determined, traditional framework one option may be a free-standing Protected Cell Company (see box to right) type structure which is responsible for the maintenance of the DAO and for fulfilling the relevant legal obligations. The content and purpose of those DAOs would be the subject of wider agreement but the DAOs themselves could operate as self-policing and operating units.

The combination of these types of structure – separating the blockchain infrastructure from the contractual agreement leaves the DAOs or smart contracts as essentially execution methods. Again, therefore, to adopt a traditional concept, the smart contract is akin to a Letter of Credit. (see box to right) – counterpart performance is triggered automatically by the relevant act.

While uncertainty remains, the courts will seek to give effect to some kind of oversight and legally recognised status to DAOs and distributed ledgers. Continuing the road analogy, whilst we now take for granted public ownership of the road network this has grown out of a network of privately funded and managed roads dating back to turnpikes on key routes.

At this stage, however, flexibility remains and we consider that, certainly, in England, with its long tradition of the common law adapting to technological changes, an opportunity exists for those willing to furrow new ground and to take a creative approach.

Regulation

From the rise of e-commerce in the '90s to the current debates around how the world will adapt to driverless cars, the adoption of new technology gives rise to complicated regulatory issues. As already mentioned, legislatures will have to consider what legal status to grant to DAOs.

Further, the potential for anonymity on some distributed ledgers may complicate anti-money laundering compliance and taxation regulation, while consumer protection laws will need to be revised just as they were to accommodate the rise of e-commerce.

Protected Cell Companies (PCC)

Commonly used to establish turnkey captive insurance companies, PCCs are a corporate structure in which a single legal entity is comprised of a core and several cells that have separate assets and liabilities. The PCC has a similar design to a hub and spoke, with the central core organisation linked to individual cells. Each cell is independent of each other and of the company's core, but the entire unit is still a single legal entity.

Could such an organism be utilised for DAOs, so that questions of responsibility for its operation and its legal status are hived off to the entire PCC unit, while allowing each to function separately and autonomously?

Letters of Credit (LOC)

An LOC is a document, typically from a bank, assuring that a seller will receive payment up to the amount of the LOC, as long as certain conditions have been met. In the event that the buyer is unable to make payment on the purchase, the seller may make a demand for payment on the bank. The bank will examine the demand and, if it complies with the terms of the LOC, will honour the demand without looking at the detail of the underlying contract or the merits of any dispute.

LOCs are separate from the underlying transaction and English law recognises such a distinction – only in the instance of fraud will English courts look beyond the bare terms of the LOC.

Other issues

Other challenges to the wider adoption of these technologies include:

  • Mistrust of bitcoin related technology due to dark-web and criminal connotations
  • Questionable capability for smart contracts to accurately execute complex instructions
  • Fear of disruptive potential can often lead to adoption resistance
  • Privacy and data-security on public blockchains
  • Software compatibility issues

Glossary of terms

In this fast-moving area of innovative technology, there is little consensus on the precise definitions, even of key terms (such as the term 'blockchain' itself).

  • Bitcoin – a finite digital currency created and held in purely electronic form. As with most modern currencies, it has a fluctuating exchange rate
  • Blockchain – in a narrow sense, the database of every bitcoin transaction ever made. More loosely, the term is used to describe the style of database, which sees information stored in a series of "blocks" and "chained" together. Copies of the database, or 'ledger' are stored on a number of servers in a decentralised fashion
  • Decentralised Autonomous Organisation or DAO (also known as decentralised autonomous corporations) – a digital entity which, once pre-coded to function in a certain way, operates with minimal or no human input
  • Disintermediation – the process of reducing the use of or need for intermediaries. In this context, refers to the reduced need for trusted third party intermediaries to validate and facilitate transactions, especially in the finance industry
  • Distributed ledger technology – see "blockchain" above. The broader use of the term blockchain. Blockchain is one example of distributed ledger technology, although the terms are often used interchangeably
  • Internet of Things – refers to the increased connectivity, or the networking of previously unconnected items embedded with technology to open communication streams between them. For example, a smart phone "talking" to a home air-conditioner and, based on the phone's location, instructing it to begin heating a house for the owner's arrival
  • Smart contract – coded instructions which execute on the occurrence of an unequivocal event. The common example of a "primitive" smart contract is the simple vending machine. On the insertion of sufficient funds, the machine will release the requested item. Questionable whether these are truly contracts or not

Blockchain And The Law - An Uncharted Landscape

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
James A. Contos
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.