Blockchain Basics and Top 3 Legal Issues

Blockchain has been considered to be the next big thing for a while now, and to be sure, the selling points are attractive. The ideas of cutting out a middleman, having immediate transactions, increased security, and decentralized authority and risk all sound like time and cost savers to business owners and customers alike. However, as it is a new technology, there are going to be some legal concerns and ambiguities.

Before we can understand the legal issues surrounding Blockchain, we first need to have a basic understanding of what Blockchain is. Blockchain eliminates reliance on a central system and allows direct peer-to-peer transactions, which cuts time, money, and risk. These direct transactions are grouped into blocks consisting of all the transactions that have taken place within the last 10 minutes. Each block is validated by a consensus of the members of the Blockchain network with high computing power. The block is then added to the chain of previously validated blocks in chronological order. The Blockchain is immediately updated ad distributed on a public ledger for all to see, which aides in accountability and transparency. Once a block is added to the chain, the data is almost impossible to alter because there is no central point of vulnerability, so any attempt to hack the data is easily detected and prevented.

Blockchain may be more secure than a central system, and it could potentially save you time as well as money, but there are some legal concerns you should be aware of before using Blockchain for your business. Here are just a few:

  1. Jurisdiction. Due to the decentralized nature of a Blockchain, members can be located anywhere and it can be difficult to determine which jurisdiction should apply if a legal issue were to arise. Each transaction in a Blockchain could potentially fall under the jurisdiction of the location of every member in the network.
  2. Confidentiality. The distributed ledger technology (DLT) of the Blockchain allows for security and transparency, but its transparency can also cause concerns. When new data is added to the Blockchain, it is almost impossible to alter and this creates concerns when that data can reveal personal information. The banking sector also has strict laws about secrecy in banking, which would be problematic with Blockchain.
  3. Smart Contracts. Another key value-add from the Blockchain technology is smart contracts. Smart contracts utilize “if this, then that” statements to automate transactions when certain key events occur. You should be wary though, since smart contracts are just computer codes, there may be enforceability issues when analyzed in the context of traditional contracts. Another issue may occur if there is a dispute regarding the contract since there is likely no arbitration clause due to the decentralized nature of Blockchain. In the interest of protection, you should ensure that there is a dispute resolution provision in the smart contracts you use.

Blockchain is gaining in popularity at the moment and has the potential to be an integral part of the way transactions are done in the future, but like all new technology and innovations, there is great risk and uncertainty involved in the beginning. Before there is more regulation and the gambit of potential problems have been encountered, Blockchain in a legal context will continue to be a grey area. It is important to proceed with caution and be aware of the potential issues before choosing Blockchain for your business.

Just like the domain name system (DNS), drones, and other emerging technologies, the blockchain along with cryptocurrency (e.g. Bitcoin) is not going away.  In fact, it appears to be gaining popularity as a technology infrastructure and financing tool, among other things.  The law, including in the form of regulation, will undoubtedly drag behind, but early adopters would be well-served to understand the legal implications of their actions as they navigate what truly could be the biggest thing since the advent of the Internet.

Article contributed, in part, by University of Texas law student Vincent Reed Hash.  Published by Hall Law attorney Brian A. Hall.


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