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Blockchain’s Legal Issues – Part I

This week our focus shifts to a topic buzzing about the modern world. We have written on numerous occasions about cryptocurrency, but we have not discussed more pointedly the technological mechanism that yields it – i.e., the blockchain.  A complex, decentralized technology with the power, accuracy, and security to replace traditional financial systems, blockchain is the process that gives cryptocurrencies their true mechanism and value.  Its international scope can pose jurisdictional questions, its decentralized nature can puzzle tort plaintiffs, and the enforceability of “smart contracts” is an issue of first impression for most courts.  Additionally, lines must be drawn with regard to intellectual property.

To provide a brief background, the blockchain is the structure by which value is produced and conserved in cryptocurrencies.  Through a complex system of checks and balances, rewarded for solving algorithms, “miners” validate transactions by mathematically verifying them against previous transactional history of the asset in question. A “block” is created when transactions consolidate after nodes in a given network unanimously corroborate their veracity. From the block, the “miners” compete to solve a highly complex algorithm; the winner receives a coin and the block is added to a “chain.”  An innovation has thus emerged onto which legal institutions must overlay their concepts.

Firstly, blockchain disputes run up against jurisdictional issues. The ubiquitous and decentralized nature of the blockchain requires careful consideration of the relevant contractual doctrines.  Applying the rules of whatever jurisdiction in which each node transacts would pose two problems: (1) the location of the transaction in question would be incredibly difficult to pinpoint; and (2) requiring compliance with every single potential location’s rules would be overwhelmingly unwieldy.  Therefore, choosing a governing law for the entire network is essential to ensure certainty.

Secondly, the decentralization of the system leaves some liability questions unanswered.  Because there is no central authority to control or stop its functioning, it is never clear where to place liability.  There are networks that require “permission” to partake in, and these do have an authority which can stop the system in its tracks, but whether this activates liability has yet to be tested.  As a result, those seeking liability must carefully consider each and every participant in the given dispute.

Thirdly, the blockchain deals with “smart contracts” rather than traditional contracts.  These are contracts that are automatically executed upon certain encoded criteria are satisfied.  Since the main purpose of the blockchain is to decentralize authority, they might not be provisions for an arbitrator to resolve the disputes. Automatically executed contracts leave unclear how the legal notions of capacity, apparent authority, offer and acceptance, consideration, and certainty apply.  For now, though some countries have chosen to accommodate this technology, however there should be a dispute resolution provision.

Fourthly, lines once blurred have recently become clearer with regard to property delineations in blockchain.  Blockchain patent owners will want to capitalize not only on their technological innovations themselves, but on also on the underlying data set.  Tailoring blockchain code to meet a certain customer’s requirements could either result in the customer demanding to own the technology himself or herself, or limit the vendor’s ability to use it in another way that might disadvantage the customer.  However, the uniqueness of blockchain technology bends toward a shared ownership of its very own foundational code writing as well.  In other words, shared IP rights rather than centralized rights.

At our firm, we are proud discuss prevalent issues and their legal ramifications. We would be delighted to set up a free initial consultation to discuss the relevant internet, technology, business, or intellectual property laws.