The legal implications of Blockchain

Blockchain technology – a form of Distributed Ledger Technology, or DLT – is still being developed. But we can already identify several areas in which laws and regulations will play a major role in keeping financial institutions and customers safe and secure. Of the many aspects identified, there are three specific ones that top the list: the legal implications of Smart Contracts, the unchangeable and irrevocable character of Blockchain data, and of course, data privacy and transparency.

The contracts of the future

Blockchain technology has the power to act as a ‘virtual notary’. To illustrate, let’s use the example of transactions. With Smart Contracts, transactions may only be executed when all stipulated conditions have been met. Every step in every transaction is visible, traceable, verifiable and secure. On the surface, it sounds like a dream solution: there is no chance that a transaction will occur unless all the stipulated conditions have been completed.

But how can we ensure that Blockchain contracts still fulfil all of the basic requirements of a paper contract? According to Dutch law, a contract is valid if it fulfils three requirements: it must be definable, created by consensus, and must not conflict with the law, public order or morality. This is why all terms of the contract must be clear, and all parties must understand all the terms before agreeing to them. It is not yet clear whether Smart Contracts on the Blockchain will fulfil these requirements. That’s why further exploration and clear guidelines are needed.

Smart Contracts will probably contain far less text than a traditional contract. Legal terms will need to be ‘translated’ into programming language, which can be quite complicated and leaves a lot of room for error. For example: traditional contracts often contain terms like ‘reasonable notice’ and ‘best endeavours’. Since Smart Contracts won’t allow transactions until conditions are met, how do terms like this translate into actionable items that cover every possible situation?

In the matter of creating a contract by consensus, further challenges arise. Parties in a Smart Contract can be located in various places in the world, and have various levels of understanding of what transaction is taking place. It will therefore be difficult to ascertain whether every involved party clearly understands and agrees to every condition. Especially since they will be written in a Smart Contract’s programming language. To address this, a sort of ‘digital translation’ of the programming language, and thus an opportunity for clear expression of consensus, will be required in order to make the contract valid.

Unchangeable and irrevocable: the second Blockchain challenge

Of course, there are alternatives that make Blockchain more aligned with traditional agreements , but then, the most attractive qualities of Blockchain begin to fall away. For example: agreements in the Blockchain are unchangeable and irrevocable. Once made, all participants are required to meet their obligations. Again, on the surface this offers a lot of potential for the financial industry. But it can also cause issues. Both Dutch and international law have stipulations for circumstances that can nullify a contract without retroactive effect. When it comes to the Smart Contract on a Blockchain, it is unclear what effect this may have.

What’s more, under certain circumstances, current laws allow situations where a contract is voidable. When a contract has been declared voidable, with retroactive effect, essentially everything needs to be brought back to the state they were in before the contract was entered into. It is as if the contract never existed. Since Smart Contracts are unchangeable and irrevocable, it seems that this will no longer be a possibility, unless somehow stipulated in the original agreement and accounted for in the technology.

Further, there is the issue of insolvency and bankruptcy. In these cases, the involved party’s assets are blocked by the general bankruptcy attachment, and he/she loses the power to manage and dispose of his/her assets. If this party has agreements in the Blockchain, this could disrupt the agreements in place. So actions must be taken to address this if Blockchain is used for financial transactions.

Last, but perhaps most importantly, financial law is constantly changing. New regulations come into effect every day, and international law is constantly being updated. In the unchangeable and irrevocable world of Blockchain, this is likely to cause serious disruption. How will Blockchain accommodate important regulatory changes?

The third challenge: protecting precious data

No matter how the technology changes, protecting our customers’ personal data – and our own – will always be a top priority. But on the Blockchain, all data is decentralized, and all parties might have access to it. As we explore the business possibilities of the technology, data protection and privacy should be a top priority.

The European General Data Protection Regulation (GDPR) will take effect in May 2018. According to the regulation, when personal data is used for transactions, it involves the identifiable nature of people. In the unchangeable Blockchain, personal data is permanently stored, which interferes with several core principles of the GDPR. The regulation states that the processing of personal data must be limited to only what is necessary, and only for the purposes for which it is processed. One of Blockchain’s core features is actually that the ‘chain of blocks’ (containing personal data) will only grow. Thus, personal data will be stored, and will often not be relevant for other processes. Furthermore, GDPR indicates that personal data must be deleted to or corrected if it is incorrect, and that the person concerned has the right to limit the processing of his/her data. In the ever-growing, irrevocable Blockchain, this poses a challenge.

In a public Blockchain network, such as Bitcoin, it is currently hard to tell who is responsible for keeping and protecting data. In these situations, the Blockchain contains many nodes of information, often in many countries, with multiple owners, some of whom are anonymous. Unless there are regulations in place to stipulate the person(s) responsible for data protection, the waters become very muddy, indeed.

Continuing the exploration

Do these legal and regulatory challenges mean we shouldn’t be exploring the potential of Blockchain? Certainly not. The technology is already showing tremendous potential to take our industry into the future. These are merely some of the initial issues we should be exploring in parallel to our exploration of the technology. When Blockchain becomes fully developed, we won’t be able to simply plug into it and start offering products. We will first need to explore all of the legal and regulatory implications of doing so. As always, to ensure that we protect our customers and ourselves against any potential mishaps.

So, it’s not a matter of not evolving with the times. It’s only a matter of ensuring that our evolution is done with foresight, insight and a clear plan of protection. Whatever the future of Blockchain holds for our industry, we must also ensure that we protect our most valuable asset: our customers.