Blockchain issues need to be understood and addressed
Many people have heard mention of blockchain, often in connection with reference to cryptocurrencies (notably Bitcoin), but increasingly more broadly as a tool for providing a wide range of digital applications, eg secure file storage, protecting against voter fraud, ID verification.
There is, however, a great deal of ignorance as to what blockchain actually is, the full extent of its benefits and limitations, and the potential legal issues involved with its use writes Quentin Golder, Partner, Birketts LLP.
So what is blockchain? It is a digital ledger, distributed over a network of computers (nodes), which is protected by cryptography.
The ledgers can be added to with a new transaction (or information to be stored), but the existing information (stored in blocks) cannot be altered or edited.
Each new block is time stamped and connected to the blocks that preceded it. When a new transaction takes place it is authenticated across the network by ‘miners’, before being recorded as a new block, at which point it is available to be viewed by other members of the blockchain.
The benefit of the system is that the alteration to any block would invalidate the data in the entire chain of blocks, therefore serving as an impediment to hackers.
The computer power required to try and hack all blocks in a blockchain has (in theory) made the idea of hacking a blockchain seem impossible.
There is no theoretical limit to the number of blockchains that could be created. They can be public or private, with added restrictions imposed on particular participants. Hence they can be quite flexible.
That flexibility has led many to consider the variety of possible uses the technology can be used for. To date that has been most widely in relation to payment mechanisms (eg cryptocurrencies) and banking related system, however its application is potentially much broader.
The technology has application in any number of different situations where highly protected information storage and verification would be beneficial.
The keys to the value of blockchain technology are (a) the decentralised nature of the network on which it can operate (eg multiple nodes across multiple jurisdictions each storing a record of each block) making it more difficult to lose, alter or destroy data, and (b) immutability, ie the level of encryption used, and the decentralised nature, making the whole system very difficult to hack, both because any attempt to verify an invalid transaction would be visible to all in the blockchain, and because a hacker would need to control more than 50 per cent the processing power of a widely dispersed network in order to be able to verify an invalid transaction.
While blockchain has many potential uses, there are a range of legal and ethical issues involved with its use, many of which have not yet been fully explored. They include:
The data contained in a blockchain might well comprise personal data. The dispersed nature of a blockchain network means it could well cross multiple jurisdictions. How are cross border transfers to be handled? Which data laws will apply? Who has ultimate responsibility for the potentially huge stores of data held? How will access to that data be restricted?
One of the attractions of blockchain technology is that it can be used (in the case of cryptocurrencies) on an anonymous basis. Individuals and entities holding the relevant ‘keys’ to complete a transaction can hide behind those keys. Hence cryptocurrencies have been utilised extensively as a payment mechanism for illegal activities on the dark web and beyond. Governments are likely to continue to look for any mechanisms available to try and prevent such activity.
Where a blockchain is created with nodes across multiple jurisdictions, issues arise as to what laws apply both to those operating the blockchain, and rights of recourse of users, who seek some form of redress.
Cryptocurrencies, for example, are illegal in certain jurisdictions, so people hosting nodes, or acting as miners, in such jurisdictions are at risk. Given any transaction within a blockchain could potentially fall under the jurisdiction of each node in the relevant blockchain, there are multiple jurisdictional issues to consider. At the very least amongst users/participants, it is essential that the relevant governing law is clear so there is an identifiable forum for any disputes.
In this day and age when there are increasing concerns about the environment, and energy usage, the amount of computing power, required to run blockchain networks can be huge. Morgan Stanley estimated that the Bitcoin blockchain alone would use as much power in 2018 as the entire nation of Argentina. PowerCompare estimated in November 2017 that Bitcoin’s then current estimated annual electricity consumption stood at 29.05TWh, which was the equivalent of 0.13 per cent of total global electricity consumption, which in turn meant Bitcoin mining used more electricity than 159 individual countries. That’s just Bitcoin. If the blockchain technology becomes widely adopted in around the world across multiple platforms, those numbers could be dwarfed.
Allocation of risk
Where blockchain is used for trading purposes, what happens if trades are not settled correctly? One of the potential problems with public blockchains, is the difficulty in turning them off. Private blockchains controlled by a limited number of persons or entities can in theory be closed down in short order.
Public blockchains however are much more unwieldy, can encompass a broad network across multiple jurisdictions, and cannot simply be turned off. While that is part of their appeal, ie, they are robust, if a blockchain platform has any form of malfunction, that could be problematic.
Who is liable in that situation? The entity managing the platform? Should it simply be a risk of those utilising the blockchain?
Blockchain technology is here to stay, and its application is certain to be broadened in the years ahead. We are still however at an early stage in dealing with the range of legal issues that will arise as a result of its continued adoption.
To find out more, call Quentin Golder on 01223 326586 or email quentin-golder [at] birketts.co.uk