Blockchain: Dissecting the Legal Issues
News    ·   30-09-2017

AUTHOR: General

Blockchain, Bitcoin, ICOs; these are all interrelated terms that have dominated the news and rocked the virtual world as of late -  but what do they actually mean? Blockchain first emerged as the technology that underlies the cryptocurrency ‘Bitcoin’.  It is a digital, decentralised record of all transactions that have occurred across a network.    However, if blockchain is just another technology, why has it generated so much hype? 

Certain aspects of blockchain raise novel legal questions.  These aspects are discussed further below:

Jurisdiction and Governing Law

Blockchain is a decentralised (or distributed) record of data stored across different nodes.  The Blockchain system contrasts greatly with most database systems that are presently available.  Currently, most systems require the intervention of an intermediary institution and data that is required to form part of these systems is stored data on a centralised server.  Conversely, the nodes involved in storing data on a blockchain ledger could be located all over the world. 

The legal issue surrounding jurisdiction lies in the fact that, particularly in respect to public and permission-less blockchains where participants in the blockchain are not controlled, it may be the case that one jurisdiction recognises certain laws which other jurisdictions do not, in terms of ownership of property for example.  This implies that any transaction that occurs across the blockchain network must conform to an absurd number of laws and regulations, some of which the parties to the transaction would not have even contemplated the transaction would encounter.  Clearly if this were to be the case, developing blockchain based technologies would grind to a halt.  Moreover, due to the fact that blockchain transactions occur in a pseudonymous manner, locating each and every node involved in the transaction, and then identifying where each node is located geographically may be a near impossible and incredibly onerous task. 

In order ensure legal certainty with respect to the applicable jurisdiction and governing law, particularly should a dispute arise between the parties, the parties should be sure to include a jurisdiction and governing clause within their agreement.

Legal Interest

In order for a party to form part of a legal proceeding, it must establish that it has the locus standi to do so.  The ability to store information on a decentralised network through blockchain has introduced the concept of Decentralised Autonomous Organisations (DAOs).  DAOs are operated through rules that are encrypted within smart contracts.  

DAOs do not have a clear and precise legal status because they are currently not directly regulated.  They are not (strictly speaking) companies; they need not have a memorandum of association, for example. Once a DAO is created through the execution of a smart contract, human involvement is limited as the DAO’s management and control is automated under the smart contracts and decisions taken on the operation of the DAO are carried out by collective votes. 

The uncertainty surrounding the classification of a DAO and the abstract concept of these organisations raises various idiosyncratic legal challenges.  These challenges need to be addressed in order to answer basic legal questions such as the question as to whether or not DAOs have legal interest to appear in proceedings of a case, should one be brought forward.  Moreover, if it can be established that the DAO does indeed have legal interest to appear as a party, where would liability fall if there are no human and identifiable shareholders? 

Smart Contracts - Enforceability & Source Codes

The term ‘smart contract’ could refer to two distinct definitions.  Firstly, a smart contract could refer to a legal electronic document that sets out the parameters of an agreement between two or more parties.  In this way, a smart contract is seen to be similar to a traditional contract, whereby the contractual terms agreed to between the parties are governed by law and executed over a digital agreement.  If a smart contract is taken to fall under this definition, Maltese law already governs certain aspects of these contracts under the Electronic Commerce Act (Chapter 426 of the Laws of Malta), albeit that these laws may need to be reviewed in order to reflect the unique issues brought about by blockchain.

However, the term ‘smart contract’ may also be used to describe the underlying source code that was prewritten in order for the contract to come into existence in the first place.  In terms of intellectual property, the original source code that was initially written is owned by its programmer.  But what happens should the contract be rewritten, to include a jurisdiction and governing law clause for example?  Current intellectual property laws stipulate that a licence must be granted to utilise intellectual property that belongs to another in order to avoid infringing the programmer’s rights.  This implies that every time a smart contract is required to be updated or renewed, a new licensing agreement would have to be agreed to between the parties, slowing down the transaction processes which Blockchain seeks to speed up. 

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