Blockchain: five profound legal impacts

Cornelius Grossmann

Cornelius Grossmann,

EY Global Law Leader

www.linkedin.com

The advent of blockchain technology not only has the potential to disrupt entire industries, but raises legal questions that present both risks and opportunities

Lawyer coding in an old law library

The pace of disruption and advent of innovative technologies is accelerating and has already triggered a seismic shift across industries. Responding to this disruption is arguably the most important strategic imperative facing companies today, and not least across financial services where it is driving fundamental change.

At this year’s EY Startup Challenge we focused on blockchain technology — one of the most transformative disruptors in today’s business landscape. Blockchain could indeed potentially revolutionize the way we do business, and understanding the related legal questions will take time and preparation.

What is blockchain?

Blockchain is a distributed database that maintains a continuously growing list of data records secured from tampering and revision. While the internet is a world-changing medium for information exchange, blockchain is the first native digital medium for peer-to-peer value exchange. Like 3-D printing, blockchain promises to build the kind of critical mass that produces explosive disruption, impacting business models, supply chains and customer relationships throughout the global economy.

While we don’t know all of the questions blockchain technology will raise, some of the potentially far-reaching legal implications are already emerging. Here are some pertinent examples that already demand consideration:

  1. Trust and security: By harnessing blockchain, trusted transactions among networked peers are derived from nearly unbreakable encryption, which validates all current and historical transactions in a given chain. This level of security could go as far as to eliminate digital rights theft by stamping out inept or malicious insiders. In the future it will be much easier for lawyers to facilitate proof of ownership and related due diligence in transactions.

  2. Publishing digital works: Publishing digital works — such as movies, music or books — in a blockchain environment could reduce or even stamp out piracy. For example, if the use of a music file anywhere in the world is automatically recorded by a public blockchain, and the transaction can be validated, digital rights theft will become almost impossible. While lawyers may be less involved in piracy-related disputes, it is likely that legal advice will still be required to guide all parties in agreeing terms before works are published. There could even be greater demand for legal advice during the transition between “analogue” transactions and blockchain.

  3. Privacy vs. transparency: Theoretically, blockchain allows businesses to better document transactions. It is envisioned that future blockchains will maintain identity transparently, potentially exposing transactions that today are private. This plays into the ongoing public debate about where to draw the line between privacy and transparency, and could require lawyers to navigate new territory. For example, blockchain could make a bank’s trading exposure public. And participants in a private network may have concerns about other participants having access to all available data.

  4. Regulatory change: Blockchain disruption will drive significant regulatory change across multiple industries and sectors, including capital markets and payments businesses. Given that assets can be moved securely and privately without a trusted intermediary — like a bank or government — the impact on financial services could be extensive. Separately, blockchain technology may be able to validate revenue earned and tax paid openly and in real time, exposing more corporate information to public scrutiny. In a world where every transaction is recorded in real time, illegal businesses will struggle to survive.

    There is no established authority in place to respond to these potential developments, and governments are only just beginning to explore the possibilities. It is difficult, therefore, for businesses and legal teams to begin to prepare during this intermediary phase. The most prudent next step is to clearly identify the risks and challenges before developing a blockchain road map. One thing is clear, however: the regulatory frameworks of today probably won’t fit the business models of tomorrow.

  5. Smart contracts: Pay-for-performance agreements could be automatically enforced in many industries. In the context of shipping, for example, a sender could agree to pay US$25 for a package received by 10 a.m. the following day, and go on to specify incremental lesser sums for later arrival. Currently, contracts that include service level targets in this way require the beneficiary to actively enforce failures. Automatic enforcement, however, would remove the human discretionary element. In this way, if smart contracts become mainstream, they could challenge traditional contract law and require lawyers to draft contracts in software programming languages. This development would have profound implications for the training, development and recruitment of legal talent. Should your business now be recruiting lawyers who can code?

Legal impact of blockchain – law files on a desk

Blockchain is developing much faster than anyone expected and has gone from an unknown technology to having more than US$1.1 billion of venture capital invested in it. Proponents say it will revolutionize many industries, and as governments adapt the law to meet tomorrow’s technology, the legal implications pose numerous risks and opportunities to business.

How will business strategies, products and services look and behave in a blockchain-enabled world? Unless business leaders start thinking now about products and services in the context of a blockchain-enabled world, they will not adapt quickly enough to remain competitive with those that do.

 

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