Blockchain: Need for standardised definitions
Blockchain and associated distributed ledger technologies (DLT) will storm the world of international commerce, boosted by the Covid-19 pandemic, new guidance for lawyers [1] has predicted.
Produced by the Tech London Advocates’ blockchain legal and regulatory group and the Law Society, it explains the role smart contracts, cryptoassets and blockchain might play in future legal practice.
It included a list of recommendations for regulation relating to DLT. Experts from major firms such as Bird & Bird, Mishcon de Reya, Baker McKenzie, Herbert Smith Freehills, Clifford Chance, Allen & Overy and Wiggin, provided detailed technical guidance and suggestions as to best practice for lawyers.
These included standardising data governance, such as clarifying what GDPR compliance looks like for developers of blockchain technology; devising clarity on how existing copyright case law should be applied to DLT; guidance from the judiciary as to the effectiveness of on-chain dispute resolution; and legislation clarifying the detailed legal meaning of cryptoassets.
The section on the commercial application of blockchain gave the example of a private blockchain – as opposed to a public one that anyone can view – being used by a supermarket and multiple client farmers supplying it with products.
The supermarket would act as a trusted intermediary, holding the data, and farmers would access the blockchain via an app to send their fresh milk to the depot.
Each palette of milk containers would have an identifying chip making it easy to track and trace. Cameras linked to the blockchain would record pick-up and delivery. If there was a problem with the goods, it would be easy to locate their whereabouts and recall them.
The author concluded: “There is no doubt that blockchain is not the solution for every kind of problem.
“However, in some specific cases, a private blockchain may be useful because the technology makes it hard to edit data once it has been recorded on the blockchain; and, by virtue of the use of digital signatures, helps to bring together disparate parties for better coordination and sharing of data.”
The advantages of smart legal contracts included the potential for greater transparency of contractual terms, efficiency in automating performance, and scope for using novel dispute resolution mechanisms such as pre-authorising the transfer of funds to limit the need for post litigation enforcement.
There were disadvantages too, such as automating things that ought not be automated – like provisions parties might wish to retain flexibility to amend from time to time – or applying an unsuitable contract for a given transaction.
It suggested that smart contracts were most suitable for transactions that already occurred at scale using standard-form documents, operated within a range of known variables and produced deliverables that could be accommodated by the digitisation process.
The report warned: “Legal counsel may be exposed to liability when facilitating a digitised contract or transaction where full consideration has not been given to the digitisation and transaction flow process, and unintended consequences arise.
“We note that there is no judicial determination on these specific points as at the date of this report.”
The general problem with DLT was that different nodes within the network from which records and transactions were passed could react quicker than others.
This flaw could be manipulated by fraudsters so as to confuse the ledger as to which transactions had occurred, in what order. If this happened, the transfer of payment could be rejected “and the supplier, having already shipped the goods, would be out of pocket”.
Awareness of this flaw meant that transactions should take place only on DLTs that validated the order of information recorded. Blockchain – so-called because it records blocks of data in chronological order – insured an irrefutable chronology was established and maintained.
Anne Rose, an associate solicitor at Mishcon de Reya, founder of the group that produced the report, pointed out that definitions used in relation to DLT were inconsistent and needed to be standardised.
Simon Davis, the Law Society’s president, added: “The publication of this report will provide a clear framework and much needed guidance on the use of blockchain in the legal services sector.
“Technology underpins innovation in legal services and plays a critical role in driving the post coronavirus recovery across all sectors of the economy.
“It is considered that 2020 [and] 2021 are ‘breakout’ years for DLT, and the pandemic has forced businesses and governments to re-evaluate their service and business models more fundamentally than ever before.”
The report adds flesh to the bones laid out in the statement [2] by the UK jurisdiction taskforce of the LawTech Delivery Panel – chaired by Sir Geoffrey Vos, Chancellor of the High Court – which declared that cryptoassets should be treated as property in law.