Are We Prepared for Blockchain Disputes?

Often associated with the cryptocurrency ‘Bitcoin’, blockchain technology is set to transform our current, typical software needs, by becoming more seamlessly fluid and, – where it is ever prevalent in an age where cyber attacks are a business’ worst nightmare -, more secure.

What is different about blockchain?

Rather simply, blockchain is a “chain of blocks” which mimics a ledger and has the potential of being publicly distributed and decentralised. It is supposedly incorruptible and can be programmed to record financial transactions and anything of value.[1]

This technology can enable multiple people to have access to the same document, they can change it as they go along, and it will be verified and updated throughout the entire system for those who have access to it to see. There is a block of evidence for every change in the system, so nothing can be tampered with, revised or deleted without being discovered.

A rather clever analogy made by William Mougayar[1] – a blockchain expert – compared blockchain to Google docs; he stated: “The traditional way of sharing documents with collaboration is to send a Microsoft Word document to another recipient, and ask them to make revisions to it. The problem with that scenario is that you need to wait until receiving a return copy before you can see or make other changes, because you are locked out of editing it until the other person is done with it. That’s how databases work today. Two owners can’t be messing with the same record at once.”

This is how blockchain works. It allows for a more seamless transaction, with less human error. It aims to remove intermediaries, making business transactions cheaper and simpler

He goes on to explain that this is how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again).

“With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people.”

This is how blockchain works. It allows for a more seamless transaction, with less human error. It aims to remove intermediaries, making business transactions cheaper and simpler; and where lawyers, brokers and bankers may panic over the fear of being replaced, this revolutionary software which has been around for longer than we knew, has begun making its way into the corporate sector.

But what can go wrong?

Smart contracts, where it has the advantages of eradicating the need of a third party, can come with complications, especially when involving multiple jurisdictions.

The globe is becoming more interconnected by the day and the beauty of technological developments is that it pushes those across continents, closer together. Blockchain is aiming to do just that as we can imagine the impact it will have on international business transactions for the better; from smart contracts to audits and taxes, there is an endless list of opportunities, however, there are apprehensions about its use and if it will manage to ‘seamlessly’ replace the traditional models we are used to.

Multiple laws in an interconnected world

Take business contracts, for example. Smart contracts, where it has the advantages of eradicating the need of a third party, can come with complications, especially when involving multiple jurisdictions. With different countries having different laws, regulations and approaches to contracts, liabilities, and ownership, how do we create a universal set of rules and laws to apply, which will be recognised throughout the blockchain system?

Speaking to Pépin Aslett, Barrister at St John’s Buildings, he comments on how embedding complex decision making in a binary matter may not always suit real-world situations.

“We know that as long as there are contracts, there will be disputes about contracts. So, what happens when things go wrong with a contract on the blockchain? This may be due to the blockchain itself containing erroneous code, bugs or incorrect data. It also may be due to ‘real world’ issues, such as: pre-contractual misrepresentations; a mistake; fraud; frustration; or a smart contract performing in an unexpected way in the view of one of the parties, due to an interpretation issue.

“The question which therefore arises is how best to deal with these situations? The traditional court route is costly and time-consuming. That is, if you even know which court you should be in and which law applies, with regard to cross-border issues.”

The present drive is firmly towards arbitration

Who would be to blame?

And where cutting out the middleman places its advantages, it can cause ambiguity during contract disputes. Smart contracts are simply prewritten computer codes which can be built on ‘permissionless’ blockchains, thus not only questioning the notion on if it truly meets the definition of what a ‘contract’ is, but also posing the question on how to deal with such disputes, if the contract is already pre-coded.

“The present drive is firmly towards arbitration”, explains Pépin. “This can itself take place using some form of ‘smart arbitration’, where the parties and the arbitrator place documents on the blockchain in relation to the dispute.  This way, an arbitrator can resolve claims in a way that is certain, quick, secure and cost efficient, as well as being confidential. The key to this process is to agree on an appropriate arbitration clause at the outset.

“In reality, smart contract disputes are likely to boil down to traditional breach of contract principles, but viewed through the prism of the blockchain. For example, what happens under an autonomous contract where one party wishes to ‘withhold payment’ to argue set off due to a breach of a different obligation by the counterparty?  Also, how will rescission, the cancellation of an agreement, work? Drafting will be the key here.”

Where arbitration is probably the best way forward in one sense, the obvious downside of not having a Judge decide a novel point is risk and uncertainty due to lack of judicial precedent.

Decentralised autonomous organisations (DAOs) run on smart contracts requiring little input from actual people; they are essentially lines of pre-devised code performing tasks like traditional companies, but where traditional legal systems require individuals and organisations – who have their own rights and rules – to participate in a transaction, DAOs “management” is conducted automatically. Who will be liable if something goes wrong? Who will be liable to such claims? This is something which the legal industry will need to address, and so we may expect a partial adoption of technology, with remaining oversight to ensure nothing truly goes wrong[2].

It will be interesting to see how these disputes are dealt with. As Pépin mentions: where arbitration is probably the best way forward in one sense, the obvious downside of not having a Judge decide a novel point is risk and uncertainty due to lack of judicial precedent. He concludes: “As to that, only time will tell.”

This is mildly scratching the surface with a small snippet of how blockchain will impact the legal industry. Privacy has also been a topical point. By enabling a smoother process, blockchain stores all relevant data – personal or contractual -, and remains reasonably transparent to ensure all needs are met and can be tracked in the future. This gives opportunities for data privacy issues to prevail, especially in situations where information about transactions and precise banking details must remain private. To tackle this, privacy-protecting blockchains may need to be devised.

Rebecca Herold, CEO of The Privacy Professor, expands on this issue[3]:

“Implementing blockchain does not fit neatly within most legal and regulatory compliance requirements that exist, and those working to meet compliance are likely new to blockchain and may not realise all the associated compliance issues […] Validating the security and privacy of blockchain is not a simple goal to accomplish.”

The healthcare sector, for example, will need to ensure that, even though blockchain can pseudonymously store patients’ information, it is still possible for someone to locate and digest such sensitive data.

With any innovative, new technology, a race to file patent applications and heated battles over IP rights typically ensues – and blockchain technology is no exception.

Traditional due diligence will also be set to change, and it will be important for transactional lawyers dealing with investment due diligence to be prepared for this. As reported by DLA Piper[4], “…there will be unique issues concerning ownership of data residing on decentralised ledgers and intellectual property ownership of blockchain-as-a-service offerings operating on open source blockchain technology platforms. These issues will need to be considered in the context of the business value proposition and competitive barriers to entry.”

And what about IP law and patenting? We spoke to Michael Casey on blockchain patent disputes, who stated: “With any innovative, new technology, a race to file patent applications and heated battles over IP rights typically ensues – and blockchain technology is no exception.”

When speaking to us (click here for the full article) Michael stated how efforts to standardise blockchain technology are already in the works, and once a sufficient number of these standards are developed, a patent war to see who gets credit for the various parts of the technology is almost inevitable. Those utilising a blockchain infrastructure may not know that the blockchain infrastructure may ultimately be patented by other technologists, and those technologists will want to be paid for it. The issue surrounding blockchain patenting is due to it being a development which can underlie the solutions to so many different problems, meaning Patent Offices in various countries are going to have to give increased scrutiny to whether there are yet unpublished patent applications that they do not yet know about that may predate the patent applications they are currently examining.

All in all, we can safely say there is a lot of uncertainty in this area and where some issues have straightforward answers, some will need rethinking prior to being fully adopted in the corporate legal sphere. Nonetheless, it is clear that we will see a shift in the way the business world works due to the advantages blockchain presents.

[1]     https://blockgeeks.com/guides/what-is-blockchain-technology/

[1] http://startupmanagement.org/2016/09/06/explaining-the-blockchain-via-a-google-docs-analogy/

[2] https://www.dlapiper.com/en/denmark/insights/publications/2017/06/blockchain-background-challenges-legal-issues/

[3] https://www.scmagazine.com/home/security-news/features/will-privacy-be-a-stumbling-block-for-blockchain/

[4] https://www.dlapiper.com/en/denmark/insights/publications/2017/06/blockchain-background-challenges-legal-issues/