Legal Aspects of Blockchain

Innovation and the market are almost always ahead of legislation. That is of course logical, but it is important that the distance between innovation and legislation does not become too great.

In this article we provide an overview of the legal aspects that play a role in the blockchain.
This is a playing field of innovative people/companies and lawyers who have or are gaining knowledge of the new subject matter. It is important that the knowledge is ultimately incorporated by the legislator into legislation that is practically useful for the user and supplier of the new developments. Realizable supervision is indispensable in this regard.

However, the basic idea should be to create ”trust” among users and that the legislator gives Blockchain time to develop further as a reliable means of processing transactions in an easier and more secure way in the future than now via internet is possible.

This requires cooperation between developers, lawyers and legislation on a national and international level.

What is Blockchain

A blockchain is a system that can be used to record data. This can be, for example, transfers such as those that are possible at a regular bank, but can also contain deeds of ownership, agreements, personal messages or other data. The special thing about the blockchain is that this is possible without a central authority, so that falsifying the recorded data is not possible by corrupting one central point.

A blockchain consists of a chain of data recorded and combined in the computer or on the internet, called blocks. The chain of data, of the data, is determined by the order in which the data is added.

A blockchain is a distributed database, which means that more parties, operating from their node, have a copy and are working on maintaining the chain, and checking each other. A blockchain can be public, which often goes hand in hand with the ability for anyone to act as a node. This requires special provisions to provide protection against manipulation and counterfeiting. A blockchain can also be closed, where an authority or fixed rules determine who is or can become a node.

Which elements play a role in achieving proper legislation and supervision in the ”Blockchain World”?

1. Creating trust

Blockchain is the technology behind the cryptocurrency. This is an unknown world for many people. Due to the volatility of this cryptocurrency and the fact that there are many ”cowboys” working in this world, there are many people who struggle to believe in this technique. This has to be done by being patient, by creating a good ‘use case’, but above all by continuing to give explanations.

Realizing workable legislation with proper supervision is also an important part of realizing this trust.

2. Smart Contracts

Blockchain Technology offers, among other things, the possibility to implement ‘smart contracts’. A so-called ‘consensus protocol’ is then laid down in the code. It follows from this protocol that those involved agree to the implementation of subsequent actions, if certain conditions are met. The subsequent actions are performed by a network of computers, without the risk that one of the parties involved will not comply with the agreements. Because the tasks are performed automatically instead of manually, the speed of the transaction is increased and the number of errors due to human actions is reduced. In order to facilitate these digital agreements, it is relevant that the network of computers is continuously available. The unavailability of one of the computers in the network could otherwise ensure that a transaction does not take place or does not take place on time, with all the associated consequences. The contractual agreements regarding the exploitation of this network of computers are therefore important.

In addition, a ‘smart contract’ also raises other legal questions, such as:

  • When is there a consensus?
  • Is there the same ”level of understanding” on both sides of the transaction? After all, transactions can take place worldwide.
  • When does an automated transaction qualify as a legal agreement?
  • What are the legal consequences if the underlying technology of a smart contract contains errors (for example, coding errors) and who is liable for this?
  • What happens in the event of insolvency and bankruptcy?
  • How do we deal with changing legislation at both national and international level (financial and legal)?

 

It will be clear that it is important that the legal and regulatory aspects of the smart contract options are already considered at the ‘front end”, during development. This means ”forward thinking” and not ”thinking”.

3. Data Protection

(Privacy) and Transparency
In a public blockchain network, there is currently no clearly identifiable party or person responsible for protecting and preserving data. In such situations, the blockchain contains a large number of information nodes, which are often spread over several countries and managed by several owners, whether anonymous or not. Without regulations that clearly prescribe who is responsible for what, it becomes very opaque.

There are already lawyers who argue that blockchain conflicts with privacy rules (such as those that apply from 21 May 20018 within the EC). One possibility would be to not process personal data within the blockchain but outside it.

It is important to assess the privacy aspect already during the design and development of the blockchain and not afterwards.

4. Multiple countries with different laws and different supervision

Blockchain crosses borders. This while the legislation and supervision per country or community (eg EC) is determined. To achieve the necessary trust, good usable applications are needed, but also applicable and verifiable legislation by regulators. This will have to be coordinated in the coming years to make blockchain technology truly possible worldwide. A big challenge!!

Conclusion

Do these legal aspects mean that we should not take advantage of the opportunities that blockchain offers us? The technology is still in its infancy but already shows enormous potential. For lawyers and legislators, these are some of the hurdles to explore in order to become familiar with the technology itself. Much can be achieved in the coming years by collaborating with the developers. It is important that developers of new Blockchain applications take the above legal aspects into account during the development process. If all this succeeds, trust can be created step by step and proof can also be provided with so-called ”use cases”.