Some initial thoughts about blockchain and the law

For those who have not yet encountered this particular creature: blockchain is a distributed online ledger of transactions made possible by internet protocols and strong cryptography. It is best known for being the ledger system for transactions in Bitcoin, the most widely used cryptocurrency, but blockchain is beginning to enjoy wider visibility as the number of applications that incorporate it – from payment systems to online storage and beyond – explodes.

So let’s talk a little bit about blockchain.

Getting educated about blockchain

For those looking for an entry point into this complex technological universe, Will Little of Prota Ventures has written a great primer explaining the basics of blockchain, tokens and token sales, distributed applications, and all the rest.

As clearly as Will has explained it, it’s still complicated material to comprehend. As one commentator has stated, cryptocurrency and blockchain are “fundamentally difficult for otherwise intelligent and highly capable people to understand.” This may or may not be a problem as far as adoption of blockchain-based technologies is concerned — after all, people don’t need to understand credit card processing system to use credit cards, or for that matter, HTML code to use the Internet.

It may be a problem, though, if we want to consider the implications of these new systems. As Lawrence Lessig, the respected Harvard Law School professor, started pointing out back in the 1990s (e.g., in his book “Code, and Other Laws of Cyberspace” and in shorter pieces such as the article “Code Is Law“), software code can serve as a hidden “regulator,” serving the same role as law. (The word “code” itself, of course, can mean a set of laws as well as a set of software instructions.) Lessig was talking about Internet protocols, and asking what values were embedded in them. A similar conversation about distributed applications built upon blockchain is under way — some believing that this class of technologies fosters democracy and individual liberty; others that they militate toward authoritarianism — but the complexity of these systems poses a daunting hurdle for many to participate in the conversation.

Legal applications

At goodcounsel, we are interested in what blockchain means for the future of contracts and transactions in particular.

Blockchain systems can be used in the context of existing legal systems, to securely document agreements or record transactions. But platforms using blockchain can also be used to generate customized applications that actually execute on contract terms when conditions are met. (Ethereum is probably the best known blockchain app for this purpose as of now.) At least one company is creating a “Decentralized Autonomous Organization” (DAO), with the ambition of serving as a “digital jurisdiction” of its own, with rules that organizations, entrepreneurs and investors can opt into and operate within.

A legal trap for the unwary

At the moment, blockchain touches goodcounsel’s practice in the transactional and securities compliance arenas. goodcounsel frequently represents early-stage private companies engaged in funding rounds with structuring, investor documentation, and securities law compliance. We are beginning to see companies engaging in fundraising via token sales and “initial coin offerings” (ICOs) of various types.

Whether they realize it or not, those engaged in these activities may be deemed issuers of securities as defined by U.S. law, and could attract the attention of the SEC. The SEC is clearly paying attention. This is an example, alluded to above, of current law and legal standards being applied to blockchain-based systems. Companies considering offerings like this should therefore consider seeking legal advice. goodcounsel would welcome the opportunity to engage.

Will blockchain render lawyers irrelevant – or make them busier?

Who knows? A lot of people would like to make lawyers go away, and technology types who have been destroying or transforming traditional industries certainly have law in their sights. But in view of the implications of these technologies, and the extent to which they are being adopted in commerce, it seems inevitable they will spawn disputes between private parties and issues tied to the applicability of current laws and regulations, a thus result in a fair amount of work for lawyers, even as some of the technologies may help people do without lawyers.

Legal issues will arise that we can only begin to imagine today: what happens if parties create a blockchain-based contract application on a platform like Ethereum, and a mistake is somehow introduced into the code? Would a court look to traditional legal doctrines of contractual mistake and reform the digital contract? Can these transactions be challenged or unwound? If parties enter into blockchain transactions anonymously using cryptocurrency, will they need to reveal their identities in order to bring legal claims relating to the transactions? How will courts obtain the knowledge and technological tools needed to review these arrangements?

Maybe these are questions with easy answers, or perhaps they’re not even the right questions, but it seems certain that tough questions are going to arise, and lawyers are going to be the ones asking some of them.

Categorised as: Blockchain, Legal Issues