Synch recently held an event about Blockchain applications and the associated legal risks and technical challenges.
Usman Wahid and Marcus Pearl, both partners at the London-based law firm Berwin Leighton Paisner, participated as guest speakers together with Synch’s Sergii Shcherbak.
Usman and Marcus presented the Blockchain basics. Blockchain is a secure immutable database shared by all parties in a distributed network. Every transaction broadcasted to the network is placed in a “block” with other pending transactions. The block then needs to be verified by the network for the transactions to be confirmed. Every block is associated with the previous one via hash. Hence, blockchain is essentially a ledger (“chain”) of transactions blocks linked to each other. Blockchains can be public or private. A public blockchain one, is a blockchain that everyone can read and write to. A private blockchain, on the other hand, is controlled by a party or set of parties which determine the read-write permissions. There are a number of initiatives, especially within the financial/insurance area where private blockchains are being tested and evaluated.
Blockchain enables smart contracts – basically, a code that automates a pre-agreed execution by auto-performing a defined set of transactions in response to a defined set of events.
Blockchain is getting more and more traction due to its immutability, auditability of transactions and, primarily, its decentralised nature eliminating a middleman which has been traditionally necessary for verifying transactions, e.g. payments. In London, for example, Blockchain is actively researched and its applications are considered within banking and insurance sectors: Allianz and Nephila Capital have piloted the use of smart contracts for transacting a natural catastrophe swap; R3 is the largest alliance of banks and insurance companies focused on Blockchain globally; the Blockchain Insurance Industry Initiative (B3i) is a collaboration of insurers and reinsurers to explore Blockchain. Synch is currently testing Blockchain to explore its applications in legal services delivery.
Risks associated with the use of Blockchain were also considered. Legal risks include, for instance, the mechanism of expressing the parties’ intent in smart contracts, whose milestones and end-result are determined by responses to events that may be outside of control of the contracting parties, which therefore makes the performance of the contract unpredictable. In addition, provided that the upcoming EU data protection legislation (GDPR) generally prohibits legal effects on an individual based solely on fully-automatic processing of their personal data unless the individual has granted their explicit consent, there is a risk that the performance of such a smart contract would not fully reflect the scope of processing of personal data that the individual has consented to when entering into the contract. Therefore, depending on the complexity of a smart contract, a mechanism of incremental consent to different milestones of the contract were suggested to be considered.
Furthermore, there is also the lack of clarity of how a smart contract will be interpreted by courts, given that there is no traditional written agreement in place but rather a set of electronic instructions executed by code. Relevant case law is still lacking, and it remains to be seen how smart contracts will be challenged in courts.
There are also several technical challenges that delay mainstream adoption of Blockchain. For example, transactions are not instant. This is due to Blockchain’s decentralised consensus mechanism which requires each node fully participating in the network to process every broadcasted transaction and maintain a copy of the ever-growing (append-only) full ledger of all previous blocks to validate against. For instance, it usually takes around 10 minutes to confirm a block of Bitcoin transactions. The protection of sensitive data on a blockchain is also a challenge. For example, smart contracts on Ethereum, a Blockchain-based platform, are public, and so are their transaction data and the underlying code. This makes the use of smart contracts limited. Another challenge is data storage. Since Blockchain is append-only, all data inserted into the ledger will be stored infinitely. As a result, investing in a scalable storage solution is required for any mainstream application built on Blockchain.
Although the Blockchain technology looks promising, its broad commercial application has been limited mostly to crypto-currencies. Markets will test whether Blockchain is a real game-changer or just an alternative to existing data management solutions. There still are a number of legal issues and technical challenges to be resolved not least related to liability between the parties contracting through smart contracts.
Developer Digital Services, Synch
Developer Digital Services, Synch