To many people blockchain is the technology world’s version of Esperanto, the manufactured global language that never really caught on, despite looking like a useful idea on paper and still having die-hard fans around the world. But, some legal experts believe blockchain’s time is still to come, rather than it already having had its moment in the sun.
In his chapter for a new book ‘Growing with Blockchain – From Disruptive Potential to Operational Reality’, Charles Kerrigan, a partner at international law firm CMS, explains that there is still plenty to think about with regard to blockchain, from an array of legal issues that are generating plenty of work, to its growing importance to corporate finance.
He starts by stating: ‘Regardless of an individual lawyer’s view of whether blockchain will change the world through the creation of new trust paradigms or is simply an oversold example of a database, it is necessary for lawyers to have at least educated themselves on the basics.’
He breaks the key areas of focus into five categories:
- Fundraising – initial coin offering of cryptocurrencies or a (regulated) security token.
- Provenance projects – designed to satisfy a person (who may be a consumer or a business) at the end of a supply chain about the traceability of a particular asset. This may be because of incidents of fraud or counterfeiting in relation to a particular type of asset (such as diamonds or wine), or because a product is sold as having a particular history (such as coffee beans or olive oil), or because a supply chain has advertised certain environmental, social and governance (ESG) credentials.
- In enterprise technology,
- In payments and settlement
- Policy use cases focus on financial and social inclusion and aim to provide better government services.
Now, there are plenty of questions around cryptocurrencies (and other tokens), of whatever type, and it’s arguable that they just get in the way, rather than increasing efficiency. But on the provenance side, there does indeed appear to be some good use cases that a distributed database may help with.
Whether you dismiss it all, or just some of it, Kerrigan notes that lawyers may still be asked to help with the above issues. For example: ‘In a provenance use case, a lawyer is focused primarily on the validity and integrity of information, regulated by contracts and sale-of-goods regulations in supply chains. While blockchain cannot help with poor historic data, it works well in situations where new data is created within the system, such as in industries that manufacture or process premium products.’
And there can also be public policy projects at a large scale, such as digital identity. ‘They can involve hard technical, as well as policy, problems and involve work with standards and standards bodies. In these cases, lawyers are involved in social policy, procurement, legislative policy and some consulting work,’ he adds.
However, as Kerrigan points out, despite all these potential use cases, detailed regulation that lawyers can turn to is patchy.
‘There is no direct regulation of blockchain technologies or applications in the United Kingdom and most other jurisdictions. Some jurisdictions do have a blockchain law which they advertise to promote themselves as friendly jurisdictions for projects. Generally, these laws are facilitative. They are designed to ensure that the mechanics of equity or debt or exchange laws allow for digital assets, rather than excluding them because the concept was not known at the time those laws were enacted,’ he states.
He adds that one challenge is that by their very nature ‘blockchain projects are not confined to one jurisdiction where local rules can fully describe them’.
Another challenge is that: ‘Blockchain projects involve multiple parties, but are not developed in a way that is traditional for multi-party commercial transactions, such as a joint venture.’
He also notes issues related to showing liability with so many parties involved in a system that could see ‘the automated nature of the technologies can give rise to unintended consequences’. There are also data privacy issues that need special attention.
And perhaps the real clincher for a commercial lawyer is this: ‘Contractual remedies are only appropriate if it is clear that the parties intend a contractual relationship to come into existence between themselves.’
I.e. How does a lawyer help in a blockchain scenario where parties may not even recognise that they have formed a contractual relationship with each other? That is a very tough challenge.
Finally, there is the use of smart contracts – an area where there is plenty of confusion still. Companies such as Clause and OpenLaw have been working hard in these areas, (the latter with a more blockchain/crypto focus), at least in relation to ‘complex legal smart contracts’, and despite their best efforts the reality is their use remains a very niche activity.
Artificial Lawyer would argue that the reason why smart contracts have stumbled in terms of uptake is in part because of their connection to cryptocurrencies, and they’d probably prosper if they could be marketed as easily integrated with the tech and fiat currencies that everyone already uses; which ironically is the case, i.e. they can be integrated into what we all use now, but the message doesn’t seem to be getting out.
Here Kerrigan adds that there are also legal barriers: ‘A smart contract, refers to a piece of code that changes a relationship between parties, for example, the transfer of value once a condition is met. [But] the English legal system (along with most others) is, however, still getting to grips with their legal status.’
All in all plenty to consider. However, this site can’t help but feel that the big moment for blockchain tech has passed and the main cause for its failure to really catch on is the focus on cryptocurrencies, which this site sees as a needless diversion that adds an extra layer of complexity to data transfer and transactional processes that, to put it simply, turns people off.
As noted, this site would also seek to draw a line between smart contracts and blockchain tech. There is no need to use anything fancy to make a smart contract work. After all, banks already use standing orders and direct debits, which are a very simple form of ‘smart contract’ that has existed for decades, and they work fine with fiat currencies and operate globally.
That said, the crypto world is not going away. And, there is still around $350 billion-worth of cryptocurrency of different types in circulation – even if a notable chunk of that is likely related to money laundering, with the rest primarily related to currency speculation, rather than connected to businesses that make or sell anything in the real world.
To conclude, Kerrigan says: ‘In my opinion, and looking just at the area I know best, it is likely that these technologies will change radically the operation of capital markets and markets for private debt. The same is likely to happen in all other transactional fields. The famous deflationary hammer of tech-enabled industry is coming to the industries that corporate finance lawyers inhabit. A small number of lawyers are already deeply involved in projects in this area and that number will only increase as the trend continues and evolves.’
So, should you give this a read? Much depends if you are picking up signals from your clients that they are interested in this area. Lawyers working in the banking sector may especially find this useful as several major banks continue to run blockchain and crypto trading projects. If you are picking up those signals, then Kerrigan’s chapter, and the book as a whole, will be a useful place to start.