The Blockchain and the law

chain-257490_640The blockchain from a technical point of view

The blockchain refers to data storage and transmission technology which is transparent and secure and operates without a central governing body nor any intermediary. It is an unalterable database that contains the history of all exchanges between its users, since its inception. Each transaction is encrypted and becomes a ‘block’ which is then validated automatically by the network.   It operates with a digital currency; the bitcoin is the most common form. This currency allows for the creation a dematerialised settling of transactions.

A new type of organisation

The blockchain is thus based on a fundamental principle: the removal of an intermediary between two people involved in a transaction. There is therefore no need for trust among people interacting since the entire process is automated. While since its inception in 2007, the blockchain has been limited to financial transactions, it continues to grow and is now more widespread. It is therefore important to instill trust and confidence back in to interactions that involve more than one human individual.

What we are witnessing is the emergence of a new type of organisation. The central body that coordinates the interactions between individuals and recovers the generated value has disappeared. In these new systems, individuals themselves work together directly, without the intermediary. The operation system is indeed much more collaborative.

With this kind of decentralised collaborative application, the question now is whether to remove not only the intermediary but also the administrator, the “trusted third party” who certifies the validity of authentic deeds (for example, a notary).

The legal issues surrounding the blockchain

Henceforth, new legal challenges have begun to crop up, in particular the issue of liability. Indeed, if all actions are performed independently and anonymously, who will be liable for opening an illicit network? Even if the creator of the blockchain is identified (which seems difficult in view of the principle of anonymity which is omnipresent in such technology), the operations cannot be stopped since they are carried out independently of the blockchain.

Clearly, it is unreasonable to apply traditional legal rules to this new and expanding digital environment. It is therefore essential to establish a new legal framework that can support, in particular, the development of the blockchain. The expression “code is law” illustrates the need for a new techno-legal revolution for the digital world, independent of the physical one.

As to the regulation issue, one may wonder what position the government will adopt vis-à-vis the blockchain. While the blockchain can afford to evade the rules in force as well as State  control, it can also lose its potential if the States seek to have too much influence on it.

The legal status of the blockchain

Discussions have already been held at the National Assembly in France. On May 13, 2016 an elected representative of Eure-Et-Loir département, filed an amendment  to the recognition of the blockchain in payment systems and conferring upon it the same legal status as a deed. Although the amendment was rejected and the Minister of justice  stated that the blockchain would not replace a notarial deed, this proposition proves that the blockchain and its legal status undoubtedly stirred debate within the government.

Another interesting debate is the legal recognition of smart contracts that are based in the blockchain. These standalone software automatically predefine certain conditions without the need for any human intervention. The advantage of this is that the conditions cannot be modified while the contract is running, thus preventing abuse or contractual fraud. Therefore, the cost of verification, enforcement and arbitration are reduced. This in turn, relates back to the idea of avoiding intervention from a “trusted third party”.

Smarts contracts are software, rather than contracts, and like the blockchain itself, do not possess any legal status. They are not binding on third parties (or at least not yet).

These technical applications of contracts could be applied to many areas: tax (collection and automatic deduction of value-added tax), insurance (traveller compensation system in case of flight delays on the Ethereum  platform), real estate (registration of title deeds), health (management of patients’ information), transport (decentralised carpool service) or even online voting (secure system preventing fraud).

In any case, we are still at the beginning of what is likely to become a revolution in the coming decades. All current decisions will influence the future of the blockchain, that of our society and its organisation. Implementation of a legal framework for the blockchain is key and it is the government’s role to provide legislation on the subject.