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BLOCKCHAIN

AND SMART CONTRACTS

TODAY & TOMORROW

"Blockchain can be explained simply as a distributed, shared, encrypted database that serves as an irreversible and incorruptible public repository of information."

Blockchain – a new frontier or new type of internet?

This Article was previously published in Vol. 31 No. 1 • September–December 2018 of the JamBar Journal.

Impressive advances in the fields of cryptography and decentralised computer networks have now resulted in the emergence of a profound new technology—known as the blockchain—which has the potential to fundamentally shift the way in which society and attorneys operate. Still a buzzword, many ask the question, “What exactly is blockchain?” Blockchain can be explained simply as a distributed, shared, encrypted database that serves as an irreversible and incorruptible public repository of information.

It enables, for the first time, unrelated people to reach consensus on the occurrence of a particular transaction or event without the need for a controlling authority.

What is the core difference between a permissioned vs. a permissionless blockchain? A permissioned blockchain restricts who can contribute; only a restricted set of users have the rights to validate the block transactions. A permissioned blockchain may also restrict access to approved persons. With a permissionless blockchain anyone can join the network, participate in the process of block verification to create consensus and also create smart contracts. Examples of permissionless blockchain are the Bitcoin and Ethereum blockchains, where any user can join the networks and start mining. However, permissioned ledgers are the models being considered by institutions, such as banks, where it is more prudent for persons with the requisite qualifications to confirm events in the ledger.

These technologies are at the relatively early stage of development, and there is still a lack of agreement on what blockchain and the smart contract are, what role they can play in the derivatives market, and how they might interact with existing legal standards and documentation. Could a smart contract ultimately replace an existing legal contract in its entirety, or will it only automate the execution of certain actions specified within the contract? This paper examines the potential benefits of blockchain technology and smart contracts, how contracts are effected, and the legal profession’s possible reactions.

Blockchain is revolutionary, underpinned by the fact that this digital database has fully distributed ownership rights. The information in the blockchain ledger or database is not shared to a network from one single access point but hosted locally on each individual’s laptop or mobile device, making the system virtually incorruptible. This universal access point could even be affixed to the middle of your palm. The ledger offers to provide information that is honest, and beyond corruption. It may be less vulnerable, therefore, to perversion or distortion. In our present landscape of mistrust, fraud and scamming this is certainly an attractive solution.

Blockchain provides a “decentralised database” or “digital ledger” of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded. This process of verification and recording is called ‘proof of work’. The more ‘proof of work’ a transaction generates, the more secure a chain of transaction blocks become. In other words, the longer a blockchain, the more trustworthy it is. Permissionless blockchains use Proof of Work mining where hashing power is offered to build trust. However, permissioned ledgers may use public key infrastructure to enable a verification method. This is a public key or private key scenario, which involves encryption techniques to authenticate transactions. No matter how odd blockchain sounds, it could revolutionise the way we carry out our transactions online. It is a recorded digital way of keeping track of all the transactions for everybody to access. The best part about blockchain technology is that no central digital head is needed to monitor transactions. This means that every transaction and bit of information can be shared on a peer-to-peer basis.

One of the earliest applications for blockchain technology has been digital currency such as Bitcoin, powering an entirely new payments system that allows for the seamless transfer of funds around the globe. While existing payments systems generally take days to transfer funds, Bitcoin can be sent across the world in as little as seven minutes at fees significantly less than the likes of Western Union or MoneyGram. However, blockchain technology is not just powering digital currencies, though originally devised for the exchange of cryptocurrencies like Bitcoin, there are a plethora of other potential use cases for the technology. Blockchain is the backbone of a new type of internet and the use cases are many. The following are intended to be an illustrative and not an exhaustive list of possibilities.

Cybersecurity

While the blockchain itself is public, the data is encrypted securely to prevent its being changed without authorisation. The growth of blockchain technology has created a growing demand for advanced cryptography and cybersecurity specialists.

Insurance 

Blockchain can be used to manage trust and verify data for insurance contracts. When personal insurance information is stored on the blockchain and claims are processed through the network, the possibility of fraud is reduced. IBM in collaboration with MetLife created a platform that will feature cognitive computing, data analytics and integration and security capabilities designed to help insurers expand access to their products and capture new customers, including the ability to integrate with blockchain networks to provide trusted, highly secure, permissioned transactions, and the option to incorporate regulatory compliance data and third-party software.

Voting

Elections can be made fair, democratic, and insusceptible to rigging by using blockchain to track voter registration and identity verification. Blockchain also provides an irrefutable record of all counted votes, making it impossible to fake or tamper with results. Now putting its stamp upon the political sphere, Sierra Leone has the distinction of being the first to feature blockchain-verified voting in the country’s presidential election. The voting process was overseen by Agora, a Swiss-based blockchain start-up. Once the voting had taken place, up to 400,000 ballots were then manually entered into Agora’s blockchain. Moscow is using the technology as part of its Active Citizen voting system where residents can vote on city issues (but not political candidates). Brazil is also using the technology to allow citizens to easily sign and verify popular petitions.

Identity tracking

Passwords might soon be a thing of the past as blockchain technologies make digital identity tracking more secure. Blockchain-based authentication systems use incorruptible identity verification through use of the encrypted public keys. These advances can be applied across a range of identity applications, from email and online banking all the way to passports and birth certificates.

Healthcare

Using blockchain technology allows medical professionals to share medical records and patient information seamlessly. This ease of access can improve the speed and accuracy of diagnosis, ensuring the best possible patient care. The Yijian Blockchain Technology Application System, a permissioned blockchain platform that uses Hyperledger Fabric, demonstrates a pilot use case. At present, this partnership takes place with one pharmaceutical retailer, a hospital and a bank running business transactions.

Online Music

Blockchain-based solutions in the online music industry can help artists to get paid directly by their fans, removing the percentage-grabbing record company from the equation. Music can also be published on the ledger with a unique ID and time stamp in a way that is effectively unalterable. This can solve the historic problem of digital content being downloaded, copied and modified at the leisure of users. Each record can store metadata containing ownership and rights information in a transparent and immutable way for everyone to see and verify. This will ensure that the correct people will get paid for the use of the content.
Blockchain technology can also revolutionise the monetisation of music. This can support a new way of offering on-demand music services. Users can select the record of their choice and immediately reward the stakeholders with cryptocurrency upon playing it.

Real Estate

In an industry where public documents and contracts are regularly shared between parties, transparency can be ensured. A use case reality now implemented in the West African country Ghana is the blockchain powered land services platform called Benben, developed by Emmanuel Noah. BenBen integrates with the Ghanaian Government (Lands Commission) to digitally enable secure and risk-free land transactions between property owners and financial institutions.

Supply Chain Tracking & Food Authentication

Blockchain also can provide supply chain transparency, enabling, among other things, verification of the origin and authenticity of food. Think of all of the “made in Italy” products. How can consumers be certain that their favourite bottle of wine or their favourite cheese really hails from the advertised locale? More important, Dole, Nestle and Unilever are working with IBM to explore how blockchain technology may be used to make the food supply chain safer. Blockchain technology can be used to improve food traceability by providing trusted information on the origin and state of food. Many die from contaminated food as the critical issues impacting food safety, such as cross-contamination, the spread of food-borne illness, unnecessary waste and the economic burden of recalls, are magnified by lack of access to information and traceability. It can take weeks to identify the precise point of contamination, causing further illness, lost revenue and wasted product. Blockchain is ideally suited to help address these challenges because it establishes a trusted environment for all transactions. In the case of the global food supply chain, all participants -growers, suppliers, processors, distributors, retailers, regulators and consumers - can gain permissioned access to known and trusted information regarding the origin and state of food for their transactions.

Smart contracts

How smart is your contract?

The enablement of smart contracts is one of the first truly disruptive technological advancements to the practise of law since the invention of Gutenberg’s printing press. Using a distributed database like the blockchain, parties can confirm that an event or condition has in fact occurred, without the need for third party corroboration.

We experience and enjoy the advances of technology daily when we use the World Wide Web. On a more technical level the Internet’s decentralised communications layers, namely the Transmission Control Protocol/Internet Protocol (TCP/IP) and the Hypertext Transfer Protocol (HTTP) are the foundational communication tools that our browser utilises. The TCP/IP is a suite of communication protocols used to interconnect network devices on the Internet, while HTTP is an application protocol for distributed, collaborative, and hypermedia information systems. HTTP is the foundation of data communication for the World Wide Web. The growth of these decentralised communications layers has led to the recognition of Lex Informatica, a complementary toolkit for the regulation of online transactions through the establishment of technical norms, in addition to contractual rules[1].

Following this natural expansion and growth, it is put forward that the progressive deployment of blockchain technology may give rise to yet another body of law—Lex Cryptographia, which is characterised by a set of rules administered through self-executing smart contracts and decentralised (and potentially autonomous) organisations. In this way, proponents of Lex Cryptographia argue that the code, or the technology itself can, in a way, replicate the obligations similar to a legal system. Smart contracts are agreements that utilise the blockchain to automatically and securely execute obligations when certain conditions are met.

A smart contract is to be self-executing and self-enforcing. Smart contracts operate on a straightforward ‘if this, then that’ Boolean logic. Boolean logic is a form of algebra in which all values are reduced to either TRUE or FALSE. Put simply, smart contracts provide the ability to virtually verify or enforce contracts once particular conditions are met. They are protocols written using computer code, which can be stored on blockchain, and parties to a particular contract can specify the terms and conditions thereof. When the required conditions have been met, such as delivery of a product or service, a particular specified outcome, such as the making of a payment.

While there is still no definition (legal or an industry agreed term) of smart contracts, Stark [2] presents two distinct schools of smart contracts:

"The enablement of smart contracts is one of the first truly disruptive technological advancements to the practise of law since the invention of Gutenberg’s printing press. Using a distributed database like the blockchain, parties can confirm that an event or condition has in fact occurred, without the need for third party corroboration.​"

Smart legal contracts: This school resonates most with lawyers. This is where the term ‘smart contract’ is used to refer to legal contracts, or elements of legal contracts, being represented and executed by software.

Smart contract code: The other school relates less to contracts as a lawyer would understand them, and more to a piece of code (known as a software agent) that is designed to execute certain tasks if predefined conditions are met. Such tasks are often embedded within and performed on a distributed ledger. For example, one well-known smart contract implementation describes software agents that create cryptocurrency, provide an electronic voting mechanism and offer an electronic blind auction mechanism as smart contracts.

Rather than viewing smart legal contracts and smart contract code as two separate domains, the reality is that there is a relationship between them. For a smart legal contract to be implemented it will need to embed one or more pieces of code designed to execute certain tasks if pre-defined conditions are met – that is, pieces of smart contract code. Smart legal contracts, therefore, are functionally made up of pieces of smart contract code – but, crucially, under the umbrella of an overall relationship that creates legally enforceable rights. As a result, every smart legal contract can be said to contain one or more pieces of smart contract code, but not every piece of smart contract code comprises a smart legal contract [3].

Foreseeable reach of smart contracts

As blockchain technology develops and is increasingly deployed, traditional business organisations, financing, and government could be impacted, fundamentally rewiring how core aspects of our society function. It also raises a number of legal and ethical challenges that must be carefully considered, introducing new regulatory issues that draw into question some fundamental tenets of law.

It is foreseeable that using the capabilities discussed above, smart contracts could be utilised in various transactions, reaching from simple financial agreements to complex structures such as wills. Could the utilisation in a Last Will and Testament by the testator see the enablement of this Boolean logic, and ‘if______, then ______’ scenario?

It is alleged that smart contracts could remove the role of courts as enforcement agents, since they are to be self-enforcing by their very nature. This means that when it comes to smart contracts coded on a public blockchain, parties will no longer have the avenue of resorting to litigation. Once the smart contract is coded, the machinery for its execution is unavoidably set in motion. The parties’ opportunity to affect the transaction ex post may be cut off.

Whilst the above may be true for smart contracts on a public blockchain, the situation for smart contracts coded on a private blockchain is slightly different. In these situations, parties who dispute the outcome of a pre-coded event on the smart contract will need to bring their disputes to the owner of the private blockchain instead. This is likely to mean that the role of the judiciary in these matters will be reduced to, perhaps, merely interpreting if the disputed smart clause governing the intention of the parties at the time of entering into the smart contract was coded accurately.

While the potential benefits of smart contracts appear substantial, the potential problems are significant as well. Authors Werbach and Cornell [4] state in their paper that “[t]here is a Frankenstein dimension to a smart contract: An instrument that fuses something innately human (entering into and enforcing agreements) with something mechanical, derived from scientific experiments. Perhaps the benefits of smart contracts will exceed the costs. Perhaps the benefits can be magnified, or the costs minimised. We should, nonetheless, carefully assess both sides of the ledger.” Werbach and Cornell argue that the advent of smart contracts in the least, illuminate foundational issues in the law of contract itself. They opine that the intent of contracting is not to merely (i) ensure the legal enforcement of the promissory commitments or moral obligations between parties or (ii) enable transactional activity, by creating a system of voluntarily binding oneself through opting into predictable consequences for breach.[5]

The foregoing may be too simplistic and does not capture the spirit of the law of contract. The purpose of the law of contract is as follows: Contract law does not exist to alter our reasons going forward—though it surely does that—but rather it exists to adjudicate the justice of a situation ex post. Its basic function is to decide whether one party has wronged another party by failing to perform a promised action. That is, contract law is a fundamentally remedial institution, not aimed at creating new reasons but aimed at resolving disputes, taking the reasons as already given. When one views contract law in this way then it is apparent that smart contracting doesn’t even purport to do what contract law does. The two have fundamentally different objectives. Smart contracting functions to ensure action. Contract law functions to recognise and remedy grievances.

In the current legal framework, the law establishes a series of rules that people must abide by. Nevertheless, everyone is free to infringe these rules (at the risk of being held liable for damages) because legal enforcement takes place ex post, after the act. As opposed to traditional contracts, where parties can decide whether or not to fulfil their obligations, the smart contract cannot be breached. Once the contracting parties have agreed to be bound by a particular clause, the smart contract’s code immutably binds them to that clause without leaving them the possibility of a breach [6].

It’s time to move the Bill forward

Technological innovation is shaping the legal minds of tomorrow, and today. So how does blockchain fit into the legal industry? The legal world appears to be more open to understanding the potential benefits this technology could have on their own businesses, as well as the potential risks it could bring. But more important, there are also ethical responsibilities that need to be addressed since private information, whether from an individual or corporate entity should not be in the public domain. Therefore, a case can be made that the legal industry would be served well to understand and then leverage blockchain technology to extract certain facts and data points and when appropriate, give permission to certain parties to access only said facts and data points.

Following the past two to three years of discussion, Jamaica’s Data Protection Bill (DPB) was finally tabled in the House of Representatives on October 3, 2017. The DPB seeks to safeguard the privacy of individuals in relation to personal data, as well as regulate the collection, regulation, processing, keeping, use and disclosure of certain information in physical or electronic form. It is a step in the right direction for ensuring that Jamaica is on par with international data management and protection standards and ensures greater accountability where management of personal data is concerned. The legislation will seek to set out the rights of the individual with respect to their personal data. This will include, for example, the right to confirm whether or not personal information or data is being processed by an organisation.

It will also seek to determine the right to access information in the custody or control of an organisation, subject to certain exceptions, such as legal privileges; to take action to rectify incomplete, inaccurate or misleading information; or to block, erase, or destroy unlawful or unnecessary data. The legislation will prevent personal data from being disclosed or transferred to third parties without informing and obtaining consent from the data subject. In addition, the transfer of personal information by organisations to recipients in other jurisdictions will be limited to areas that afford the same or greater levels of protection as provided by the sender.

Reactions to Lex Cryptographia

Considering the benefits and characteristics of blockchain technology, the deployment and mainstream adoption of this technology may require a shift in the way we perceive the role of law. Today we are faced with a question of how to articulate what the law is so that we may give it a robust and healthy life in the digital space. It is important for traditional legal practitioners to contribute to development of Lex Cryptographia because projects that sound good from a doctrinal or computer science standpoint may not stand up to the reality of legal practice. Not only must smart contracts work in the crypto space, their methodologies must also withstand traditional legal scrutiny when they eventually come before a court of law.

The code should contemplate adversarial thinking skills and vulnerabilities to collateral attack, certainly not by hacking but by legal reasoning. This is a skill that practising lawyers hone over time and one that we may need to contribute to the development and consistent enhancement of Lex Cryptographia.

Another step in planning a healthy Lex Cryptographia is reliable contract and corporate governance models. Contracts are the means by which individuals and entities manage their future obligations. The legal doctrine undergirding contracts guides dispute resolution and teaches lawyers about the second aspect of law: making predictions about future events. Providing predictability in planning the future is the primary function of contract drafting, insofar as deeming contracts to be pieces of code. Contract provisions work together algebraically to govern the prospective consensual relationship between parties, which is what makes contracts easily amenable to coding or programming language. If a contract doesn’t anticipate all foreseeable contingencies, it may fail, and the parties end up in expensive litigation. A lawyer’s job may be to foresee the maximum number of contingencies and plan for it in a document.

The call to react and regulate

Regulation is still a judicial quagmire. The urgent call for regulatory framework to be established around blockchain appears to be in demand before it can be embraced. Championing the case, the Organisation for Economic Co-operation and Development (OECD) recently convened a forum to discuss just that, “Why does blockchain need to be regulated?”. Among other things, the OECD forum provided an opportunity for industry, non-profit, academia, and regulators to come together for a more intelligent and harmonised approach, rather than the current confusing patchwork of opinion, temporary solutions, and more significant structural frameworks.

A more realistic goal would be for the regions that share common law jurisdiction to generate a shared rulebook, including governance of sound principles, such as protection of rights, personal information and establishment of common standards, than to proscribe every aspect of behaviour and every use case. Bermuda has done an admirable job to articulate a cogent, progressive framework supporting fintech and blockchain, which nourishes innovation while remaining adherent to European AML/KYC standards.

Noteworthy of mention and timely is a copyright dispute judgment delivered on June 27, 2018 rendered by the Hangzhou Internet Court in China, which will be the first time blockchain technology has been recognised as an admitted means of evidence in a civil law case. The authenticity of third-party evidence was demonstrated through preservation on a platform called Baoquan.com that uses blockchain technology.

Conclusion

It is meritorious that there are a number of potential benefits for the use cases of blockchain technology. The crucial need for more education and explanations are paramount, not to mention regulation for mass adoption. Attorneys are challenged to pay attention, regulate and create the framework for Lex Cryptographia’s expansion. The intricacies of smart legal contracts and smart contract code must be harmonised for implementation. Use cases for blockchain technology continue to grow exponentially, with major players embracing blockchain and smart contracts technologies, and already navigating the complex worlds of regulation and legal oversight. We possibly stand on the cusp of the next wave. As with the Internet, the public and private sector opportunities are exciting, and the changes disruptive.

Monique Clarke

Endnotes

[1] Joel R. Reidenberg, Lex Informatica: The Formulation of Information Policy Rules

Through Technology, 76 TEX. L. REV. 553, 570 (1998).

[2]Making sense of blockchain smart contracts’, Stark, J. (2016), http://www.coindesk/com/making-sense-smart-contracts.

[3] Smart Contracts and Distributed Ledger – A Legal Perspective’ by ISDA and Linklaters (2017), https://www.isda.org/a/6EKDE/smart-contracts-and-distributed-ledger-a-legal-perspective.pdf, p.5

[4] Contracts Ex Machina, Werbach & Cornell (Duke Law Journal, 2017), p. 364

[5] Ibid at 352 - 362

[6] Nick Szabo, The Idea of Smart Contracts (1997), http://szabo.best.vwh.net/smart_contracts_idea.html

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