10.3.2017
B&F
> Banking and Finance

(Legal) insight into the blockchain

Blockchain technology is a digital platform enabling a safe, transparent, decentralized and effective way to carry out any transaction without any intermediaries. It seems that in the future, this digital platform will renew many social relations and simplify the development of the sharing economy. In this respect, the law will also have to find many answers to the arising questions.

The blockchain technology was placed first in the “What if I Told You …” report by one of the leading investment banks – Goldman Sachs exploring the emerging trends that will significantly change the way we live and work. The bank foresees that this technology will globally become applicable on a larger scale in 5 to 10 years and will enable the streamlining of processes while saving 6 billion USD of assets only in the financial sector in the stock markets. There will be no need for a number of intermediaries (banks, clearing houses, notaries…), which are now essential in ensuring the trust and executing the transactions. The blockchain technology can provide with exactly these functions.

This blockchain technology is represented by blocks containing software code, encrypted and daisy-chained in a manner of each new block depending on the contents of all the previous ones. This chain of blocks is a kind of a decentralized database, divided among a large number of mutually synchronized computers. Those decentralized computers would quickly detect if someone wanted to change the block from the past and that makes this technology transparent, safe and effective. This technology was first used with the bitcoin cryptocurrency, where the individual blocks are intended primarily for data on the number of bitcoins belonging to individual owners, and the bitcoin transactions. In recent years, the development of a variety of platforms has begun, and it will enable to place more than just data on ownership and transactions in one block. This development brings endless possibilities of this blockchain technology.

This technology will enable composing a smart contract containing all the classical contract elements with the significant difference – the software code blocks contained in the blockchain not only define an agreement, but also carry it out. This reduces the need for trust in the execution of the agreement between the parties since the execution of this smart contract is automatic and independent of the will and discretion of the parties: for example, in case of an insurance contract for damage to crops by adverse weather conditions, a smart contract itself could check the weather conditions in a given period of time in a certain place, assess the amount of damage and automatically pay out the adequate insurance fee if the weather and other conditions according to the contract are met.

With the help of the blockchain technology, it will also be possible to transfer material (vehicles, real estate, artwork…) and non-material assets (information, medical information, reputation…) as smart property. The essence of the smart property is that they are registered as digital assets in a blockchain, and the ownership and transfer of funds are performed via block-chaining using smart contracts. When the certain conditions met and the digital identity of the property beneficiary confirmed, this technology will allow a real estate door to unlock, a smartphone to activate or a car to be brought by itself.

A software code in the blocks can also be used for implementing a variety of decentralized applications. Their characteristic is that their data is stored in a decentralized manner in an encrypted format and is carried out autonomously without being controlled by any entity. Currently, the decentralized applications are already developed and represent the substitutes for centralized applications such as Uber, Facebook, Dropbox, Kickstarter…

Also, it is possible to use this software code in the blocks for establishing decentralized autonomous organizations (DAO). Their software code typically carries out the tasks of managing organizations according to certain rules written in the form of a software code without any human intervention. When establishing such organization, the participants receive digital coins in the value of their investment payment. When operating, the participants vote with the coins on which projects to be funded by the organization and any other pre-defined decisions. The organization then executes those projects by itself when the conditions, set out in the software code (e.g. a certain number of votes), are met.

The use of new technologies opens up a range of legal issues. The problem regarding legal regulation lies in a fact that the decentralized blockchains are located and carried out with the help of computers worldwide, while the identity of the operators is anonymous in most cases. Therefore, the first problem is to find applicable law for those relations and to define the legal nature of those relations. So what is DAO for example? Since it’s not a legal person (at least according to the Slovenian law), is it a kind of civil social contract? Who is its carrier, what is the legal nature of their digital coins (is an analogy with the shares possible?), how are the profits taxed? Is anyone liable for the organization’s obligations? The regulators had already started addressing these issues, but are avoiding to regulate them for now. In connection with bitcoins, the Bank of Slovenia took the standpoint that bitcoins are neither the electronic money in accordance with the The Law on Payment Services and Systems neither the foreign currency in accordance with the Foreign Exchange Act; and that bicoins are an unregulated digital money which no central bank guarantees for.

It will be necessary to assess the relations between a smart and a classic contract, which will probably live parallel lives. In interpreting the smart contracts, the question is whether it will still be allowed to look for the right will of the clients (also outside the framework of the content specified in the software code) as in the conventional obligation relations between individuals, or the strict “language” interpretation will prevail, according to which only what is written in the software code applies. In this respect, the new standards might be formed, also the new professions might be created such as diligence / responsible programmer.

The blockchain technology is in its infancy, but promises to change the world as we know it. It enables fast and secure development of sharing economy and a welcome rationalization of the natural and human resources management. It seems that any market operator will have to re-analyze his situation and determine how to improve or at least maintain the use of new technologies. It’s pointless to fight against the progress – as it can not be successful in the long run.