Technology and the Law
Wide Open Spaces
How blockchain has moved beyond currency.
By Ronald L. Chichester
Bitcoin is an open-source1 network for an alternative currency and used as a payment system for digital assets. In 2009, someone under the alias “Satoshi Nakamoto” developed a cryptographic mailing list software application and released the source code for that application under an open-source license. Bitcoin is a “purely peer-to-peer version of electronic cash,” according to Nakamoto, that “would allow online payments to be sent directly from one party to another without going through a financial institution.”2
Digital cash is not new. In the past, however, there was always the need to engage a trusted third party that had to maintain a ledger of the transaction. But with bitcoin, each transaction is verified by multiple nodes on a network that records the transaction on a publicly distributed ledger called a blockchain.3 The blockchain technology employed by bitcoin eliminates the need for a third party to be involved in (or record) the transaction. In essence, the third-party verification process has been automated using the blockchain.
The remarkable rise in popularity of bitcoin has been described adequately in many papers,4 books,5 and even movies.6 In contrast, this article will identify different uses of the blockchain technology for areas other than currency that have legal ramifications, such as the automated recording of contract compliance7 in business law, real estate, software licensing, family law,8 voting,9 and parole conditions in criminal law.
Blockchains require multiple parties and a shared infrastructure. The first requirement is a network. The internet is a suitable network, although depending upon the application, something as small as a local area network is acceptable. Next, three or more parties each need to have a device that is connected to the network and those devices must be running software derived from the aforementioned open source software application.10 Once the applications are running and can communicate over the network, then transactions can take place and be recorded. It is the peer-to-peer character of the blockchain that distinguishes it from centralized ledgers used by financial organizations. The following two diagrams illustrate the distinction.
Figure 1 illustrates a traditional arrangement between two parties that, for business purposes, require some type of certification authority. In the scenario of Figure 1, a producer generates a product for a consumer. The consumer will want to verify the authenticity or quality of the product, however, and this is accomplished through the use of a third party, namely the certifying agent.
Figure 2 illustrates the centrality of the blockchain between multiple organizations in lieu of a certification authority. In essence, a blockchain can be used to automate or decentralize the certification authority.
The process for adding something to a blockchain is illustrated in Figure 3. The process of adding to the blockchain starts when a person or organization wishes to add a (signed) contract to a blockchain (step 1). The person puts a copy of the contract into the blockchain software, which in turn generates a “block” (step 2). The block is then placed onto the network (step 3), and its presence is broadcast to all of the devices that are connected to that network (step 4). The devices that are connected to the network then “approve” of the placement as “valid” (step 5). Once validated, the block is then added to the blockchain so that an indelible and transparent record of the block is available on the blockchain (step 6). Interested parties can then retrieve the block and verify its authenticity (step 7). Note, removal of one block breaks the chain, which accounts for the indelible nature of the blockchain.
As illustrated, the blockchain technology is well suited for digital currency. However, this same technology can be employed wherever two individuals (or organizations) wish to have a verified transaction of something of value.
Blockchains in Business and Law
Blockchains are an obvious choice for organizations that need to record transactions and do so in an automated and inexpensive way. Take the scenario involving a software license when its owner is a developer who is a solo or small operation whose longevity is in question by a much larger customer (who depends upon that software for critical operations). In such a case, the customer often requires that the software developer deposit the current version of the code base to an escrow agent as updates are made available so that the large organization can be assured of continued critical operations if the developer dies or otherwise discontinues development or maintenance of the software.
With blockchains, the software developer can avoid the expense and encumbrance of the software escrow agent by providing an encrypted file of the source code of the application to the customer through the blockchain (in exactly the same manner that bitcoins are transferred). Similarly, if an escrow event is triggered, the cryptographic key for the software can be sent to the customer using the same blockchain method.
In another example, a marriage was performed at Walt Disney World in Orlando, Florida, in 2014, wherein the nuptials were submitted to a blockchain. (The couple was legally married in a civil ceremony.) The marriage was “performed and registered without the involvement of any government or religious organization.”11
There is no reason to think that links within a blockchain could not be admissible in court. While an expert may be needed to opine on the authenticity of the particular blockchain and the specific transaction, there is nothing inherently different about blockchains than other software programs.12 Moreover, the mere presence of the transaction on the blockchain may obviate the need for litigation in the first place, and certainly could automate discovery and thus reduce litigation costs. Finally, there are also techniques (besides encryption) that can be employed to keep the contents of the agreement secret yet still enjoy the benefits of blockchains.
The blockchain model provides a public evidentiary mechanism for actions undertaken by parties. In other words, they can be used as a public recording of actions taken (or not taken) by a party in an agreement. Because the blockchain method is implemented with software, the transactions can be embedded into existing software systems, thereby leveraging automation, with the records contained within being admissible in court. Thus, blockchains can potentially reduce costs and risks associated with the monitoring or existence of agreements between individuals and organizations.TBJ
|RONALD L. CHICHESTER is a registered patent attorney, certified computer forensic examiner, expert witness, and certified information systems auditor. He is a past chair of the Computer & Technology and Business Law sections of the State Bar of Texas. He holds bachelor’s and master’s degrees in aerospace engineering from the University of Michigan and earned his J.D. at the University of Houston Law Center.|