Legal applications and implications of blockchain

There is no doubt that in recent years technological advances have transformed the world. The above entails several positive aspects but the truth is that it also implies new challenges for businesses and their regulatory regulation. One of these innovations is the Blockchain.

 

The Blockchain is known mainly for its connection with cryptocurrencies, such as Bitcoin or Ether. However, the reality is that it has a much broader scope than the one mentioned above, which has generated the creation of applications in various fields.

 

But what is the Blockchain? Without going into technical details, we can define it as a decentralized ledger or database of transactions that cannot be tampered. As its name in English indicates, it is a chain of blocks that stores information. Thus, we can exemplify the above by stating that in a cryptocurrency transaction, the buyer’s data, the seller’s data and the amount paid would be recorded in a block.

Although it seems legally insecure, the truth is that it is not possible to regulate the Blockchain as such, but we must consider that we can regulate the applications of such technology.

One of the main legal applications of this modern technology are the so-called «smart contracts», which should be understood as a computer code supported by this platform that determines a series of instructions to execute agreements between the parties involved.

How do these contracts work? Although the name of these agreements can be intimidating, the truth is that they are simply contracts that are executed autonomously and automatically once the agreed conditions are met. In other words, when we speak of smart contracts, we refer to contracts that have previously been negotiated by the parties but that are capable of being executed and enforced by themselves through computer programming. In practice, currently, it is usual to use the «Ethereum» platform to create these contracts.

Due to the above, these contracts are formulated through a programming language (generally Solidity) establishing conditions in a way that «if A then B» happens. Some examples are:

– if a debtor does not make the payment within the stipulated time, then the guarantees granted for that purpose are executed.

– if the death of a person is recorded in the civil registry, then automatically the registrable assets are distributed and assigned among the heirs.

This type of contract helps reduce the breaches of the parties with respect to their contractual relationships and prevents the tampering of the legal obligation by any of the parties using bad faith.

Some practical problems that have arisen regarding smart contracts occur due to their inflexibility and privacy risks. Although it is true, contracts are made to be fulfilled, in many cases there are negotiations and a margin of flexibility granted by the parties involved. An example of the above is that, in a loan contract, the bank grants the debtor a grace period to make the payment on a date subsequent to the agreed date instead of immediately executing the guarantee granted. This problem arises due to the characteristic of «no tampering» that defines the Blockchain, which, although it gives security, on the one hand, on the other, limits the flexibility that the parties can have.

However, solutions have emerged as trusted third parties called «oracles», which have granted more flexibility since they have the capacity to respond almost in real time to changing conditions. These trusted third parties can be both people and programs. An example is the connection that a program linked to the LIBOR database can have, which always allows the amount to be paid for interest to be updated.

Any lawyer can conclude that in most contracts this type of logical language is not enough, so it has been chosen many times to make hybrid contracts. What kind of aspects seem difficult to translate into instructions? For example, the indication that the parties will make their «best efforts» to comply with an obligation or agreement that the parties will act with good faith.

Just as the characteristic of «no tampering» that provides security generates a problem of rigidity, the publicity characteristic that generates transparency can constitute a confidentiality problem that is fundamental in many relationships.

Considering all the above, it is clear that, for the moment, this type of contract is not recommended in all cases or for any type of legal relationship, but in my opinion, this is not a sufficient reason not to use this new technology that can provide so many benefits

Faced with these technological advances, there are those who say that the legal profession is in danger and that it will eventually be extinguished. In my opinion, our profession is not coming to an end, but what is in going to change is our way of working so far. It is essential that lawyers stop seeing the computer world as alien and that we study technological issues to be able to advise our clients according to the current reality, since they are adapting their business models and taking advantage of the benefits that this gives them. Therefore, lawyers should not only find the risks of these technologies to protect our clients but also use them to take advantage of them. As a real example, we can mention that international legal firms such as Hogan and Lovells have started to use smart contracts, although in a hybrid way with common contracts.

Finally, note that in addition to the cryptocurrencies and smart contracts, there are Blockchain applications that have direct and indirect effects in the legal world, such as the application of this technology in the field of real estate and securities records by the granting of a unique digital print for each good. Likewise, this system also serves to protect intellectual property, since it allows to grant digital prints to the original products and to register them according to their date of creation and the corresponding authorship.

In this way, we can think about the implantation of this technology in civil registries, to register in a safe way births, deaths, marriages, and divorces that allow a safe custody of certain and updated public information.

It should be noted that in case of judicial records there is a possible contingency due to the fact that the «non-alteration» that characterizes Blockchain could clash with the right of be forgotten that people have regarding our personal data.

In conclusion, I believe that we must accept that this disruptive technology is changing not only business but also the legal world, which is why we must find the way to regulate in the best way the risks they have without limiting innovation.

 

Ramírez, Natalia