The application of blockchain technology in multiple fields from a legal perspective

The popularity of digital currencies such as Bitcoin is increasing. People point out that digital currencies have the potential to replace or complement the shortcomings of legal currencies. But the real innovation is the underlying architecture of digital currencies - decentralized transaction ledger blockchain, which can have a profound impact on countless industries.

Let's popularize some knowledge first. The Bitcoin system is decentralized, and the tracking, confirmation, and maintenance of Bitcoin network transactions are not completed by a central agency. The Bitcoin database (Bitcoin blockchain) uses cryptography to improve network security and practicality. The Bitcoin blockchain is a public ledger, and each network user keeps a copy of the ledger and can view all transaction records. When someone initiates a transaction, the transaction is packaged together with other transactions; the packaged transaction (block) is added to the ledger. For users, blocks are distributed, and the authenticity of the blocks can be verified by the user's computer computing power. Once a transaction is confirmed, it cannot be changed, and the entire process only requires the sender to initiate the transaction.

Although regulators have begun to pay attention to the role of digital currency in financial transactions, as blockchain distributed ledger technology becomes more popular, corresponding legal issues will also arise and even become more complicated. In this article, we will talk about the legal obstacles that should be overcome first in areas involving blockchain applications.

Financial transfers

Cryptocurrencies can be used for speculative investment or as a medium of exchange. Blockchain technology can make cross-border transfers faster and cheaper. Therefore, the technology can be used in areas such as international remittances, clearing and settlement, cross-border currency exchange and bank transfers. In fact, as of September this year, more than 50 financial institutions have joined the R3CEV blockchain alliance to explore the application of distributed ledger technology. In addition, some other financial institutions are also working together to develop private chain systems, in which the number of participants is limited and their identities need to be verified.

We cannot force blockchain technology into existing financial laws and regulations. Therefore, relevant laws must be amended, and non-litigation immunity provisions or detailed guidelines are also necessary.

Multi-signature transactions

Blockchain technology enables escrow through multi-signature transactions. Funds are deposited into a cryptocurrency address, which then initiates a transaction involving three parties—two contractors and a third-party “escrow.” At least two signatures are required to complete a transaction or request a refund.

Existing custody rules apply only to tangible assets and do not cover the regulation of this type of transaction. For example, the California government stipulates that custody procedures must use professional terms such as "delivers" and "to be held." Given that there is no physical delivery or holding in virtual currency transactions, the law in this area must be further improved.

Commercial digital currencies and colored coins

The legal definitions of “coloured coins” and some commercially issued cryptocurrencies are very vague. For example, the New York Department of Financial Services (NYDFS) BitLicense excludes electronic gift cards, defining them as a payment device that can be used in stores or service providers, which is “issued in specific quantities” and is “used on a prepaid basis in exchange for future goods or services”. If a digital currency with a fixed value can be used in stores, its regulation should refer to the existing gift card system.

Colored coins represent assets, which are digital currencies with labels. The digital products produced by this process function similarly to gift cards, coupons, or other discount certificates. For example, a merchant can label a Bitcoin transaction to prove that the Bitcoin represents a commodity worth $1,000 and is redeemable. However, since Bitcoin itself has value, the final product value should be the sum of the value of the digital currency and the asset certificate.

Title registration and intellectual property

Blockchain technology can also be used to supplement or replace property registration systems. Property ownership can be recorded and verified on the blockchain, so the transfer of ownership no longer needs to be executed by a centralized third party. Intellectual property (IP) can also be recorded in a decentralized ledger. Tokens representing personal identities can allow IP to be transferred peer-to-peer. For example, copyrights can be sold in the form of tokens without affecting other personal property. Although regulators may be reluctant to move to a decentralized official registration system, emerging technologies such as blockchain do have many advantages, such as increased security, fraud prevention, and reduced transfer costs.

In this area, the rules and legislation governing the use of blockchain technology also need to be improved. Current regulations for issuing IP certificates focus more on contractual relationships than on the transfer of property rights. However, blockchain systems could modify IP law to make it more applicable to electronic products, such as the first sale doctrine ^[1] . This doctrine allows patented products to be resold. This is problematic for digital files because we don’t know if the original purchaser resold the original file or created a copy. Blockchain technology would allow any digital copy to be personally marked so that the seller can confirm the completion of the transaction, and the first sale doctrine could then be enforced.

Storage and Data Transfer

Other information can also be transferred or stored on the blockchain. The decentralized verification process of the blockchain can ensure the security of digital signatures. Identity information can be stored and verified through the blockchain ledger. Verified identity information (semi-anonymization) can reduce fraud and provide trust ratings in P2P markets or lending services.

However, this type of identity authentication will cause privacy issues. Do such applications have the right to involve privacy? In addition, creating a large-scale information library will also have the risk of data leakage. Although cryptographic ledgers can basically guarantee security, if personal information and other data are exposed on other platforms and involve blockchain data, transactions can be tracked, even if the ledger is semi-anonymous.

Smart Contracts

A smart contract is a computer program that automatically executes the terms of a contract. The most basic smart contracts operate entirely online; users can set it up in advance, such as automatically rewarding a website after a certain number of articles are published. Smart contracts can also sell digital products, and when payment is received through the blockchain, it is recorded in the corresponding ledger and an activation code is sent. With the development of the Internet of Things (IoT), physical transactions can also be digitally verified to ensure security.

But smart contracts can bring legal problems. First, the automatic execution of smart contracts violates the spirit of traditional contracts. Once a smart contract is executed, it cannot be revoked, and it may even be mandatory or unreasonable. Since the terms of a smart contract are codes, the parties involved must strictly abide by them. Second, smart contracts, like blockchains, face privacy issues. The parties to the contract are fully visible on the public ledger, and third parties may maliciously track other people's contracts. Finally, smart contracts can reform the legal system. At that time, lawyers will be responsible for writing or adjudicating smart contracts.

Decentralized Organization

Traditional organizations can use blockchain to distribute rights, such as voting. Company resolutions can be automatically executed by smart contracts, such as automatic dividend distribution after authorization by organization members.

However, the issue of liability for decentralized organizations is difficult to define because the management of such organizations is automated. In today’s legal system, it is determined who will be held responsible if a company engages in illegal activities. Similarly, the legal status of such organizations needs to be further improved.

Securities and financial products

It is worth noting that Overstock.com plans to issue securities using blockchain technology. The U.S. Securities and Exchange Commission (SEC) has announced that Overstock's S-3 filing is effective in December 2015, which means that Overstock can publicly issue blockchain stocks.

Other companies are raising money by selling their own native tokens, which they say are not securities but pre-sales of their technology products. Whether or not these tokens are securities depends on the specific circumstances; different applications of the same technology can produce different results. In addition, smart contracts can create and distribute financial products. For example, it can automatically distribute the original shares of a company. Regulators and exchanges can also add compliance clauses before the contract officially takes effect.

Summarize

Blockchain will continue to create new possibilities for our information transactions. These opportunities will bring more complex legal challenges, but they will also promote the improvement of legislation. We hope that the future legal framework will encourage the development of this innovation.

Notes (↵ returns to text)

1. First sale means that after the patented product manufactured by the patentee himself or licensed to others is put on the market for the first time, the patentee no longer has any control over these specific products. In short, the purchaser's further transfer or use of these products has nothing to do with the patentee. ↵