By Alice (Fei) Chen, Zun Hu and Keyu Shi
Introduction
Before we look into the blockchain, we may first look at a beautiful Micronesian island named Yap. The currency on the island is stone money, which is a large doughnut-shaped stone weighing up to four tons. So how do they use it in trade? The Yapese people innovatively developed their monetary system that, without the physical transfer of such stones, they record each transaction throughout the tribe in their distributed ledger. Each family holds its own ledger and the majority of the ledgers validate a transaction.[1] It might sound a bit primitive, but in reality, it builds up a very trustworthy and verifiable system. A single person could not change or tamper the record because it exists not only between two parties but among everyone.
And this is precisely how blockchain works, building a tech-based Yapese village. One salient feature of blockchain is its immutability. Once created, it couldn’t be changed. The other feature is cryptography, with the private key controlling specific account and the public key as sending address to validate a specific transaction, it secures the communication.[2]
Application in Legal World
The smart contract
Blockchain can fundamentally change the process and mode of P2P transactions, and one application is “smart contracts”. The concept of “smart contract” is broader than a traditional “contract” or “legal contract”. It is a written program akin to a contract, and once the precondition is met, it will automatically be enforced.[3] Despite the inherited benefit of immutability, another advantage of a smart contract is its automatic execution.
A typical and canonical real-life example of such would be a vending machine. The transaction rules and prices are preset, and only when you insert enough coins (digital asset) could you get the product or service. If you insert too much, it will eject and return the change. If the machine runs out of products, you can get your money back. It is an automatic system that offers service 24/7, and individuals could transact in a free and simultaneous way.
Such a streamline process could avoid intermediary services, such as brokers, lawyers, and bankers. It can save great time processing with these paperworks, save relevant service expenses. And more importantly, avoid manual mistakes or possible bias in the process.
On the other hand, some legal practitioners express their concerns that smart contracts might lead to certain unconformity with the contract law, especially the format requirement and illegality.[4] However, history repeats itself. The same concern was also raised thirty years ago at the introduction of e-commerce and the internet. And as we see, the online regulation and registration system secure online transactions in a safe and rapid way. Moreover, the legislature and courts are gradually recognizing the existence of the electronic contract. So before quickly jumping into a pessimistic conclusion, as lawyers, we may take it as a chance that international transactions would be significantly boosted, and we should find our position in the system. Unlike a middleman, we may play a role more like a surveillant, helping our clients oversee the automatic process and avoid possible risks.
Transfer of Rights
As the discussion above, blockchain can be used as the transaction platform of digital assets (i.e., bitcoin). Furthermore, its immutable and efficiency features allow transactions of more intangible assets to be recorded in the ledgers. Those intangible assets include the rights of real estate and intellectual property. In those sections, records reflect the rights of ownership, and also obligations.
Traditionally, the land registry requires a government department to verify and process the transfer of the entitlement. Certain disputes may arise under this model, like double spending, fake records and difficulty in identifying the genuine owners.[5] Land or real estate is different from ‘manufactured products’ in which a root title may be sourced to the point of manufacture. The origins of the title may have been lost in the mists of time.[6] Although some initiatives based on ICT technologies have been employed in registry systems,[7] most of them still require a central institution to mutually record and control the transactions. Massive data are generated daily and higher demands of efficiency and security are made.
Blockchain technology can be introduced in those areas to solve the above-mentioned problems. In a blockchain-based land registry system, each item contains buyers and sellers, time of transaction, type of rights transferred, etc. They will be recorded in ledgers when transactions are made in an immutable way entrenched by cryptography. It would allow certified users to check the status of certain property. When a new record is inputted, it will be reviewed by each node. Double spending or fraud would no longer be possible. In recent years, more and more states are in the race for blockchain. The republic of Georgia has established a complete blockchain registry system, Japan, United States, Netherlands and many other countries also set up relevant projects. NSW LRS is supported by ChromaWay, aiming to “position New South Wales property market as a model of transparency and efficiency”.[8]
As to intellectual property (“IP”), blockchain with AI (Artificial Intelligence) will change the IP industry, especially for those small-scale startups. It is hard for startups to protect their intellectual property due to excessive costs. The function of blockchain to the IP industry is similar to land registry as mentioned above. The low cost in blockchain is quite friendly to small-scale companies. With the help of AI, it will allow the system to identify possible IP infringements. [9] For example, AI could easily identify the similarity among different designs.
Others
Blockchain not only raised forensic disputes to be settled in Courts, but also helps boost the efficiency of legal system. Evidence storage and sharing require efficiency and security, which correspond with the characters of blockchain. Sometimes, “trolley load litigation”[10] imposes great pressure on lawyers, unless lawyers disobey their duties. For example, Dubai International Financial Centre (DIFC) Courts already launched the first court of blockchain, which solves the disputes of blockchain and also use blockchain as a tool to “streamline the judicial process”.[11]
Current trend and possible challenges
Law firms, consulting firms, institutions and organizations are all developing their services with blockchain, which includes smart contracts, cryptocurrencies, fin-tech, logistics, real estate, data security, etc. Specifically, law firms, such as Lander & Rogers, Herbert Smith Freehills, and Bird & Bird already provided legal advice on blockchain businesses.
With the broad application of blockchain, there could be challenges and risks. First, there is a challenge to identify the users' identity as no personal information is stored in the centralized server. There could be millions of users within the blockchain. And some participants may not want to disclose their data. For instance, some companies may assert that their internal data is confidential. It will subsequently lead to loose information, which makes blockchain not much different from other data storage channels.
Second, there could be problems with Cyber Currencies, which is the foundation of blockchain. How should we define and distinguish between virtual properties and traditional properties. And if the cybercurrency is widely adopted, under which jurisdiction should tax be charged, who should be charged, and how to calculate?
Blockchain itself also can be hashed and one well-known method is the “51% rule”. Where hackers, or a company, controls 51% of one blockchain network, then there is a possibility to create fraudulence. Moreover, each node in the blockchain needs hardware to download and yield data, but as blockchain increasingly enlarges, the capacity of storage and speed of yield could be a real challenge. Besides, what technical standard should we adopt to transform data between different systems, software, and platforms to ensure the certainty and accuracy of displaying the data?
Conclusion
Admittedly, there are challenges and obstacles we have to face in the road of adopting the blockchain. But the advantages will far exceed the disadvantages. It will redefine the legal industry substantially and procedurally. As lawyers, we need to adapt to the changes and find our positions, because the changes are happening and they are going to happen anyway.
Endnotes
[1] Reade Ryan; Mayme Donohue, ‘Securities on Blockchain’ (2017) 73(1) Business Lawyer, 108.
[2] Ibid.
[3] ZibinZheng; ShaoanXie, ‘An overview on smart contracts: Challenges, advances and platforms’ (2020) 105 Future Generation Computer Systems, 475-91.
[4] Michael Bacina, ‘When two worlds collide: smart contracts and the Australian legal system’ (2018) 21 Journal of Internet Law, 16.
[5] Shuaib, Mohammed et al. “Blockchain-Based Framework for Secure and Reliable Land Registry System.” (2020) TELKOMNIKA 18.5, 2562.
[6] Thomas, Rod. “Blockchain’s Incompatibility for Use as a Land Registry: Issues of Definition, Feasibility and Risk.” (2017) European Property Law Journal 6.3, 376.
[7] i.e. NSW Land Registry Services (NSW LRS), eConveyancing in NSW (07 May 2020) < https://www.nswlrs.com.au/eConveyancing>.
[8] NSW Office of Registrar General, Response to Discussion Paper Removing Barriers to Electronic Land Contracts, Comments Submitted by ChromaWay Australia (2018), 2-3.
[9] Gürkaynak, Gönenç et al. “Intellectual Property Law and Practice in the Blockchain Realm.” The computer law and security report 34.4 (2018): 847–862. 855. In this article, the writer discussed the CAD files in IP registry.
[10] M Kumar et al. Civil Procedure in New South Wales (Thomson Reuters, 4ed, 2021), 658.
[11] Dubai International Financial Centre, DIFC Courts and Smart Dubai launch joint taskforce for world’s first Court of the Blockchain (30 July 2018) < https://www.difc.ae/newsroom/news/difc-courts-and-smart-dubai-launch-joint-taskforce-worlds-first-court-blockchain/>