BLOCKCHAIN: LEGAL CONUNDRUM OR STEPPING FORWARD?

 

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Blockchain technology has been, until recently, barely known beyond being the technological framework behind the first significant cryptocurrency system: Bitcoin. The simplest explanation is that Blockchain is a protocol or digital system that allows for the creation of multiple decentralized and highly secure databases in which each transaction is authenticated in a multiple and decentralized way. In the case of cryptocurrency systems, transactions consist of the transfer between portfolios of the so-called “tokens”, whose value is market-determined.

The creators of Blockchain envisaged and designed a highly secure transaction verification system that allows for them (i) to be made without supervision; (ii) to be unforgeable; (iii) to leave an indelible trace; and, at the same time, (iv) to protect the identity of the wallets that have participated in each transaction. Therefore, Blockchain wards off fraud and offers sufficient guarantees for a centralized supervisory body to be unnecessary. In effect, its decentralized and ubiquitous character allows, on the one hand, to increase security in transactions, and on the other hand, to eliminate a bottle-neck effect that intermediaries and conventional supervisory body may involve.

Blockchain and its implications may seem complex and even contradictory, but this may in fact be due to to the lack of familiarity with it as it entails a paradigm shift; to which – en passant – we resist more for inertia than for necessity. We would like to point out two aspects related to Blockchain that present challenges to lawyers; the suitability of current anti-money laundering regulations, and a new language for writing contract clauses (programming languages), to create Smart Contracts.

Firstly, the lawyers face the challenge of guaranteeing compliance with anti-money laundering regulations whose premises are hardly compatible with the way Blockchain technologies operate. Lawyers face the conundrum of assisting clients that wish to carry out these transactions and discouraging them. Seasoned lawyers looking to assist their clients will need to devise creative formulas in jurisdictions more open to this new reality.

What’s more, legislators must decide whether to continue warning against the use of this technology, or whether to constructively analyze how to benefit from their features to implement anti-money laundering measures that are tailored to Blockchain’s own characteristics. In fact, the cryptography that protects the identities of the portfolios participating in the transactions is not an accessory to the Blockchain technology, but an essential requirement to ensure their security and decentralized supervision. This technology, therefore, must either be adopted as it is, or not adopted at all.

Secondly, the emergence and spreading of Smart Contracts on the Ethereum platform (which is also home to the most popular cryptocurrency system after Bitcoin: Ether) also poses an interesting legal challenge. Smart Contracts are written in the form of a programming code; which means that once certain conditions are met, the program will execute specific orders. In other words, it has the same structure as some clauses of a contract but with the particularity that they are implemented automatically. In the Fintech world they are in fact increasingly common.

The challenge we face in relation to Smart Contracts is: are us lawyers going to be able to write and read the clauses directly in programming language? The answer, we believe, should be affirmative as any translation from a legal language into a programming language will be incomplete, and also because the Smart Contract code not only automates its implementation but also provides interpretive accuracy.

An increase in the number of hybrid contracts will require lawyers that have learnt programming languages; something that is perfectly affordable to jurists. Similarly, and until magistrates sufficiently “catch up” with these languages, the contracts will be submitted to arbitration and jurisdictions that adequately regulate the use of wallets and Blockchain systems.

These are just two of the complexities that can arise with the irruption of Blockchain in the business world. As lawyers, we find ourselves facing a paradigm shift in the business actuality and – given the impossibility of preventing such a change – perhaps the most prudent approach is to embrace it, just as it is wiser to weather the storm than to fight it. We are entering unchartered territory, and the markets ask us to take a step forward and leave the conundrum behind.

 

 

José María Viñals Camallonga
Partner and Director of Madrid Office

Tania Esparza Gutiérrez
Senior Associate

Lupicinio International Law Firm