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Only a few deny the huge impact blockchains will have on
many areas of social and corporate life. Even outside the IT world,
professionals have quickly acknowledged the potential of blockchain
technology, which builds the backbone of digital currencies such as
the bitcoin, for use in a vast amount of other areas. For example,
there are many blockchain-based projects and applications in supply
chain management, mobility services and data management in IoT use
cases.

The underlying technologies of blockchains

The technical characteristics of blockchains can be summarized
as follows: a blockchain is a distributed network of servers
(“nodes”), where information is mirrored on all
participating computers. There is no single entity that has control
over the entire system (often referred to as middleman) so that
changes to the blockchain can only be implemented by the
participants controlling together the majority of the computing
power.
Blockchains are ledgers
that record transactions with
information about the sender and recipient of a digital coin or
token, the amount or number, and the exact date and time of the
transaction. Numerous network computers verify each transaction
through laborious calculations. To increase security, blockchains make extensive use of
cryptography
. Ultimately, what may be essential to the
success of blockchain technology, and especially to digital
currencies, is that it has solved the so-called problem of double
spending: it prevents multiple use of a digital coin simply by
replicating digital copies. Blockchains appear to be much more
secure and resilient against hacking attempts or manipulations than
centralized servers under the control of a few. And security is
what lawyers like, too.

For that reason, it makes sense to evaluate if there are
blockchain use cases that relate to how we document legally
relevant facts or transactions.

Blockchain-based legal registries

At first, what comes to mind are all sorts of registers that
document the status, identity, or rights of a person or legal
entity, namely commercial registers, land registries, civil
registries, share registers, and
patent
or
trademark registers
. Secondly, if blockchains are secure
and allow the registration of information, they could also be used
for securing evidence that can be presented in court proceedings.
Examples are screenshots of websites, photos or any other digital
or digitized content, and of course contracts. It has to be noted
that usually, not the file itself is stored on the blockchain, but
only a cryptographic hash value. The ability to reproduce the same
hash as the one stored on the blockchain proves that the original
file has not been altered and, thus, is authentic.

Blockchain and data protection

The security standards of blockchains are so high that it is
virtually impossible to erase information. What might be a good
feature under some circumstances can be a legal problem in other
situations, for example, if personal data is concerned. Most
privacy laws, especially the General Data Protection Regulation in the EU
(“GDPR”)
, require that personal data must only be
stored for lawful purposes, for so long it is necessary to serve
the purpose, must be corrected if incorrect, and the concerned
person has a right of access to the stored information. All this
does not mean, however, that blockchains are invariably incompliant
with data protection laws, but it is a challenge to design the
blockchain architecture and applications in a way that they respect
privacy laws. One approach is to keep personal data away from the
blockchain (“off-chain”) and to store only the proof that
certain personal data has been used, shared or verified, etc.
without disclosing the underlying data.

Blockchain-based smart contracts

Moreover, blockchain is a software-based technology that allows
the automation of certain processes. This is where the much-quoted
smart contracts come into play. Smart contracts are software that
resides and interacts with blockchains. The basic concept is that
if pre-defined conditions deduced from a certain information input
are met, determined consequences by performing calculations based
on algorithms are triggered (the output). While these
if-then-relations advocate that smart contracts are software, but
not legally binding contracts as some claim, the analogy was made,
because parties agree in contracts that if one party does,
produces, or delivers something, then the other party has
to do, give, perform something else. This analogy is questionable,
because contracts are much more complex. Parties accept that they
are necessarily incomplete and that implied exceptions may apply in
good faith. Good faith, though, is not a concept computers can work
with, regardless how touring-complete they are conceived (named
after computer scientist Alan Turing, this means that a computer
programming language is able to simulate or calculate any real word
scenario, only limited by the available computer power).

Outlook

Blockchain-based registers have certain advantages over
centralized registers that are either maintained offline or
electronically. However, in countries where there are already
functioning state-run registers available that are largely
undisputed and provide for legal recourse against incorrect
entries, there is little incentive to adopt blockchain-based
registries. Moreover, changes to the existing system may also
require lengthy legislative procedures. Further, all information
stored on blockchains must meet varying requirements of secrecy and
privacy, as well as modifiability and erasability. Despite bold
headlines suggesting a new generation of lawyers who are sometimes
called “legal coders,” the tech-savvy legal counsel or
judge is still a scarce minority. For these reasons, it is not to
be expected that blockchain-based applications will replace
existing use cases in the legal field on a large scale anytime
soon.

Annotation:

This article is based on the author’s essay “How
Blockchain will change our legal system” in the book “The
Blockchain Factor – How Blockchain will change our
society
” edited by Prof. Dr. Philipp Sandner, Prof.
Dr. Andranik Tumasjan, and Prof. Dr. Isabell Welpe (currently only
available in German).

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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