Blockchain Legal Issues Explained

Blockchain is a term that most everybody now is familiar with. If you delve deeper into this world, you will find several elements and factors that influence and shape this ecosystem.

One such issue that needs some discussion is the legal issues associated with blockchain.

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What are blockchain legal issues?

As is the case with almost all legal issues, blockchain also gives rise to certain legal challenges.

Knowledge about these issues and how to manage them is thus of extreme importance. There are some of the major points, that must be kept in mind.

Smart contracts

Smart contracts are contracts which have the elements of a ‘traditional’ contract in a set of computer-coded instructions. However, the question here remains that this system might not be able to achieve the degree of subjectivity or judgment which is based on separate cases and takes into account events that occur outside their underlying code.

For example, a smart contract may not be able to regulate if it is used illegal activities. Issues about its regulations and legality arise from this very debate.

Data

Data protection laws are of extreme importance as blockchain holds personal data. The distributed and decentralized nature of blockchain causes concern here. It may be so, that their will be a need to comply with the laws to different states.

Many regulatory measures are coming up like the implementation of the approved Model Clauses or (for transfers involving the US) recipients signing up the EU-US Privacy Shield.

The new General Data Protection Regulation will also look to formalize an obligation on data processors to pseudonymize data and a right for data subjects to request erasure of their personal data.

Creation of huge data repositories on a blockchain gives rise to the potential for security breaches which is why blockchain operators need to take cybersecurity particularly seriously so as to avoid potential regulatory action probable damage to the reputation.

Regulatory framework

While the ‘wait and see’ approach as is being taken by most regulators tends to encourage more innovation, it does not in any way provide any certainty for businesses or blockchain innovators.

As with any development, it seems likely that legal issues will be resolved in line with existing laws, principles and guidance. However, it’s no secret that laws can quickly fall out of date, so it’s almost inevitable that laws will need to be adapted, or that entirely

New laws which won’t be out of date and is suitable to cater to blockchain should be implemented.

As we know, records on a blockchain are immutable and what remains to be seen is that, whether blockchain technology is capable of amending the records in the face of new legislation.

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Liability and responsibility

There are questions regarding the legal status of blockchain-enabled organization which operates through pre-programmed smart contracts, without human involvement.

For now, it is hoped that the legal landscape will develop over time. However, the status of a DAO and questions of liability depends on a number of factors, e.g. how the DAO code is used, the purpose for which the DAO has been established, who ‘controls’ it and how many owners there are.

Litigation and dispute resolution

Actors in a blockchain system will be “distributed” which raises concerns about how applicable laws will be determined. If the actors fall under different jurisdictions, advance thought should be given to which dispute resolution mechanism is the most appropriate.

In practice, it would seem advisable for parties to define the applicable law and jurisdiction in advance, perhaps in the ‘terms’ (i.e. code) of the relevant smart contract.

Over time, we may see blockchain-based service providers requiring customers to sign up to governing law and jurisdiction in the same way as for websites, i.e. via ‘terms of use’.

Conclusion

All in all, it might be said that though there are many conjectures and theoretical explanations on maintaining the legality of blockchain technology, mostly none has been put to practice and it is only with increased usage and more use cases that we will be able to find out.

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Rishma Banerjee

Rishma is currently pursuing a bachelor’s degree in International Relations and has a special place in her life for sifting through all sorts of random trivia, thank you very much.