In his recent article, Peter Sayer explained five key issues underlying blockchain distributed ledger technology. Many claim that distributed ledgers will be the most significant technology to disrupt business since the internet. A whole host of major financial companies have publicised their interest and investment in this technology.
Yet most businesses and their advisers have yet to understand distributed ledgers, let alone their real utility. Not since "the cloud" has one buzzword caused so much hype. And, of course, the head-scratching extends to governments and regulators who – as with every new technology wave – are struggling to work out the legal and regulatory implications.
Blockchain refers to one type of distributed ledger: basically, a ledger of digital records or transactions that is accessible to all computers running the same protocol. Distributed ledgers are decentralised in order to eliminate the need for a central authority or intermediary to process, validate or authenticate transactions. Each record is time/date stamped and provided with a unique cryptographic signature, which is designed to ensure the ledger's authenticity and integrity. The cryptographic technology means that it's possible both to compress data and to maintain confidentiality of the content and participants in each transaction. Only someone with the correct "key" can access the details associated with a specific record.
As with any potentially transformative new technology, distributed ledgers raise a number of questions for policy makers and regulators at both national and international levels. Regulators are certainly closely analysing and monitoring distributed ledger developments and, for now, appear cautiously optimistic about its potential, especially because of the potential that distributed ledgers could actually help to improve regulatory compliance tracking and reporting. But, guess what?: most authorities are taking a "wait and see" approach.
Blockchain and distributed ledger technology is not without its challenges, including scalability and latency, lack of mainstream understanding, lack of readiness in some sectors to rely exclusively on data in digital form, over-reliance on out-dated legacy systems which would need to be overhauled before distributed ledger technology could be implemented.
Successful use of the technology is also likely to require collaboration across all interested parties (including regulators). For example, in the financial services context, market participants and their advisers would need to work with other trading firms, exchanges, clearing and settlement services, trade bodies and regulators to settle on a workable solution. This raises issues of standardisation and interoperability.
From a legal and regulatory perspective, a project to create or adopt a distributed ledger solution will be similar to negotiating any large scale IT development or outsourcing arrangement, but there are some key additional challenges:
- Accountability/responsibility: Control over the ledger is necessarily distributed, so how do you control or regulate the ledger, its users or other parties in the system? Who is accountable in a decentralised system? Whom (or what) do you regulate?
- Who would regulate? Given the cross-border nature of the technology, who would regulate? It's very likely that there would need to be agreed international regulatory principles and cooperation among regulators.
- Smart contracts: How would existing contract law need to change to take account of automated or "smart" contracts? Would they be valid and enforceable?
- Privacy and security: The technology relies on an assumption that it is very secure because records would be almost impossible to decrypt. However, with the continued development of quantum computing, this may not always be the case. There are other security concerns, for example, that it could be possible to trace or deduce a party's identity from transactions or through access to a party that has permission to decrypt the data.
- Competition/anti-trust: If private distributed ledgers are created that are equivalent to consortia, there could be arguments of cartel activity. Also, there could be a risk that algorithms are set up in a manner which produces anti-competitive results that are secret or not readily detectible.
It's clear that blockchain technology has significant potential to transform a variety of sectors and scenarios, and an increasing number of organisations are considering how this technology could be used in their own businesses. However, the technology is not a panacea, and organisations need to address both practical issues and regulatory challenges when adopting it.