16 May 2019

BY YASH CHOUDHARY (ASC SOLICITORS & ADVOCATES)

The blockchain technology is a disorderly technology, also called Distributed Ledger Technology (DLT). A blockchain is a distributed ledger in which information is accumulated in a authoritative and protected way using cryptography. A blockchain is a ‘trustless’ distributed ledger, ‘trustless’ because they do not require third-party verification, but rather use high-powered crypto-economic motivation code of behaviors to authenticate the authenticity of a transaction in the database. There can be many use of  blockchain like register, inventory and exchange of assets, including all areas of finance, economics and money, durable goods (material goods) and intangible assets (votes, ideas, reputation, intent, data and health information). The use of blockchain technology allows multiple applications in all segments of the company involved in financial, market transactions and data storage.

In 2018, the United Nations Office for Project Services and Blockchainpilots.nl brought in concert a group of legal and Blockchain specialists from The Netherlands, Singapore, and the United States to construct a research presenting an introduction to the legal aspects of Blockchain.

THE REMARKS ON BLOCKCHAIN AND THE LAW

The decentralized character of Blockchain makes it feasible to view existing compositions, which are based on central databases. This is evidenced by the mount of Bitcoin and other cryptocurrencies in a brief period, a financial system worth hundreds of millions of dollars was generated without the participation of any bank or government.

It is a system that is difficult to grasp within our current legal frameworks, which is exactly why it is interesting from a legal perspective. There are regular calls for legislative changes and new regulations due to the existence of Blockchain technology. However, when looking at Blockchain on a transaction level, it is clear that many legal questions about Blockchain can be answered within current legal frameworks.

LAW IN A DECENTRALIZED WORLD

Humans are use to the idea that crossing border alteration in rules, from which side of the road we drive on to fundamental rights stemming from the United Nations Charter. The Internet has now shadowed those national borders, with the push of a button on your computer; you can conduct a legal transaction within a country. Our legal frameworks are based on national borders and are highly related to a legal viewpoint which country any legal act has been performed. This is relevant for which law applies and which government has the authority to enforce the law. However, the real relevance of the law it  is limited; for example, if I am in The India and I order a new pair of shoes from England through the Internet, all that really matters is that I get a good pair of shoes for a great price. Where the shoes come from is not legally relevant.

Blockchain technology takes the crossborder aspects of Internet from the level of information and communication to the level of transactions and contracts. The decentralized nature of Blockchain means that the system no longer needs to be linked to any legal system. The nodes that form a Blockchain can theoretically be located in any country in the world. However, a country also can declare that its laws apply to any nodes located within its borders. Should the other nodes in the network reject the applicability of these rules, the action of the government in question means essentially nothing. In other words, the lack of a central database and a communicating central party means that governments only have limited say about what does and does not happen in a Blockchain. It is interesting to see how a society deals with such legal and organizational issues. example

The Parity MultiSig Wallet.

In July 2017, a “black hat” hacker—that is, a hacker with malicious intentions—discovered a flaw in the Parity MultiSig Wallet. Basically, the “names” of the signatories (the externally owned account numbers) could be overwritten without a犀利士 ny checks, meaning that the hacker was able to overwrite him-/herself as signatory multiple times. This enabled the hacker to sign the minimum required M times by him-/herself and transfer funds without authorization.

The Ethereum startup immediately warned the white hat hackers about the suspicious activities. This resulted in a race between the white hat hackers and the black hat hacker(s). An important element of Blockchain is its transparency, which played a crucial role in the counter-actions to the black hats. Just as it is possible to see all transactions in permissionless Blockchains, it is also possible to search for smart contract code, which means that the addresses of other Parity MultiSig Wallets were easily found. This is what the white hat hackers did, and, using the flaw found by the black hat hacker, they transferred the funds from the vulnerable wallets into safe accounts.

THE USE OF BLOCKCHAIN TECHNOLOGY IN EXISTING LEGAL PRACTICE

Blockchain presents a unusual way of looking at the existing legal system. This does not mean that Blockchain technology does not raise important questions within current legal frameworks.

Relevant Law

The decentralized character of Blockchain technology means it is not probable to establish which laws apply to Blockchain, because every legal area sets the conditions for applicability within its domain. Thus, it is conceivable that Dutch civil law will apply to a Blockchain transaction while the German authorities can levy taxes on the same transaction. In fact, regulations from many different legal systems could apply to a Blockchain, depending on the context.

At the transaction level, it is usually quite clear which laws apply. If a Blockchain transaction is executed between two parties in the same country, then the civil law of the country in question generally will apply. However, international law will have to decide which civil law applies to a transaction between parties from different countries. The general rule is that parties can make a decision in advance between themselves which laws apply to their Blockchain transaction. If they do not do so, then the laws of the country where the characteristic performance is executed will generally apply.

Identity in a Blockchain

All transactions on open (non-permissioned) Blockchains are public. This does not mean it is always clear who has executed the transactions in a public Blockchain. In the Bitcoin Blockchain, for example, all users have a public key and there is no way to determine who is behind a key. It also is not possible to determine who is behind a specific account through a central organization because no central organization regulates the Bitcoin Blockchain.

This could lead to problems. If you do not know who you are transacting with on a Blockchain, it is practically impossible to take that party to court if something goes wrong with the transaction. It is conceivable, for instance, that you make a payment with Bitcoin and accidentally enter an additional zero, which means ten times as many Bitcoins as intended are transferred to the receiving party. If such a transaction had taken place through a bank, it would be relatively simple to find out the identity of the receiving party and force repayment judicially. For a Blockchain transaction, finding out the identity of the receiving party is simply much more complicated.

Blockchain and the UN

 Use of Blockchain protocols in development is as new as it is promising. The UN system is in a unique position to apply these protocols, due to the reach of its operations, its independence, and its institutional experience. The UN system have enough regulatory flexibility to work with and refine Blockchain platforms under current circumstances, UN activities might serve as a kind of test lab both for Blockchain systems and for new regulatory approaches to Blockchain-based international transactions. A solution to the lack of direct representation within complex Blockchain systems could be the creation of third-party entities to serve as contractual intermediaries between decentralized autonomous organization-type communities and regulatory mechanisms or third-party partners.

Some have suggested that the United Nations Commission on International Trade Law (UNCITRAL) play a central role in outlining a regulatory framework for this process. Within existing UNCITRAL works, including the Model Law on Electronic Commerce, the Model Law on Electronic Signatures, the Convention on the Use of Electronic Communications in International Contracts, the Model Law on Electronic Transferable Records, and others, it appears that these existing structures can account for the use of Blockchain exchange systems with some flexibility.

However,  exceptions exist to provide incentive for UNCITRAL to develop new works to account directly for cryptocurrencies and other Blockchain-enabled transactions. For example, Koji Takahashi notes that Bitcoin and other cryptocurrencies could meet this definition if a state legally adopted it as valid currency but, looking further, a cryptocurrency cannot qualify as a “tangible asset” under ST Model Law Article 2(ll) and therefore cannot be treated directly as money under this regulatory model. It is therefore recommended that UNCITRAL develop new works specifically to provide an international model for the regulation of cryptocurrencies.

While current frameworks regulating international financial transactions do not tend to disallow the use of cryptocurrencies per se, if such mechanisms are to become a stable and widespread source of development funding, it is inevitable that more fine-tuned regulatory structures will arise to deal with the inevitable conflicts that arise.

 UNCITRAL, with its resources and history of legitimacy in this area, is ideally situated to step into this niche. Given that the UN public mandate puts UN system organizations in a position to be early developers for a range of Blockchain protocol types, it is especially appropriate, and reflective of its international accountability, that the UN system take on a corresponding normative role.

Bibliography

Only for educational use.

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