Blockchain:

Legal implications, questions,

opportunities and risks
September 2022
Contents

Introduction 01
What is blockchain? 02
Practicalities 05
Smart contracts 07
A blank canvas 12
Solutions 13
Global trade aspects 14
What’s next? 17
Blockchain: Legal implications, questions, opportunities and risks | Introduction

Introduction
Blockchain continues to be the most polarizing concept in technology
– with its advocates and critics each fervently making their case for the
technology’s potential and necessity, or its folly and waste. There is,
however, consensus that ‘blockchain’ is relevant.

Enormous sums of capital (wholesale and retail) are being deployed, with
value created, destroyed and re-allocated through the use of blockchains.
Large engineering efforts, and research and development, are being
applied to iterate and to create new flavours of ‘level 1’ blockchains, along
with software to make those blockchains accessible to users. Blockchain-
based technologies raise fundamental questions as to the nature of
property, contracts and legal persons, which are being seriously revisited
in jurisdictions around the world. Macro-economic concepts such as the
‘soundness’ of money and the nature of central bank money, are being
consulted on by central banks. Micro-economic concepts such as the nature
of scarcity of an asset and new manifestations of ‘status’ goods are being
experimented on, and are forming part of the social zeitgeist. Hardware
supply chains and component prices are being impacted by the demand
for specialist ‘proof-of-work’ mining equipment used to power blockchains –
which varies based on cryptoasset prices, and on technological roadmaps
that might obviate the need for this kind of mining. Social concepts of
sovereign identity, pseudonymity, reputation, new forms of governance
and audit, along with proving information to a third party, without needing
to share context, are all being experimented on, trialled, and tested.

In short, blockchain continues to develop beyond its initial cryptocurrency

use case, into areas such as ‘non-fungible tokens’ (NFTs), ‘decentralized
autonomous organizations’ (DAOs), and decentralized finance (DeFi) –
often with little respect for the status quo. To blockchain proponents these
use cases are overpowering and underway. To critics, they are overcooked
and underwhelming. In any case, it behoves us to pay attention and to
understand the ‘what’, ‘how’, and ‘why’ of blockchain, as its relevance looks
set to continue.
01
Blockchain: Legal implications, questions, opportunities and risks | What is blockchain?

What is blockchain?

At its simplest, blockchain involves recording information in a way that

creates trust in the information recorded.

The blockchain software is used to synchronize data While any one node could change the data in its copy
stored in a distributed manner amongst peers on all of the blockchain, those amended records would be
the computers or servers (“nodes”) participating in a rejected by other participants because either the
particular network. This allows for multiple records of blocks would not ‘add up’ properly, or the chain would
identical data. Trust is created because all the nodes be shorter, and therefore represent an expensive
in the network control, check and consent to any ‘minority’ view.
additions or changes to what is recorded. Blockchain
can be used for record keeping, transferring value (via Where this paper describes a public blockchain as
cryptocurrencies or otherwise) and smart contracts to ‘immutable’, it does not mean that any particular data
automatically execute a transaction when one or more record literally cannot be amended. Instead it means,
preconditions is met. ‘the blockchain’ is defined as the version of a blockchain
which has a prevailing consensus by the majority of
Once stored on the blockchain, participants are participants as being the preferred version, and that:
incentivized to not manipulate or change the data – in (a) it is expensive for any one user of the network to
practice, the data is immutable. Every block contains adopt a minority, non-consensus view; (b) it is not
a unique summary of the previous block in the form technologically possible to force users to change their
of a secure hash value – think of the way a jigsaw records; (c) it is legally unfeasible to force users to
puzzle pieces fit together. And because each block change their records, as they are decentralized and
is connected, altering the timing, order or content of not identified; and (d) that no one person has the
a transaction would create an invalid configuration, computing power to write a longer blockchain that
unless all subsequent blocks were also changed (which they control – to do so would require more computing
would be computationally expensive or slow). power than the rest of the network combined, but that
computing power would be expensive to gather and
Participants in the blockchain (miners to validate use, and would have no benefit until the 51% point was
transactions, nodes, and wallet users) are all expected reached.
to use the longest blockchain (with the most blocks
in it) as the definitive version. This norm perpetuates In practice therefore, the longest version of a public
because users are expected to be self-interested: blockchain is immutable.
being in the minority is expensive because you would
input resources (electricity, capital, etc.) but not see
the returns that come from being in the majority. In
practice, a consensus forms as the definitive version,
based on the actions of the majority.

02
Blockchain: Legal implications, questions, opportunities and risks | What is blockchain?

Immutability Permissioned vs. permissionless

As a distributed ledger containing immutable data, a There are two types of blockchain: permissionless
blockchain can be trusted as a single source of truth. (in which anyone can participate) and permissioned
(in which a participant must be approved in order
But what does immutability mean in practice? to participate). The need for permission might be to
That the piece of information was included in the protect the privacy or trade secrets of those involved
blockchain at some verifiable point in the past – not or to ensure compliance with regulations, such as
necessarily that the information is correct. The those designed to prevent money laundering or
garbage-in, garbage-out principal is as applicable here financing of terrorism.
as with any other process, the difference being that we
cannot go back and correct the mistake. It can only be
corrected by adding another block to the chain with the
consent of all the participants.

A blockchain records information representing Permissionless blockchains are public;

tangible and intangible assets and obligations participants have ID numbers, and so
between a network of peers using the same can operate pseudonymously, without
software, algorithms and cryptography to identification or authentication.
maintain the records. These assets and
obligations can then be transferred between
participants.

A blockchain allows participants to publish Permissioned blockchains are private and

signed information (including messages) protected by access control and (potentially)
without the need for intermediaries to different reading and writing privileges.
operate or maintain the service, or verify Participants are known, identified and
the real identity of authors (or senders). authenticated and the network may be
All parties share the same data, which is controlled by a super-user. Authentication and
replicated across all the nodes in the network. identification use highly secure cryptography.
The records included in the blockchain are
immutable (even if they are wrong) and provide
an unchangeable, timestamped audit trail.

03
Blockchain: Legal implications, questions, opportunities and risks | What is blockchain?

Applications
There are various uses enabled by blockchain software.
Blockchain is considered
These include tokenization to protect sensitive data; disruptive because it is
timestamping because of blockchain’s immutability;
serving as a payment channel that enables the transfer of
transparent and eliminates
assets and liabilities; and, as discussed below, facilitating the need for intermediaries
smart contracts to create legal contracts. Blockchain
technology has been used either to make existing
and other third parties while
processes more efficient, faster or cheaper, or to create being both robust (in terms
new methods or services previously not possible. The
most obvious example of this is the much-discussed
of base layer dependability)
cryptocurrencies. However, blockchain use is being and cost efficient (compared
adopted across a range of industries, including:
to the total cost of equivalent
Aviation (where smart contracts are easing checks and balances created
clearing between airlines), ticket agents and
banks, mining (to create a blockchain-based
in a traditional way).
virtual marketplace);

Transport (with virtual passports for locomotives);

However, each of these
and characteristics is open to
Oil and gas (to monitor good corporate
challenge – can a network be
governance of affiliates and financial services in a said to be transparent when
variety of ways, from clearing to loyalty programs).
its participants hide behind
pseudonyms?
Until law and regulation catches up, some
transactions are impossible without the
involvement of a third party to validate or
perfect the transaction. Coding flaws in
the software that uses the blockchain may
compromise users’ assets and undermine
security, and cost efficiency is open to question
when the externalities of blockchain use, such
as the volume of computing power used are
taken into account.

04
Blockchain: Legal implications, questions, opportunities and risks | Practicalities

Practicalities

Right the first time

Since blockchain records are immutable, it is important
to understand the use case requirements (technical,
legal, and commercial) up front. Disintermediation
allows for the speed of transactions to be increased
and the cost reduced. However, the intermediaries who
are being excluded from these transactions may have
performed valuable functions beyond simply recording
a transaction. This includes protecting the interests
of the parties to the transaction and third parties,
guaranteeing performance of parties’ obligations,
netting off risks, and fulfilling the regulatory tasks
without which the transactions are invalid or illegal.

For example, it may be technically possible to transfer

the ownership of a house from one participant in a
blockchain to another, but in many jurisdictions real
property transactions are not legally valid without
registering the transaction on the national cadastre
or land registry. Consequently, legal input is essential
to understand what requirements must be fulfilled
or avoided, and any regulatory frameworks – such as
data protection and anti-money laundering provisions
– must be complied with. These may necessitate the
ongoing involvement of third parties to perform these
formalities and duties, unless and until the law directly
acknowledges blockchain records and processes.

05
Blockchain: Legal implications, questions, opportunities and risks | Practicalities

Data protection In the European framework of data protection law,

Data protection is a hot topic and a key challenge there is on-going legal debate as to whether each of
for those using blockchain. Where personal data these other nodes are operating as ‘sub-processors’
is recorded in a blockchain, who is responsible for of the personal data (meaning overall the initial
protecting that data and complying with national and data controller is responsible for their actions) or as
supra-national regulations, such as the EU (European ‘controllers’ (meaning each node would be responsible
Union) General Data Protection Regulation (GDPR)? for its own actions) – in reality it would depend on
the particular facts of the situation. One approach
Because smart contracts are based on distributed to this challenge is not to use blockchain technology
ledger technology, the first issue is data export out of for processing personal data where the legal basis to
the initial territory. The GDPR and UK Data Protection do so is based on consent. If the transfer of personal
Act 2018 broadly restrict transfers of data outside data is reliant on consent, then as personal data
the European Economic Area (EEA) with certain relating to a transaction cannot be erased or forgotten,
exceptions. How can this be complied with when the requirement cannot be met when consent is
validators are global? One way to address this is via withdrawn. However, if a process disapplies the right to
the level of encryption and control with the validator. If be forgotten (e.g., the land registry), then this is not a
set correctly, the information sent outside the EEA can consideration.
be encrypted or anonymized so that no personal data
remains in it, or the personal data in it cannot be read Another personal data issue occurs with the right
or used. Therefore, this type of approach could meet to rectification, such as in the GDPR. Much like with
the criteria required for transferring personal data erasure, there is no mechanic to change the data on
outside the EEA. the other blockchain nodes, however additional data
can be added to the blockchain to correct and update
Another issue is the right to be forgotten or ‘right to the old data. The blockchain system and processes
be erased’. This is a right of data subjects that typically should be constructed such that the latest record
applies where their personal data is processed is read and relied upon, and the older records are
following their consent. Here, we need to be more identified as incorrect, and only to be used for audit/
precise again on the nature of ‘immutability’. While logging purposes (or even not to be used at all).
the person that initially put the information on the
blockchain (the ‘data controller’) might be able to erase
the relevant personal data in their own records, this
would have no practical benefit to the data subject,
because all the other blockchain records would remain
unchanged. The operators of all the other ‘nodes’
cannot be identified or practically compelled to update
their records, and they have no incentive to adopt
a non-consensus blockchain with the erased data
removed.

06
Blockchain: Legal implications, questions, opportunities and risks | Smart contracts

Smart contracts
The common definition is a computer protocol propose approaches in this regard. For example, the
intended to digitally facilitate, verify or enforce the UK Law Commission has proposed a novel method of
negotiation or performance of a contract. Blockchain- contractual interpretation by objectively assessing how
based smart contracts are often criticized as not a reasonable coder would interpret the software code
being ‘smart’ (as they do not have intelligence or think for (the ‘reasonable coder test’). Note, crucially, that this
themselves) – however they can outperform humans in may well depart from how a computer processor would
arithmetic, memory, speed, and logical processing. They interpret and perform the software code.
are also criticized as not being ‘contracts’ – but this is
based on a misunderstanding of what a contract is. Agency law applies when an individual is given agency
to fulfil or enter into a contract on another’s behalf:
A ‘contract’ is the abstract bargain between parties the autonomous performance of a smart contract
that creates a legal relationship. The contract can be by a blockchain adds some complexity to the normal
documented on paper, and represented in words, but analysis. Often the operator of a computer system that
it is intangible, and can both differ from the words the does something on behalf of a user would be held to
parties used to record it (for example, implied terms be an agent for the user, who is the ‘principal’. With the
and pre-contractual representations) and may have automatic performance of actions by a decentralized
restrictions on how it can be enforced from legislation system of ever-changing participants, there seems
(such as consumer rights and unfair terms). In this to be a vacuum: the principal is quite far removed
sense, the criticism is akin to saying a piece of paper from the actions, but there is no identifiable agent
is not a contract: it could never be, but it might be the performing the actions on behalf of the principal. The
most accurate and useful representation of the terms developers might be seen to be an agent (despite
of a contract. perhaps not being involved after they wrote the code),
or the individual miner that happened to verify the
The smart contract, or the sheet of paper, might not transaction in question, or perhaps there is no agency
be a contract however – they might be a summary relationship at all. Again, complex, novel, legal issues
only of the contract, might be directions where to arise, which will be very fact dependent.
find the contract, might be the contract expressed
in another language, might be a message which is Tort law also applies (more so than with traditional
itself performance of a contract, might be a notice contracts) due to potential issues with ‘drafting’
in relation to a contract, etc. As we see, fundamental (coding) of the smart contract. A tort could be triggered
analysis of the bargain, and the words and messages if the design of the smart contract did not contain all
between the parties is needed to understand what the terms of the underlying contract meaning the legal
contractual relations are created, and whether they contract did not occur properly, arguably leading to a
meet the standard requirements to form a contract claim of negligence against the designer.
(typically offer, acceptance, certainty, consideration,
and intention to create legal relations). Regulations and statutes also need to be considered.
EDIAS (Electronic Identification and Trust Service)
Smart contracts raise a range of legal issues – not just is a European regulation that allows for electronic
relating to contract law or contractual interpretation signatures and other electronic actions to substitute
– for example agency and tort factors come into play. real life actions, for example a digitally signed contract
How to interpret a contract written in code, rather than versus a wet signature which is crucial for the validation
words, is the first challenge. We are lacking in clear of smart contracts. This has been adopted in England
legal authority on this, however, think tanks and policy via the Electronic Communications Act 2000.
statements around the world continue to explore and

07
Blockchain: Legal implications, questions, opportunities and risks | Smart contracts

NFTs (Non-Fungible Token) DAO (Decentralized Autonomous Organizations)

Being non-fungible means that these tokens are not Essentially a DAO is a method using a blockchain
equivalent to each other and can be distinguished. and smart contracts to organize and co-ordinate the
For example, a one of a kind token that represents actions and preferences of a decentralized group of
ownership of, or rights in relation to, a real or digital participants, often based on pre-agreed software
asset. rules. For example, instead of deciding who to hire
from a list of applicants a smart contract can assess
NFTs use the same core technology and programming the applicants based on pre-agreed criteria, and issue
language as other cryptocurrencies such as blockchain. services agreements without any human input. Every
NFTs mainly exist on the Ethereum blockchain due to part of the digital process performed by a human could
its ability to write more complex smart contracts. (in theory) be replaced with autonomous code.

Traditional companies have shareholder meetings

where members can vote on resolutions for the
management board to implement. In a DAO this
management board can be done away with in respect
of digital activities: once a decision is made the code
and operation of the platform can immediately
and automatically perform the decision and its
consequences.

DAOs can continually improve and grow because

their participants can submit and vote on changes to
them, based on number of tokens held, perhaps with
additional rules such as the need to ‘stake’ tokens
to register a vote, or with different classes of tokens
carrying different rights.

08
Blockchain: Legal implications, questions, opportunities and risks | Smart contracts

The activities of the DAO might generate revenue

by it charging a fee for its services – which gives the
tokens value in controlling the revenue stream and
representing a claim on that revenue and profit. A DAO
itself, without additional steps, is generally not a legal
person, capable of suing and being sued, or owning
property. In legal terms, its activities are typically done
by the underlying actors and participants, not the DAO
itself. Myriad legal issues therefore arise, relating to
agency, securities law, financial promotions, collective
investment schemes, trusts and beneficial title,
unincorporated associations, and more.

There are significant benefits to a DAO structure

however, in respect of transparency, speed and
resistance to certain types of corruption, and so
various approaches are being tested and adopted
to address these legal issues. Legislation has been
created in various jurisdictions to put on a clear footing
how a DAO can lawfully operate and is governed. Also,
structures have been established for the use of legal
persons such as companies to act and operate the
DAO in accordance with the DAO rules. This gives a
mechanic for the DAO to hold property, to perform
off-chain activity, to assert its rights, and to enter into
contracts with third parties.

09
Blockchain: Legal implications, questions, opportunities and risks | Smart contracts

DeFi (Decentralized Finance) When trading on a DEX there is no exchange operator,

Decentralized finance aims to make a new financial no sign up, no identify verification, no withdrawal fees
system that is open to everyone and does not require and instant settlement. Instead, the smart contracts
trust in intermediaries. To achieve this, DeFi relies enforce the rules, execute trades, and securely handle
heavily on blockchain and smart contracts. Most DeFi funds. Unlike centralized exchanges, there is often no
projects are built on Ethereum because of its widely need to deposit funds into an exchange account before
adopted program language called solidity, which allows conducting a trade, or to separately withdraw funds
for the writing of advanced smart contracts that control from an exchange account, eliminating the major risk of
the logic of the DeFi applications. exchange hacking.

Stablecoins are cryptoassets created to reduce Decentralized money markets also connect borrows
volatility as they are ‘pegged’ to a more stable asset with lenders. These services allow for peer-to-peer
such as fiat currencies. In centralized stablecoins, based borrowing and lending, without being exposed
the theory is that the cryptoasset represents a claim to non-performance by the counterparty, but also
on an equivalent amount of the pegged currency without needing a centralized party. This allows for
(e.g., US dollars in a bank account). For the purpose cryptocurrencies can be leant out to earn interest, and
of DeFi, a stablecoin is need that does not use fiat for them to be ‘staked’ as collateral to borrow against.
money reserves for maintaining a peg, as this would Novel contractual arrangements are often put in place,
require a central authority. Decentralized stablecoins, for example that non-payment of interest on a loan
pegged to fiat currencies, have been created by does not represent a breach of contract, but instead
holding overcollateralized cryptoasset reserves, with an election to forego the relevant collateral. This can
the stablecoin representing a senior debt claim (of an have important consequences in terms of contractual
amount measured in the relevant fiat currency) against remedies, rights to sue, liability limits, the rule against
those reserves. penalties, and more.

This mechanic allows for volatility in the underlying There are risks involved with DeFi, most importantly
reserves, provided that the reserves continue to DeFi is still in its infancy, and things can go wrong.
exceed the claims against them, represented by the Smart contracts are frequently mis-programmed,
stablecoins issued. This trustless, permissionless, meaning third parties can drain the treasury of funds
stable asset class can subsequently form the basis of by sending them rogue instructions. As these DeFi
decentralized financial services, without needing the applications can carry risks, decentralized insurance
participant to be exposed to the general volatility of the has been created to pool and mitigate these risks.
‘cryptocurrency’ asset class. Decentralized platforms can connect insurers with
insured parties autonomously, again without any
A common use case is decentralized exchanges insurance company or agent in the middle.
or ‘DEX’. These operate according to a set of rules
(smart contracts) allowing users to buy sell or trade
cryptocurrencies.

10
Blockchain: Legal implications, questions, opportunities and risks | Smart contracts

Web 3.0
Web 1.0 platforms are publishers: statis information is
published, and users consume it, on a read-only basis,
without interaction. Although Web 1.0 includes dynamic
content such as that via ‘flash’ and ‘java’ added more
features, users were still just consumers of information.

Web 2.0 is characterized by the two-way flow of

information, not only did users get information from
pages, but pages got information from its users. Web 2.0
brought about forums, message boards, social networks,
user-generated content, and platforms, but also targeted
advertising and the erosion of privacy for users. The
hosting assets are however run and owned by centralized
companies, who own the profits and capital in relation to
those websites and services.

Web 3.0 is an ambition to remove the need for centralized

third parties to operate websites and services, so the
value created can be owned by the users, rather than a
service provider, so they are transparent, and so they do
not require the consent of any third parties to operate.
There are necessary building blocks, and implementations,
to this Web 3.0 vision: blockchains, cryptoassets, DeFi,
NFTs, decentralized identity services and DAOs. The
combinations of these building blocks enhance their
power and potential, but also the complexity, novelty, and
therefore the legal uncertainties.

11
Blockchain: Legal implications, questions, opportunities and risks | A blank canvas

A blank canvas
Like paper, a blockchain can be
used to write and record many
different types of legal instrument.

Amongst many possible use cases, one could use a

blockchain solution to record agreements between
two or more parties or to record a unilateral act under
private law, for the execution and publication of a
resolution subject to public law, as a single source of
truth (in other words, as proof), for the execution of
a legal procedure or judgement subject to different
domains of law, for compliance with tax obligations or
for the use of suspensive and/or dissolving solutions to
legal acts.

12
Blockchain: Legal implications, questions, opportunities and risks | Solutions

Solutions
As lawyers and technologists wrestle with the legal issues we
describe, a number of solutions are being explored.

Combinations On- vs. off-chain

One solution to combine permissioned and Another solution is to decide what goes on the chain
permissionless blockchains where components of the or in the smart contract and what is taken care of
proposed transactions require some intervention by ‘off-chain’. While it is possible to include provisions as
a responsible party, such as compliance with Know to liability, jurisdiction and other legal aspects in the
Your Client regulations. In this setup, all participants in smart contract, this allows no room for subjective
and users of blockchains and smart contracts in which interpretation, or ‘efforts’-based obligations, because
personal data is exchanged are data controllers and it is programmable logic. Where a human readable
must comply independently with all data protection contract is needed, but the parties want to memorialize
requirements. Meanwhile, all parties that run nodes in the terms in a provable way, the “real” contract can
the blockchain are data processors and must comply stored off the chain, but linked to it with a blockchain-
with relevant provisions. This is more easily managed in based hash secure value so that the parties can
a permissioned than a permissionless blockchain. have confidence that the agreed version is the one
being relied on, taking advantage of blockchain’s
timestamping capability.

In addition to general legal considerations, there are

also industry-specific ones such as the European
Market Infrastructure Regulation for financial services
companies, CE marking in the automotive sector
and nature conservation regulations that affect the
extractive industries. In some cases, it may be possible
to build demonstrable compliance into the blockchain
while others may require an off-chain solution.

13
Blockchain: Legal implications, questions, opportunities and risks | Global trade aspects

Global trade aspects

The ongoing regulatory push for more data – together with other trends,
such as controlled free trade, higher border security and integrated border
management, accreditation of economic operators, and the outsourcing of
regulatory functions to them – is leading to higher compliance costs.

In response, parties trading globally need higher supply chain visibility and security – data that is both of
high quality and secure, as well as trade compliance systems that can cope with electronic exchange of data.
Technology solutions such as blockchain allow businesses to cope with these challenges.

A multi-party solution Record keeping on blockchain allows parties to trace

Global trade involves a variety of parties beyond the documents throughout the supply chain: from the
buyer and seller, including the customs and regulatory beginning, when origin is a determinant of access to
authorities in the countries of origin and destination, free trade agreements and other preferential systems
financial institutions, shippers, brokers and insurers. and non-preferential origin claims, and at the end when
Between those parties there are multiple exchanges it can be used to demonstrate compliance with export
of (first- and second-hand) data. As such it presents controls and sanction regimes, and to prove the end-
many opportunities for the implementation of a use of the goods.
blockchain to trigger and record invoicing, bills of lading
and customs compliance, along with general evidence Blockchain can also facilitate trade in the context of
of provenance, members of the supply chain, quality, trusted trader schemes such as the EU’s authorized
freshness and sustainability. economic operator (AEO) program. It can also be
combined with other technologies, such as the Internet
of Things (IoT), to track and trace shipments and enable
paperless trade.

14
Blockchain: Legal implications, questions, opportunities and risks | Global trade aspects

Trade finance application

A blockchain could also be implemented to execute the trade
finance process in a transparent and trustworthy manner that
decreases the risk of fraud. It would also eliminate the volume of
documentation and the time-consuming manual processes that
create a drag on the speed with which transactions occur while
increasing costs.

1. Create purchase agreement (smart contract)

A buyer agrees to purchase goods from a seller; a
purchase agreement is created and shared via a
smart contract

Terms of the purchase are laid out in the smart

contract conditions

Smart contract is sent to required parties for

approval

2. Smart contract approval

Both financier and seller review the shared
agreement and digitally signs the contract upon
agreeing with the parties involved and terms of
purchase

3. Ship goods and generate invoice

Whether the blockchain is used within a group
Seller initiates the shipment of goods and updates
of companies (where, as trust should be
the smart contract to reflect the shipment
assumed, it might be redundant), between the
buyer and seller or involving the authorities, it Shipper acknowledgements receipt and updates
allows for tracking and visibility of the supply the contract in return by providing a bill of lading
chain. By enabling this tracking, the parties
Seller invoices the buyer for the shipment goods;
are also able to ensure that they are not
goods are tracked throughout transit using data
unwittingly breaching sanction provisions by
inputs from IoT devices
exporting to blacklisted countries.

4. Complete payment
Smart contracts could automatically execute
Upon delivery, the buyer will digitally acknowledge
payment for the goods and any associated
receipt of goods and trigger payment
duties once the relevant preconditions have
been triggered, while ensuring that access to Using the provided acknowledgement, smart
preferential trade agreements is optimized. contracts can initiate/execute/track payments both
within the blockchain network and externally
In the compliance domain, applications of
blockchain include batch management, quota
allocation, document certification and certified
end-user statements to comply with export
control regulations.

Within a group of companies, a permissioned

blockchain could be implemented to
automatically attribute and collect duty
payments from relevant companies within
the group by a central import and export
management function.

15
Blockchain: Legal implications, questions, opportunities and risks | Global trade aspects

Additional considerations Future opportunities

For customs duty purposes, an ideal future state Future events can be generally classified into technology
would involve the relevant public authorities being improvements, legal changes, and adoption increases.
participants in a blockchain with all other parties
to a cross-border trading relationship, allowing for Core blockchain improvements are expected in the
automated authorizations and duty payments, which is next few years to greatly increase the number of
already envisaged by article 185 of the Union Customs transactions per second. In terms of Ethereum, high
Code. This would enable an enhanced and more increases are hoped for by changing to a ‘proof-of-
effective “Single Window,” providing every party to the stake’ consensus method (rather than ‘proof-of-work’),
transaction with transparency into its progress and ‘rolling-up’ transactions so that some transactions
compliance. can be processed on ‘side-chains’, ‘sharding’ so that
processing can be done in parallel, and making the
Whilst implementing a blockchain offers many benefits blockchain ‘stateless’, so a node does not need to
to those involved in global trade, there are undeniable download the entire ledger history before it can
risks and barriers that must first be mitigated or function. Novel implementations are also expected to
overcome. These include addressing data privacy become more mainstream as applications for them
and security concerns, gaining the commitment of all become more user friendly, such as ‘zero-knowledge
parties to the transaction to increase the benefits, SNARKS’ which allow selected sub-facts to be proven
understanding the level of financial and technological to a particular third party without such proof being
commitment required to implement and operate onwardly shareable, or the entire ‘fact’ having to be
the blockchain, and accounting for prior registration revealed (for example, that income is within a range,
requirements with the relevant government bodies. but not what it is).

Using blockchain in a supply chain allows complete Legal changes are also continuing at pace. The US, UK,
traceability of a product’s origin and final recipient. By and EU are all introducing legislation to regulate core
way of simple example, at the factory where a drug is blockchain and cryptoasset use (not just anti-money
manufactured it can be recorded using RFID, barcode laundering, financial promotions, and tax, which has
or other technology. This would be registered in the historically been the case). In particular, stablecoins are
first block in the chain. Having checked against block receiving particular scrutiny as an area in which retail
one, the second block would record the drug’s updated consumers need protection. Multiple central banks
status as it is moved to a warehouse. Permissions are consulting on ‘central bank digital currencies’ and
built into the blockchain would limit its onward sale to how they would fit into their money supply. A handful
approved trading partners. Having checked the validity of jurisdictions have created new categories of legal
to date as recorded in the earlier blocks, block three person to give legal personality to DAOs, or to smart
would update the drug’s status again as it is received at contracts. Novel categories of property right are being
its final destination. dreamt up by IP lawyers, and seriously proposed as
being worthy of introduction to the statute book. In
short, expect to see more legitimacy, more regulatory
checks and balances, and more certainty.

Adoption is also showing little sign of slowing down.

At a fundamental level, the number of bitcoin and
Ethereum wallets with a non-zero balance continues
to increase linearly. Surveys show merchants are
expecting widespread cryptocurrency and stablecoin
adoption in the next five years, and that financial
services leaders see digital assets as very important
to their industry in the medium run. At a more
commercial level blockchain-based projects are
being built, planned, promoted and launched by
brand owners, CPG manufacturers, and across the
entertainment industry, in every geography, at an
unprecedented pace.

16
Blockchain: Legal implications, questions, opportunities and risks | What’s next?

What’s next?
A multi-party solution To discuss the legal implications of blockchain
Deloitte Legal is involved in the Deloitte Blockchain implementation in your business contact:
Institute, which offers an end-to-end portfolio of
services from ideation to implementation to make Paul O’Hare
your blockchain vision work. We already have more Deloitte Global Technology Law Leader – Deloitte Legal
than 20 prototypes in development and combine pohare@[Link]
our legal, technological, talent, strategy and +44 20 7303 3545
operations expertise to provide fully integrated
blockchain capabilities. Richard Folsom
Partner, Deloitte Legal UK
Blockchain is a nascent field in both law and rfolsom@[Link]
business. Our comments are not intended to +44 20 7303 0117
be exhaustive but rather to present various
aspects of blockchain from a legal perspective Richard Morgan
and the associated issues to keep in mind. We will Consultant, Deloitte Legal UK
continue to investigate the many opportunities richardmorgan@[Link]
that blockchain presents as they emerge and to +44 20 7303 3130
exchange ideas as the landscape evolves.

17
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