Not-so-new kid on the block is about to come of age

Blockchain – a global digital ledger – is set to disrupt the digital scene

From artificial intelligence and robotics to 3D printing and blockchain, technology is fundamentally changing the way we do business. Blockchain, initially associated as being the technology that enabled the online currency bitcoin, has suddenly become the latest buzzword in the growing tech lexicon. Though the technology has been around for a while, the now not-so-new kid on the block is growing up and looks set to disrupt the digital scene.

Blockchain started as technology that was looking for a use, but now sectors ranging from financial services to the media, from betting to mining are showing a keen interest in the distributed digital ledger. The technology is still a relatively novel concept, and the legal and regulatory environment in which it is destined to operate is, as yet, unchartered. Richard Goold, head of tech law at EY, surveys the scene and answers some key questions:

What is blockchain?

The blockchain is a distributed, global digital ledger that records and tracks transactions. Put simply, it is a method of recording data. You could think of it as the rails on which the train of data or payment runs. The data is encrypted and stored in blocks, in a chronological chain using algorithms. The ledger is not stored in one place, but in a distributed, open-source network of users’ computers worldwide, which makes it impossible to hack and alter – at least for now.

Who is using it?

Use of blockchain technology remains in its early stages, but many businesses, led by the financial services sector, are experimenting with it. According to Blockchain Angels, a network of blockchain angel investors and venture capitalists, which has just launched a Blockchain Startup Tracker, there are already more than 760 startups looking at innovative uses. It is likely that traditional corporate organisations will seek to partner with fintech startups to discover how best to exploit blockchain. EY is seeking to foster such co-operation through our Startup Challenge, matching potential partners.

Anyone looking at using this type of technology needs to consider the legal elements from the outset of the design process

TheDAO

An example of how the technology is currently being used is TheDAO. In contrast to a traditional corporate entity, a DAO is a decentralised autonomous organisation in which software acts according to a set of rules encoded on a blockchain. TheDAO is on open-source computer programme that works like an investment club or funding platform. It exists on ethereum, a decentralised computer platform, with a built-in cryptocurrency – ether – which has a real-world value and can be traded on exchanges.

What are the legal issues?

Disruptive technologies, such as blockchain, are creating new ways of doing business. As with many emerging technologies, the law around it is playing catch-up. While you can easily and nimbly create a new piece of software, international law-making is not so nimble. But anyone looking at using this type of technology needs to consider the legal elements from the outset of the design process. You will need to consider three broad categories – general commercial law considerations, tax implications and regulatory issues. At the moment there are no definitive answers to questions of compliance in this evolving space. Businesses will need to address the issues, such as ownership, trust and security and contract law that are thrown up, and seek advice on how to manage their risks.

Ownership: While most data is owned or controlled by an individual, an institution or a regulator, which can enforce its ownership rights, the information contained on the blockchain is shared and the issue of ownership remains moot. Who is responsible for the information contained on the ledger, its use and security?

Privacy and cyber security: At the moment the security of the blockchain relies on the assumption that the encrypted information is impossible to hack. But, as technology develops, this may not remain the case. Many clients are looking at a walled-garden solution to cyber security, in which access to the software system is limited and controlled by the carrier or service provider. But, if security is breached and the identities of parties involved in transactions are revealed, it could create problems over privacy breaches.

Smart contracts: Blockchain will enable “smart contracts” to be executed. But what would be their status in law and how could their validity be challenged or enforced?

Regulation

The regulators in almost all sectors will undoubtedly assess how businesses using blockchain are operating and take a view. Businesses too, even those that are unregulated, may need to turn their mind to the regulatory implications of what they are doing on the blockchain. Given the global, public nature of the technology, the question of who regulates it is difficult. It is likely that the issue will require cross-border and cross-sector co-operation. The UK government has signalled its determination to drive the digital agenda and to make the UK a global hub of the digital economy of which blockchain will play an increasingly large role. And the UK financial regulator, the Financial Conduct Authority, is proving to be one of the most progressive regulators in the fintech space. Its Regulatory Sandbox initiative created a “safe space” for startups and businesses with new offerings to engage with it in order to ensure compliance.

EYX and the EY Startup Challenge

EYX is EY’s new internal cross-service line innovation initiative, based at Second Home in London’s Shoreditch. It is a “workspace and cultural venue for thinkers, makers, artists and entrepreneurs”. The aim is to help EY and its clients navigate and take advantage of disruption, to support innovation and realise the business value of key emerging technologies. EYX is also responsible for the next iteration of the EY Startup Challenge – an intensive ten-week innovation programme designed to bring together EY’s clients with technology startups in order to address today’s business challenges in an exploratory and collaborative way. Following two programmes in 2014 and 2015, and one earlier this year in Berlin, it returns to London in September. The EY Startup Challenge will provide a studio environment for clients to connect and collaborate with blockchain startups, to explore blockchain technology and its potential to transform businesses, and make innovations real and tangible.

Richard Goold can be contacted via e-mail at RGoold@uk.ey.com or for further information please visit ey.com/law

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