Nov 29, 2016
What In-House Counsel Need to Know About Blockchain Technology
Part I: Why It Matters
Summary: In the first of a three-part series on blockchain technology, we explore why blockchain matters and how it will soon begin to affect businesses — and in particular their in-house counsel. This article was first published over at InTheHouse.org.
When anyone touts a new technology as “revolutionary,” some skepticism is in order. If someone tells you something is going to be “as big as the Internet,” you should probably nod politely and move along.
Blockchains, the technology under the hood of Bitcoin, have already been the subject of a lot of hype. The story goes like this: Bitcoin has received a bad name because of its association with the black market and hacked currency exchanges, but the technology on which it is based can be a powerful tool to transform many different industries.
There’s an element of truth and an element of exaggeration to this tale. Bitcoin itself is much more of a success story than many think, with an $11 billion (and rising) market cap. And blockchains are really good for some, but not all situations.
Still, there is pretty solid evidence that blockchains, also known as distributed ledgers, will have a significant impact on most industries over the course of the next five to 10 years. That’s not hype — it’s based on a groundswell of use cases across many different sectors, too many to ignore. That means blockchains will soon begin affect the business people you support in a multitude of ways.
What is a Blockchain?
In the simplest terms, blockchain technology allows parties to transact directly with each other in a secure manner and without complex, trust-authenticating functions. In short, blockchains can eliminate middlemen from many transactions. (In Part II of this series, we will delve into the details of how blockchains actually work.)
Blockchains are essentially a new form of database, where multiple parties who otherwise do not trust each other (such as competitors) can share data. Blockchain technology first appeared in the context of Bitcoin, where the “data” being shared is a token (or key) representing a digital asset, plus the metadata about the transaction itself. But blockchains can be used to facilitate and track the transfer of any kind of digital information.
For instance, blockchains can be used to more securely — and more transparently — track movement of goods among the multiple independent parties in a supply chain. They can be used to manage the intellectual property transfers and facilitate rapid payment to all participants. They can be used to help manage personal identity. Anywhere data exists in separate silos, and where efficiencies can be created by sharing some of that data among parties, blockchains may have an impact.
Blockchains use two tricks to make this possible. First, they use crypotography to secure individual transactions — a sort of lock and key system where only authorized users can access the full transactional details. Second, they use a distributed network of peer-to-peer computer nodes, each of which houses a copy of the entire chain of authorized transactions, to ensure that records are immutable. Blockchains make it very hard to cheat, or hack, the underlying data.
Public or Private?
Public blockchains, like the one used by Bitcoin, rely on a third trick: a system of incentives that entice users to contribute computing power to the network. Users known as “miners” employ their nodes to solve complex mathematical problems and are rewarded for doing so with the issuance of a certain number of Bitcoins. The miners also authorize blocks of transactions on the network. This system keeps the network running and encourages others to join.
The Bitcoin blockchain itself already is being used for many applications beyond the transfer of the Bitcoin cryptocurrency. Companies are piggybacking on the Bitcoin network to secure and time-stamp all types of transactional data.
There are other public blockchains. The second-largest, Ethereum, has an almost $1 billion market cap and promises much more robust types of transactions because the blockchain was designed to provide more computing flexibility than Bitcoin’s. Many observers believe that public blockchains provide great promise, because they cannot easily be manipulated by governments or large corporations.
However, there is also substantial interest in private blockchains, which are blockchains typically run by a consortium of private companies or government entities. Also known as “permissioned” blockchains, access to these networks is limited to authorized users. For instance, Visa is in the process of building out a business-to-business network using blockchain technology.
What it Means for You
A recent report from IBM, based on a survey of some 200 banking institutions, found that 15 percent of those institutions anticipate having a commercial blockchain application in place, in some form, by the end of 2107. While roll-out in other industries will take a bit longer, a wave of change is on the way. That wave will disrupt existing businesses, but also drive innovation and new sources of income for companies that are nimble.
As in-house counsel, it may be hard to predict precisely how that wave will affect your own company until it hits, but a quick internet search for the name of your industry and “blockchain” will almost certainly lead you to at least a few start-ups who are proposing relevant applications — these may give you some idea of what’s to come. Talk with your IT people, and your transactional teams that engage with new technologies. Chances are, they are already aware of blockchains and may be considering how they may be utilized (or alternatively, how other companies deploying blockchains may use them disrupt your business).
More essentially, try to develop a basic understanding of how the technology works; most people who delve into blockchains, even superficially, pretty quickly start to see ways in which their areas of interest might be affected.
Understanding the technology is the first step in being able to provide legal advice around blockchain implementations. In Part III of this series, we will address specific, new legal issues that may arise in this space, including the regulation of digital currencies, “smart contracts,” recognition of digital tokens as transfers of ownership, and even the legalities of “decentralized autonomous organizations,” a new form of entity made possible by blockchains.
Don’t let the blockchain “revolution” sneak up on you!
