By Jennifer A. Beckage and James E.B. Bobseine, originally published in Rochester Business Journal on September 15, 2017.
Understanding the Practical and Legal Challenges of Blockchain
However, blockchain’s utility in recording, securing and sharing information is causing its use to spread quickly to other industries. For this reason, some technology experts anticipate that businesses across all sectors, including those in health care, real estate and insurance, will soon be taking advantage of blockchain. Businesses always face certain practical challenges in adapting to emerging technologies, such as implementing them into the organization, communicating costs and benefits to customers, and conforming conduct to a speedily changing legal and regulatory environment. Businesses seeking to understand and use blockchain technology are no different.
What is blockchain technology?
Blockchain is a relatively new concept that has been defined in a number of ways in news, social media and other internet resources; this undoubtedly has caused many to ask, “What is it?” In short, blockchain is a different way to store information related to a record of transactions.
Historically, businesses store data in a centralized database that is maintained by one organization and its administrator. Revisions to and history concerning this centralized database reside only with its owner, unless portions or copies of data are shared with others. Blockchain takes a very different approach. Instead of a centralized database used to record transactions, many parties can access and contribute to database information. All contributions are shared with the other participants who have access to the database.
Thus, blockchain is a public, distributed ledger of information serving as a constantly growing chronological record of information transactions. Each transaction is recorded in a “block” that is linked inextricably to the “blocks” that were recorded before. Instead of this ledger of transactions being kept in one centralized location, each connected computer (called a “node”) downloads a complete copy upon joining the blockchain network.
When a modification is made to the ledger (for example, a new transaction is added or an attempt is made to modify an existing transaction), all copies at each node are alerted. Each node must agree to the modification for the transaction to be included in the blockchain. Transactions are built upon one another so the information in the blockchain is immutable, which is meant to increase the security and authenticity of the ledger. Blockchain has the potential to eliminate the need for each party to have its own separate database of information to maintain and protect.
Potential benefits and risks
Instead of isolating information (e.g., in a series of intermediaries) in order to collect and secure it, blockchain distributes it widely to ensure that there is no single information repository. Some experts argue that blockchain’s decentralized structure could, in this regard, ease data security and authenticity concerns. In theory, if someone attempts to make a fraudulent modification to a transaction, the other nodes will be notified and provided the opportunity to reject the modification before it is made.
Adopters of blockchain technology will face (as with any new technology) an initial overhaul of technology systems, policies and procedures, which will be accompanied by a certain amount of inevitable organizational disruption. Furthermore, the promise of the technology will not obviate the necessity to carefully vet third-party service vendors and closely scrutinize the rules and protocols underlying the specific type of blockchain technology utilized by an organization. Nonetheless, blockchain’s long-term usefulness may in some instances outweigh these burdens and risks.
Legal and regulatory framework
It takes great time and cost to understand the ever-shifting legal and regulatory landscape relating to—and to undertake the ongoing evaluation of—new technologies like blockchain. This is partly due to the uncertainty and risks involved in adopting any new technology, and partly due to the unavoidable transactional costs of adopting new systems of storing and securing information.
To this point, lawmakers and regulators have moved cautiously with respect to blockchain. The State of Delaware’s Blockchain Initiative, which began in May 2016, aims to recognize the trading of stocks using blockchain, among other efforts. In February of this year, members of the U.S. House of Representatives, in recognition of “the potential for blockchain technology to significantly improve identity management, asset tracking and ownership, healthcare records management, intellectual property rights,” created the Blockchain Caucus.
In March, the Federal Trade Commission held its third FinTech Forum, which focused on the consumer protection implications of increased use of artificial intelligence and blockchain. In June, acting chairman of the Commodity Futures Trading Commission J. Christopher Giancarlo, in testimony before the U.S. Senate Committee on Appropriations Subcommittee on Financial Services and General Government, requested additional funding to meet the challenges of regulating “breaking digital innovations” like blockchain.
In July, the Securities and Exchange Commission warned that certain initial coin offerings using blockchain technology are subject to federal securities laws, and thus regulation by the SEC. However, it would not be surprising if these early, cautious moves resulted in more concrete legal and regulatory obligations in the near future as more businesses consider using blockchain.
Jennifer A. Beckage is a partner at Phillips Lytle LLP and leader of the firm’s Data Security & Privacy Practice Team. She can be reached at firstname.lastname@example.org. James E.B. Bobseine, an attorney in the firm’s Buffalo office and a member of the Data Security & Privacy Practice Team, co-authored this article. He can be reached at email@example.com.