Legal Update – Blockchain: What Is It and What It Means For Your Business

18 July 2016

It is common for businesses seek to advance their interests by transacting with persons with whom they have no pre-existing relationship. This often means there is a limited foundation of trust, where substantial finances may be at stake. For years, businesses have dealt with this lack of trust through the use of contracts which minimise the risk of expectations not being aligned, or worse, deliberate betrayals of that trust.

“Blockchain” is considered an innovative new solution to the “trust issues” in business. So much so, it is tipped to revolutionise how business transactions are performed in the future.

You may have heard of “Bitcoin”. Invented in 2008, Bitcoin is a virtual currency which facilitates transactions, person to person, without any intermediary. More technically, it uses encrypted computer coding to create a network of users, each of whom has a copy of the so-called “Bitcoin ledger”, allowing them to trust that unknown third parties are the true owners of the virtual currency used to complete the transaction. Bitcoin transactions are distinct from transactions using regular currency, the latter requiring (at least) the involvement of a bank.

Bitcoin is a variation of the wider “blockchain” technology. Blockchain can be used to execute any transaction involving the exchange of something valuable. Currently, many transactions involve risks associated with physical delivery, transfer of title and payment occurring at different times. With blockchain, all three of these things can happen simultaneously, without the need for any intermediary.

Why the fuss and what can it be used for?

Blockchain has the potential to save the global cash securities market US $11-12 billion per year, including by cutting settlement times and reconciliation costs. It is also projected to save US $3-5 billion in the improvements it offers to anti-money laundering compliance.

However, the real appeal of blockchain lies in its ability to reliably execute legal transactions without the need for intermediaries. This opens up a wide range of potential uses for business.

In the banking sector, blockchain enables transactions to be approved almost instantly, without the need for intermediaries and their propensity for error. Blockchain also has application in the securities sector, which currently relies on ownership transfer through a slow settlement process involving clearing houses and intermediaries. The technology could also be used in the intellectual property space, including by establishing first-in-time ownership rights by its time-stamping capabilities.

Smart Contracts

One of the most interesting potential uses for blockchain is what is known as the “smart contract”. Under a smart contract , the terms of the contract are encoded as part of a computer program which executes automatically when an agreed event occurs, without the need for a third party to action, supervise or enforce it. As a simple example, if a smart contract is used to provide for money to be paid from A to B on a specific date, the smart contract is encoded so that it effects the transaction automatically.

Does that mean lawyers are redundant?

Fortunately (for us) no; most of the current uses for smart contracts are in very simple contracts involving simple contractual instructions (such as the example above). For this reason, blockchain offers significant advantages for low value payment transactions, where the cost to enforce (e.g. seeking Court orders) is more than the contract amount. Also, for a smart contract to work, the parties need to be able to precisely define an outcome to make it the subject of a blockchain code. The more complicated the contract, the more difficult the code and risk of the transaction going wrong.

When is it coming in and are there any risks?

In many respects,  blockchain is still in the experimentation and development stages. It is difficult to know exactly when its use will become mainstream, but we will keep you updated.

One of the psychological challenges facing blockchain is people being willing to place their trust in a computer code for the administration of their contracts rather than a trusted legal advisor. Also, like any new technology, blockchain presents new regulatory challenges and risks. How will smart contracts fit in with traditional contract law principles? Will the slow process by which new laws are passed be able to keep pace with advances in the technology? These are the types of issues which regulators will need to consider.

It sounds too complex for me, do I need to worry about it?

Given the significant opportunities and potential cost savings presented by blockchain, it is commercially difficult to ignore. We consider it is prudent for businesses to be aware of the technology and understand how it may affect or improve how they do business in the future.

We would be pleased to advise you further in relation to the new laws and will provide an update to this article once the new laws commence.

Contact Partner: Michael Coe
Direct Telephone : 07 3210 5709
Mobile Telephone : 0408 983 876
michael.coe@kinneallymiley.com.au

Contact Jessica Duncan:
Direct Telephone : 07 3210 5789
jessica.duncan@kinneallymiley.com.au

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