This article provides a brief overview of Blockchain, the supporting technology for Bitcoin cryptocurrency, and the applicability of this Blockchain technology to the field of law through the use of so-called “Smart Contracts”. The fourth industrial revolution era in which we currently find ourselves is exciting to say the least.
BLOCKCHAIN TECHNOLOGY
According to De Kock in De Rebus, Blockchain records transaction information in blocks and makes this information difficult to alter or hack. A block is created once a transaction occurs and each new block is connected to the previous blocks forming a chain of transactions. The more the number of transactions the greater the Blockchain grows. Every transaction is recorded in the ledger of a participant to the Blockchain. This ledger is a decentralised database known as Distributed Ledger Technology (DLT). The DLT can be programmed by inputting code to perform certain transactions automatically upon the happening of certain “if-then” conditions. A Smart Contract can be formed once such code is used as it enables a contract to be self-executing. According to B Bodó et al in the International Journal of Law and Information Technology, this is the case when code allows nodes in the network to interact with Blockchain data allowing it to act in an autonomous way once certain pre-conditions are met.
Blockchain is more accurately defined as “a range of different DLTs, which share some fundamental principles, but vary inter alia in their design, purpose and affordances”. Anyone with access to these ledgers has access to the full transaction history thereof. Moreover, ledgers ensure that the tokens belonging to specific accounts are not spent twice. Tokens can inter alia represent anything from a unit of virtual currency, an asset, or a physical object.
Blockchain transactions are recorded using an unchangeable cryptographic signature. These transactions are recorded in a transparent and verifiable way, which would theoretically allow South Africans to clearly follow the money trail when the State uses funds. This also completely avoids the convenient disappearance of documentation.
Smart Contracts cut out the middleman, allowing individuals to exchange tokens of value with little reliance on intermediaries like banks. This allows for the freedom of decentralization and disintermediation.
SO WHY HASN’T SA ADOPTED THIS TECHNOLOGY?
It isn’t cheap. De Kock states that Blockchain is not a “Disruptive” technology able to quickly lower the costs of business. It is a “Foundational” technology meaning that there is the opportunity to create new foundations for economic and social systems.
Further, that although Blockchain would make official government record keeping more efficient, accurate and trustworthy, it will probably lead to the retrenchment of government workers. It is unlikely for the State to consider widespread layoffs in the current economic climate.
Blockchain will also probably substitute the function of notaries as it has a built-in authentication process, meaning that no certification is needed relating to the correctness or truthfulness of submitted documents.
However, it is predicted that the financial sector will be the first to implement Blockchain as banks need to decide on policies regarding the acceptance and/or management of cryptocurrencies.
IS BLOCKCHAIN A SOLUTION TO OWNERSHIP AND ROYALTY ISSUES RELATING TO COPYRIGHT?
It is common for an author of a work in which copyright subsists to struggle to prove when a copyright infringement has occurred. Bodó states that Blockchain allows authors of works to create a quasi-immutable record of initial ownership and to thereafter make use of Smart Contracts to license the use of said works in return for remuneration.
Different elements of copyright can be represented by cryptographic tokens such as: works, ownership metadata, licensing terms and remuneration. These elements allow DLTs to provide a decentralised platform for works registries.
Technological protection measures (TPMs) and Rights Management Information (RMI), collectively referred to as Digital Rights management (DRM), are the rules impacting the functioning and development of Blockchains. TPMs are technologies that limit the actions which may be performed in respect of a copyrighted work and RMIs consist of electronic information attached to a work which indicate ownership and terms of use. The use of DRM technology will greatly help authors of works to prove the subsistence of copyright and monitor the royalties due to them.
SMART CONTRACTS
Woebbeking, in the Journal of Intellectual Property, Information Technology and Electronic Commerce Law (JIPITEC),identified that contracts dealing with access to digital content, being easily translatable into software, are likely to take the form of Smart Contracts.
Additionally, that the self-executing nature of Smart Contracts makes the drafting phase of a contract much more important compared to the execution phase. The reasons for this are that Smart Contracts cannot be easily modified and contractual terms are more formalized than in traditional contracts. This is due to the fact that most written text is ambiguous and Blockchain cannot function properly if the code used is ambiguous, this will be the case where, for example, good faith clauses are included in the code. In such a scenario, an interpretation problem will arise, thus a more rigorous and thorough expression of contractual terms is required. Although, it is suggested that such interpretation problems may be assigned to a human-based oracle acting as an intermediary.
The automated execution of terms in Smart Contracts also brings to light the possibility of automatic self-help and the principle of the mandament van spolie, or taking the law into one’s own hands. An example of such a clause encapsulating this is making provision for starter interrupter which automatically prevents a leased car from starting if the debtor is in default. A further consideration is the possibility of enforcement of legally unenforceable agreements. Such possibilities arise due to the difficulty in modification of Smart Contracts.
A fair negotiating process between two parties of equal bargaining power is a rare occurrence for today’s consumers. This is due to the standardization of contractual terms which minimized the consumer’s participation in the negotiation process. This is particularly the case with e-commerce where consumers are given a contract on a “take-it-or-leave-it” basis. It is suggested that Smart Contracts will have AI agents which will facilitate the individualization and personalization of contracts once again.
Smart Contracts can be defined as: “computer protocols that are self-executing. [They rely] on the abilities of Blockchains, operate autonomously and transparently, and … are basically tamper-resistant and immutable”.
The contractual terms of Smart Contracts are memorialized in code and allows these terms to be enforced in a cost-efficient manner by avoiding the courts. Thus, it becomes easier to enter into contracts where one contracting party is unknown to the other as no trust is needed between the parties. Additionally, the risk and cost of having to enforce rights in international e-commerce contracts is reduced. However, one concern over the use of Smart Contracts surrounds security vulnerabilities if the code used is incorrect. For this reason, most Smart Contracts will likely be captured in an additional written or electronic form in a natural language.
There is much potential for interpretational problems to arise in Smart Contracts. For this reason Smart Contracts will mainly be used to enforce unequivocal terms. Legal practitioners should not forget to express to what extent the Smart Contract code should be used for interpretative purposes in comparison to the underlying written agreement.
The use of Blockchain technology in cryptocurrency has promoted curiosity in its application to other domains, including the field of law. This openminded view should be encouraged among legal practitioners in order to adapt to the fourth industrial revolution and the changing needs of consumers with it.
By: Aaron Balie, Candidate Attorney
