A General Introduction to Blockchain

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A General Introduction to Blockchain

By Benjamin Jacob and Sam Guyonvarch*


Introduction

 

The recent surge of Bitcoin has shed light on blockchain, a technology still very little known to the general public but nevertheless destined to significantly change the way we interact in the digital world. Often viewed as revolutionary, blockchain technology is described as the missing key which will allow users to shift from the current “internet of information and things” to the “internet of value and money” although it may in fact have much more far-reaching technical, legal and social implications.

 

The origin of blockchain technology

 

Paradoxically, the origin of blockchain remains quite a mystery. Legend has it that it was created by a single individual under the pseudonym Satoshi Nakamoto as the underpinning technology behind Bitcoin, a digital cryptocurrency launched in 2009 and exchangeable online through a decentralized peer-to-peer system free from any single regulating body[1].

 

Satoshi’s work outlined how bitcoin could be used to send payments between individuals and/or companies without the need for third-party supervision as each participant of the network has control over the validity of the transaction through a shared public ledger: the blockchain.

 

The definition of blockchain technology

 

Broadly speaking, blockchain technology can be defined as a technological protocol which enables two or more parties to exchange data and/or assets within a secure, transparent, distributed and decentralized peer-to-peer network in which all participants keep an immutable record of all exchanges carried out between them[2].

 

On a more technical level, blockchain technology runs on a private or public peer-to-peer network. Put simply, all exchanges carried out by the participants of the network are broadcasted to all the computers connected to said network (known as “nodes”). In that way, each node is able to check whether the ongoing exchange is valid according to the network’s rules and the shared blockchain in which all previous exchanges have been securely recorded. If the exchange is valid, it is incorporated by the node into a “block” with other exchanges which occurred in a similar time frame. Nodes will then compete with one another to solve a difficult mathematical problem based on a cryptographic hash algorithm. This operation is known as “mining”. The first node to solve the problem gets the right to integrate its block to the end of the Blockchain and is rewarded with digital currency. The updated blockchain is then broadcasted to the entire network and acts as the new ledger.

 

The main advantages of blockchain technology

The main advantage of blockchain technology is that it paves the way to complete disintermediation. For the first time in human history, parties who may not even know each other can carry out transactions without having to rely on intermediaries such as banks, rating agencies, government bodies or lawyers to verify their identities, establish trust, or perform business logistics such as contracting, clearing, settling, and record-keeping tasks[3].

 

Blockchain technology also allows transparency. All of the network’s participants can access all of the data stored in a fully auditable ledger. Thus, previous exchanges can be controlled and monitored which, if transactions are being carried out using Blockchain, ultimately increases security of ownership for participating parties.  

 

Finally, blockchain technology provides increased security to its users. All of the information broadcasted and stored on the blockchain is encrypted and each of the network’s participants has its own assigned private key which acts as a personal digital signature. In addition, because blockchain is decentralized and continually updated, it is seemingly impossible to interfere with the data because it is not contained in a central location and thus cannot be hacked, altered or tempered with from a single computer.

The different uses of Blockchain technology

 

Blockchain technology was initially used in the field of decentralized cryptocurrencies (such as Bitcoin) as a means of online payment for goods and services provided on the internet. Considering that cryptocurrencies based on blockchain can be exchanged online and – more importantly – anonymously, they quickly became a preferred means of payment on the darknet black markets. Since then, the use of Blockchain has greatly expanded, and its uses have spread from allowing an increasing number of assets transfers (e.g., shares, bonds or votes) to acting as a certification and traceability tool for products or data.

 

The primary record-keeping function of blockchain technology indeed allows users to verify the provenance of the data stored in the blockchain and its consecutive use in a chronological order.  The blockchain essentially forms an immutable audit trail for the data itself and thus enables users to trace and certify it without the need of trusted third parties. This use may particularly prove to be effective in supply chains where provenance and chain-of-custody is key information.  

 

However, another promising function of blockchain technology (especially for lawyers) certainly resides with “Smart Contracts”, which can be defined as stand-alone programs, entered on the Blockchain, which enable a contract concluded between two or more parties to self-execute as soon as pre-defined conditions are met. Once the Smart Contract is deployed, its conditions cannot be changed and its performance (e.g., transfer of assets) will be validated and replicated on the blockchain. Hence, Smart Contract could possibly reduce the risk of non-performance and consequently the need for middlemen, lawyers and judges to enforce the agreement.

 

Blockchain applications

 

Blockchain technology’s unique characteristics may lead to many private and public applications in all kinds of sectors and industries. It enables not just new means by which financial services can be provided, but it can also redefine government, legal services, accountancy, supply chains and distribution.

 

As an example, there is increasing talk of using blockchain technology to improve the transparency and efficiency in the music industry. Blockchain could indeed be used to create a global and transparent copyright database which would integrate data on content ownership but also make it easier for users to obtain authorizations to use protected works through Smart Contract, which would self-execute and permit payment of royalties according to previously agreed splits between the right holders[4].

 

One other growing application of blockchain technology is the traceability of product especially in the food and pharmaceutical industries where businesses are often put under regulatory pressure to trace products throughout the entire supply chain to ensure quality and safety and prevent counterfeit. With blockchain, the entire supply chain is transparent and the data immutable, which enables companies, supervisory authorities and consumers to know where a product starts and where it ends up[5] for a very low cost.

 

The regulation of blockchain

 

With blockchain technology, users can forge their own rules applied to a network global by nature. Hence, blockchains are capable of operating as complete independent systems without the need to apply State regulations. Nevertheless, as secure and independent as it is, Blockchain technology is bound to face difficulties in its functioning and cannot actually deprive itself from any kind of regulated environment.

 

In this respect, there are growing concerns on how blockchains meet contemporary requirements on money laundering and terrorist financing. Furthermore, in a system where anonymity prevails, contractual issues may also arise regarding identification of parties and liability. In addition, with the GDPR coming into force on May 25th, 2018, the protection of personal data indefinitely stored in blockchains which are administered by as many data controllers as there are participants to the networks will also have to be addressed. In a given blockchain, who should be considered as the “data controller”? As far as data protection is at stake, should a difference be made between private and public blockchains? Should a “miner” be considered as processing personal data within the meaning of GDPR? These are the obvious questions that needs to be dealt with, but many additional and certainly trickier questions will also have to be answered.

 

States are aware of these issues and have begun to adopt policies or enact legislation in that respect.

 

While on February 1st, 2018 the European Commission launched a Blockchain Observatory to support future legislative work[6], in 2016 France was the first European country to adopt a law recognizing blockchain technology in the field of cash vouchers followed, in 2017, by regulation on the use of blockchain technology to simplify and secure the transfer of ownership of unlisted financial securities.

 

In the United States, the federal government is showing growing interest in Blockchains for various purposes[7]. However, some states have already begun to adopt the first blockchain technology laws. As an example, in June 2015 New York became the first state in the U.S. to regulate virtual currency companies through state agency rulemaking. In 2017, important bills promoting Bitcoin and blockchain technology have also been passed in several US States such as Arizona (recognition of smart contracts), Vermont (blockchain as evidence) and Chicago (real estate records)[8].

 

As with the internet, there is however fear that these local regulations will prove unable to control a growing technology which operates on a global scale and tends to develop and expand its uses anarchically.


 

[1] A Short History Of Bitcoin And Crypto Currency Everyone Should Read, Bernard Marr, Forbes, December 6th, 2017.

[2] Qu’est-ce que la blockchain ? www. blockchainfrance.net.

[3] How Blockchain Is Changing Finance, Alex Tapscott & Don Tapscot, Harvard Business Review, March 1st, 2017.

[4] Blockchain and IP law: a match made in crypto heaven? Birgit Clark, WIPO Magazine, February 2018.

[5] Mastering Traceability Basics for Blockchain Success, Melanie Nuce, www.foodqualityandsafety.com, January 25th, 2018.

[6] European Commission launches the EU Blockchain Observatory and Forum, Press release, February 1st, 2018.

[7] Developments and adoption of Blockchain in the U.S. Federal Government, Steve Delahunty, Forbes, January 25th, 2018.

[8] How the laws & regulation affecting blockchain technology can impact its adoption, Divya Joshi, Business Insider, October 20th, 2017.


* Benjamin Jacob is a partner and head of the IP & Technology team at PDGB Avocats, located in Paris, FRANCE. Benjamin Jacob can be contacted at benjamin.jacob@pdgb.com. Sam Guyonvarch is an associate at PDGB Avocats and specializes in IP & Technology law. He is located in Paris, France, and can be contacted at sam.guyonvarch@pdgb.com.

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Paris,
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Wednesday, May 30, 2018
Information Technology / Computer Law