Blockchain Technology and the Law: Using technological developments of the past to navigate the future
Windsor Law LTEC Lab
J.D. candidate, 2021
Windsor Law Professor Muharem Kianieff recently released his new book titled, Blockchain Technology and the Law: Opportunities and Risks (Informa Law – Routledge, 2019). In his book, Professor Kianieff identifies and critically assesses the strengths and shortcomings of Blockchain that need to be addressed in order to allow the technology to succeed. By utilizing a theoretical perspective informed by previous technological developments in commercial spaces, Kianieff highlights how, contrary to many of its advocates, Blockchain is not a risk free proposition for consumers. In fact, he finds that much can be learned about the way forward for Blockchain by looking at the past.
The book begins with an overview of Blockchain technology to give readers a baseline understanding of how it works. Blockchain is an online registry that can record transactions amongst anonymous individuals. In contrast to traditional databases, the information on the registry is not held in one centralized place, rather, Blockchain is a decentralized ledger that is recorded on many computers throughout the world. A unique future of Blockchain is that transactions cannot be modified or deleted, any changes require a new transaction on the ledger and other participants become aware of any changes that are made. Its immutability ensures the security of the system against tampering and also allows transactions on the Blockchain to be easily audited.
The book goes on to assess some of the proposed applications of the technology, and describes many of the fundamental difficulties consumers may encounter, such as correcting transactional errors. Next, the book turns to the interaction of Blockchain with legal issues such as securities regulations and privacy law. Finally, the book concludes with an exploration of what the future holds for Blockchain.
In an interview with Windsor Law LTEC Lab, Professor Kianieff spoke about his motivation for writing the book and his thoughts on blockchain and the law.
What was your objective when writing the book and what you were hoping to add to this area of scholarship?
My reason for writing the book was my background in banking and payment systems. Since Blockchain technology and crypto currencies intersect with banking and payments, I was interested in how this new development would affect consumer rights. I am familiar with some of the policy objectives that the law in that area seeks to achieve and I am also quite familiar with the history of why we regulate payment mechanisms. I wanted to understand how Blockchain would either reinforce or undermine existing regulatory rubrics.
In my initial impressions of the technology, what immediately came to mind was the fact that many of the issues I had spent time studying as a graduate student working in payment mechanisms were some of the same issues that were either being ignored by cryptocurrency promotors, or they weren’t even aware of. I saw a number of consumer protection issues coming to the fore, such as, where do consumers go if a transaction doesn’t proceed as they expected? These were all things that cryptocurrency promoters hadn’t given a satisfactory answer for.
As I was starting to do research, one of the things that I was struck by was that the existing literature and promotions were written in isolation, they seemed to be written without taking into consideration what had come before or what insights could be offered by scholarly literature across various disciplines.
Not only that, but many took the perspective that we are going to invent something completely new, when if you look at cryptocurrency products, they are repeating many features of concepts from previous business models from the 1950s and 1960s, which is why we have some of the regulations that we have now.
In other words, one of the things that I wanted to achieve was to start a conversation going both in the policy community and the academic community. We have all these insights we gained from previous efforts of regulating payment mechanisms and you have these new products that are emerging that are repeating some of the same mistakes. Let’s see if we can get people to start talking to each other. And that’s one of the things I argue in the book, when asking about the question “what do we do with Blockchain?” It is helpful to look at how we have dealt with similar types of innovations that were developed from different interdisciplinary perspectives. Rather than starting from zero, let’s take that knowledge and see if it can help us today and see what we need to work on to try and build up a technology that consumers can have confidence in.
Are there any unique risks that come along with blockchain for businesses and lawyers that work with it, which previous developments in technology haven’t covered?
Yes, one of the most striking ones is actually also a selling point of blockchain, that it is immutable, which means once something is on the blockchain it is there forever and you can’t change it (for the most part). The only way you can account for changes is essentially to engage in an entirely new transaction when transacting in cryptocurrencies. This is an important difference with how consumer credit card transactions, which are the dominant mode of payments online, are conducted today: if someone charges something to your credit card that is not authorized by you, the current technology allows us to perform a charge back. With cryptocurrencies you can’t do that. If you want to get your money back you need a new transaction.
Also, the development of cryptocurrencies has given rise to new legal and operational issues. For example, what happens when an entity you are relying on to give you access to your cryptocurrency becomes insolvent – you can’t look to someone to rectify an issue. Another famous example is if you lose what is called your private key that allows you to access your currency or engage in transactions on the blockchain. Once you lose your private key, your money / account is locked away and is for all intents and purposes gone. It is not something you can reset like forgetting your email password. This will have significant legal ramifications, so much so that people are now starting to leave their keys in their wills which is something that they may not have considered before. If the key is lost, there is no one you can look to in order to help you retrieve it, unlike some of these traditional technologies we have now. Granted there are software solutions that can help you, but we need to consider how inadvertent negligence, could have catastrophic consequences for some individuals.
Something mentioned in the book is the transaction cost rule, that is, where transaction costs are lowered by a technology, the technology is likely to see its greatest benefit. However, in the event that the technology introduces new risks or imposes costs that were not previously incurred, it will bring down the economy of that market as a whole. Given the nature of blockchain as a decentralized system how do you think regulations and law will play a role in reducing these transaction costs?
Regulation and the law can reduce these transaction costs by giving people a baseline set of rules to make the product more predictable. When you’re talking about commercial products or any type of commercial innovation, the objective of the law in this area is to reduce uncertainty and enhance predictability. Simply saying we are starting all over again from zero, and isn’t this wonderful how we can just rely on each other to sort things out, brings a great deal of turbulence and uncertainty to the marketplace and I argue it also undermines the acceptability of the product. At the end of the day whether blockchain-based products survive in the marketplace all depends on whether they can offer customers some sort of positive value proposition. In other words, they have to answer the questions that a consumer may have such as: why would I want to use this? How am I better off using a Blockchain version of an existing technology rather than the conventional version? And this is where the transaction costs rule comes in. What we have seen in the past is that society benefits from a product that reduces transaction costs because it makes it easier to do business and that of course allows greater economic growth. Similarity on an individual level unless it allows you to do something better than something that is already out there, you are not going to use it.
In your book you dedicate an entire chapter to the privacy considerations that come with Blockchain. Can you explain what unique considerations come with Blockchain and what the best way to address them are?
One of the unique features of distributed ledgers is that certain Blockchains can be publicly accessible. There are also private versions that can only be accessed by limited parties. A public version can be used by you to give access to third parties, of information about you or something that they have an interest in which you control or have information about. This is one of the selling points behind it because you can now increase interoperability since different sets of actors can have different access to information you make available.
Say for example, you have completed your post-secondary degree and would like to apply for jobs with this degree in hand. You can have that post-secondary degree put on a public Blockchain for you by the Ministry of Education or your post-secondary institution. One of the advantages is that the information has been verified by the software to determine that it is not a forgery, and then you can make this available to prospective employers or people you already do business with. This reduces transaction costs for you because you don’t have to worry about getting things notarized or having to get your grades translated by an educational equivalency company. Giving people access to information that they can trust hasn’t been tampered with is wonderful because that reduces transaction costs. The flip side to that is that if everything about you is out there, even if it is encrypted, we know from experience technology evolves and as the encryption techniques evolve so does the capacity for people to thwart those techniques.
Again, if all of this information about you is in a place that’s easily accessible, what does this say about the ability of people to gain insights into your private details? There is something to talk about the use of anonymization and pseudonymization to help remove names or identifiers associated with particular patterns of behavior. One of the things I caution against is this myth that data miners need to know your name to generate information about aspects of your life – the fact is that they do not. This is one of the things I caution against in the book. Don’t think that everything that comes with distributed ledgers is always going to be beneficial for people. You have to look not only at the benefits something brings but also at the costs. By identifying the risk points initially, before we get high-profile incidence, we can use what is called a privacy by design approach which says lets looks at a product and work to address potential privacy issues at the design stage before they become a problem which will create an unforeseen hardship for individuals or undermine confidence in the system as a whole.
For students who are interested in this area of law, what are some of the ways they can best prepare themselves?
My advice would be to familiarize yourself with emerging technological developments. There are some business models emerging right now that are using blockchain to change how law firms operate for example, so what I would suggest is not to ignore the technology, read up on it, understand how it works, and also understand that there are a number of different perspectives to be brought to the analysis. Each of these perspectives will bring their own insights to this. To this end, we are setting up a class at Windsor in the winter term on Blockchain and commercial law and this is the sort of thing we will be doing. We will be talking about what is special about the technology, how does it differ from existing technology, and what are some of the challenges it brings to existing legal rubrics.