As new uses of blockchain technology become more varied and appealing, the issue of appropriate regulatory structure is a common legal theme.
Blockchain delivers a secure, tamper-evident digital evidence structure. Blockchains combine distributed computer networks and cryptography to make a better way of storing and proving who did what when. From a functional legal perspective, it is this evidence feature that creates the unique value proposition of blockchain technology: executed carefully, blockchain systems can conduct many of the rote jobs that lawyers traditionally do. These features involve creating, storing and transferring contractual rights and obligations, as well as execution and proof of transactional logic.
Organizing infinite space. For lawyers, it’s often useful to think of blockchain data organization structure in analogy to common law reporters:
This useful organization of cyberspace creates infinite digital territory in which to conduct inexpensive, real-time operations. It’s this new commercial territory that has created the “hype” about blockchain in every sector. Basic evidence creation and proof processes are so ubiquitous they have the potential to affect everything we can and may do with a computer: identity, contracts, money, relationships, governance and social interaction, to name a few. As evidence structures, blockchains work so well that alternative “currencies’ are one of the most popular projects created with the technology, but its true utility as legal technology goes far deeper.
The breadth of the fundamental, broad-reaching power of digital evidence leaves many legal questions. Are smart contracts enforceable? How and by whom? Are blockchains even legal? How should agencies react to the rhetoric about what blockchains might be in the future, and how should they respond to today’s new challenges?
Blockchain gives us a reliable, tamper-proof way to organize information in digital space so that we may rely upon it and act. While cryptocurrencies attract a great deal of attention, the true, transformative promise of blockchain is to create better commercial processes to achieve human and business goals. Blockchains are a promising new tool for solving existing and evolving difficult problems.
Blockchain technology in itself does not require regulating any more than we need regulations governing mathematics, logic or art. Blockchains do not do anything special by themselves, but they allow humans to create new relationship models based on transparent, forensically demonstrable processes. It’s the use of technology in commerce that comes into regulator purview, not it’s existence. When actors use blockchains to conduct regulated activity, they are regulated already. For jurisdictions that intend to be a part of global, electronic commerce as it matures, this means regulation with a light touch, consistent with traditional U.S. principles of least restrictive frameworks to achieve commercial ends.
Regulations for harnessing infinite digital potential. As to new rules, a light touch should guide regulator action. The guidance of legal history is instructive in this regard, particularly for lawyers trained in U.S. common and commercial law systems. Blockchain technology will enable commercial systems to harness the productive potential of digital territory similarly to how railroads and highways allowed the U.S. to harness the productive resources of American lands and people.
As industrialization emerged across the country, U.S. commercial regulations encouraged interstate commerce with enabling laws, not restrictions. The means was a vast supply chain tied together with a loose framework of laws, the Uniform Commercial Code, that gave non-prescriptive predictability in business relationships and worked hand-in-glove with common law and other regulations. The success of the UCC model is manifest, and its lessons are critical for regulators today.
The issues we face in data-driven commerce are not fundamentally new, but blockchain delivers new tools with which to solve complex problems and simplify processes that will smooth global commercial flow. Rather than crafting regulations that limit what problems we may solve with blockchain technology, agencies should focus on creating the least-restrictive method available for achieving a commercial end.
Nina Gunther Kilbride is Head of Legal Engineering at Monax Industries. This post is part of an online symposium entitled “Blockchain: The Future of Finance and Capital Markets?” You can read all the posts here.