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The long road for blockchain

10 March 2017

The world's central banks are being encouraged to take stock of the challenges and opportunities posed by blockchain technology.

In a recent report, the Basel-based Bank for International Settlements ("BIS"), which promotes cooperation among central banks, lauded the potential benefits of the new technology, but highlighted that "there is still a long way to go" before blockchain's promise is fully realised.

What is blockchain?

Blockchain, a type of distributed ledger technology ("DLT"), enables a shared ledger to be maintained by multiple parties and updated simultaneously. This shared information can be used to record transfers of property, receipts and transactions. It is typically intended to be immutable, so that it can only be altered by consensus among the participants.

Why is an updated legal framework needed?

Although traditional payment, clearing and settlement systems have an established and clear legal basis, the BIS has stated that "much work is needed" to ensure that the lack of an established legal underpinning of DLT does not undermine the technology's potential benefits.

The BIS report highlights a number of legal concerns in relation to blockchain and other DLT:

  • The nature of settlement finality may not be clearly defined in blockchain arrangements.  There may not be a single, clearly defined moment when a transaction or transfer becomes irrevocable and unconditional.
  • The legal basis for the ownership or transfer of assets or the rights and obligations of the parties may not be clear, especially in transactions that take place across borders or multiple jurisdictions.  This could give rise to issues relating to conflicts of laws.
  • It will be important to establish clearly the rights and obligations of the participants (for example, in rules, contracts, or a code) and a mechanism for dispute resolution. 

Could blockchain reduce legal risk?

According to the BIS, DLT could also potentially reduce legal risk. For example, if a DLT arrangement allows contractual obligations to be automated, such as the payment of interest in a contract, the risk of the obligation not being met is significantly reduced.  

An opportunity for regulators

A key message of the BIS is that regulators can help embed the new technology by providing a clear and transparent legal framework for blockchain and other DLT arrangements. 

The findings of the BIS echo the recent publication by Hogan Lovells (with Innovative Finance and EY) of our report, "Blockchain, DLT and the capital markets journey: Navigating the regulatory and legal landscape" (October 2016).

Our report found that regulators can provide real assistance to the industry by ensuring regulatory certainty and offering clear guidance on regulatory matters. This will help to ensure that DLT can optimally deliver legal and financial benefits.

Nick Edwards

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