Blockchain is a distributed ledger system which is a list of records of data and transactions arranged in a block and arranged in a chain, secured by a cryptographic hash function. Every block that forms the blockchain contains a cryptographic hash that acts as a security of the previous block, a timestamp, and the data of the transaction. The blockchain is “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way"[1]. Every system connected to the blockchain is a node. The blockchain basically consists of a set of nodes that are connected to each other on a peer-to-peer basis. Any change made to the transaction in any one block gets recorded in all the nodes connected on the chain.
Therefore it becomes impossible for the block to be changed in any manner without it being reflected in the block on all the other nodes. This provides the security of the data on the blockchain as any unauthorized change cannot be made on the blockchain as each of the blocks will approve a change to any other block only if it is done in an authorized manner. “Decentralized consensus has therefore been claimed with a blockchain”.[2]
With the recent bitcoin and cryptocurrency revolution blockchain technology has now become the fastest developing technology in the computer space. And this development of technology is contingent on the law that plays a huge role in the application of technology in the day-to-day activities of the modern-day world.
HOW DOES IT WORK
Blockchain technology, though said to be a revolution as big as the internet itself, was not an innovation per se, but was a combination of three already existing technologies that created a new system of functioning of the internet. These three technologies that make the blockchain are :
1. Private key cryptography
2. Distributed ledger system
3. The means of accounting for the transactions and records related to the network
In order to gain a sense of the technology involved, the example of two individuals seeking to make a transaction can be taken. In the blockchain network, each of these two individuals possesses two keys. One is a private key and one is a public key. These private and public keys are used together to generate a secure digital identity reference point. The private key is held by each agent and is not shared with any other party whereas the public key is shared with all other agents. Public keys are cryptographically generated addresses that are stored in the blockchain. Together the private and public keys generate a digital signature which is utilized for the certification and control of ownership of the assets associated with the block.
The digital signature of the cryptographic component is then put together with the distributed network technology component. Blockchain technology basically acts as a huge network of peers who act as validators of each transaction that occurs on the blockchain. This validation of the transaction will happen only if there is a general and complete consensus reached as to the validity of the transaction. Thus by combining the two different concepts of cryptographic keys with a distributed network system, blockchain brings about a new form of digital interaction in the world.
The most important aspect of the blockchain is the validation or the confirmation of the transaction that occurs in the network. In the example stated above, if the two individuals seek to make a transaction wherein the first party seeks to send data or make a payment, this part of the transaction will be done by means of the private key. This information put together forms a block, which contains in itself a digital signature, a timestamp and the data itself. However, the block does not contain the identity of the sender of the block. [3]This block is then transmitted to the entire network represented by different nodes. Each node is a computer system connected to the blockchain network. The second individual who intends to obtain the information (the data or the payment) of the transaction will do so by accessing it on his own node by use of his public key which is programmed to access the transaction. What makes the block secure is the fact that once a block is created it is automatically distributed to every node in the network instantaneously. If any other unauthorized change or tamper is made on the block then every other node will be aware of such unauthorized change and the transaction will not occur[4]. Thus the very mechanism of the blockchain is programmed in a way that makes it impossible for any form of unauthorized hack or access to data to occur.
The validation and storage of the data in a blockchain transaction are performed by all the nodes connected to the network through a mutual sharing system. Rather than the conventional system of the internet wherein, the data is stored on huge server farms, in the blockchain network, every node participates in storing as well as using its computing resources to perform the task of checking whether the transaction is in consonance with the other nodes and therefore a valid one.[5]
IMPACT OF BLOCKCHAIN TECHNOLOGY ON THE LEGAL WORLD
Smart Contracts
Smart contracts are contracts that are executed on the blockchain network and which will automatically execute the terms of the contract based on the underlying conditions. Smart contracts will soon take over the conventional form of contracts due to the multiple advantages it possesses with respect to a definite outcome of the situations imposed in the contract. The occurrences of non-performance and breach of contracts are severely reduced in smart contracts which will be the cause for its eventual widespread use in all contractual agreements across wor[6]ld[7]
Intellectual Property
Non-tangible rights such as IPR will be benefitted from blockchain technology to a great extent. At present, IPR is subject to infringement in cyberspace due to various reasons such as hacking, phishing, etc. The right holders of IPR in music, films, etc often do not receive the royalties due to them when their work is being illegally used. With the storage of intellectual property on the blockchain, it will become practically impossible for any person to illegally obtain any such work and not pay for it.
Property Rights
At present, proof of ownership of a property is evidenced by age-old records and documents that were made many generations ago and have been passed down. There have been multiple cases of the loss and forgery of such physical documents and in most cases, the documents offer little help in determining the exact ownership or boundaries of a particular property. By storing the ownership details and rights of such property on the blockchain it becomes impossible to tamper with. The blockchain itself is a ledger system, making the storage of such details onto the blockchain ledger the most ideal, secure, and immutable method to store the data pertaining to property rights.
Chain Of Custody
Chain of custody refers to the paper trail of evidence that gets admitted in court during a trial. Generally in cases of electronic evidence, one of the issues always pertains to the authenticity of electronic records and whether they had been subject to tampering or forgery in any manner. However, with the advent of blockchain technology, the complete paper trail of any document and its authenticity will be completely secure and trackable and will reduce the time taken in trying to decide the authenticity of such documents.
Financial Transactions
Various intermediaries in the finance sector such as banks, mutual funds, etc, and regulators such as the RBI and SEBI will soon find their functions severely reduced to the fact that such functions will be performed by the blockchain technology in a close to infallible manner. Not only with cryptocurrency be used extensively as a form of legal tender, but the governance and regulation of the entire finance sector will be overhauled by the blockchain.[8]
Notary Public
The function of a notary is to certify the authenticity of the documents presented to him. This function will soon be extinct as through the blockchain technology there will no longer be a need for any third party to authenticate any document as such documents will have a timestamp and hash key fingerprint which guarantees their authenticity once such documents are a part of the blockchain.
Taking into account the legal impact of Blockchain Technology on the legal world, the need of the hour is for the law to regulate the use of technology and not the technology itself. Granted that certain aspects of the technology may be completely in dissonance with the existing laws which may be a century or two older than the technology, however, the crux of the matter remains the same that the end use of the technology must be such that it is regulated by the generally applicable law and not necessarily by tailor-made rules and regulations.
________________________________________
[1] Lakhani & Karim R., The Truth About Blockchain, 95 HARVARD BUSINESS REVIEW 118 -127, Harvard University (January 2017)
[2] Raval & Siraj, "What Is a Decentralized Application?". Decentralized Applications: Harnessing Bitcoin's Blockchain Technology 1-2 (O'Reilly Media Inc.. ISBN 978-1-4919-2452-5, 2016).
[3] Philip Stafford, FT Explainer: The blockchain and financial markets, FINANCIAL TIMES, (July 14, 2015), https://www.ft.com/content/454be1c8-2577-11e5-9c4e-a775d2b173ca
[4]RBI Press Release, Prohibition on dealing in Virtual Currencies, RBI/2017-18/154; DBR.No.BP.BC.104 /08.13.102/2017-18, (April 6, 2018), available at https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0
[5] Turpin & Jonathan B, Bitcoin: The Economic Case for a Global, Virtual Currency Operating in an Unexplored Legal Framework, 21 INDIANA JOURNAL OF GLOBAL LEGAL STUDIES 1, 335–368 (2014).
[6] Anastasia Sotiropoulou & Dominique Guégan, Bitcoin and the challenges for financial regulation, 12 CAPITAL MARKETS LAW JOURNAL 4, 466-479, (2017)
[7]Jeremy M. Sklaroff, Smart Contracts and the Cost of Inflexibility, 166 U. PA. L. REV. 263 (2017)
[8] Bryce Suzuki, Todd Taylor & Gary Marchant, Breathe: Blockchain: How It Will Change Your Legal Practice Arizona Attorney, 54 AZ ATTORNEY 12, (2018)