Blockchain Technologies Create Novel Legal Issues

Gilbertson Davis LLPCommercial, Commercial Law, Contract Disputes, Cyber Risks0 Comments

Blockchain technology is increasingly gaining traction in a variety of different markets and industries, including insurance, securities, and enforcing contracts, and with these new uses come new legal considerations.

Blockchain is essentially a ledger, decentralized with copies maintained across numerous computers, which maintains records of transactions which can be added to in an automated and secure manner. Because the entire history of the validated blockchain ledger is incorporated into all subsequent versions of the ledger, it allows for easy verification of the completion and authenticity of a transaction, since the history of the fund or asset can be traced back to the beginning of the entire blockchain. It is also very resistant to fraud and hacking, since any attempt to create a fraudulent transaction the blockchain must simultaneously modify all previous versions of the blockchain on the majority of the computers running the ledger in order for the transaction to be validated.

One of the first, and the most well-known, uses for this technology is the cryptocurrency Bitcoin, however the technology is increasingly being applied to various sectors and industries.

For instance, the Ontario Securities Commission has recently reported that businesses utilizing blockchain technology should take care to consider whether the transactions they are processing constitute securities under applicable Ontario legislation, even if they are not selling traditional corporate stock. If so, those organizations should ensure the necessary requirements are met. Similarly, in the United States, the Securities and Exchange Commission recently rejected the creation of a Bitcoin ETF (exchange-traded fund), citing its unregulated status as preventing it from being traded on the public exchange.

On a smaller scale, blockchain technology can also be used to implement and enforce so-called “smart contracts”, which can utilize the blockchain system to automate, verify, and timestamp the completion of contractual steps, potentially eliminating the need for intermediaries, such as escrow agents, to oversee and verify contractual agreements.

Blockchains are not without their drawbacks, however. For instance, the security of the blockchain is dependent on ensuring the identity of the parties submitting transactions to the ledger. While the identities of the parties are secured through encryption, should someone’s private key be publicly disclosed, then anyone else could use that key to authorize any transaction on their behalf. Additionally, legal questions arise regarding liability, jurisdiction, and applicable law to interpret and either enforce or rescind smart contracts, where the traditional notions of contractual formation and completion are not present. Furthermore, it is uncertain what role the courts would play in overseeing and enforcing a judicial determination on such a contract.

Blockchains represent a unique opportunity and an uncertain future in the creation and enforcement of contracts and other transactions. Whether you are looking to enter into a “smart contract”, utilize a blockchain system for managing transactions, or simply cut out intermediaries from your day-to-day operations, it is important that you seek legal advice to ensure your interests are protected and legal risks minimized.

If you have an issue relating to blockchains, or other internet and technology issues, contact us for an initial consultation.

Brief informational summaries about insurance litigation, commercial litigation and family law litigation matters in the courts of Ontario and Canada are periodically published on our website. Please note that our website content is for informational purposes only, and should not be construed or relied upon to provide legal advice. If you require legal advice, please request an initial consultation with Gilbertson Davis LLP using the Request Consultation Form on this webpage or by contacting our Intake Coordinator on (416) 979-2020, ext. 223 (both subject to the Terms of Use described on our Contact page).

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