Introduction
Over the past years blockchain-technology has been and still is a trending topic. Cryptocurrency trading, bitcoin mining, and Non-Fungible-Tokens (NFTs) are familiar terms that raise temptation to invest for allegedly huge profits. But next to those financial interests there are new and upcoming ideas for the use of the underlying blockchain-technology for better and more efficient legal systems.
How does blockchain work?
Prior to the examining the possibilities presented by the blockchain we must first look at the basic technology behind it.
Primarily the blockchain is what it says, a chain out of “blocks.” Every block has its own “fingerprint.” It is composed of a timestamp, an index, transaction dates and the “hash” of the previous block. A hash is a digital and cryptographic coded value which is set for every block. By using the hash of its predecessor, two blocks get bound together.
When trying to manipulate the information of one block, its hash will change as well. But the antecedent unmodified hash has already become part of the subsequent block. As a result, the new and the old hash collide. By this, the blockchain is interrupted, and the manipulation becomes evident. Therefore, every single hash that follows must be calculated newly when trying to change data. This poses such a complex calculation procedure that it exceeds today´s and the near future´s computer power by far.
Additionally, the blockchain database is saved in a decentralized manner, which means it is administered by every user and not by a single third-party controlled unit. In a so-called Peer-2-Peer-Network every user is directly connected with another user. Every computer represents a “node” in the network and every node retains a copy of the whole blockchain. They thereby control and verify together if the blockchain is intact.
Summarized, in order to manipulate an information in the blockchain, you would need to recalculate all following hashes and change all copies stored in all nodes. In contrast to a third-party database, the blockchain gets its security through the mutual connection and control of every node and block. Therefore, it is nearly impossible to manipulate information.
What is possible when blockchain is implemented into legal systems?
Through the security guaranteed by this technology, new possibilities reveal themself for particular aspects of our legal systems.
Digital identity
An interesting idea of blockchain use is “Digital Identity”. The project dealing with the idea, called “Proof of Humanity”, can be described as an online phonebook where people can sign up and add their citizenship, degrees, or skills. Each member gets its authenticity from a video confirmation and a person who vouches for them. This “proof” then gets added on a decentralized registry on the blockchain. Profiles can also be disputed by other members if they think that a profile might be fake. Thereby fake profiles could be eliminated, and misinformation sources could be attacked.
What is intriguing about this project is that it could be applied in voting systems. In this way, only verified persons could vote once and mistakes could be minimalized. The actual use in our general elections may still be far away but companies are working hard to create suitable surroundings in which the listed features are achieved and votes are kept private.[i]
Next to the use in general elections the principle could be used in virtual shareholder meetings to ensure that the voters are authorized to do so. This could end the need of proxy intermediaries and an increase in transparency and efficiency.[ii]
Digital registers
Conceivable could be the use of a digital registers, which could replace administrative offices. We may see the end of an analog land register (in Austria: Grundbuch) as we know them. The administration and control would be undertaken by the blockchain. Again, forgery would be nearly impossible and the necessity of a third person executing the registration would become unnecessary.
Tokenization
The tokenization of items such as company parts (equity token), real estate, or stocks (security token) could simplify the accompanying processes. Tokenization means the exchange of sensitive data (for example the ownership of a property) into non-sensitive data, a token.[iii] It will make transfers in general easier and has particular promise when it comes to inheritance. Whereas normally a part of an inheritance has to be disbursed in conventional manners, the right of ownership could be divided into security tokens which then could be distributed among the heirs. Tokens would act as certificates in digital form. Even tax offices could get their share in form of tokens when collecting real estate transfer taxes. The final decision to liquidate the token or to keep it as an asset will then lie with the owner.
Furthermore, tokens could fulfill the same task as securities and other financial instruments.
Smart contracts
Another notable possibility is “smart contracts”. Smart contracts are codes which are set up in the blockchain and automatically execute the whole or parts of an agreement. They can be included into traditional text-based contracts or be the contract itself.
When parties fulfill their obligation and add the required parameter into the smart contract, the code will then execute another action. Such triggered actions could be, for example, money or token transfers. The code could also be modified to charge a fee in case of late or insufficient fulfillment.[iv]
Smart contracts will also be able to apply terms and conditions automatically by virtue of programmable components through blockchain networking.
Where are we now?
While these are just some examples which could change our professional everyday lives, these could also be steps towards the unification of different laws. While ideas like “smart contracts” are already in use and even blockchain-controlled voting systems have been deployed (like in the state of Colorado), other ideas seem far away. Many Austrian jurists might agree that an abolishment of the “Grundbuch” does not sounds right considering its presence since day one of their legal studies. Moreover, there are still unsettled questions concerning privacy of the blockchain and the security of access points (wallets or such). But in the end, technology will develop ever more rapidly so that it will be the decision of the legislator as to when and in which regard blockchain technology will be formally introduced into our legal systems.
[i] See “How Blockchain Could Solve the Problem of Digital Identity” TIME, Available at: https://time.com/6142810/proof-of-humanity/.
[ii] See “Shareholders should not share their voting rights: Elimination of Proxy Voting through Blockchain Technology” Fordham Journal of Corporate & Financial Law, Available at: https://news.law.fordham.edu/jcfl/2020/11/16/shareholders-should-not-share-their-voting-rights-elimination-of-proxy-voting-through-blockchain-technology/.
[iii] See “Fintech, distributed-ledger technology and the token economy” European Commission, Available at: https://ec.europa.eu/growth/access-finance-smes/policy-areas/fintech-distributed-ledger-technology-and-token-economy_en.
[iv] See “An Introduction to Smart Contracts and their Potential and Inherent Limitations” Harvard Law School Forum on Corporate Governance, Available at: https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/.
Over the past years blockchain-technology has been and still is a trending topic. Cryptocurrency trading, bitcoin mining, and Non-Fungible-Tokens (NFTs) are familiar terms that raise temptation to invest for allegedly huge profits. But next to those financial interests there are new and upcoming ideas for the use of the underlying blockchain-technology for better and more efficient legal systems.
Prior to the examining the possibilities presented by the blockchain we must first look at the basic technology behind it.
Primarily the blockchain is what it says, a chain out of “blocks.” Every block has its own “fingerprint.” It is composed of a timestamp, an index, transaction dates and the “hash” of the previous block. A hash is a digital and cryptographic coded value which is set for every block. By using the hash of its predecessor, two blocks get bound together.
When trying to manipulate the information of one block, its hash will change as well. But the antecedent unmodified hash has already become part of the subsequent block. As a result, the new and the old hash collide. By this, the blockchain is interrupted, and the manipulation becomes evident. Therefore, every single hash that follows must be calculated newly when trying to change data. This poses such a complex calculation procedure that it exceeds today´s and the near future´s computer power by far.
Additionally, the blockchain database is saved in a decentralized manner, which means it is administered by every user and not by a single third-party controlled unit. In a so-called Peer-2-Peer-Network every user is directly connected with another user. Every computer represents a “node” in the network and every node retains a copy of the whole blockchain. They thereby control and verify together if the blockchain is intact.
Summarized, in order to manipulate an information in the blockchain, you would need to recalculate all following hashes and change all copies stored in all nodes. In contrast to a third-party database, the blockchain gets its security through the mutual connection and control of every node and block. Therefore, it is nearly impossible to manipulate information.
Through the security guaranteed by this technology, new possibilities reveal themself for particular aspects of our legal systems.
Digital identity
An interesting idea of blockchain use is “Digital Identity”. The project dealing with the idea, called “Proof of Humanity”, can be described as an online phonebook where people can sign up and add their citizenship, degrees, or skills. Each member gets its authenticity from a video confirmation and a person who vouches for them. This “proof” then gets added on a decentralized registry on the blockchain. Profiles can also be disputed by other members if they think that a profile might be fake. Thereby fake profiles could be eliminated, and misinformation sources could be attacked.
What is intriguing about this project is that it could be applied in voting systems. In this way, only verified persons could vote once and mistakes could be minimalized. The actual use in our general elections may still be far away but companies are working hard to create suitable surroundings in which the listed features are achieved and votes are kept private.[i]
Next to the use in general elections the principle could be used in virtual shareholder meetings to ensure that the voters are authorized to do so. This could end the need of proxy intermediaries and an increase in transparency and efficiency.[ii]
Digital registers
Conceivable could be the use of a digital registers, which could replace administrative offices. We may see the end of an analog land register (in Austria: Grundbuch) as we know them. The administration and control would be undertaken by the blockchain. Again, forgery would be nearly impossible and the necessity of a third person executing the registration would become unnecessary.
Tokenization
The tokenization of items such as company parts (equity token), real estate, or stocks (security token) could simplify the accompanying processes. Tokenization means the exchange of sensitive data (for example the ownership of a property) into non-sensitive data, a token.[iii] It will make transfers in general easier and has particular promise when it comes to inheritance. Whereas normally a part of an inheritance has to be disbursed in conventional manners, the right of ownership could be divided into security tokens which then could be distributed among the heirs. Tokens would act as certificates in digital form. Even tax offices could get their share in form of tokens when collecting real estate transfer taxes. The final decision to liquidate the token or to keep it as an asset will then lie with the owner.
Furthermore, tokens could fulfill the same task as securities and other financial instruments.
Smart contracts
Another notable possibility is “smart contracts”. Smart contracts are codes which are set up in the blockchain and automatically execute the whole or parts of an agreement. They can be included into traditional text-based contracts or be the contract itself.
When parties fulfill their obligation and add the required parameter into the smart contract, the code will then execute another action. Such triggered actions could be, for example, money or token transfers. The code could also be modified to charge a fee in case of late or insufficient fulfillment.[iv]
Smart contracts will also be able to apply terms and conditions automatically by virtue of programmable components through blockchain networking.
[i] See “How Blockchain Could Solve the Problem of Digital Identity” TIME, Available at: https://time.com/6142810/proof-of-humanity/.
[ii] See “Shareholders should not share their voting rights: Elimination of Proxy Voting through Blockchain Technology” Fordham Journal of Corporate & Financial Law, Available at: https://news.law.fordham.edu/jcfl/2020/11/16/shareholders-should-not-share-their-voting-rights-elimination-of-proxy-voting-through-blockchain-technology/.
[iii] See “Fintech, distributed-ledger technology and the token economy” European Commission, Available at: https://ec.europa.eu/growth/access-finance-smes/policy-areas/fintech-distributed-ledger-technology-and-token-economy_en.
[iv] See “An Introduction to Smart Contracts and their Potential and Inherent Limitations” Harvard Law School Forum on Corporate Governance, Available at: https://corpgov.law.harvard.edu/2018/05/26/an-introduction-to-smart-contracts-and-their-potential-and-inherent-limitations/.
While these are just some examples which could change our professional everyday lives, these could also be steps towards the unification of different laws. While ideas like “smart contracts” are already in use and even blockchain-controlled voting systems have been deployed (like in the state of Colorado), other ideas seem far away. Many Austrian jurists might agree that an abolishment of the “Grundbuch” does not sounds right considering its presence since day one of their legal studies. Moreover, there are still unsettled questions concerning privacy of the blockchain and the security of access points (wallets or such). But in the end, technology will develop ever more rapidly so that it will be the decision of the legislator as to when and in which regard blockchain technology will be formally introduced into our legal systems.