Not-so-new kid on the block is about to come of age

From arti­fi­cial intel­li­gence and robot­ics to 3D print­ing and blockchain, tech­nol­o­gy is fun­da­men­tal­ly chang­ing the way we do busi­ness. Blockchain, ini­tial­ly asso­ci­at­ed as being the tech­nol­o­gy that enabled the online cur­ren­cy bit­coin, has sud­den­ly become the lat­est buzz­word in the grow­ing tech lex­i­con. Though the tech­nol­o­gy has been around for a while, the now not-so-new kid on the block is grow­ing up and looks set to dis­rupt the dig­i­tal scene.

Blockchain start­ed as tech­nol­o­gy that was look­ing for a use, but now sec­tors rang­ing from finan­cial ser­vices to the media, from bet­ting to min­ing are show­ing a keen inter­est in the dis­trib­uted dig­i­tal ledger. The tech­nol­o­gy is still a rel­a­tive­ly nov­el con­cept, and the legal and reg­u­la­to­ry envi­ron­ment in which it is des­tined to oper­ate is, as yet, unchar­tered. Richard Goold, head of tech law at EY, sur­veys the scene and answers some key ques­tions:

What is blockchain?

The blockchain is a dis­trib­uted, glob­al dig­i­tal ledger that records and tracks trans­ac­tions. Put sim­ply, it is a method of record­ing data. You could think of it as the rails on which the train of data or pay­ment runs. The data is encrypt­ed and stored in blocks, in a chrono­log­i­cal chain using algo­rithms. The ledger is not stored in one place, but in a dis­trib­uted, open-source net­work of users’ com­put­ers world­wide, which makes it impos­si­ble to hack and alter – at least for now.

Who is using it?

Use of blockchain tech­nol­o­gy remains in its ear­ly stages, but many busi­ness­es, led by the finan­cial ser­vices sec­tor, are exper­i­ment­ing with it. Accord­ing to Blockchain Angels, a net­work of blockchain angel investors and ven­ture cap­i­tal­ists, which has just launched a Blockchain Start­up Track­er, there are already more than 760 star­tups look­ing at inno­v­a­tive uses. It is like­ly that tra­di­tion­al cor­po­rate organ­i­sa­tions will seek to part­ner with fin­tech star­tups to dis­cov­er how best to exploit blockchain. EY is seek­ing to fos­ter such co-oper­a­tion through our Start­up Chal­lenge, match­ing poten­tial part­ners.

Any­one look­ing at using this type of tech­nol­o­gy needs to con­sid­er the legal ele­ments from the out­set of the design process

TheDAO

An exam­ple of how the tech­nol­o­gy is cur­rent­ly being used is TheDAO. In con­trast to a tra­di­tion­al cor­po­rate enti­ty, a DAO is a decen­tralised autonomous organ­i­sa­tion in which soft­ware acts accord­ing to a set of rules encod­ed on a blockchain. TheDAO is on open-source com­put­er pro­gramme that works like an invest­ment club or fund­ing plat­form. It exists on ethereum, a decen­tralised com­put­er plat­form, with a built-in cryp­tocur­ren­cy – ether – which has a real-world val­ue and can be trad­ed on exchanges.

What are the legal issues?

Dis­rup­tive tech­nolo­gies, such as blockchain, are cre­at­ing new ways of doing busi­ness. As with many emerg­ing tech­nolo­gies, the law around it is play­ing catch-up. While you can eas­i­ly and nim­bly cre­ate a new piece of soft­ware, inter­na­tion­al law-mak­ing is not so nim­ble. But any­one look­ing at using this type of tech­nol­o­gy needs to con­sid­er the legal ele­ments from the out­set of the design process. You will need to con­sid­er three broad cat­e­gories – gen­er­al com­mer­cial law con­sid­er­a­tions, tax impli­ca­tions and reg­u­la­to­ry issues. At the moment there are no defin­i­tive answers to ques­tions of com­pli­ance in this evolv­ing space. Busi­ness­es will need to address the issues, such as own­er­ship, trust and secu­ri­ty and con­tract law that are thrown up, and seek advice on how to man­age their risks.

Own­er­ship: While most data is owned or con­trolled by an indi­vid­ual, an insti­tu­tion or a reg­u­la­tor, which can enforce its own­er­ship rights, the infor­ma­tion con­tained on the blockchain is shared and the issue of own­er­ship remains moot. Who is respon­si­ble for the infor­ma­tion con­tained on the ledger, its use and secu­ri­ty?

Pri­va­cy and cyber secu­ri­ty: At the moment the secu­ri­ty of the blockchain relies on the assump­tion that the encrypt­ed infor­ma­tion is impos­si­ble to hack. But, as tech­nol­o­gy devel­ops, this may not remain the case. Many clients are look­ing at a walled-gar­den solu­tion to cyber secu­ri­ty, in which access to the soft­ware sys­tem is lim­it­ed and con­trolled by the car­ri­er or ser­vice provider. But, if secu­ri­ty is breached and the iden­ti­ties of par­ties involved in trans­ac­tions are revealed, it could cre­ate prob­lems over pri­va­cy breach­es.

Smart con­tracts: Blockchain will enable “smart con­tracts” to be exe­cut­ed. But what would be their sta­tus in law and how could their valid­i­ty be chal­lenged or enforced?

Reg­u­la­tion

The reg­u­la­tors in almost all sec­tors will undoubt­ed­ly assess how busi­ness­es using blockchain are oper­at­ing and take a view. Busi­ness­es too, even those that are unreg­u­lat­ed, may need to turn their mind to the reg­u­la­to­ry impli­ca­tions of what they are doing on the blockchain. Giv­en the glob­al, pub­lic nature of the tech­nol­o­gy, the ques­tion of who reg­u­lates it is dif­fi­cult. It is like­ly that the issue will require cross-bor­der and cross-sec­tor co-oper­a­tion. The UK gov­ern­ment has sig­nalled its deter­mi­na­tion to dri­ve the dig­i­tal agen­da and to make the UK a glob­al hub of the dig­i­tal econ­o­my of which blockchain will play an increas­ing­ly large role. And the UK finan­cial reg­u­la­tor, the Finan­cial Con­duct Author­i­ty, is prov­ing to be one of the most pro­gres­sive reg­u­la­tors in the fin­tech space. Its Reg­u­la­to­ry Sand­box ini­tia­tive cre­at­ed a “safe space” for star­tups and busi­ness­es with new offer­ings to engage with it in order to ensure com­pli­ance.

EYX and the EY Start­up Chal­lenge

EYX is EY’s new inter­nal cross-ser­vice line inno­va­tion ini­tia­tive, based at Sec­ond Home in London’s Shored­itch. It is a “work­space and cul­tur­al venue for thinkers, mak­ers, artists and entre­pre­neurs”. The aim is to help EY and its clients nav­i­gate and take advan­tage of dis­rup­tion, to sup­port inno­va­tion and realise the busi­ness val­ue of key emerg­ing tech­nolo­gies. EYX is also respon­si­ble for the next iter­a­tion of the EY Start­up Chal­lenge – an inten­sive ten-week inno­va­tion pro­gramme designed to bring togeth­er EY’s clients with tech­nol­o­gy star­tups in order to address today’s busi­ness chal­lenges in an explorato­ry and col­lab­o­ra­tive way. Fol­low­ing two pro­grammes in 2014 and 2015, and one ear­li­er this year in Berlin, it returns to Lon­don in Sep­tem­ber. The EY Start­up Chal­lenge will pro­vide a stu­dio envi­ron­ment for clients to con­nect and col­lab­o­rate with blockchain star­tups, to explore blockchain tech­nol­o­gy and its poten­tial to trans­form busi­ness­es, and make inno­va­tions real and tan­gi­ble.

Richard Goold can be con­tact­ed via e‑mail at RGoold@uk.ey.com or for fur­ther infor­ma­tion please vis­it ey.com/law