BLOCKCHAIN TECHNOLOGY: AN INTERCONNECTED LEGAL FRAMEWORK FOR AN INTERCONNECTED SYSTEM.

• Author: Fyrigou-Koulouri, Marina

INTRODUCTION

On October 31, 2008, Satoshi Nakamoto, following his vision to create a purely peer-to-peer version of electronic cash, published a paper (1) developing a protocol for digital cash that used Bitcoin. Bitcoin is a digital cryptocurrency; however, the underlying technology Bitcoin uses is the Blockchain. (2)

Now, Blockchain is considered the technology most likely to have the greatest impact on the world in the next decades. (3) It gives the opportunity to move to the second generation of the Internet, evolving from the Internet of information to the Internet of value. (4)

"Just as decentralization communication systems lead to the creation of the Internet, today... the blockchain has the potential to decentralize the way [people] store data and manage information, potentially leading to a reduced role for one of the most important regulatory actors in our society: the middleman." (5) Indeed, this technology seems to be able to revolutionize and disrupt a whole range of industries, from "financial services to manufacturing, supply chain management, and to health care records, by infusing transparency and trust in traditionally closed systems." (6)

As this technology develops, the main concern, and even drawback, in its evolution is the absence of an official regulatory framework. The uncertainty and instability around the Blockchain and the legal issues it creates could obstruct its evolution. On the other hand, a severe regulatory environment could also have the same result.

This paper will discuss the issues associated with Blockchain, and ultimately propose a regulatory approach. In Part I, it will simply present this new technology, the way it works, and its main features. Then, in Part II, after reviewing other regulatory frameworks of industries with similar characteristics, it will argue that the optimal choice at this point in time, is to establish an international legal framework of principles and standards for the Blockchain.

PART A

OVERVIEW OF BLOCKHAIN TECHNOLOGY

1. How do Blockchains work

   The decentralized ledger technology or Blockchain (7) is a "decentralized database that stores a registry of assets and transactions across a peer-to-peer network." (8) It is "a global spreadsheet, an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value and importance to humankind," (9) including "birth and death certificates, marriage licenses, deeds and titles of ownership, educational degrees, financial accounts, medical procedures, insurance claims, votes, transactions between 'smart' objects, and anything else that can be expressed in code." (10) At its most basic, it is simply "a public registry of who owns what and who transacts what." (11)

   Blockchain technology "combine[s] peer-to-peer networks, cryptographic algorithms, distributed data storage, and a decentralized consensus mechanisms" (12) empowering "people to agree on a particular state of affairs and record that agreement in a secure and verifiable manner." (13) Decentralized ledger technologies build "online lists, maintained by no one and available to everyone, [that] are maintained by a consensus protocol." (14) A blockchain is a chronological database of transactions shared by all nodes (15) participating in a system, (16) whereas every blockchain is encrypted and divided into smaller parts known as "blocks." (17) Each block, often described as "a container data structure," (18) consists of information about recent transactions, a reference to the previous block in the blockchain (19), a timestamp, (20) and a unique answer to a challenging mathematical puzzle, (21) used to validate the data and the transactions included in that block. A new block will only be added to the ledger if the network verifies that its transactions are legitimate and valid, and do not contradict previous transactions. (22) In other words, "[a] new block of data will be appended to the end of the blockchain only after the computers on the network reach consensus as to the validity of the transaction." (23) Finally, every node of the network stores a copy of the blockchain and all nodes periodically synchronize to ensure the consistency of their shared database. (24)

   In other words, "[t]hink of the blockchain as a log whose records are batched into timestamped blocks. Each block is identified by its cryptographic hash. Each block references the hash of the block that came before it. This establishes a link between the blocks, thus creating a chain of blocks, or blockchain" (25) See Figure 1.

   To begin with, a pair of private/public keys is essential in order to interact with the network. (27) The first (private) is used to sign transactions that are addressable to the network using the public key. (28) Authentication, integrity, and non-repudiation are the goal of this asymmetric cryptography. (29) The first step for a transaction in a blockchain is a message to the Blockchain network by one of the stakeholders describing the terms and conditions of the underlying transaction. Thereafter, the other party needs to signal its acceptance to the network. In fact, transacting parties must broadcast their transaction to the entire network since operations in a blockchain are effectively validated by network participants. Therefore, the acceptance by the second party acts as the trigger point for the rest of the network nodes to authenticate and verify the validity of the transaction through a "proof-of-work" system. (30) This validation system is essentially a competition among network participants, who, by exercising computational power, aim to validate transactions. (31) In Bitcoin, this proof-of-work became known as "mining." Miners compete and the first miner who validates the block is rewarded in digital currency. (32) After this validation, the public ledger and each separate user are updated en masse with the status of the recently added transaction. (33) "The transaction history gets locked in blocks of data that are then cryptographically linked together and secured. This creates an immutable unforgeable record of all these transactions across this network, which is replicated on every computer that uses the network." (34) In other words, the network must agree that each transaction is valid and no single entity can modify the record. This provides security against hacking because, by linking each block to the previous one and that block to the chain of block, someone would, effectively, need to hack every single computer in the system at the same time to hack the blockchain.

2. Dividing deeper into the blockchain (Principles and Characteristics)

   One of the core problems of human transactions is uncertainty. (35) People, who constantly try to lower uncertainty between each other in order to exchange value, use--for that purpose--institutions that act as middlemen. (36) According to the Nobel economist Douglass North, "institutions have been devised by human beings to create order and reduce uncertainty in exchange." (37) It seems, though, that a new era of how human beings interact and trade, is starting. A "new technological institution" can change the way people exchange value, since for the first time, technology alone seems capable of lowering the threat of uncertainty without the need of any traditional institution, economic or political. (38)

   The first key point to understand is that blockchain technology creates, in fact, "a distributed peer-to-peer network where non-trusting members can interact with each other without a trusted intermediary, in a verifiable manner (emphasis added)." (39) That is why it is also described as the "trustless" technology, (40) which implies that transactions and exchanges of value can be performed without a centralized ledger, without the presence of an intermediary or a trusted third party, and also without the threat of the double spending problem. (41) In fact, the main principle of decentralized technologies is the elimination of the third trusted party, where people can transact peer to peer and trust each other. For the first time in human history, trust is not established by some big institution or middleman. Trust, in the blockchain, is established "by collaboration, by cryptography and by some clever code." (42)

   Therefore, since there is no central database, each blockchain is distributed publicly since it is located in the network and encrypted as it uses encryption mechanisms, including public and private keys, to ensure security of the system. (43) Briefly, decentralization, trust, provenance, resilience, and irreversibility summarize the key attributes of the blockchain technology. (44) Decentralization is based on the idea of creating a public ledger (the blockchain) that includes a complete record of past transactions and is shared amongst all nodes of the network, instead of relying on a centralized ledger. (45) People can use this value network to interact peer to peer and exchange value by conducting transactions and exchanging ownership without any intermediaries. (46) Moreover, the way the technology is designed--the information each block contains and the way they are all linked...