Blockchain-based technology is fraught with legal issues. It’s new to many, innovative, and has scared regulators into making an abundance of regulatory decisions quickly and fiercely.
Despite the novelty of blockchain technology to the average lay person (if you want a definition, you won’t find it here), many of the legal aspects applicable to the technology are nothing new. If your organization is considering implementing blockchains in some form or fashion (cryptocurrency, recordkeeping, funds transfer, product safety, etc.), here are some aspects to consider.
Ownership of Intellectual Property
As in any software dealing, special consideration should be taken to define the scope of ownership between the user and the vendor. There is a significant investment required for blockchain technology, so blockchain vendors will need to carefully determine their IP strategy in order to realize financial returns or other commercial benefits stemming from blockchain technology and underlying data sets. As the data set is likely to be related to — and created by — the users, this is often a highly negotiated area.
Aside from the data set ownership, the user may require that specific solutions be created for its intended purpose — ownership of that development will follow the rules of typical software arrangements: where the vendor may apply the solution to its other customers, the blockchain vendor will want ownership; if the user would like the option to apply the solution with another blockchain vendor, the user will fight for ownership.
The popularity of blockchain is due in large part to the nature of having a transparent database that cannot be easily altered. However, this does not always align with the interests of those seeking discretion in connection with their transactions. A centralized blockchain with restrictions in place for allowing only permitted users access to review records will only serve as a solution if the benefits of a decentralized network are not needed. Designing privacy-protecting blockchains that balance privacy and transparency still serves as a hurdle for certain organizations, especially those in the financial services industry.
Liability and Indemnification
One of the most important considerations with implementing any new technology is deciding which side of the dealing will bear the brunt of the blame (and pay the bill) if something goes wrong. Liability and indemnification provisions are often negotiated hand-in-hand with IP ownership — if the blockchain vendor retains ownership, they oftentimes retain responsibility as well.
Enforceability of Smart Contracts
Smart contracts are gaining popularity as an alternative to traditional contracts, as they are automatically executed when coded conditions of the contract are met. Because brokers and other intermediaries are unnecessary, the transaction achieves high efficiency at a lower cost valuation.
Because a smart contract is essentially a prewritten computer code, many of the traditional concepts of contracts law are difficult to apply. When there is a dispute — and the smart contract has already been executed, a permissionless blockchain does not allow for a central controlling authority to come in and resolve the issue. Users and vendors should take care to build in dispute resolution perms that will work in conjunction with the underlying technology and reduce any uncertainty in the transaction.
Blockchain is on its way to becoming an integral part of business, offering scalability and security at a low operating cost. Considering the risks and benefits of implementing blockchain technology within your organization requires significant due diligence and negotiation. The attorneys at Rockridge Venture Law can help you achieve your goals while maintaining your organizational integrity.
About Lauren Hughes
Lauren Hughes is the privacy and branding lead at Rockridge Venture Law®. Equally adept at creative campaigns as well as technology transactions, Lauren leads clients through copyright, privacy, regulatory, and trademark considerations in optimizing successful e-commerce portfolios. She is a leading voice among women practicing in technology and tech law. Her primary practice areas include copyright and trademark law, data privacy, sports and entertainment law, and technology transactions. Lauren also leads the Knoxville Technology Council’s Women in Tech Committee, and is a Director of the Tennessee Women’s Theater Project. Read more about Lauren, connect with her, and Calendly her.
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