When a US federal judge started a lawsuit at the start of the year, claiming that a popular American digital currency exchange has challenged the launch of the cryptocurrency Bitcoin Cash, he started with a reservation, warning the parties that this was "a kind of new brave world" "with whom he was not remotely familiar.
With the number of cases citing the words crypto-currency, Bitcoin or blockchain tripled in the first two quarters of 2018 in the United States, according to the legal analysis company Lex Machina, the trendy legal experts expect to gain steam and will eventually enter in Canada, the legal world will have to deal with the complex, new and challenging legal issues that the blockchain raises.
While the blockchain controversy, the core technology at the forefront that supports digital resources like Bitcoin, has so far focused almost entirely on crypto-currencies, which are expected to change as blockchain is much more than virtual currencies. Often described as the most disruptive Internet technology, the blockchain is now moving beyond the exploration phase to identify and develop practical applications. Although still at the beginning, the blockchain promises to destroy corporate, social and technological models that can potentially have a pervasive impact on business and society. The technology that replicates and distributes a digital ledger on a computer network to create a decentralized, secure, cryptographically protected database has produced applications ranging from intelligent contracts and digitally recorded real estate properties to supply chain control and record management of patients.
The legal world will also suffer. CaseLines, a global digital testing management provider, has filed an application to patent the use of blockchain for document management. But as with any nascent technology, blockchain also has the potential to create conflicts with existing laws and regulations, raising complex legal and compliance issues that affect jurisdiction, evidence, privacy, enforcement and, of course, activities. illegal.
"People are trying to figure out what the problems are and how they can deal with them proactively," notes Imran Ahmad, a lawyer specializing in information security, technology and privacy at Miller Thomson LLP.
For now, the thorny issues surrounding cryptocurrencies are attracting the attention of the courts and regulators. In the United States, in mid-November 2018, 57 class shares were launched and other private cases dealing with digital currencies, as well as 53 cases of termination and termination, 26 criminal cases and 19 cases filed by two regulatory authorities, the US Securities and Exchange Commission and Trade Commission for commodity futures in the United States, according to a cryptocurrency dispute tracker published by the American law firm Morrison Cohen LLP. In Canada, there were 17 cases concerning cryptocurrencies that were heard in the last 18 months by courts, securities regulators or administrative courts.
Most of these cases have different lines of work. Apart from those initiated by regulatory authorities that repress encrypted companies that allegedly sell unregistered securities or presumably engaged in fraudulent activity, some cases are the result of corporate partnerships that have become sour and others by unsatisfied buyers.
In addition, the North American Securities Administrators Association has revealed that over 200 active surveys on initial coin offerings or "ICOs" – a form of fundraising popular among cryptocurrency companies – and cryptocurrency-related investment products are currently underway by state and as part of the Cryptosweep operation, the provincial regulators of US and Canadian securities. More than 20 billion dollars have been collected from crypto projects through ICOs since the beginning of 2017, according to the research company Autonomous NEXT.
"The reason we're starting to see a lot of controversy involving cryptocurrencies is because even with the recent price drop, they're worth more than a couple of years ago, so obviously it's more interesting to have a dispute," says Evan Thomas, a lawyer with Osler Hoskin & Harcourt LLP, who works with startups encrypted on regulations and compliance. Not even the absence of clear regulatory guidelines on the status of cryptocurrencies and ICOs is not helpful. A report from the 2018 Blockchain Research Institute said that space innovators complain about "lack of regulatory clarity and guidance".
In the absence of clear regulatory guidelines on cryptocurrencies, two cases issued by the Supreme Court of British Columbia underline the challenges the courts face in trying to come up with decisions that meet the new realities of the digital economy. The first case concerns Copytrack PTE Ltd., a Singapore company that has mistakenly transferred its digital tokens worth approximately $ 495,000 instead of $ 780 per token to an investor. The company informed the defendant of the error, but did not return it, claiming that the virtual currency was no longer in its possession or control. The court granted an order that allows Copytrack to track down and recover the cryptocurrencies transferred incorrectly, thus implying that it is property, even if it has not explicitly stated that cryptocurrencies are property. (It is highly unlikely that Copytrack will retrieve digital tokens while the defendant has died before the summary application is heard.) The "correct characterization of cryptocurrency" is "a complex and still undecided question" that can not be determined with summary judgment, held the court in Copytrack Pte Ltd. v. Wall. However, several months later, in another case involving a former executive accused by his former employer of embezzlement of 5.3 million dollars of digital currency, the court assumed that virtual currencies were owned.
"These cases show that the courts are about to understand how to apply the existing law to these new facts," Thomas says. "We're going to see inconsistencies on the margins between decisions, and it's not unusual, which is often how the law develops."
This is also the probable scenario that will occur when blockchain-related cases, other than those involving crypto-currencies, will start to make their way through the courts. But the legal issues that the courts will have to face will be of a different nature.
Take smart blockchain-based contracts, an application of blockchain technology that is increasing the growing number of companies. This involves a computer code that automatically executes all or part of an agreement that is stored on a blockchain-based platform. Smart contracts can be the only manifestation of the agreement between the parties or a digitized version of a paper contract. Proponents promote blockchain-based smart contracts as if they were able to cut intermediaries and cut costs while making transactions traceable, transparent and irreversible.
Smart moniker contracts, however, are a bit improper. Contracts are legally binding only if they meet certain elements: there must be an offer and acceptance, as well as an adequate consideration on the part of both parties that have the intention of creating legal relationships – and this is where complications can arise.
"If we are trying to use the code as a contract, how can we be able to show that factors such as multiple parts, adequate consideration and applicable law are met, so that contracts can actually be defined?" He asks Ahmad. "And if it's a contract that mentions government law, which law would have precedence?" Because blockchains are decentralized through a network of unrelated computers – servers and devices – called nodes – located anywhere in the world, this can lead to complex jurisdictional problems. In a party-to-party transaction, any law in the world can govern the transaction, Ahmad says.
But if consumers are part of the picture, issues related to the law governing public policies may emerge. Although the inclusion of an exclusive jurisdiction and jurisdiction clause in an intelligent block-enabled contract is not always applicable, it is still advisable to include such clauses, says Thomas. "One of the problems with smart contracts and distributed applications is that no one necessarily puts written terms and conditions around their use," he says. "If there is a dispute, this puts the court in a position where it must imply what those terms are – and this is a whole world of uncertainty".
There is more. Connected to the core problem of jurisdiction are the related problems of responsibility and execution, concerns that concern all blockchain applications and not only cryptocurrencies or smart contracts based on blockchain. If something goes wrong, like code errors, data errors and simple errors, it can be a real headache for the courts to establish responsibilities because the nodes are decentralized, with copies of transactions stored on a blockchain that does not have a single physical location. Furthermore, transactions recorded on the blockchain are technically immutable because they can not be canceled or modified. Thus, identifying where a breach or failure has occurred can be complicated and lead to jurisdictional confusion.
All of this drives the Quebec City lawyer Jean-François De Rico, who practices information technology, intellectual property and privacy at Langlois LLPs, to state that regulators and regulators will ultimately have to understand how to provide an adequate legal protection for litigants. "To whom should we aim?" He asks De Rico rhetorically. "In the case of the Internet, we have indicated Internet access providers: In the case of blockchains, we still rely on the network infrastructure, but the nodes are so numerous that I do not see how network operators could be. [held accountable]. So, will the developers be? This is something we need to reflect on because, ultimately, being able to make judgments is a real, big difficulty. "
The courts will also have to consider how the trials will be dealt with in cases related to the blockchain. In 2016, the state of Vermont passed a law allowing a "digital register electronically recorded in a blockchain" to be admissible in a court according to its test rules. More recently, in September 2018, the People's Supreme Court of China allowed the use of archived and verified evidence on blockchain platforms in legal disputes, making the first time that blockchain technology was recognized as a means of proof admitted in a case of civil law. The Canadian courts will "need a path to address and consider the evidential value of blockchain registries," says De Rico.
It could turn out to be a war between expert testimony, says Ahmad. "Depending on the issue that will be judged by the court, if it will be very technical, it will be based on the code, so I think it will be a battle between experts and the judge will have to make a decision about it," Ahmad says.
Privacy is still an enigma that must be addressed. Blockchains are inherently designed to be immutable and transparent. The information is also shared between each participant and node. If the information in a transaction or block in the ledger contains private information, it will be visible to all users of each node.
This appears to be in conflict with privacy laws such as the General Data Protection Regulation of the European Union, which was applied as of May 2018. The GDPR has strengthened the rights of people to digital privacy and enshrined the notion of "the right to oblivion". "The French data protection authority was the first regulatory agency to evaluate the issue by offering some experimental solutions that would have allowed blockchain to exist in the GDPR and the European Parliament recently adopted a resolution to explore the potential regulation of distributed accounting technologies such as blockchain.
Elsewhere, there is radio silence. "Many of our law systems do not necessarily fit into the idea of a system that can not be turned off or that can not be changed," says Thomas. "A database blockchain poses a potential challenge to the right to oblivion as there is no central authority that can delete or delete an information".
Kris Klein, a privacy expert with nNation LLP, has a slightly different approach. "The problem is too new and it is not clear how technology will be implemented to know for sure if it will be a curse or a blessing for privacy," says Klein. "Many experts suggest that some of its intrinsic qualities, being immutable, for example, can lead to advances in privacy – time will tell which direction it goes, but it is exciting that it has the potential to be a technology that enhances privacy."
Meanwhile, a growing number of jurisdictions, 16 states of the United States in the end, have slowly begun to leave their legislative footprint on blockchain technology or cryptocurrencies. More significantly, Delaware, which hosts over 50% of all companies listed in the United States, has amended its general company law to allow Delaware companies to use blockchain to create and maintain corporate registers, including the register of securities in the society.
The implications are huge, says Donald Johnston, co-chair of Aird & Berlis LLP's technology, privacy and data security group. Delaware companies can now cryptographically link share shares to an owner in a way that can not be effectively challenged thanks to the "bullet-proof nature of modern cryptography," says Johnston. "This has the ability to change the whole model of shareholder democracy, which could change a lot of governance in the annual general meeting and transfer power from brokers to individual shareholders in a way that could be quite shocking. "Public companies may be shaken because they may no longer be able to influence individual shareholders in the way they were able to interact with large brokers. And big brokers could end up being confused because "they had voting power to do what they want in the general assembly, and now they do not," says Johnston.
Blockchain technology certainly seems to have the potential to shake things up. Regardless of crypto-currencies, litigation on legal issues raised by blockchain technology is still far away, although blockchain-enabled smart contracts seem fertile ground for legal action. Time will tell how the courts will address the plethora of complex issues. A step forward by industry associations to develop standards will probably end up helping the courts. Thus, even clearer guidance from the regulatory authorities that have so far struggled to provide clear answers. "The first cases will be seminal," says Ahmad. "They are going to set the tone for everything that happens".
Perhaps, however, the time has come for nations to put their heads on fashion agreements that will create legal frameworks to address the issues raised by blockchain technology, says Toronto blockchain attorney Chetan Phull. "This is a mature area for international treatment," said Phull of Smartblock Law PC. "Blockchain technology is necessarily multi-jurisdictional in most cases, and it is very difficult to fight a blockchain case, not to say apply a blockchain case, when you do not know which set of rules applies. What an advance will happen is that we will be treated and then the individual countries will clarify and fill the gaps ".