Blockchain: what kind of technology is behind this foreign word? Comment by Ivan Babin of S&K Vertical for Pravo.ru

29 september 2017
What kind of technology is behind this foreign word “blockchain”? Will it bring new legal problems and why lawyers are still cautiously looking at it? "Pravo.ru" has studied the foreign experience of using the blockchain and found out from Russian expertst what do they know about this new thing and what is missing in the laws for the broader use of the technology.

Blockchain is a public digital register in which every user's action is visible to his counterparties, and operations cannot be canceled or modified retroactively. If several companies need to carry out some complicated transaction, blockchain will help them monitor each other's actions. Say one company transferred the money to another. Then other parties to the contract immediately know not only about the fact of payment, but also about the amount.

While blockchain is not widely used in commercial activities, its capabilities are already being tested by many large companies. In particular, it allows you to create automatic "smart contracts", computer programs that take effect when certain conditions are met. When the parties enter into such a contract, its execution begins automatically, without their direct participation.

Blockchain worldwide: the future has come today

The first example of a "smart contract" in the fall of 2016 was the $ 100,000 delivery of cheese and butter to the Seychelles company from Ornua, the Israeli manufacturer. The buyer paid with the a letter of credit (the bank's obligation to pay to a third party at the request of the client when certain conditions are met) through blockchain. The products were delivered by sea, and the whole package was marked by special geolocation sensors on containers. As soon as the vessel entered the port of destination, they sent the signal to the system. This meant that the bank can pay money to the seller. The deal eventually passed for 4 hours instead of 10 days under normal conditions. In addition, there was no need to send paper documents to each other, and the opportunity to forge them was excluded.

Now there are already several worldwide "smart contracts" platforms, but the most common is Ethereum. Users around the world pick this project for crowdfunding, tickets distribution for all kinds of events, and some people even manage real estate with it.

By 2022, global banks with the help of blockchain will be able to cut costs by $ 15-20 billion. This is a huge saving for the financial sector, as analysts of the Spanish bank Santander (10th place in the world's assets, quoted by Banki.ru) have calculated.

In addition, the technology may be of interest for lawyers in terms of more effective protection of IP rights. It records the fact of ownership of a right with a specific date and the exact time when the right to use a particular object - a song or a book - is granted. Such a mechanism is already working on the Mycelia platform, where music is sold through blockchain.

According to the PricewaterhouseCoopers (PwC) blockchain laboratories, in the nine months of 2016, a total of $ 1.4 billion was invested in projects related to the "chain of blocks"

Blockchain in Russia: what to expect (and when)

The success of foreign colleagues have also inspired Russian developers. In April 2017, it became known that the Skolkovo Foundation had begun to develop a platform for copyright management based on blockchain. "We will offer all authors and rights owners to place their objects on the platform and determine the limits and ways to use them. Also, we will have to develop a standard for information exchange so that other rights owners can connect their systems to the platform," said the Skolkovo Foundation IP Advisor.

At the same time, it is too early to talk about any blockchain-based services having success and demand among lawyers (and not only among lawyers), says Konstantin Bochkarev, head of the IP practice in Russia and the CIS, PwC Legal. Indeed, outside the field of crypto-currency this technology is still in the prototype stage, confirms Ekaterina Tyagai, director of the Institute of Business Law of the Moscow State Law Academy. Although there are examples of successful Russian projects. Since the blockchain terminology is not yet fixed by law, all projects using "smart contracts" are necessarily duplicated by a paper agreement between the parties, says Alexander Vasiliev, deputy director of the IT department for innovation RosEvroBank: "That is, the parties agree on a single interpretation of the algorithm for the smart contract operation and prescribe the liability of the parties in case of possible conflicts." RosEvroBank, according to Vasiliev, has already begun to use blockchain. On its basis, the credit organization has developed a prototype system that will allow individuals to open accounts and receive loans remotely. The client will have only to register with one credit institution, and he can receive the services of the remaining banks without visiting their offices.

Kirill Zheleznov, consultant in Legal for Tech Group of Deloitte, explains that smart contracts are not useful for lawyers, but are very good at optimizing business processes: "Such technologies will not be able to deprive lawyers of their jobs or make them easier, they will simply make work for others." According to the expert, now at the conclusion of agreements it is necessary to ensure that the parties correctly stated on paper what they have acturally agreed upon. And when using smart contracts, a lawyer will monitor the accuracy of the same information, which is already embedded in the program code.

Zheleznov gives an example of a successful similar transaction between Russian companies. The airline S7 Airlines and Alfa-Bank at the end of 2016 used blockchain in their settlements. Under this contract, the firms automated their payments for services. This technology has allowed them to shorten the closing date for every deal from 5 days to 1 hour, the expert stressed.

Where to use blockchain: opinion of professionals

Blockchain challenges the monopoly of lawyers over the trust and is important in cases where the market players need maximum transparency, says Bochkarev. On the blockchain platform, one can create any register, says Vladislav Arkhipov, IP & IT counsel at Dentons, Associate Professor at the Law Faculty of St. Petersburg State University. The expert identifies three potential databases: rights, transactions and legal facts. "Smart contracts" is not a new institution, but it is one more way for contractual performance, which is similar to a letter of credit, says Arkhipov.

According to Ilya Bulgakov, senior lawyer at DLA Piper, the very use of such technology entails many legal issues. Ivan Babin of S&K Vertical believes that the "smart contract" is not easy to use in situations when there are many various conditions: "In one and the same supply contract, the amount of payment depends on a variety of things, from quality to assortment." All factors are difficult to take into account, the lawyer admits.

Alexander Ermolenko, partner at FBK Legal, treats blockchain with a great deal of skepticism. In theory, it is convenient, he says, but how to technically attach blockchain to legal reality, is not very clear. In his opinion, it is much more important now to modernize simpler things: "Take at least the work of court secretaries, keeping the record, queues to get access to casefiles and lines before courtrooms, thousands of cases a year referred to one judge." The state must deal with these problems first, and not get carried away with new-fangled ideas. "

Pravo.ru experts on how to regulate blockchain

Babin believes that the legislator needs to define blockchain and its properties. Bulgakov stands for a differentiated approach in this matter. In his opinion, as the area of crypto currency, there is a need for a mechanism that could protect investors and buyers, but this area is not worthy of careful consideration, and what is enough is the most common standards. As to "smart contracts", Bulgakov proposes to register them in the Civil Code as a way of fulfilling the obligation: "Firstly, it will give an understanding that such a mechanism is recognized by the state. Secondly, it popularizes this technology."

Arkhipov adds that such technologies are difficult to regulate, as in different countries the laws differ: "It must be taken into account that blockchain users are everywhere around the world." In his opinion, the new approaches as to the control of such a system are needed here. Experience shows that excessive legislative regulation is ruining the technology, Bochkarev sums up. At the same time, according to him, "the competent setting of the rules of the game stimulates the influx of investment and interest in technology as a whole." Continuing the thought of his colleagues, Alexander Trifonov, the expert in LegalTech projects, says even that the issue of legislative regulation of blockchain will be resolved easily: "Nobody prevents large companies from collecting money on lawyers and prepare the rule for parliamentary approval."

Someone thinks that it is too early to speak about the legal regulation of such technologies. It will become possible when there are prerequisites for their mass use, says Tyagai: "First, the state or the market should choose the leaders in this area, which will happen in the next couple of years." But now the expert singles out a few things that lawyers should prepare for in the near future:

• Digital evidence in litigation.

• Turnover of crypto-currency in settlements between legal entities.

• Automation and decentralization of legal processes.

Viktor Gerbutov, partner, head of Dispute Resolution Practice of Noerr, compares the problem of technology regulation with the attempt to control the Internet: "The World Wide Web, just as blockchain, is not controlled by any individual states." Alexander Nektorov, a partner of Nektorov, Saveliev and Partners, also draws attention to the problems in tax control over crypto currency, he said that at the moment there is a proposal to recognize bitcoin as a "digital product." Accordingly, it is possible that VAT will be applied to transactions with crypto currency "Then the transactions with digital currency will simply be withdrawn from the jurisdiction of the Russian Federation." At the same time, all interviewed experts now warn that in disputes around blockchain, a great technical expertise will definitely be required." In addition, Babin predicts disputes over "smart contracts" in the event that there is an error in the software, or there will be a situation that the parties did not take into account when the contract was drafted.

FYI: more about how blockchain works

Blockchain became known through the system of digital money (bitcoin). This, in essence, is an electronic notary, who certifies a transaction.

The concept of chains of blocks (blockchain) was proposed in 2008 by Satoshi Nakamoto (Satoshi Nakamoto). For the first time it was implemented in 2009 as a component of the digital currency – bitcoin - where blockchain plays the role of the main general register for all money transactions.

Basic properties of blockchain:



As of the beginning of 2016, more than 40 leading financial companies announced that they were making developments in this area.

By Alexey Malakhovsky
https://pravo.ru/review/view/141356/
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