ABN:

ABN: 81
81 141
141 521
521 571
571

4/2/2016
4/2/2016

Some Legal Issues

with Blockchains

conceptual

Introduction

In

Page | 1 In 1997, Nick Szabo published a

paper that was ground breaking
as he conceived the possibility of
Smart Contracts.

A smart-

contract is a specific piece of

software

that

autonomously

will

monitor

the

performance of a contract and if

there is any deviation in such
performance then the software
will execute certain conditional

smart

Edition
Volume 22
Edition 2016
2016 Volume
contract

framework.

Next issue

2008,

an

unknown

mathematician/cryptologist
going by the name of Satoshi
Nakamoto

(pseudonym)

published an obscure paper

BYOD
arrangements: staff
rules and the legal
risks involved.

which described a new form a

cryptocurrency,

Nakamoto called bitcoin. The

underlying

Ransomware

which

technology

of

bitcoin is hash algorithms and

digital signature algorithms,

Are the payments

of the ransom by
bitcoin legal?

which technology were central

to my Ph.D.

stuff it up either intentionally or

car loan, if the borrower does not

Nakamoto devised a fiendishly

pay on time the cars inbuilt

accidentally or
reckless
through

disregard motivated by greed,

cleaver

software will activate certain

causing

technologies to create what is

functionality so that the car will

consequences such as the global

now known as blockchains and a

only travel a specific route like

financial crisis in 2008.

new consensus protocol.

going to work utilising its

advent of the blockchain was

Nakamoto proposed a position

activated GPS; thus depriving

that it was a distributed ledger of

whereby there was no trusted

the owner of any enjoyment in

value.

third

its use. Alternatively, the car

recorded in the blockchain it

collective

could be disabled completely

cannot be deleted or edited. It

(distributed ledger) would be

and be forced to park at a secure

becomes a permanent record for

implemented and everybody in

location

all eternity.

the collective would have the

functions. For example, with a

like

residence.
repossession

the

borrowers

use

of

both

these

The

Once a transaction is

This will make

easier

for

the

same
Previously,

commerce

catastrophic

had

party

but

instead

arrangement

global

information.

transparent
Hence, it was

always relied upon the existence

unnecessary for there to be a

of a central organisation, which

At the time of the Szabo paper,

central authority to control the

was designed to be a trusted

he conceded that the technology

trusted environment.

third

at that time was not able to

unfortunately there was always

Even though Nakamotos idea

adequately

the possibility for someone to

was initially directed at the

lender.

implement

his

party,

though

ABN: 81 141 521 571

implementation

blockchain becomes immutable.

cryptocurrency, the underlying

what

business

That is, it is not possible to alter

technology

of

characteristics. Further, being a

earlier pieces of information as

covering anything of value. That

disruptive technology how will

to do so will break the chain and

or should the law react to such

thus cause a major problem.

disruption.

Basically,

the

is

use

Edition 2016 Volume 2

But what is the blockchain and

Page | 2 is,

of

4/2/2016

capable
of

blockchain

technology can be extended to

any

value

arrangement

transference
or

simply

the

recording of transactions in real

time.

The currency aspect of

bitcoin is really a meta-physical

concept of a unified agreed value
by which commerce is able to
conduct

business.

Money

represents a standard by which

all things can be valued against.
It was this concept of value that
has caused and will continue to
cause the greatest advancement
in the digital economy since the
advent of the internet.

The

blockchain will

the

become

are

its

Obviously, it is not possible in

this newsletter to delve into the
technical

details

of

the

from

perspective

the

becomes

tamper

digital

blockchain
evident

repository.

blockchain as firstly it would

The term block of information is

bore most of the readers of this

basically a discrete piece of

newsletter, secondly it is quite

information that is structured so

complex which would require

as to securely reference the

many pages (in excess of 50 at

immediate

the

explain.

which when strung together

Despite this, the next section is

forms a continuous chain. Each

still quite complex and readers

block can by analogy be akin to a

who are not interested in an

link in a physical chain.

very

least)

to

overview may wish to skip the

next section and move to the
business section of blockchain.

preceding

block

Another aspect of the blockchain

is that it is a decentralized /
distributed information ledger
or repository. This means that

in modern society and business

What is Blockchain
Technology?

or as the head of the Bank of

A blockchain is basically a

system will possess an exact

England has noted: blockchain

decentralized (multiple copies of

copy

is

the fourth

the same thing) continuous set of

Everyone is on an equal footing

revolution.

information

to

ultimate disruptive technology

the

start

of

information

blocks

that

everyone who has access to the

are

of

verify

the
every

repository.
transaction

Though bitcoin was designed for

interconnected

unique

effected on the blockchain. This

the

manner such that as the chain of

is different to a centralized data

blockchain can be adjusted to

information

increases

repository as the security is

record

though

past blocks within the chain of

entirely dependent upon the

there have been some dispute as

information become very secure

repository

to whether this is a proper use of

from an integrity perspective. It

generally referred to as the data-

blockchain.

has

base

transfer

of

value

transactions;

the

been

information

in

blocks

stated
stored

that
in

the
a

manager

administrator

who
and

is
the

technology she/he manages. In a

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traditional sense the centralized

utilise the corresponding private

kept private and must only be

approach involves a single point

key.

entire

accessible or capable of being

of failure which does not occur

bitcoin/blockchain

structure

used by the authorised holder.

with a decentralized distributed

utilises public key technology

The

which involves 2 keys which are

technology is that it will have a

basically two very large non-

myriad of applications, which

trivial

are being explored by many

Page | 3 repository.
The original bitcoin blockchain
is referred to a permission less /
open blockchain. Anyone is able
to see every transaction as it
occurs. There has recently been
developed

permissioned

blockchains
embedded

which
in

have

them

some

authentication mechanism. That

is, only those who possess the
authentication code can operate
the blockchain.
Nakamoto

developing

permission-less
privacy

is,

numbers

the

which

are

mathematically related but it is

computationally infeasible

to

determine one from the other.

The two keys as respectively
known as the public key and the
corresponding private key. The
public key is used by anyone to
encrypt a message intended for
the owner of that public key.
However, only the owner can
decrypt the message since only

in

blockchain

That

open

bitcoin

incorporated
element

into

she

he

possesses

the

corresponding private key used

to decrypt the message. The use

the

of the keys in this manner creates

blockchain by not including any

the

participants

confidentiality.

personal

functionality

of

The beauty of

but

this system is that if a participant

pseudo-

encrypts a message using the

anonymous element through the

private key which they are the

use of a participants public-key.

only holder of then anyone with

The rationale behind the use of a

the corresponding public key

public key is that it should be

will be able to authenticate the

unique to only one particular

message as originating from the

person who should always be

holder of the private key.

identifiable
instead

information

creating

able to verify that she/he is

connected

to

the

published

public key as she/he should be

the only person who is able to

The

public

key

can

be

distributed openly whereas the

private key must as all times be

advantages

of

this

organisations.

Business Characteristics
of the Blockchain
Currently,

the

principal

commercial sector investigating

the deployment of blockchain is
the finance sector. Rationale for
this investigation is that it has
been

identified

that

the

blockchain has the following

advantages:
(a) It is reliable and available due
to its extensive participant
involvement;
(b) It is transparent as all
participants have access to the
recorded information;
(c) It is immutable in that once the
information is recorded on the
blockchain it cannot be
changed (its integrity is
guaranteed);
(d) It is irrevocable in that the
information recorded cannot
be deleted or reversed (this has
significant advantages from an
auditing perspective);
(e) It is digital and thus can be
deployed in non-face to face

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transactions and thus can be

automated.

third

occurred so as to incorporate a

manufacturers

The Financial sector is currently

trust

through RFID Technology or

investing a substantial amount

environment.

Page | 4 of resources into blockchain

party

involvement

factor

into

the

The third party

With

(a)

other

IoT

electronic
could

embed

technology

was to validate the transaction as

blockchain reference which the

The underlying

an independent third party who

manufacturer will set up. The

principal benefit of bitcoin is that

had no financial interest other

blockchain in being an integral

it

third

than being compensated for

part of the supply chain /

party involvement and reduce

such involvement. The use of

ownership of goods structure

the time involved in verifying

blockchain deployment can do

can substantially reduce the risk

online transactions. This results

away with

third party

of counterfeit products entering

in a substantial reduction in

involvement and thus reduce

the market and being traded.

costs covering the transference

transaction cost.

All new / potential owners will

of value.

estimated that in the global

be

development.
can

disintermediate

the

It has been

able

to

interrogate

the

finance sector this saving could

blockchain to make sure that the

share

amount to more than US $20

relevant

transactions the time to verify a

billion annually. Consequently,

counterfeit. Luxury goods could

transaction is currently set at T

if a transaction is dependent

be embedded with a QR code by

(Transaction event time) + 2

upon the involvement of a third

the manufacturer which can be

days.

The longer the period

party to validate a transaction

scanned by any mobile devise so

between the transaction event

then blockchain deployment can

as to interrogate the blockchain

time and the settlement time the

disintermediate

to

greater the risk to all parties

involvement of such third party

involved.

and thus reduce transaction cost.

For

example,

in

If the time can be

that

reduced to say a few hours after

goods

check

are

its

not

validity

authenticity.
The serial number or Vehicle

T then the parties are better off.

An example where blockchain

Identification Number (VIN) of

Consequently, if time between

deployment can be useful is as

the product can be the reference

the transaction and settlement

follows:

point for the product.

is an issue then blockchain

deployment can be a solution
and

thus

reduce

the

risk

involved.
Another benefit of blockchain
deployment

is

that

it

can

disintermediate

third

party

involvement.

Traditionally,

(a) Supply chain management.

(b) Specific product insurance
including
motor
vehicle
insurance;
(c) Lending funds to consumers
to purchase goods;
(d) Product recall arrangements;
(e) Repair of products.

The

manufacturer sells the product

to

distributor.

Such

transaction will be put into the

blockchain. The distributor sells
the product to a retailer. Again
the

transaction

incorporated
blockchain.

will
into

be
the

The blockchain

ABN: 81 141 521 571

records

all

transactions

involving

the

4/2/2016

Edition 2016 Volume 2

Finally, the manufacturer needs

will

to undertake a product recall

individual copy of the software

ownership of the product from

due

will operate.

the manufacture through to the

identified

transfer

of

Page | 5 consumer.
Each owner will want to take out
insurance on the product. How
does the insurance company
determine

that

the

person

claiming ownership actually is

the owner or has an insurable
interest?

The

insurance

company can interrogate the

blockchain

using

the

serial

number/VIN as the reference

point to determine ownership.
This

safety

post

fault

sale.

blockchain

the

recall

(a random number which will be

notice.

Now

some

designated to each individual

safety

jurisdictions it

in

is

illegal

to

copy of say Microsoft office).

transfer a product whilst a

There may be some 100 million

product recall notice has been

copies

issued.

Once the defect, the

deployed and each copy will

subject of the recall notice, has

have its own individual nonce

been

embedded. So each version will

corrected

then

the

each time it is activated look to

product has been corrected.

the blockchain to make sure that

reduced cost and without delay.

product outright and so needs to

deployment

borrow funds from a lender. The

software sector. The blockchain

lender wants to make sure that

could be used to substantially

the

already

reduce

intellectual

property

encumbered and so it also

piracy

covering

movies,

interrogates

software and electronic books.

the

blockchain

office

blockchain to identify that the

Another

not

Microsoft

be unique.

sufficient funds to buy the

are

of

manufacturer will update the

parties and can be undertaken at

goods

That is, each

will have embedded in it a nonce

fraud.
have

one

manufacturer can register on the

without the involvement of third

not

only

released version of the software

substantially reduce insurance

does

that

The

All of the above can be achieved

owner

alone

some

should

The

aspect

to

ensure

use

of
can

example,

blockchain
be

each

in

the

using the serial number/VIN as a

For

released

reference point. The blockchain

software package could have

is used record all transactions

embedded into it a reference to a

that involve the relevant product

particular blockchain which will

including all borrowings and

register all authorised licenses

insurance policies issued.

for that software.

If anyone

copies the software then it will

not operate as the blockchain

The software will

it is the correct authenticated

version.
aspects

There may be other

which

can

also

be

deployed into the blockchain to

harden this structure but the
blockchain can be deployed to
quickly

validate

authentic

versions of all software.

There is also the opportunity for
governments

to

utilise

blockchain technology in their

land titles system. Currently, in
Australia there is a delay in land
title/interests

registration

procedures and the use of

blockchain could not only speed
up the registration system but
substantially reduce costs to the
government in maintaining the

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Edition 2016 Volume 2

register, as well as assisting

a private blockchain. With an

the

lenders, property owners and

open blockchain such as the

blockchain is:

local councils in their respective

bitcoin blockchain there are

business operations. There are

inbuilt mechanisms to assist in

Page | 6 governments overseas that are

enhancing privacy such as not

investigating how blockchain

using

can be used to reduce costs in

information of the participants.

maintaining a land registration

Each participant in the bitcoin

system. Consequently, property

blockchain is allocated a unique

developers will be impacted by

code (and it is possible for a

this disruptive technology.

participant to possess more than

How will or should the

law
react
to
blockchain Technology
Each sector needs to understand

any

identifiable

one of these codes to give greater

complexity to the system) that
only they can utilise (usually
their public key that relates to
their private key).

their respective legal framework

Further in the bitcoin sphere, the

that they operate under. There

use of independent third parties

will be laws which will need to

known as bitcoin miners are

be adjusted but it appears that

designed

most regulators are operating

transaction that occurs in the

under a wait and see principal.

bitcoin environment through a

Recently,

the

Commodity

head

of

Futures

the

Trading

Commission (CFTC) in the USA

indicated that the best approach
is

to

not

enact

rules

and

to

validate

every

expenditure

(this

is

quite

private

blockchain

do no harm principal.

appropriate security structures

difference

between an open blockchain and

blockchain

environment it is open to anyone

and so there are no security
participation

mechanisms

deployed. Irrespective of whether

the blockchain is public or private,

transactions.

In Australia the

blockchain will need to ensure

environment will be subject to

bitcoin

explained here).

technology. This is known as the

be

the

operator/promoter of a private

The

will

In

complex so it will not be

can

There

(a) P2P
network:
product
transfers directly between
parties who control the
product.
(b) No
virtual
currency
is
involved: networks are built
for specific markets and can
issue & transfer product.
(c) No mining: transactions are
required by trusted parties that
form a "federation" or the
nodes on a distributed ledger.
(d) Accelerated confirmation in
seconds.
(e) Scalable:
Capable
of
thousands of transactions per
second.

when it comes to transparency of

mining is really unnecessary.

new

private

privacy will always be an issue

use of proof of work

impact the potential benefits that

this

the

In a private blockchain the use of

from

of

consensus protocol that involves

regulations that could adversely

arise

structure

that

will

permission

each

that they are complying with the

Australian

Privacy

Principles

(these issues were discussed in

greater details in Newsletter no.
3).
Further,

the
and

Australian

participant to have access to the

Competition

Consumer

blockchain structure. In general

Commission (ACCC) being the

ABN: 81 141 521 571

principal

consumer

authority

in

protection

Australia

with

4/2/2016

Edition 2016 Volume 2

has established its innovative hub

term really impact all sectors of

for

society and business.

FinTech

(Financial

extensive legislative powers will

Technology) development.

obviously keep a watching brief

the centre of this technology hub

The law covering this new

Page | 7 on any movement involving

blockchain deployment and the
marketing of such technology
making sure that the general
public is not mislead by any
promoters of such technology.

is the deployment of blockchain

disruptive

products.

immature

Also, the use of smart-contracts

will

need

to

be

carefully

addressed because if the terms

and conditions embedded in the
smart-contract are too harsh
then it could result in the ACCC
getting involved by relying on
such legislative mechanisms as
unfair contracts provisions. The
law in Australia has not been
settled as to the impact of
penalties and if the smartcontract

results

in

an

unconscionable action through

the

technology

then

the

ramification could be severe for

the provider of the relevant
contract.

Consequently, care

must be taken by a provider and

At

but

jurisdictions

is

in

most

there

are

Finally, as noted in the above

regulatory

example

monitoring the situation.

covering

smart-

authorities
In

contracts there are a number of

Australia, ASIC in particular has

legal issues that will need to be

set

addressed. For example, as far

technology hub to assist Fintech

as the author is aware no motor

startups in their quest to get to

vehicle

market. By being close to the

registration

authority

up

its

own

financial

anywhere in the world currently

development

recognises the blockchain as

wants to understand the new

being the register of ownership.

Fintech technologies so that it

If this were to occur then the

can react within a minimal

relevant

each

amount of time if they identify

an issue that warrants their

authorities

jurisdiction

could

in
be

participant in the blockchain

thus giving credibility to the
record

embodied

blockchain.

It

in

the

would

also

substantially reduce the cost to

the authority by recognizing the
truth of the records within the
blockchain.

Conclusion

the smart-contract should be

who

This newsletter has been a bit

understands the implication of

different to other newsletters

such contracts.

released by ODMOB lawyers as

assessed by a lawyer

technology

it

has

concentrated

on

Finally, the Australian Securities

explaining a new disruptive

Investment Commission (ASIC)

technology that will in the near

intervention.

epicenter

ASIC

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Edition 2016 Volume 2

Page | 8

Adrian McCullagh: ODMOB Lawyers

ABN: 81 141 521 571

Email:
Mob:

Ajmccullagh57@gmail.com

+61 (0) 401 646 486

If you wish to subscribe or unsubscribe to this newsletter then please contact the author by
email at the above email address.
IF YOU REQUIRE ANY IT LEGAL ASSISTANCE THEN PLEASE CONTACT THE AUTHOR
BY EMAIL AT THE ABOVE EMAIL ADDRESS.
PLEASE NOTE this paper is NOT the provision of legal advice. If a reader has an issue then
they should seek appropriate legal advice. The author makes no warranty as to
correctness of anything contained in this paper. This paper is the sole opinion of the author
and must not be relied upon as legal advice. Every situation is different and as such proper
analysis must be undertaken when seeking a legal opinion. Consequently, the author takes
no responsibility for any errors that may exist in this paper and certainly takes no
responsibility if any reader takes any actions based on what is (expressly or by implication)
contained in this paper. All readers take full responsibility for anything they may do in
reliance of anything contained in this paper.