Blockchain technology...What Is It?

Jul. 12, 2018

What is a block chain?

According to Merriam-Webster, a blockchain is a “digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network.”  While there are many variations on this definition, the concept remains the same.  All sources agree it is a digital database that offers the opportunity for real-time, verified transactions on a decentralized network. 

 

Blockchain technology was originally invented in 2009 by Satoshi Nakamoto.  Since its initial inception, its potential uses have continued to grow as individuals understand the concept and its potential.  However, there are several common misconceptions about blockchain technology that can limit its potential application if not corrected.

 

Common Misconceptions

Bitcoin. One common misconception is that blockchain technology is Bitcoin or cryptocurrency.  Bitcoin is actually an application of blockchain technology to create cryptocurrency.  Utilization of blockchain technology makes it possible for cryptocurrency to come about.  Its decentralized nature makes it difficult, but not impossible, for an individual to hack or otherwise alter the digital verification of transactions. 

 

Cloud.  Another common misconception that exists is that blockchain technology is cloud storage of documents.  Blockchain has been compared to a GoogleDocs spreadsheet that multiple parties can collaborate in in real-time.  While blockchain technology can be used in this way, the nature of the technology may be such that not everything should be shared or subject to collaborated via blockchain.  Information that is entered and shared in a blockchain essentially has a permanent footprint across multiple platforms.  For organizations with document retention and destruction policies, this may cause an issue, as it may be very difficult or impossible to destroy a record on a blockchain. 

 

 

 

Business Applications

While blockchain is most commonly tied to financial transactions, many companies have found innovative ways to utilize the technology for alternative uses. 

 

Coffee Kiosk.  Blockchain technology has been utilized in a coffee grading machine in remote villages where small farmers produce 70 – 80% of the world’s coffee supply.  The machines time-stamp coffee cherries when the farmers bring them from the field to market.  It enables discerning coffee lovers the ability to see their coffee’s journey from field to New York coffee shop. 

 

The machine also removes the middleman from the transaction by providing immediate objective feedback on the quality of the coffee cherries and offering a price to the farmer.  Once the farmer accepts the offered price, payment is immediately sent to their cell phone.  Without the kiosks, buyers would provide subjective feedback, often downgrading the crop’s quality and offering lower prices.  The buyers would then have discretion as to when they would pay the farmer. 

 

Copyright protection.  Blockai has introduced blockchain technology in the arena of copyright protection.  This company offers authors the means to timestamp their work and catalog copyright certificates.  After the company has issued the certificates, they then track online usage of the work and notify the owner of unauthorized usage.  While the concept is innovative, it presents several legal issues such as whether the individual who registered the work had the right to do so, how to pursue a copyright infringement claim, and how to comply with the various copyright laws across multiple jurisdictions. 

 

Smart Contracts. As blockchain has grown in popularity, more industries have started utilizing it.  Some startups have embraced blockchain technology and built their business model around the technology.  Large corporations have also looked to blockchain technology to replace existing processes not only with managing ledgers, but also with implementing smart contracts. 

 

According to Investopedia, smart contracts “are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.  The code and the agreements contained therein exist across a distributed, decentralized blockchain network.  Smart contracts are innovative and offer traceable, transparent and irreversible transactions. 

Additionally, smart contracts are automatically enforced when the conditions are met.  It has the potential to make any contract, even ones that could be unenforceable according to the laws of the state, automatically enforceable. 

How the courts will treat smart contracts and those which were automatically enforced is yet to be seen since the technology is so new.  As with any contract, it is always best to work with counsel to ensure you understand the terms of the agreement and to determine whether a smart contract is the best form for the agreement. 

 

Supply Chain.  Like the coffee kiosk, blockchain technology has the potential to be utilized in numerous supply train applications.  From the point of production of a raw material such as silk for a blouse to the manufacturer and through distribution channels.  Blockchain technology has the potential to transform traditional notions of the manufacturing cycle into traceable points with accountability at each level.  Transportation businesses are also able to utilize blockchain technology to track shipments to verify actual distance traveled when being charged by the mile and to pay invoices in real time. 

 

Business Considerations

As noted previously, the immutable ledger aspect of blockchain technology can cause issues when it comes to a corporation’s document retention policy.  When a business adopts or engages in transactions that involve blockchain, they should work with counsel and their IT department to develop corporate policies regarding the use, access, and retention. 

 

Businesses should also understand possible litigation repercussions as well.  Information stored on a blockchain could bring additional costs and liability exposure since the records on a blockchain exist indefinitely.  If a document was created utilizing blockchain and the company’s typical document retention is only 7 years before destruction, then the company would still be required to produce the document if litigation arises even after that time.  Additionally, the expense to produce a smart contract created on blockchain can be quite substantial as it could take third-party programmers to extract and analyze the contract to be produced.

 

While businesses may be excited about the opportunities blockchain can bring, they should make sure they work with both technology and legal professionals to understand the implications of utilization.  As with any business decision, there are several factors to consider.  Making an informed decision with a thorough understanding of the what blockchain is and is not will be critical.    




Written By:
Brian Edstrom

Brian Edstrom is a Shareholder and Attorney at Avisen Legal, P.A. He brings to Avisen seven years of experience working for federal and state regulators.

Rachell Henning is a second-year student in the Mitchell Hamline School of Law's innovative Hybrid program. Rachell is an Avisen Fellow who enjoys spending time with her husband and two young daughters when she is not working or studying.

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