Like many attorneys, I consider myself a lifelong learner, and I embrace opportunities to learn something new. So, in 2017, I noticed that “bitcoin,” “initial coin offering (ICO),” and “cryptocurrency” were buzzwords appearing everywhere. My curiosity was sparked. I checked out three books from my local public library that summer, and two of those books were about digital currencies. But my blockchain journey really began with the third book, entitled Blockchain: Blueprint for a New Economy, by Melanie Swan. This book makes the case for blockchain’s potential beyond financial applications and into areas such as identity verification, health care, and more. I was convinced then, as I am now, that distributed ledger technologies such as blockchain will inevitably become another layer in the invisible fabric that powers many of our lives.
Where there is innovation, there are naturally new (and sometimes challenging) questions of law and policy. And through litigation and policymaking, attorneys tend to have an outsized impact on how these questions are debated and ultimately answered. Even though the first blockchain transaction occurred in 2009, and the ICO boom of 2017 is a distant memory for many of us, there remain challenging debates to engage in and interesting questions for attorneys to answer.
Before you can begin to evaluate what a blockchain law practice could look like for your office, you should understand how blockchain is used and what some of the common legal issues are.
On January 3, 2009, the mysterious figure known as Satoshi Nakamoto introduced the world to bitcoin (BTC)—the first cryptocurrency—by mining the first block on the bitcoin network. About a week later, the first transaction occurred when Nakamoto sent 10 BTC to Hal Finney, a well-known cypherpunk. This was the first peer-to-peer transaction on blockchain.
At its core, blockchain is a digital ledger technology that meticulously records and verifies information across a distributed network of devices rather than on a single server. The distributed network operates as a decentralized database and has a consensus mechanism that ensures that the information contained there is both secure and immutable. This configuration creates a transparent and tamper-resistant ledger of data.
Decentralization, transparency, and immutability are distinctive attributes of blockchain that contribute to its role as the foundational infrastructure for the next version of the Internet, known as Web3.0 (or simply “Web3”). At the heart of Web3 is the belief that Internet users should have greater control over their user-generated data and online interactions. Blockchain underpins many of the components that will likely be critical in a fully realized Web3, such as decentralized applications (dApps), decentralized autonomous organizations (DAOs), decentralized finance (DeFi), non-fungible tokens (NFTs), and smart contracts.
As a legal practitioner, you need to understand the foundational principles of blockchain if you work with businesses or individuals shaping the ongoing digital transformation. This technology raises interesting questions about topics such as intellectual property rights, but it also introduces a labyrinth of intricate regulatory and compliance considerations. There are a lot of opportunities for firms that are willing to embrace the challenges of learning about this technology and the evolving legal landscape.
Many known legal questions pop up in a “blockchain law” practice, and more questions are cropping up as the technology matures. Below are a few example scenarios.
Your former college roommate has a wine-shipping company that ships wine from producers to distributors across the United States. His company’s main value proposition is that they guarantee wine will be maintained at the ideal temperature while in transit. They use connected devices to allow distributors to monitor and record the temperature on a blockchain. The company uses an online portal to receive shipping orders and will eventually leverage smart contracts to automatically execute a number of terms, including issuing credits to distributors when the temperature rises or falls outside the ideal range. Payment for shipping will automatically be released from escrow to the company when the shipment is geolocated at the shipping destination using sensors and validated on the blockchain.
What does your former roommate need to know before adopting smart contracts for his shipping company?
While “smart contracts” may make some of the legal issues seem novel, many of the questions will boil down to standard contract law. Does the smart contract itself contain the elements of a binding agreement, or is it simply executing the terms of an agreement? Who bears the risk if the temperature monitor device is damaged or malfunctions? What if the code contains an error that results in shipping accounts being over-credited? Should severe coding errors be a force majeure event? If so, what qualifies as “severe”?
Ultimately, many of the same legal questions that parties must contemplate when forming a traditional contract are important to the formation of smart contracts.
A family friend has founded a blockchain-based electronic health records company that wants to give patients in the United States control over their health data. The company accomplishes this by storing health records and user-generated health information on a blockchain. The contents of the stored information are not visible on the blockchain. However, there are details that, when combined with publicly available details, can be used to decipher information on the ledger, such as patient identity, health care provider, pharmacy, and dates of service.
What legal issues should the electronic health records company be on the lookout for?
For starters, anytime a company collects or processes health data, the odds are good that the company will need to comply with one or more health information laws. It is not always straightforward for companies to determine what is “health data” or what constitutes “processing” under the various laws. If a user allows her connected health device, such as a fitness tracker, to transmit data to the blockchain, is this “health data”? Is this “processing”? With the proliferation of state data protection and privacy laws, compliance is increasingly complicated. What happens if a user wants to stop using the blockchain for record management and wants all his data on the blockchain deleted? Does the company have a legal obligation to comply in certain states? Are there alternative ways to comply (e.g., de-identification)?
These are just a few of the data questions an attorney (or several) would need to think about when working with a blockchain company in the health records space.
Your dentist’s daughter is a social media influencer with a large following; she wants to capitalize on her popularity by creating and selling NFTs. She is a personal style influencer known for mixing high-end and luxury fashion brands with more affordable or fast fashion brands. Each NFT consists of a unique animated cartoon image of the influencer at a notable fashion event and is set to a five-second clip of royalty-free music. The cartoon images are rendered from photographs that were captured by third parties and shared on social media.
What are some of the legal questions this influencer should have?
Quite a few checks need to be performed before this influencer should feel comfortable moving forward with her NFT collection. Does her use of the third-party photographs constitute copyright infringement, or has she sufficiently transformed them? If other people, such as a notable fashion editor or model, are in the image, must they be removed from the image? What about prominent branding, such as brand logos? Are there restrictions in the royalty-free music license about how the music can be used? Is this a commercial purpose that would breach the license agreement? What rights does the influencer intend to convey in the NFT sale? Can purchasers create a gallery in a metaverse and charge visitors to view the NFT?
This is a mere sampling of the intellectual property and publicity rights considerations that were discussed during the NFT craze of 2021 and that continue to work themselves out in the courts.
A law school classmate of yours recently helped secure a large settlement for a client, and the client wants to invest the settlement in an investment DAO that funds social impact start-ups. This fund is investor-operated, and investor-members vote to make governance decisions and investment decisions. This fund does not utilize a simple token-based proportional voting but instead awards more voting power to members who lock in their investment for longer periods of time and members who actively participate in the DAO.
What should the client know before investing?
Before joining an investment DAO, the client will want to ensure due diligence is performed on the DAO, and a number of key questions must be asked. Is there transparency regarding the DAO’s investment strategy, financials, and historical investment performance? Do any of these areas contain red flags from a regulatory compliance perspective? Does the DAO have processes in place to comply with anti–money laundering regulations? Has the DAO’s code been audited for compliance with the governance rules or for security vulnerabilities? How often is the code audited? Are there mechanisms for updating the DAO’s governance rules?
By raising these types of questions and many others, attorneys can help their clients make more informed risk analyses about participating in DAOs.
For those considering a blockchain law practice, know that there isn’t one “right” way to break into this area. However, you can do a number of things to begin to build the knowledge and skills to attract and support clients who are engaging with this evolving technology.
You don’t need to be able to code. You don’t need to know the mechanics of validation. But you should develop a foundational understanding of the technology, its underlying principles, and common use cases. If you want to dive deep into a topic, make that topic smart contracts because they play an important role in blockchain-based applications.
The legal landscape for some blockchain uses is still developing, but familiarize yourself with the existing legal frameworks and regulations related to blockchain and cryptocurrencies. Financial laws aren’t the only laws that apply to blockchain. Compare and contrast the various approaches states and countries are taking to regulatory frameworks when it comes to this technology. Read up on how disputes involving blockchain are playing out in the courts.
Law schools and bar associations are increasingly offering classes and continuing legal education courses on blockchain. Many of these are designed for a non-technical audience. Take a few courses or enroll in a certification program that focuses on blockchain law, cryptocurrency, smart contracts, and related topics.
Many people across industries are enthusiastic about blockchain and welcome the opportunity to share this enthusiasm. The best way to connect with blockchain communities is by attending events and conferences. You can build a network with legal professionals and nonlegal professionals who have varying degrees of expertise across different topics. This is essential because you are bound to have both legal and nonlegal questions if you embark on this journey.
Seek opportunities to work with more experienced practitioners on blockchain-related legal projects or cases. This might involve assisting blockchain start-ups, ICOs, or established companies that have launched blockchain projects and are navigating related legal challenges.
This technology is changing rapidly, and so is the law. Set up alerts to monitor the blockchain and cryptocurrency space and stay informed about developments in the law and new or emerging use cases.
Take stock of your current legal expertise and research how your practice areas currently intersect with blockchain. This is particularly useful if you have expertise in an area of regulatory compliance. Within the blockchain and cryptocurrency space, companies need legal assistance in navigating what are often complex regulatory environments.
A lot of space and opportunity remain for legal newcomers to blockchain. Write articles, contribute to a blog or research paper, or simply post your thoughts on blockchain-related legal topics on social media. This can help establish your interest and knowledge and also attract clients or other opportunities.
Branching out into blockchain law demands a commitment to ongoing learning and adaptability, as the field is constantly evolving. By building expertise, networking with industry professionals, and gaining practical experience, attorneys can position themselves as valuable resources in this burgeoning sector.
It can be daunting to think about building a law practice around a technology that is still maturing and changing, but with change comes opportunity. The intersection of law and blockchain innovation presents endless opportunities for attorneys willing to learn about the technology and attendant legal issues. As this transformative technology continues to reshape industries, attorneys have an opportunity to help shape blockchain as a legal practice area for years to come. By embracing blockchain’s potential, navigating its legal complexities, and fostering collaboration between law and technology, attorneys can help their clients shepherd in the next phase of the digital era.
