Blockchain is an emerging technology that is innovating business practices across various industries. Most often associated with cryptocurrencies, blockchain technology has moved beyond financial transactions to broader applications disrupting business practices.
As blockchain becomes more widely applied, the technology is bound to give rise to a considerable number of regulatory actions and broad-ranging legal claims. While state and federal agencies are increasingly interested in regulating blockchain activities, consistent laws and regulations that govern the use of blockchain are lacking. How can lawyers navigate discovery of blockchain-related data through an unsettled legal landscape?
Blockchain is a digital and decentralized ledger technology. An information block, such as a business transaction, is recorded on the ledger and distributed to the participants in the blockchain. Each participant has access to an independent full data set of the ledger. Each time a transaction is approved and verified, the information block is added to the chain of recorded information.
The information recorded on a blockchain is immutable. Each block contains a cryptographic hash of the previous block along with the related transaction information. A cryptographic hash is a mathematical equation that converts data into a string of characters. Each subsequent transaction is tagged with its own cryptographic hash and the hash of the transaction prior to it in the chain. The participants on the blockchain approve the validity of the transaction. Any amendments to the transactions can occur by adding the amendments to the blockchain.
Beyond the financial sector, businesses are applying blockchain technology to innovate the way transactions are validated and tracked. For example, government agencies are considering blockchain for use in online voting, supply chain management, and digital and device identity. Businesses are using blockchain for standardizing operations, medical records, real estate records, and tracking and authenticating parts and shipments. Blockchain is being applied in legal services for timekeeping and managing transactions, facilitating the discovery process, collecting business evidence, and verifying legal documents. Startup companies are developing blockchain-based business solutions for generating smart contracts drafted by programmers that allow coded programs to act upon predefined triggers and legal agreements that can be executed on the blockchain.
Because the ledger is an ongoing, validated, and secure log of all transactions recorded, blockchain can be useful for transactions involving proof and chain of title and ownership of property. These features also make blockchain effective for providing current and accurate audit trails and identifying parties to transactions. Blockchain technology may also eliminate risks associated with current settlement and record-keeping methods. Many cybersecurity statutes and regulations require transparency and audit trails, which blockchain would satisfy.
As more businesses adopt blockchain, the legislative and regulatory framework for the technology is developing. New, and potentially inconsistent, state and federal laws and regulations are emerging. Arizona, California, Colorado, Connecticut, Delaware, New York, North Carolina, Ohio, Tennessee, Vermont, and Wyoming enacted or adopted blockchain legislation in 2018. Some of the aspects being regulated include cybersecurity, storage of electronic information, and contract law. While the states are seeking to regulate the same aspects of blockchain, the requirements differ.
Federal legislation has recently been introduced to help navigate inconsistencies in the use and enforcement of blockchain technology. On April 9, 2019, the Token Taxonomy Act of 2019 (H.R. 2144) and the Digital Taxonomy Act (H.R. 2154) were introduced to provide clarity on legal issues, from contract law to health care privacy, related to blockchain technology.
Until there is more certainty regarding the new laws aimed specifically at blockchain, businesses using blockchain should consider the traditional laws and regulations that substantively govern the underlying product, service, or transaction. For example, blockchain technology used in health care would be considered in the context of health care law and smart contracts would be considered in the context of contract law.
Although courts have not yet specifically addressed the admissibility of blockchain records, they are arguably more reliable than other data sources. The following are advantages of blockchain records: (1) They are self-authenticating, as they are immutable. (2) They provide a chain of custody for each recorded transaction. (3) They are complete because each transaction is captured, updated, and validated in real time.
Accordingly, blockchain records may qualify as self-authenticating, computer-generated information under Rule 902 of the Federal Rules of Evidence, if the record is concurrently submitted with a written certification from a qualified person. At least one state, Vermont, has amended its evidentiary rules to include blockchain data among the categories of records that qualify as self-authenticating. If other states and the federal government follow suit, blockchain could streamline litigation by eliminating the need to authenticate key evidence, so long as records were continuously managed in the blockchain environment.
Blockchain does, however, raise some potential discovery challenges because the parties to blockchain transactions are anonymous, and their identities are typically not publicly available on the blockchain. Wallet addresses (places to send cryptocurrency) involved in transactions are generally publicly available on the blockchain. Third parties, such as cryptocurrency exchanges, may have information linking wallet addresses to identities. Provided that the request is narrowly tailored, plaintiffs have been permitted to discover identifying information for parties to blockchain transactions. Such discovery may help identify defendants for service of process.
Additionally, a party receiving a discovery request for blockchain transaction records might have legitimate grounds for objecting. Technically, no one is in “possession, custody or control” of blockchain transaction records, which are decentralized, with no central governing body. Such information would arguably be as easily obtainable by the requesting party.
As more businesses adopt blockchain, litigation related to blockchain technology will likely give rise to issues of first impression in the discovery context as courts apply existing principles to blockchain technology. Parties should anticipate dealing with accompanying struggles associated with understanding complicated technology. Expert discovery in areas of computer technology, data science, and cryptocurrency may be useful to explain the technology and how it is applied to otherwise straightforward legal issues.
Some technical aspects that may require experts include explaining blockchain technology itself, how it is applied to relevant business practices, and accessing, reviewing, and analyzing data on the blockchain. For example, with respect to business solutions such as smart contracts that allow coded programs to act upon predefined triggers, parties can expect discovery issues arising relating to the contracting parties’ intent and what steps the code executes. As a third-party programmer will often be the one who drafted the smart contract, they may not be otherwise involved in the transaction at issue.
As blockchain technology becomes more widely adopted to innovate various business practices, inconsistent state and federal laws and regulations bring uncertainty in the use and enforcement of blockchain technology. Attorneys with a sound understanding of the underlying laws and technologies will confidently navigate discovery issues through the uncertain legal landscape.
