One of the main consideration that the introduction of blockchain-based solutions in the IP Ecosystem refers to the regulatory challenges. In the following lines, my aim is to answer to this question: are there regulatory challenges of blockchain applications in the IP ecosystem?. Such answer is complex and can be divided into three steps. Each of those steps, starts with the following words:
- Yes …
- … however …
- … in any case.
Yes, there are regulatory challenges when trying to implement certain applications of blockchain in the IP ecosystem. The reason is simple: it is usually the case that at the early stages of the introduction of a new technology, the legal system is not prepared to provide answers to the questions raised by the new technology – and this is particularly so at the present moment in which we are experience a huge technological revolution usually referred to the 4th Industrial Revolution. This is the case with blockchain: the technology has certain features and allows the implementation of certain applications which are unknown for the legal systems (e. g. smart contract, Non-Fungible Tokens) or which hinder the application of the existing legal framework, thus there are no straight answers. This creates legal uncertainty.
Legal uncertainty in blockchain is multi-dimensional. It should also be noted that activities in the IP ecosystem are not only governed by IP-related legislation, but by many other fields of law such as contract law, procedural law, law enforcement issues or personal data protection. Legal uncertainty of blockchain thus exists in relation to many fields of law.
Legal uncertainty of blockchain increases due to it multijurisdictional dimension: likewise many other Internet-based technology, the different elements of a blockchain (nodes, participants) can be located in different jurisdictions. As a consequence, even if legal questions raised by a blockchain network can be answered, those answers can be different in each of the legal systems connected to the network.
Legal uncertainty may have negative effects for the introduction of blockchain solutions in the IP Ecosystem:
- public authorities may feel reluctant to its introduction or promotion;
2. private entrepreneurs might feel reluctant to work on blockchain projects, in particular if they cannot commercialise them international;
3. promoters of blockchain projects, can find huge obstacles to design governance structures that meet the requirements of all the legal systems a blockchain might be connected with. It is in the interest of digital entrepreneurs to develop blockchain solutions that can be displayed internationally.
Examples of the regulatory challenges raised by blockchain which are difficult to answer with the existing legal framework are the following:
- Absence of a central authority. The first thing we are told about blockchain is its decentralized character, meaning that ledgers are copied in nodes which are distributed all around internet, and that anyone with the computer capabilities can adhere to the blockchain an become a node. There are the decentralized-permissionless blockchains. The problem with these blockchains is that there is not a central authority responsible for legal compliance and ultimate accountability for the data exchanged and the activities carried out in the blockchain.
- Multijurisdictional character. The problem increases when the blockchain network is international. Identifying the law enforcement authorities with jurisdiction to regulate the network, and identifying the law applicable to determine compliance might be highly complicated.
- Pseudonymity/anonymity. Another problem refers to the various degrees of pseudonymity and in some cases anonymity that blockchain-based platforms can provide to users and miners. This makes it difficult to know who is using the platform and to what end. This might be a considerable obstacle when enforcing the law and imposing penalties and sanctions.
- Personal data protection. Plenty of personal data is stored and flows through blockchains. For instance, data traded in blockchain systems can include personal data. In addition, when participants in the platform are physical persons, the contact details they provide, and the trace they generate about the trading with their digital assets would be considered as personal. Most of the legislation in this area (including the GDPR) was written before the rise of blockchain and was therefore conceived with more traditional, centralized data-processing paradigms in mind. This has led to tensions between blockchains and the personal data protection regulations. The more decentralized blockchains are the more difficult it can be to identify data controllers and processors in charge of complying with the legislation. This is not only a problem for law enforcers but also for data rights subjects who may not know whom they should contact to exercise their rights. Such exercise of rights can also be difficult for other reasons – e. g. right to erasure.
- Smart contracts, digital assets and tokens. These are new means of doing business which are completely new for the legal system. Can contracts be expressed in computer code? Is it possible to trade with tokens, i. e. digital representations of tangible or intangible assets? Therefore, the question raised by itself: are they legal? If should, which bodies of law are applicable to them?
While accepting the legal uncertainty surrounding blockchain, there is consensus among legal academics that many of the new challenges raised by blockchain applications:
- Are not applicable to all blockchains;
- They can be answered with recourse to the general legal principles or by means of extensive interpretation of the existing legal instruments.
This is the case of:
- Absence of a central authority. Many scholars sustain this problem should not be overestimated. There are different levels of decentralization in the blockchain space. Permissionless blockchain networks are open to anyone with the necessary hardware and know-how to participate in them by operating a node. Thus, if the necessary measures are not adopted (e.g. in the governance framework) these problems might appear. However, private-permissioned blockchains will generally have a legal entity at their core and established mechanisms to identify nodes and users in their governance frameworks. This would be the case of blockchains administered by an online intermediary platform (e.g. Kleros or Jur), by a private consortium of actors in the IP ecosystems, or those that can be deployed by IP Offices, whether individually or in groups. In such cases, identification of the accountable entity for legal compliance of the blockchain should not be a problem. It can be sustained that private-permissioned blockchains are not as secure as public/permissionless ones. When introducing the blockchain structure (which is one of the first and fundamental decisions of the governance framework) interest of promoters and potential users need to be taken into account.
- Pseudonimity. Again, this problem depends on the category of blockchain. In private-permissioned blockchain, all actors (nodes and users) are identifiable and accountability is easily determined. As previously mentioned, it is our opinion that blockchains developed in the IP Ecosystem will be private-permissioned. Furthermore, governments can discourage the use of anonymization techniques in blockchain in the IP Ecosystem. It should be also borne in mind that open source ecosystems, such as Ethereum (and Bitcoin), which are widely used for blockchain projects, do not support anonymity.
- Personal data protection. Fot these same reasons, the application of personal data protection legislation is facilitated: it is easier to identify the controller and processors.
- Multijurisdictional character of blockchain. When a legal dispute is connected with several legal orders, Private international law rules provide answers to the questions: which are the law enforcement authorities with jurisdiction to regulate the activity; what is the law applicable to determine compliance or to solve the dispute. Private international law instruments (conventions and, in particular, Regulations in the European Union) were updated in the first decade of the XXI century to adapt to the new challenges raised by Internet. To my understanding, due to the broad concepts used in those instruments, they can provide adequate answers to both questions in relation with blockchain activities.
- Smart contracts and freedom to contract. It is widely accepted that smart contracts are enforceable under general principles of contractual law (freedom of contract, including on the form in which the contract is concluded). Nonetheless, many States have either proposed or enacted legislation applicable to smart contracts or contracts in electronic format. It is widely admitted that contracts cannot be denied validity due to their electronic format. Furthermore, it is generally accepted that in those cases where the law requires the contract to be concluded in writing, such requirement is met if the contract is stored in a durable medium. This is relevant from the point of view of IP, since it is usually the case that IP licenses must meet this requirement. It is, however, doubtful whether a smart contract would comply with this requirement if the contract is not expressed in a semantic language that the parties can understand. In this regard, it has been affirmed that “where national law requires a written contract, a smart contract consisting only of the computer code would not be enforceable whereas a combination of semantic and smart contract likely would be”.
- Tokens and extensive interpretation of existing legal categories. Analogy is used to qualify the new instruments into existing legal categories. For instance, certain tokens can qualify as “electronic money” in accordance with EU legislation (Second electronic money Directive); payment tokens may qualify as transferable securities under EU legislation. From a Common Law perspective, digital assets are considered “Property”. This would also be the case of Non-Fungible Tokens attached to digital artworks.
… in any case.
In any case, while legal experts can adopt interpretations that provide answer to the legal questions raised by blockchain, this is not a viable solution:
- these answers are only accessible to legal experts. Informational costs for digital entrepreneurs can be very high.
- case law on blockchain-related problems does not exist yet, in certain cases different interpretations can be supported,
- and in others an amendment of the legal framework is clearly needed – e. g. legal value of blockchain registries as evidence before public authorities.
Therefore, national or regional initiatives to regulate certain blockchain applications are needed. In this regard, it should be recalled that several national legislators have adopted or are in the process of introducing legislation to provide answers to the questions raised by blockchain.
However, it should be recalled that actors in the IP Ecosystem are usually active worldwide, thus the adoption of divergent national legislations in relation to the technology might be an obstacle to digital enterpreneurs. The adoption of a harmonized legislation at international level should reduce this problem. In this regard, works in progress at UNCITRAL (See “Legal issues related to the digital economy – Note by the Secretariat”, Doc. A/CN.9/1012), UNIDROIT and The Hague Conference of PIL (see “Conclusions and Decisions adopted by CGAP at its meeting of 3–6 March 2020) should be endorsed. These works should not necessary consist on conventions of a binding nature, but on soft-law instruments such as Model Laws, Recommendations or Principles that provide guidelines to interpret or to adapt existing national regulations. This will ensure a certain level of harmonization of national legislation reducing legal uncertainty to facilitate the consolidation of blockchain-based solutions in the IP Ecosystem.