blockchain some legal points - aisa blockchain griffith university.pdf · bitcoin & blockchain...

Bitcoin & Blockchain

Some Legal PointsDr. Adrian McCullagh

Ph.D. (IT Sec), LL.B. (Hons), B. App. Sc. (Computing), GAICD

ODMOB Lawyers

Brisbane Australia

[email protected]

Mob: +61401646486

mailto:[email protected]

Disclaimer PLEASE NOTE: the information disclosed in the presentation is NOT the

provision of Legal advice or Professional Services advice. If a reader/attendee has an issue then they should seek appropriate legal/technical advice. The author/presenter makes no warranty as to correctness of anything contained in this presentation. The topic of this presentation is ever changing at a rapid rate and as such this presentation is the sole opinion of the author/presenter and must not be relied upon as either legal or technical advice. Every situation is different and as such proper analysis must be undertaken when seeking professional advice.

Consequently, the author/presenter takes no responsibility for any errors that may exist in this paper and certainly takes no responsibility if any reader/attendee takes any actions based on what is (expressly or by implication) contained in this paper/presentation.

All readers/attendees take full responsibility for anything they may do in reliance of anything contained in this paper/presentation.

25 May 2016Griffith University Blockchain Presentation

2

Agenda

The origins of the blockchain

What is a blockchain

What are the benefits of the blockchain

Proposed Blockchain uses

Why is blockchain a hot topic

Smart Contracts and Legal Implications

Road Blocks in the development of Blockchains as a disruptive Technology

Conclusion


3



4


In 2008, an unknown mathematician/cryptographer going

by the name of Satoshi Nakamoto (pseudonym) published

an obscure paper which described a new form of

cryptocurrency, which Nakamoto called bitcoin.

Nowhere in the Nakamoto paper is there mentioned the

term “Blockchain”;


5


BUT

Nakamoto defined his virtual currency as a chain

of digital signatures; that is each owner transfers

each coin to another person by digitally signing

the hash of the previous transaction and the

public key of the next owner.


6


He further states “'Nodes always consider the

longest “chain” to be the correct one and will

keep working on extending it. If two nodes

broadcast different versions for the next “block”….

The effect of this is that a cryptographic chain of

information (Blocks) is created.


7


Hence, blockchain has its origins with the bitcoin paper written by

Nakamoto, though the actual origins of the concatenated word

“block chain” like Nakamoto him/herself remain a mystery.

There are 3 underlying technologies and one specific protocol that

is encapsulated in bitcoin:

Hash Algorithms;

Digital Signatures;

Merkle Trees; and

The Proof of Work Protocol or consensus protocol.


8


Nakamoto devised a fiendishly cleaver use of these

technologies to create what is now known as bitcoin

and a new consensus protocol.

The ultimate aspect of bitcoin is that bitcoin is the first

technology in the digital environment that eliminates the

double spend problem without the need of a trusted

third party.


9


The blockchain has been described as being the ultimate

disruptive technology in modern society and business.

As disruptive as the internet was in 1992 when the National

Science Foundation allowed non defence commercial

entities to take advantage of the World Wide Web.

OR as the Governor of the Bank of England has noted:

“blockchain is the start of the fourth information revolution”.


10

What is a blockchain


11

What is a blockchainA blockchain is basically a distributed ledger

(multiple copies of the same thing) that has the

following characteristics:

Once a transaction is recorded in the blockchain

it cannot be deleted or edited without leaving

some trace of such deletion or alteration. It

becomes a permanent record for all eternity. Any

attempted changes to the record will

automatically be identified which will cause all

parties to investigate what has gone wrong. In

essence, the blockchain becomes a tamper

evident record of transactions (Immutable).25 May 2016

Griffith University Blockchain Presentation

12

What is a blockchainNo Central party will control the blockchain;

BUT some private blockchains that are being

developed will be controlled by a central

authority. In general, being a distributed leger

a number of copies will be established which

makes it difficult for unauthorised third parties

to successfully hack every copy of the ledger.

Therefore there is no single point of failure. It

would require a hacker to simultaneously

attack at least 51% of all copies which is just

not feasible.


13

What is a blockchainThe bitcoin blockchain is completely

transparent with every participant having

read access to the entire blockchain and

being able to add to the blockchain when

they wish to effect an authorised transaction.

The bitcoin blockchain is known as a

permissionless blockchain or open

blockchain.

There are being developed permissioned

blockchains which will only allow authorised

persons having the right to read and add to

the blockchain. R3CEV is an example of this.25 May 2016Griffith University Blockchain Presentation

14

The technical aspects of the BitCoin

blockchain

Each block will contain multiple transactions.

In BITCOIN a block is set at 1 megabyte. There is

currently a dispute among core administrators of the

bitcoin code on how to improve the scalability of

bitcoin.

In private blockchains the size of the blocks will be set by

the administrator/creator of the blockchain.

The data structure of a block will be set by the

administrator.


15

What is a Block: data structure

Size Field Description

4 bytes Block Size

The size of the

block, in bytes,

following this field

80 bytes Block HeaderSeveral fields form

the block header

1-9 bytes (Variable

Integer)

Transaction

Counter

How many

transactions follow

Variable (alpha

numeric)Transactions

The transactions

recorded in this

block

25 May 2016

Griffith University Blockchain Presentation

16

Single Block data structure


17

TX1 TX2 TX3 TX4TX number =4 Blockheader*Block size – 1 Mega byte

* The Blockcheader field is expanded in next slide

Block headerSize Field Description

4 bytes VersionA version number to track

software/protocol upgrades

32 bytes Previous Block Hash

A reference to the hash of

the previous (parent) block in

the chain

32 bytes Merkle Root

A hash of the root of the

merkle tree of this block’s

transactions

4 bytes Timestamp

The approximate creation

time of this block (seconds

from Unix Epoch)

4 bytes Difficulty TargetThe proof-of-work algorithm

difficulty target for this block

4 bytes NonceA counter used for the proof-

of-work algorithm


18

Block-header data structure


19

Version Previous block hash Merkle root* Time stamp Target difficulty** Nonce

* This field is more fully

explained in next slide

** Target difficulty deals with

the proof of work protocol

Blockchain: Merkle root


20

Block-header data structure


21

Version Previous block hash Merkle root Time stamp Target difficulty Nonce

Target Difficulty – Proof of work Proof of work involves the use of Cryptographic hash functions.

A cryptographic hash function is a mathematical algorithm that maps data

of any arbitrary size to a fixed length bit string (the resultant is know as the

hash or message digest of the original document).

That is, a function is infeasible to invert, and thus us one way.

The characteristics of a good hash functions are:

Very quick if calculate;

One way: meaning it should be infeasible to guess the original document by

simply knowing its hash result;

Collision free: it should be infeasible to find two documents that result in the same

hash result;

Every document should have its own unique hash result which means that any

change to the original document should result in an entirely different hash


22

Target Difficulty – Proof of work

From a technical perspective a good hash function must

have the following properties:

Pre-image resistance

Given a hash value h it should be difficult to find any

message m such that h = hash(m). This concept is related to

that of one-way function. Functions that lack this property are vulnerable to preimage attacks.

Second pre-image resistance

Given an input m1 it should be difficult to find different input

m2 such that hash(m1) = hash(m2). Functions that lack this property are vulnerable to second-preimage attacks.


23

Target Difficulty – Proof of work

Collision Free

It should be difficult to find two different messages m1 and m2

such that hash(m1) = hash(m2). Such a pair is called a

cryptographic hash collision. This property is sometimes referred to as strong collision resistance.

Proof of work is a brute force procedure to change the

nonce so that the resultant hash will have at least 64 leading

0’s.

It is energy intensive but once solved is easy to prove.


24

Version Previous block hash Merkle root Time stamp Target difficulty Nonce

Target Difficulty: Proof of Work Because it is not possible to identify from a document

what its hash result will be then to get a resultant hash with 64 leading 0’s requires the energy of going through nonce after nonce until the desired hash is created.

It has been calculated that currently the energy required to run bitcoin is actually greater than what google expends to run its business operations.

In the bitcoin environment, Proof of Work is undertaken by miners who use specially designed chips (ASICs) to calculated the desired hashes.


25

What is a blockchain: a cryptographically

connected series of blocks of transaction data


26

Transaction A Transaction B Transaction C

http://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svg

http://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svg

What is the blockchain: P2P distributed /

decentralised database of transactions


27

Benefits of the blockchain


28

Advantages of the blockchain The blockchain has the following advantages:

It is reliable and available due to its extensive participant involvement;

It is transparent as all participants have access to the recorded information;

It is immutable in that once the information is recorded on the blockchain it cannot be changed without leaving some trace (its integrity is guaranteed);

It is irrevocable in that the information recorded cannot be deleted or reversed (this has significant advantages from an auditing perspective);


29

Advantages of the blockchain It is digital and thus can be deployed in non-face to

face transactions and thus can be automated.

It can substantially reduce the time between the

instigation of a transaction and its settlement.

It can be used for any type of transfer of value: not just

bitcoin;

It can eliminate the involvement of a trusted third party

and thus reduce friction costs or as Coates identified

transactions costs.


30

Disadvantages of blockchain


31

Blockchain disadvantages Blockchains by themselves do not provide any

advantage. It is only when other applications are

layered on top of them that there is a benefit.

As Sir Mark Walport UK Chief Scientist noted: “the

implementation of distributive ledgers with embedded

smart contracts should lead to substantial improvements

in compliance, cost efficiency and accountability.”

BUT there are some real outstanding legal issues involved

in so called smart contracts.

Migration of data will be an issue if another system is

later developed which is more commercially appealing.


32

Blockchain disadvantages Blockchains standards have not been finalised as this is

an evolving technology. Work need to be done of settling the data structure for all transactions whether it is bitcoin or some other transaction that involves blockchains.

There are currently billions of dollars invested in legacy systems. The simplest transition is for the currently deployed data repository infrastructure to remain in tact and for blockchain applications to be developed which can interrogate the blockchain and transfer the collected data to the current legacy systems on a temporary basis for reporting purposes only. Once the reports are completed the temporary repository can be wiped.


33

Proposed Blockchain usesblockchain deployment can be useful in the

following:

Supply chain management.

Specific product insurance including motor

vehicle insurance;

Lending funds to consumers to purchase

goods;

Product recall arrangements;

Repair of products.


34

Supply chain managementManufacturers could embed through RFID

Technology or other IoT technology a

blockchain reference which the manufacturer

will set up.

The blockchain in being an integral part of the

supply chain / ownership of goods structure can

substantially reduce the risk of counterfeit

products entering the market and being traded.


35

Supply chain management The blockchain will not prevent counterfeit goods

from entering the market but it will allow the end

user/consumer to validate the authenticity of all

products and thus it should substantially reduce the

size of the end user market and thus reduce the

fraud committed on end users.

This will particularly important in the pharmaceutical

industry with counterfeit drugs. Health professionals

will be able to ensure that authentic drugs are at all

time administered to patients.


36

Supply chain management

All new / potential owners will be able to

interrogate the blockchain to make sure that

the relevant goods are not counterfeit.

Luxury goods could be embedded with a QR

code by the manufacturer which can be

scanned by any mobile devise so as to

interrogate the blockchain to check its validity /

authenticity.


37

Supply chain managementWrite Once Read Many-times (WORM) technology.

It is possible for a manufacturer to embed in some

polymer film a key that can be read using a hand-held

device like a mobile phone that has embodied in it an

app that has been developed by the manufacturer.

The App can be authenticated when downloaded from

an authorised website that has extended validation

certificates allocated to it. Further the app could be

digitally signed by the manufacturer so as to reduce the

risk of false apps be deployed.

It is expected the Pharmaceutical industry to take

advantage of this technology.


38

Supply chain managementCounterfeit drugs adversely impacted the US economy

by $72 billion in 2015.

Basically a clear sheath of a special polymer film could

be applied to the encapsulate packaging that is used in

keeping the drugs sterilised A smart phone with light

emanation will be able to read the crypto and

interrogate the blockchain for authenticity and use by

date.

Last year it has been estimated that nearly a billion

dollars of out of date drug were administered in third

world locations.


39

Insurance FraudHow 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 aspect alone should substantially reduce

insurance fraud.


40

Lending and blockchain interrogationThe lender wants to make sure that the goods

are not already encumbered and so it also

interrogates the blockchain using the serial

number of the product as a reference point.

The blockchain is used to record all transactions

that involve the relevant product including all

borrowings and insurance policies issued.


41

Product recall by a Manufacturer/Repairs

The manufacturer needs to undertake a product recall

due to some safety fault identified post sale.

The manufacturer can register on the blockchain the

safety recall notice. Now in some jurisdictions it is illegal

to transfer a product whilst a product recall notice has

been issued.

Once the defect, the subject of the recall notice, has

been corrected then the manufacturer will update the

blockchain to identify that the product has been

corrected.


42

Why blockchain is a hot topic


43

Why is Blockchain a hot topic

There are a number of major industries that are expending substantial funds on blockchain research, development and deployment. These industries include:

Finance sector (FIN TECH);

Luxury Goods (Diamond Trades);

Insurance;

Stock Exchanges;

Movie Studios;

Software development.


44


Each of the above industries are looking at the

use of blockchain from a different angle:

The finance/share market sectors is wanting

to reduce the time between the signing of a

transaction and the time of settlement. In

land contracts the delayed time can be as

high as 60 days or longer and in the share

market it is T+2 days. The longer the period

the greater the risk of an issue arising.

Luxury goods and Pharmaceutical sectors

want to counteract counterfeit goods. 25 May 2016Griffith University Blockchain Presentation

45


The insurance sector wants to

reduce/eliminate the risk of fraud.

The IP sectors including movies and software

want to eliminate piracy.

The blockchain can in each case be used to

assist in solving these issues.


46

Smart Contracts : Legal aspects


47

SMART CONTRACTS & Legal Issues A so called smart contract is neither smart or a contract.

Lawyers would call it a humpty-dumptyism. (See Lord Glanville Williams series of papers on plain English for lawyers and the discussion between Alice and Humpty-Dumpty from “Alice through the Looking Glass”)

What is a so called smart-contract? : it is computer code that will be connected to a blockchain. The smart code will monitor the internal performance of a contract and any deviation will cause the software to activate certain responses.

The Ethereum project has a number of so called smart contracts in development.


48

SMART CONTRACTS & Legal Issues

The R3CEV group is also investigating smart contract

uses in a number financial transactions.

The difficulties of smart contracts are:

How are equitable principle accommodated such as

innocent misrepresentation or discretionary aspects of

voiding a contract proper;

How can force majeure events be accommodated

as these are usually external events that impact

performance. This may be an opportunity for news

gathering organisations that are trusted to provide

information dealing with externalities.


49

SMART CONTRACTS & Legal IssuesWhat happens if a contract is frustrated due to some

external situation that the parties did not

contemplate at the time of contracting. Again news

providers may be able to establish themselves as a

trusted source of such information.

What is too occur if performance of the contract is

later determined to be illegal;

What if the some of the terms are determined by a

court to be harsh or unconscionable?

How will aspects of the UCC be accommodated

such as limitation of liability provisions and font size

and capitalization of language. (this is a minor issue

but is mentioned for completeness only).


50

SMART CONTRACTS & Legal Issues

Assuming that the above can be accommodated

are there certain contracts that should not be

monitored by a smart contract?

Further investigation / research is required for this

area.


51

Road Blocks for Blockchain


52

Road Blocks for Blockchain On 20 April Morgan Stanley issued its report on the

development and deployment of Blockchain solutions.

This report identified 10 road-blocks that need to be addressed before blockchains become a reality in banking:

1. is there a compelling business case to support the expenditure?,

2. cost mutualisation/who funds the overhaul of legacy systems?,

3. Are there misaligned incentives,

4. How do the lack of standards currently impact the development and ultimate deployment especially for inter-operability,

5. Is the technology scalable without performance degradation,


53

Road Blocks for Blockchain6. What governance needs to be developed;

7. How will regulators deal with the advancement of

this new technology,

8. What are the legal risks not only with regulators but

also with clients,

9. Are there any cryptology/security issues presently

existing or down the track like the development of

Quantum cryptography, and

10. Can a blockchain system be developed that is

simplistic and interoperable with both other

blockchain deployments and legacy systems.


54

Road Blocks for Blockchain It is interesting that Morgan Stanley noted that no

single policymaker they met concerning the research for their report would allow an "unpermissioned" distributed ledger.

In general a blockchain is meant to be a transparent recording of transactions but it is unlikely that this will be the case for all transactions as the finance sector and its customers will not want their business transaction to be disclosed across the blockchain.

One issue that still needs to be resolved will be partial permissioned blockchain where parts will only be visible to those with the correct credentials.


55

Conclusion


56

Conclusion

Blockchain is clearly at this point in time an immature

technology but is advancing at a rapid rate.

Morgan Stanley estimate that commercial systems with

Regulatory approval will not occur until 2017/2018.

There is great promise and investment occurring in this

area.

The financial sector is leading the way but other sectors

like pharmaceuticals are rapidly looking at this

technology.


57

Conclusion

Regulators across the world are interested in this

technology and are greatly assisting in the development

and sandbox deployment of blockchain solutions.

Risk is still an issue and regulatory compliance remains an

outstanding issue as does system liability issues fro clients.

Smart contracts are code applications that are built on

top of a blockchain and this still needs further

investigation


58

?? Questions ??


59

blockchain some legal points - aisa blockchain griffith university.pdf · bitcoin & blockchain...

Documents