EY outlines blockchain technologies ‘legal impacts’

Formerly known as Ernst & Young, EY is one of the “Big Four” professional firms, a collection of mammoth organizations that do accounting and advise on tax, plus offer a wide range of management and assurance services, all the while auditing more than 80 percent of all US public companies. The group includes KPMG, Deloitte, PwC and EY.

Although usually identified as single companies, each one the firms is actually a network of independent corporations who have entered into agreements with one another to set quality standards and share a common name.

EY has been extremely active in the bitcoin and blockchain space recently, including becoming the first of the Big Four accounting firms to accept bitcoin for their services in Switzerland, where they have installing an BTM machine in their lobby and gave bitcoin wallets to their employees.

The firm looked at a large selection of disruptive technologies in July, and stated that blockchain may have the most impact of the bunch. The group included a range of other developments, such as artificial intelligence, virtual reality, robotic process automation, cloud computing, and the internet of things (IoT).

"The advent of blockchain technology not only has the potential to disrupt entire industries, but raises legal questions that present both risks and opportunities."
— – Cornelius Grossmann, EY Global Law Leader

EY’s Global Law Leader, Cornelius Grossmann, recently authored an EY Law article stating that “Blockchain is developing much faster than anyone expected,” and is having "profound legal impacts." Grossman also outlined five key areas the would be impacted.

“Trust and security” is first the legal expert’s list. Grossmann asserts that blockchain technology could, in time, eliminate confusion in who owns what digital property, and greatly reduce digital rights theft, “A blockchain environment could reduce or even stamp out piracy.”

Satoshi Nakamoto’s original design for a blockchain makes an ideal platform to store and access Digital Rights Management (DRM) information, making immutable records for all kinds of digital property from books to video to business documents.

Deloitte has also examined DRM, and published a report on blockchain applications in the media industry. The firm suggested that a smart contract could be used to automatically compensate artists, who would be able to manage their intellectual property online, ensure that their content is used correctly, and of course be paid. “A blockchain would ensure that copyright theft and illegal file-sharing become all but impossible,” the firm explained.

“In the future it will be much easier for lawyers to facilitate proof of ownership and related due diligence in transactions.”
— – Grossmann

The DRM field is full of startups and big companies trying to take advantage of this technology. Two-time Grammy nominated music and performance artist Imogen Heap has championed blockchain based DRM for well over a year, while Telecom giant Verizon filed a patent to use blockchain tech for DRM in August.

Several startups are trying to offer their own brand of DRM using blockchains. Bittunes is an entire marketplace for music that keeps track of digital rights for artists and allows them to stream their music directly to users profitably. Ascribe is doing something similar for graphic artists, allowing them to directly sell, lend out, or even sell digital prints of their artwork, with the help of the bitcoin blockchain.

South African startup Custos was specifically created to help end digital piracy. They offer Hollywood studios a way to identify the source of leaked content. The system applies a unique watermark to pre-release movies that are used within the industry. The watermark also contains a bitcoin bounty that can be claimed by the public if the copy is leaked.

“While lawyers may be less involved in piracy-related disputes, it is likely that legal advice will still be required to guide all parties in agreeing terms before works are published. There could even be greater demand for legal advice during the transition between “analogue” transactions and blockchain.”
— – Grossmann

Another important area Grossmann mentioned he calls “Privacy vs. transparency.” The legal expert stated that the transparent nature of blockchain technology could expose transactions that are currently kept private. “This plays into the ongoing public debate about where to draw the line between privacy and transparency,” he explained.

Due to Nakamoto’s design of a shared ledger that is readable by all, which uses transparency for the sake of tracking transactions, similar blockchain systems would expose private transactions of any kind, but not necessarily identify the senders and recipients.

The European Data Protection Supervisor (EDPS) has said since 2011 that privacy and transparency should not be an afterthought. EDPS Supervisor Giovanni Buttarelli said, “It is also important to note that transparency and privacy are of equal fundamental importance.”

Professor Joseph Cannataci at the University of Groningen believes that privacy and transparency complement each other, and that transparency is fundamental to the protection of personal data. He is the UN Special Rapporteur on Right to Privacy and led UNESCO research project "Balancing privacy and transparency in the context of promoting online freedom of expression.”

Charities that accept bitcoin embody the possibilities in this area more than any other business structure. Complaints about existing charities being too opaque are all too common. With poor tracking, donors can lose faith in the charity itself, even if they are doing a perfectly honest job of spending their donations as intended.

Services like BitGive’s upcoming GiveTrack were designed to make every step of a donation to charities fully transparent. Using blockchain technology, GiveTrack allows transactions to be tracked on a public platform in real time. Donors and the public can use it, “to see how funds are spent, ensure they reach their final destination, and track the results generated from contributions,” according to BitGive Foundation.

The City of London is also looking at transparency, for the sake of budget planning, and has created a public blockchain called the “Mayor’s chain” to explore the radical idea of making the city’s finances completely public.

EY’s Global Technology Law Leader, Richard Goold, said blockchain technology allows transactions to be documented better, and therefore can help “avoid any crime connected with the possibility of hidden transactions.” Grossmann further commented that blockchain’s widespread adoption “could require lawyers to navigate new territory.”

“The entire legal system as we know it might extinguish if blockchain can provide more efficient ways to manage the business relationship between individuals and companies.”
— – Peter Katko, EY’s Global Digital Tax Law Leader

Another of Grossmann’s factors is simply labeled “Regulatory change.” He believes that blockchains can potentially disrupt all industries and “will drive significant regulatory change across multiple industries and sectors.” There is currently no established authority to respond to these potential developments, the expert states. Consequently, it is difficult for businesses and legal teams to be prepared.

“The most prudent next step is to clearly identify the risks and challenges before developing a blockchain road map,” Grossman suggested. “One thing is clear, however: the regulatory frameworks of today probably won’t fit the business models of tomorrow.”

Many different jurisdictions have already put their own cryptocurrency regulations in place, and blockchain regulation is now starting to appear. New York’s infamous BitLicense has made the state tougher on bitcoin adoption than any other jurisdiction in a bitcoin legal-country, forcing many startups to flee the state altogether. Meanwhile, the nearby state of Delaware has gone out of it’s way to encourage blockchain adoption in their startup-friendly state.

Major capitals like the City of London are also starting to promote blockchain-friendly atmospheres, going so far as to offer regulatory sandboxes to ease FinTech development. The format has been recently swept through Eastern countries, including Singapore, Hong Kong, Indonesia, Malaysia, Australia, and Thailand.

“MAS would like to encourage more FinTech experimentations so that promising innovations can be tested in the market and have a chance for wider adoption, in Singapore and abroad.”
— – Monetary Authority of Singapore

The last area Grossmann mentioned was smart contracts, which he also referred to as “pay-for-performance agreements.” The lawyer explained that beneficiaries currently have to actively enforce failures, and automatic enforcement of smart contracts would remove the human discretionary element.

The legal expert claims smart contracts “could challenge traditional contract law and require lawyers to draft contracts in software programming languages.” This would have a profound effect on legal training, development, and recruitment. “Should your business now be recruiting lawyers who can code?” Grossmann questioned.

Joe Dewey of Holland & Knight answered that question emphatically in a discussion last August. stating that it’s impractical for all lawyers to become computer coders. Most of them will interact with a lawyer-friendly user interface built for non-coders.

Scott Farrell of King & Wood Mallesons shares the sentiment, as does Dax Hansen of Pekins Coie. “Clients will demand sophisticated legal advice related to their complex use of blockchain technologies to evolve their business practices.” Hansen states. The software and database tools used by lawyers will soon incorporate blockchain technology. “Lawyers will take on an enhanced role of creating and mediating legal structures within which smart contracts will operate.”

The need for non-coder professionals to draft smart contracts has attracted many blockchain-related startups. Leading the pack is a company called Monax, formerly Eris Industries. The company, who has already been working with EY and several law firms and banks, lives by the motto that legal contracts are code, and produces software solutions to help bridge the gap.

“In today’s increasingly data-driven world, it makes much more sense for contractual obligations to be represented in code and processed at least in part by computers – improving adherence, easing compliance, and automating performance.”

• Monax

Several law firms have already started embracing blockchain technology, and some even offer legal services in the space. Steptoe & Johnson, for example, started a multi-disciplinarian practice to help manage the blockchain for clients in August, and accepts bitcoin for payments. The firm also co-founded the Blockchain Alliance, a coalition of blockchain companies and law enforcement and regulatory agencies, with the Chamber of Digital Commerce and Coin Center.