Distributed ledger technology will reorder the mechanics of financial transactions and businesses need to decide soon if they will participate or invest in its development, according to a new report.
Law firm, Allens, on Monday published a report, Blockchain Reaction, that covers the opportunities and challenges of the technology and how it should be governed and regulated.
“There will be a significant risk in waiting on the sidelines to see how the technology evolves,” said the report’s co-lead author, Gavin Smith.
“While some do that, distributed ledger may be deployed by competitors and new entrants alike. This is true for law firms as much as it is for our own clients,” Smith said.
The report urged businesses to think with scale when considering distributed ledger technology, even if it means accepting substantial costs in the short to medium term.
It also recommended regulators avoid overly onerous obligations on transaction participants before the full economic benefits of distributed ledger technology are understood.
“In our view, the policy goal should be to develop a functional approach to regulation, which regards distributed ledger technology as ‘neutral before the law.’ It should be regulated on a user case basis with reference to the existing legal frameworks governing each industry when it is relevant,” Smith said.
Smart contracts – in which terms of a contract are encoded as part of a computer program and execute automatically – present one of distributed ledger’s most interesting and potentially transformative use cases, the report said.
Co-author Valeska Bloch, said smart contracts are a prime example of how distributed ledger technology is colliding with the legal system, Bloch said large international securities exchanges are likely to adopt smart contracts in the near future.
“From a legal perspective, this will present enormous challenges for governance, contractual arrangements, permissions, liability and dispute resolution,” Bloch said. “Smart contracts in their current state run fairly basic functions, but as they evolve, what will sit outside the code to make a smart contract a legal contract? How will a dispute be resolved over a smart contract,” she asked.
Bloch said parties effectively cede control to a digitised process which cannot be reasoned with or influenced.
“Legal and technical codes represent two diverging approaches to regulating problems,” said Bloch.
“Under legal code, the rules can be broken but any breach results in consequences. With technical code, the rules are programmed into the ledger from the outset and if broken, the technology simply does not work.”
Follow Byron Connolly on Twitter: @ByronConnolly
Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.