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Article: October 2017: International Trade Update

Business Litigation Reports

The Legal Implications of the Use of Blockchain in International Trade. What has become popularly known as “blockchain” is a form of Distributed Ledger Technology (“DLT”). At its core, blockchain is for electronic record-keeping. In recent years, blockchain has gained the most attention for its role as the underlying technology of cryptocurrencies, such as Bitcoin.

The true potential of blockchain technology has yet to be realized. International trade, in particular, is ripe for disruption by blockchain technologies. International trade, and the logistics underlying it, has not changed much for centuries. Blockchain promises to revolutionize global trade, and blockchain technologies are already being utilized in the core conduct of trade. With systemic changes to international trade will come new legal opportunities and challenges for lawyers, particularly in the fields of intellectual property law, contract law, and regulatory law.

Blockchain Basics. A blockchain is a recordkeeping computer program that creates an unchangeable digital ledger that records the storage and transfer of digital assets, maintained across a network of peer-to-peer computers rather than routing through a central server. The record of transactions is stored chronologically in the blockchain, consisting of virtual “blocks” of data linked together by a sequence of short digests of data or a “hash.” This hash is what is stored on block and transferred via blockchain.

But because each hash is a product of the data recorded in the preceding blocks in the chain, it is nearly impossible to manipulate the records of any transaction without disrupting the entire blockchain. Furthermore, each node holds all or part of an entire blockchain, and applies that blockchain’s algorithm to verify new blocks and allow them to be added to the chain. Indeed, even if one node fails, all the other nodes can continue operating. Since each block only contains a digest, the hashed data cannot be decrypted to produce the full underlying transaction data. And as the system is decentralized, all parties to the system have access to the blockchain in order to verify, authenticate, and audit transactions.

Thus, these characteristics of the blockchain system enable its key benefits: reliability, availability, transparency, irrevocability, and immutability.

BlockChain and Global Trade. Today, international trade is cumbersome and hampered by costs—both in time and money. On a physical level, it has been estimated that shipping documents on average weigh up to 40kg per vessel, and cost up to 10% of the value of the goods. Indeed, numerous documents are required for export transactions depending on the destination and type of product. Each document must be accurately filled out, with a slight error resulting in nonpayment, delays, and even confiscation of goods. And every stop along the supply chain, whether for inspection or paperwork, increases the time and cost of the transaction. Moreover, a current lack of transparency along the supply chain can undermine trust amongst the parties. Often when making a purchase, buyers do not know where the goods they ordered are coming from, who made them, or even whether they have been shipped.

Blockchain promises a better way. On a physical level, blockchain can make much of the logistics of international trade paperless, replacing paper ledgers with universal digital ledgers. Blockchain can also ensure that every party necessary to a transaction—whether the seller, buyer, shipper, or regulatory authority—has access to real time, digital information about every step of the transaction and supply chain. Malicious parties would face greater difficulties, as transactions could be auditable, chains of custody verifiable, and records immutable.

No longer entirely theoretical, the actual use of blockchain in international trade has already begun. The first blockchain-based trade deal occurred in September 2016, with a transaction guaranteeing the export of almost $100,000 worth of cheese and butter from an Irish food co-operative. The efficiency gains were substantial, cutting a process that normally takes over a week to several hours. And this is not just a one-off occurrence—both start-ups and established corporations are now using blockchain in a wide-variety of transactions including, for example, assuring recipients that pharmaceuticals remain within an acceptable temperature range in transit, increasing transparency of the environmental impact of manufacturing, tracking the movements of minerals from the mine to the store, and tracking produce, processed foods, and meat from farm to factory to shelves.

Inevitably, these novel applications of blockchain will pose legal implications for international trade. Lawyers who specialize in international trade issueswill have to adapt, particularly in the fields of intellectual property law, regulatory law, and contract law.

Regulatory and Legislative Impact. A fundamental role that lawyers will serve as global trade utilizes blockchain will be to create regulatory and legislative support structures for this technology. Currently, there is a global patchwork of laws and regulations that will affect the initial implementation of blockchain. Regulations are imposed at every step of the international supply chain, whether regulating the service provider (such as export/import regulations or the regulation of financial institutions), certain kinds of transactions, or technical standard imposed on computers and networks that blockchain runs on. Further many countries have extensive restrictions on the localization and the cross-border transfer of certain kinds of data.

The existing network of international agreements may provide a means to address these difficulties and new international agreements such as the proposed Trans-Pacific Partnership may include regulations that are an even better fit for blockchain. This July, for example, the United Nations Commission on International Trade Law (“UNCITRAL”), whose key mandate is to remove legal obstacles to international trade through modernization and harmonization of trade law, adopted the UNCITRAL Model Law on Electronic Transferable Records. This Model Law “legally enables the use of electronic transferable records that are functionally equivalent to transferable documents and instruments including bills of lading, bills of exchange, promissory notes and warehouse receipts.”

Blockchain also has the potential to enable regulatory structures that provide authorities and parties real time, secure data at every stage of a supply chain. Rather than manually submitting information to regulators, all required information in the supply chain can be accessible instantly, globally, and updated in real time. This in turn creates efficiencies on the part of the regulator who has constant, digital access to this information to audit or monitor industry, and even automate the review of the data. Which authorities are permitted to access this blockchain data, when they are permitted to access it, and what they are permitted to do with it are all immediate concerns that must be addressed by a blockchain regulatory structure. Private practice lawyers must lobby for clients’ interests, as government lawyers create and enforce new regulatory structures.

Thus, companies implementing blockchain technology will inevitably require legal advice regarding how existing local regulations and laws, existing trade agreements, and trade agreements under negotiation, may impact the use of blockchain in their supply chain.

Smart Contracts. The “smart contract” is an application of blockchain with long-term implications for nearly every legal context in which a contract might apply. And it will no doubt be particularly impactful for international trade, given the ubiquity of contracts governing these transactions. At their core, smart contracts are contracts stored on a blockchain and implemented by computer algorithms. These computer algorithms can, without relying on human intervention, verify, execute, and enforce the terms of a business agreement. This, for example, would allow smart contracts to collect taxes, issue regulatory reports, and handle other requirements based on certain events (e.g., releasing an escrow payment at the occurrence of a triggering event, such as the last day of a month).

Lawyers may find smart contracts shift the nexus of disputes in transactions to the moment of dynamic execution, given that the contract is self-enforcing by nature. This dynamic execution also promises to challenge the core common law tenets behind contract law, including traditional remedies for breach, and likely will require contract doctrine to evolve. Such questions that may need to be addressed include: How does one terminate a self-executive contract for duress, mistake, or misrepresentation? How does one terminate a self executing contract at all? What are parties’ options if circumstances change in the middle of a self-executing contract, such that performance is no longer preferable or viable? How does ambiguity affect a smart contract?

Courts will have to craft the law of “dynamic transactions” as issues of first impression appear. Litigators will be a driving force for the creation of such law and how it looks, and likewise will need to keep themselves and their clients appraised of what is sure to be a rapidly evolving doctrine.

Intellectual Property. Finally, blockchain has the potential to change how international intellectual property rights are registered and enforced, and how the owners of such rights will be compensated. Blockchain is uniquely suited to create a secure, immutable, and real time platform for the creation and distribution of intellectual property. At its most basic level, blockchain promises an indisputable record of filing for all intellectual property rights that could be accessed globally. This means blockchain offers a novel way for creators of intellectual property to demonstrate first use, whether in trademark, patents, or copyrights.

For lawyers representing traditional parties in the realm of creative intellectual property, getting up to speed on how blockchain companies may address piracy, control intellectual property, and monetize intellectual property is critical. A number of new, global music distribution and streaming platforms are appearing, all of which will challenge traditional paths and modes of distribution. In the winter of 2016, the U.S. Department of Commerce’s Internet Policy Taskforce held a public meeting entitled “Developing the Digital Marketplace for Copyrighted Works,” to discuss the impact of blockchain on a single, immutable copyright registry.

Conclusion. While many of the promises of blockchain have yet to be realized, its implementation into the core conduct and logistics of international trade has begun. Lawyers will be involved at every stage of implementation, and will see the effects in their practice for the foreseeable future. The rise of blockchain technology in international trade thus promises a multitude of challenges and opportunities for practitioners.