As blockchain technology accelerates, there is considerable excitement. Blockchain is a distributed ledger. Blockchain enables smart contracts. Blockchain eliminates trusted central authorities. Or so say the advocates.
I believe blockchain has enormous, vital potential to stabilize digitally stored information that can be relied upon as fact, not fiction. But there is a missing link in the public rhetoric, one first exposed in the ancient history of electronic commerce, dating back to the 1980s. If this link is not forged into the design and roll-out of any blockchain-based system, the system itself is vulnerable to failure.
What is the missing link? Quite simply, the parties that will place their reliance on an information object stored within a blockchain must agree mutually, among all stakeholders, the object will be treated as real–an authentic, secure, accurate, and complete expression of an historic fact that can be trusted. That agreement must be itself valid and enforceable. And that is where blockchain technology becomes vulnerable.
Valid by what rules? Enforceable in what venues? By whom? Proven to be complete and accurate as an expression of the intent of the parties by what standards of interpretation? In the global, borderless dimensions of the Cloud, answers to these questions must be as certain as the cryptography serves to render the information object itself. But, ask anyone trained in the law to formulate those answers, and you will almost receive the response: “It depends”.
Yet, how else can enforceable certainty be achieved? Imagine if one stakeholder, adversely threatened by the information contained within a record stored within a blockchain, protests its authenticity or accuracy to the point that the stakeholder refuses to perform the next action within the related process. That action could be a shipment of the goods, a release of payment, or merely a confirmation of available inventory to be purchased. While blockchain promises to automate these sequences, any process is vulnerable to disruption by non-performance.
How will the downstream, relying stakeholders prove the information object was indeed authentic and the non-performance unjustified? Where will this be demonstrated? Under what rules? In the absence of any explicit agreement among the stakeholders anticipating these conditions, the chain remains vulnerable.
These very same issues confronted the first implementations of digital records in substitution of paper documents way back when. Electronic data interchange (EDI) offered immense leaps in efficiency, allowing companies to exchange batches of purchase orders, invoices, warehouse receipts, and other digital versions of trade documents. But these innovations faced the same issues as blockchain: what happens if the authenticity of the digital record were to be questioned?
The solution then was to forge a written agreement, enforceable according to designated laws in a forum mutually approved by the parties, that neither party would object to the admissibility or authenticity of digital information assets created and exchanged between them using the standards designated by the agreement. In other words, a real contract was needed. The same is true with blockchain–a real contract is needed to eliminate disputes between the parties as to the authenticity of the records stored within a blockchain system. As before, that system must be well-defined and used as described by the rules.
One of the challenges in international trade in these agreements is making the various designations–which laws, venues, standards, and other rules control how the shared information assets will be created and disputes addressed. Nothing changes with blockchain–the underlying agreement must still be crafted, and the parties must balance the probabilities of non-performances which require enforcement of the agreement to proceed.
In my book, these agreements are characterized within the Unified Rules Model as Implementing Layer Rules. No matter the enthusiasm for a blockchain system, the legal functionality of the records as evidence of the truth will require rules to be authored at that layer. The challenge will be for business executives to displace the lawyers in assuming responsibility for how those rules are authored to assure the automated capabilities of blockchain are not undercut by the lawyers’ penchant for inherent ambiguity.