Blockchain: smart contracts for smart businesses
If you operate within the technology sector, you will have been hard-pressed to go through the last year without hearing the term ‘blockchain’ being reported at least once by the media.
Alternatively, you may have heard it in passing from the latest tech-savvy entrepreneur, championing the way blockchain technology will revolutionise how companies operate in the future. Out of politeness, you may nod your head in agreement and feign some knowledge of what they are talking about. But what exactly is blockchain, and how will it affect businesses?
A brief history
Blockchain technology was originally developed to assist with the distribution of cryptocurrencies (eg, Bitcoin) on peer-to-peer (P2P) networks. Coins for various cryptocurrencies are obtained by ‘mining’. This term describes the process where computers are tasked with solving complex cryptographic problems. These problems are difficult to solve but easy to verify by other computers.
Verification is performed by the solving computer presenting its ‘proof of work’ to the verifying computers, setting out in detail its solution to the cryptographic problem. Once verified, a new digital coin is ‘minted’ and issued as a reward for the hard work.
Unlike normal currencies, cryptocurrencies are not regulated by a trusted centralised authority (eg, a bank). From a practical perspective, this is because of the security risk associated with storing digital currency information on a third party’s database. That third party would be an obvious target for hackers looking to manipulate the cryptocurrency market. To get around this problem, the concept of a digital ledger was introduced.
This ledger would hold all the transactional information relating to a particular cryptocurrency and would be stored on every computer running that cryptocurrency software—as opposed to being stored on and accessed via a third party database. This concept of a decentralised (aka distributed) digital ledger of information is blockchain technology.
A decentralised digital ledger
As discussed above, blockchain is shorthand for a range of distributed ledger technologies that can be programmed to record and track anything of value (eg, financial transactions; medical records; land titles). Similar to the old school paper ledger systems that were once used by banks, blockchain is a continuously growing list of recorded information.
Each time new information needs to be added to the list, another ‘block’ of information is added to the chain. An important factor is that old information cannot be altered or deleted from the chain.
Storing and recording data
Blockchain stores information in blocks that are stored in chronological order to form a continuous timeline. The information held on the blockchain is indelible, meaning any amendments are performed by adding a new block rather than destroying or re-writing old blocks of data.
Every piece of information, past or present, is accounted for on the blockchain. This method of recording and storing data is therefore useful in helping resolve disputes that may arise between parties in relation to specific transactions (eg, chain of title disputes in IP transactions).
Security
A copy of the blockchain will be stored on each user’s computer as part of the P2P network. This trusted P2P network acts as a security measure by policing the manipulation of any data held on the blockchain. If there is a discrepancy between copies of the blockchain, the version of the blockchain that is stored on the majority of users’ computers will be held as the valid blockchain. Consequently, the larger the P2P network, the harder it is for hackers to manipulate information held on the blockchain.
As with ‘mining’ digital coins, new blocks of information may be created and added to the blockchain only once a cryptographic puzzle has been solved. As before, the solving computer presents its ‘proof of work’ to the verifying computers on the network. Once verified, the new block is added to the chain. These stringent safeguards provide comfort to users that the data held on each block of the blockchain is trustworthy.
A streamlined process
Since blockchain is decentralised, users interact with the P2P network rather than an intermediary (eg, a lawyer) or third party central authority (eg, a bank). By interacting with peers and sharing information via blockchain, the user is able to make savings in costs and time by cutting out the middle-man. Instead, users can verify and transact directly with one another. Indeed, banks are already looking to use blockchain to speed trading and simplify back-end functions.
The application of blockchain
Although blockchain technology has its roots in digital currencies, companies have come to realise that it has wide-ranging potential and can be applied outside the scope of financial services. Applications include digital advertising, storing clinical trial data, streamlining supply chains and even chicken counting.
Of course, there is no end to the number of industries that blockchain technology will disrupt as technology experts predict its application will follow in cybersecurity, banking and payments, healthcare, cloud storage, real estate and commercial transactions, to name a few. For instance, it has been reported that Chinese telecoms giant Huawei is in talks to build a blockchain-ready smartphone.
Smart contracts
The characteristics of blockchain make the technology ideal for complex transactions involving assets and multiple parties. However, in order to enable blockchain transactions, developers had to create ‘smart contracts’ to add layers of information and set conditions for transactions.
In simple terms, ‘smart contracts’ are self-executing contracts with terms written in code that are held on the blockchain network and executed when pre-determined conditions are satisfied.
These smart contracts establish an autonomous machine-to-machine network which results in superfast transactions and communication. These contracts are stored with all parties at the same time and copies are updated simultaneously and instantly. This technology has the prospect of streamlining the transactional process, thereby saving companies time and valuable resources by reducing the associated costs of workers that would normally be in charge of processing the transaction. This may be particularly attractive to SMEs or startups with limited resources.
Smart contracts are therefore effective tools for streamlining transactions concerning assets. These benefits make smart contracts ideal for agreements concerning the sale and licensing of IP rights. For example:
Contract: Party A agrees to sell/license its IP to party B in exchange for monetary payment.
Performance: Party B deposits the monetary payment onto the blockchain.
Execution: The monetary payment is verified (ie, confirming deposit; currency; amount). Following verification, digital tokens are provided to the parties.
Completion: Digital tokens corresponding to the IP and money are redeemed by the parties offline.
Smart contracts may be of particular use in relation to the licensing of IP where it is not always a straightforward task to locate the owner. For example, one party may wish to license the copyright in a particular work but the owner or owners are unidentifiable. To avoid the associated cost and burden of tracking down the owner, the party may decide to copy the work at risk of infringement.
However, this situation could be avoided by using smart contracts to record ownership. Prospective licensees would automatically pay a licence/royalty fee upon the use of the work (the amount may differ depending on the scope and duration of the licence), thereby avoiding the associated costs of identifying the owner and would be safe in the knowledge they have permission to use the work. Moreover, the owner of the copyright benefits by having an autonomous system providing an accurate and secure revenue stream.
Admittedly, the above benefits may not apply to IP where it is easy to identify the owner because they are listed on a register (eg, registered trademarks, patents). However, smart contracts can still benefit licensors by allowing them to track the grant of licences (and any sub-licences) to licensees. Importantly, the blockchain platform will enable the licensor to keep tabs on royalty payments whilst reducing the administrative burden and risk of human error.
Smart contracts can also be applied in the context of other agreements involving IP. For instance, smart contracts can be used in relation to collaboration and/or R&D agreements that require the parties to share confidential information (eg, know-how) and/or cross-license IP. For example:
Contract: Party A and party B wish to collaborate on a new project to humanise antibodies.
Performance: Party A and party B upload their respective know-how and IP necessary for the purpose of the collaboration.
Execution: Each party’s uploaded information is verified and digital tokens are issued to each party.
Completion: Digital tokens corresponding to the know-how and IP are redeemed offline.
In addition, the ownership (plus access rights) of any foreground IP that may exist as a result of the collaboration could also be managed using the blockchain network.
What is the downside?
As is always the case with new technology, there will be issues for the practitioners to resolve before we enter a new era of automated and superfast transactions. For instance, the implementation of smart contracts in a business model will save costs over time, however, the initial cost to set up the necessary infrastructure and develop the technology to enable smart contracts to run on a blockchain network are not likely to be cheap.
Businesses will need to conduct trials using smart contracts and weed out any problems from the outset in order to avoid potentially undesirable consequences in the future (eg, licensing the wrong IP; setting the licence fee incorrectly). Such trial periods will take time and may disrupt on-going commercial transactions.
In addition, although blockchain is a secure platform, this resilience does not necessarily extend to smart contracts. Hackers have already established that smart contracts are susceptible to coding errors and flaws by stealing and freezing digital wallet accounts. Moreover, any errors contained in the coding of a smart contract, once published on the blockchain, become permanent and thereby add pressure on developers to draft the code correctly from the start.
From a human perspective, the advent of smart contracts may, in the short-term, lead to a decrease in a company’s workforce (or at least require people to specialise or qualify into different roles within the company). Generally, the lawyers among you can breathe a sigh of relief as the underlying contracts will still need to be drafted before they are coded into smart contracts.
In addition, although computers have progressed in leaps and bounds in recent years, the drafting subtleties of certain legal expressions and concepts are still an area reserved for specialist lawyers. Indeed, concepts such as ‘know-how’ and ‘material breach’ may not always be clear to a computer (or a human for that matter). Consequently, the lawyer may not necessarily be removed from the transaction but will likely be more focused on specialist drafting.
Summary
The application of blockchain technology to industries outside of the cryptocurrency market is still in its infancy. Nonetheless, forward-thinking companies from a range of different sectors are already looking to see how the technology could streamline their processes.
Smart contracts are a useful tool for streamlining transactions and will have a large role to play in the licensing and sale of IP. There will always be an inherent risk when implementing new technology before it has had the opportunity to mature, however, early adopters stand the most to gain as a new technological frontier dawns.
Alex Walker is an associate at Taylor Wessing. He can be contacted at: a.walker@taylorwessing.com
