Graham Hansen, Commercial associate and data protection expert from HRC Law, discusses what the benefits are for blockchain businesses when taking into account their legal infrastructures
Whilst probably best known in relation to Bitcoin, it was quickly realised blockchain could have a wider application due to its features of transparency and immutability. Smart contracts (self-executing protocols embedded in the blockchain) are central to its potential because they permit transactions which might have been traditionally managed by third parties (such as the purchase of land or other assets); to be automatically executed. It’s anticipated this will provide reductions in third-party fees and transaction times, whilst enhancing customer access and limiting fraud.
With blockchain technology developing at an ever-increasing pace, what can businesses wanting to utilise blockchain technology do to protect themselves and gain a competitive edge?
Secure your investment: Usually, a third-party developer is needed to build the blockchain, so remember the blockchain is software, and you should have a contract in place with your developer as you would for any other software-related project. If you intend to create a DApp (Distributed Application) to operate on Ethereum, it is important to understand this operates on both permissive and restrictive licenses, and how this fits your business model.
Remember that a smart contract is still a contract, so there needs to be a clear record of the coded terms, which may need to be negotiated if there is more than one party involved. This will also demonstrate the legality and functionality of your business for customers and investors.
Understand the IP: Consider carefully the elements of intellectual property involved. If you are paying for the creation of proprietary software, you will want to become the owner of this wherever possible.
Ensure all licences relating to third-party software or creative content within your business model are in place- nothing ruins a good business idea like a claim for infringement of intellectual property rights.
Data Protection: Data privacy is a particularly complex issue for blockchain businesses, due to the transparent and unchangeable nature of blockchain. Whilst providing an excellent method to prove the provenance of goods or maintain unique records for individuals, it also means personal details are retained forever. Therefore, careful consideration of privacy rights and required privacy information is needed!
Increasing regulation: If you choose to create your own cryptocurrency through an Initial Coin Offering, your business will be subject to regulation if the coin (token) is deemed to be a regulated investment and/or the activities of your company can be classed as regulated activities. In particular, companies issuing Security Tokens (which represent fractions of an existing, tradable asset), are likely to attract the attention of regulators.
Customer engagement: Whilst blockchain projects operate independently, they will need to interface with a business’ intended market and will be subject to established laws. These often include laws governing consumer rights, distance selling (via the internet), restrictions on marketing and sector-specific regulations.
Comprehensive terms of business are a priority to ensure all parties are clear on their expectations, liabilities and potential charges/income. Similarly, if you are looking to outsource support or a customer interface to cloud or SaaS suppliers, then a contract is advisable.
Investment and Sale: Finally, most businesses require external investment whilst often also having one eye on a future sale. Both will be easier if you can demonstrate your business in order with development agreements, IP protection, valuable customer contracts etc. whilst also having compliance documentation in place.
Graham Hansen
Commercial associate & data protection expert
