Blockchain: Legal Challenges and How the Blockchain Technology May Shape the Legal Profession

Transcription

1 Blockchain: Legal Challenges and How the Blockchain Technology May Shape the Legal Profession 1. Keynote: Blockchain: New and different opportunities Dr. Alesch Staehelin, Lead Counsel Research Europe, IBM, Zurich 2. Bain & Company: Distributed ledgers opportunities and challenges Dr. Florian Müller and Markus Trautwein 3. Pestalozzi: Legal challenges of blockchain based smart contracts and distributed ledger technologies 4. Discussion / Exchange of experiences / How may blockchain change the legal profession 1

2 Legal challenges of blockchain based smart contracts and distributed ledger technologies 2

3 BLOCKCHAIN >> SMART CONTRACTS A smart contract is: - an automated contract, recorded on the blockchain - once initiated, - self-executing - unchangeable - unstoppable

4 SMART CONTRACTS WHAT IS IT (NOT) not a contract: not smart: It is simply a code, a «computer program» It is a set of predefined instructions as smart as the person programming it The idea of smart contracts (and computer programs) exists since decades So, what s the point? BLOCKCHAIN > SMART CONTRACT > INSTRUCTIONS

5 Example: >> SHARING ECONOMY I NEED YOU HAVE

6 SMART CONTRACT Legal Contract -> handle a complex world Smart Contract -> handle predictable steps efficiently Need for Transaction Need for Transaction Sequence 1 Issue A B C D Sequence 2 Perfect 100% Result

7 Smart Contract vs Legal Contract I NEED - Where there is a smart contract, there is usually also a legal contract: legal contracts can be concluded orally or by implied consent - All fine as long as the result of the smart contract is the same as agreed in the legal contract (orally or by implied consent) - But if there is a difference in the outcome of the «smart contract» as opposed to the «legal contract», it is a mess > time to call in the litigators YOU HAVE

8 Dispute Resolution Aspects Florian Mohs Partner / Litigation & Arbitration florian.mohs@ Lukas Rusch Associate / Litigation & Arbitration lukas.rusch@ 8

9 Introduction «Algorithms, and not lawyers, therefore guarantee compliance with the contracts and legal regulations. The system thus prevents disputes from the outset.» NZZ am Sonntag, 8 April 2017

10 Example: Sale of Goods non-payment non-conformity Buyer A Traditional Contract Seller B no delivery / no offtake damage to or loss of goods non conforming documents / LC procedural issues third party disputes

11 The promise of blockchain from dispute perspective What it can do solves the problem of manipulation eliminates human errors, in particular by the registry administrator automatically enforce obligations and what it cannot do decide matters of discretion and questions of fault does not know parties real intent enforce a claim (in a legal sense) avoids the problem of double spending (guarantee of uniqueness) cannot predict the future (change of circumstances)

12 Example: «Smart» Sale of Goods non-payment non-conformity Buyer A Smart Contract Seller B no delivery / no offtake damage to or loss of goods non conforming documents / LC procedural issues third party disputes

13 New technology new legal challenges Code can be buggy or manipulated who is responsible? Legal doctrinal issues Parties agreement vs. smart contract

14 Conclusion Blockchain/smart contracts may reduce the risk of «everyday» claims but do not eliminate complex disputes lead to better contracts due to standardization (thus potentially reducing disputes) shift party roles shift burden of proof NOT replace lawyers with algorithms (at least not for the time being)

15 Blockchain and Data Protection Issues Lorenza Ferrari Hofer Partner / IP&TMT Group, Co-Head Life Sciences Group lorenza.ferrari@ Janine Demont Senior Associate / IP&TMT Group janine.demont@ 15

16 Legal setup Blockchain - electronic database secured against data manipulation Anonymization: Transactions do contain no names, no addresses, no phone numbers etc. De-Anonymization: Content from search results allows to trace back to IP addresses, specific internet connections or connection owners User and transaction network allows to trace back to specific users

17 Data protection and privacy rights in jeopardy Proportionality of data processing for clear and legitimate purposes (art. 4 Swiss Data Protection Act [«DPA»]) this is challenged by compliance monitoring of the electronic data processing Data controller and internal data protection officer who is the data controller of blockchain databases Right to access personal data (art. 8 DPA) Right to delete or correct personal data (art. 5 DPA) this may destroy the data integrity of the entire blockchain database Applicable law and jurisdiction justiciability of blockchain databases and technology

18 How to comply with data protection requirements Privacy by Design designing data so that they do not need protection (art. 18 VE-DPA, art. 25 GDPR) Privacy by Default effectiveness of data protection throughout the entire blockchain transactions (art. 18 VE-DPA, art. 25 GDPR) Extent of technical measures to comply with requirements of privacy by design development of industry standards is necessary Need for coordination on jurisdiction and applicable law

19 Corporate Law, M&A & Capital Market Aspects Beat Schwarz Partner Corporate / M&A / Capital Market beat.schwarz@ Christian Leuenberger Partner Corporate / M&A / Capital Market christian.leuenberger@ 19

20 What does this all mean for corporate law or M&A? Short answer: Not much (fundamentally) or maybe yes? - let s discuss later But, it may impact (important) side aspects of M&A and Corporate Governance: Data Analysis / Due Diligence: better tools for e-discovery for M&A or (internal) risk detection to avoid board liability etc. Less Risks (a world with all interactions immutably saved on the blockchain): Less probability of (hidden) risk, easier to detect (technical) chain analysis vs. traditional Due Diligence Automated and efficient registers (commercial register, share ledger etc.) Etc.

21 Example: share ledger Who in this room has never felt pain when taking care of a company s share ledger? encountered a messy share ledger or is unable to support the statement that in many (private) M&A transactions, from a strictly legal point of view, the target was not 100% owned by the ones claiming to own it? Why?: Under Swiss law, shareholding/ownership requires an unbroken chain of valid share transfers from incorporation up to today (high probability of mistakes, need (in M&A transactions) to have all transfers properly documented) >> «unbroken chain» / «track record» - rings a bell? Sounds like blockchain?

22 What you need for a share register / evidence of share ownership is essentially what blockchain provides Simplified: Blockchain is a database / register that lists the holders of certain rights (with a cryptographic key ( private key ) instead of name and address), with the ability to have it recorded decentralized and is an example of a distributed ledger technology. One such example is apparently the Swisscom C Share project There are many efforts out there, and we get a lot of inquiries, to use blockchain to replace the traditional share (for example in the context of an ICO > later).

23 New way to transfer shares? (very simplified) Token Generating Event blockchain - Number of shares - Nominal Value - Shareholder s rights (voting, dividend etc.) A B C D «protocol» «share ledger» «digital token» [the «share»] A B C D

24 Blockchain based shares (cont d) What is the difficulty (and a good example where statute does not adapt in the same pace technology does)? Digital token itself represents a valid share certificate? Can transfer shareholder rights? If not a valid share certificate, Swiss law requires a (handwritten) signature on an assignment declaration >> authorized e-signature, not a practical / no integration into blockchain (technically) Solution as intermediated security (Bucheffekten)? Requires the recording/book entry with (centralized) intermediaries as specified by law

25 Blockchain based shares (cont d) Handwritting or the use of a (centralized) intermediary simply defeats the purpose of a decentralized blockchain / smart contract technology. - Simplified: There are some theories out there, but as of today, a fair chance that a court will not consider a blockchain based «share transfer» / «digital token transfer» to be a valid share transfer, i.e., shareholder rights and ownership do not effectively transfer by only transfering the digital token.

26 Looking Abroad: Delaware Effective August 1, 2017: Changes to the Delaware General Corporation Law (DGCL) As amended, Section 219(c) defines stock ledger as one or more records administered by or on behalf of the corporation in which the names of all of the corporation s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with Section 224 of the DGCL. To allow the corporate records/shares to be administered on behalf of the corporation paves the way to use blockchain technology (but there are still some hurdles: SEC)

27 Initial Coin Offering

28 Initial Coin Offering ICO - issuance of new tokens to finance a project (Token Generating Event, TGE) Token - unit representing certain rights or characteristics Right to use a service, access to plattform, means of payment on a plattform (Usage) Right to share in the profits of the project (Profit Share) Right to vote in the project (Voting Right) No right (except for right to hold and trade the kryptocurrency) Combinations Consideration usually established cryptocurrencies (Bitcoin, Ether); sometimes fiats

29 Initial Coin Offering Cornerstones in an ICO process Pre-sale Publication white paper Satoshi Nakamoto s Bitcoin paper (2008) Purpose and form of white paper Peer-review process Start of crowdsale End of crowdsale Allocation of tokens (or refund)

30 Initial Coin Offering Comparison with IPO process (and why this is a useful comparison ) ICO vs. IPO No (specific!) regulation vs. highly regulated (very) early stage vs. well established corporations Low costs vs. high costs (no banks, no roadshows) Free trading of tokens (ERC20-standard) vs. listing of shares at stock exchange White paper vs. issue and listing prospectus is the white paper a prospectus (652 / 1152 CO)? Allocation of tokens vs. allocation of shares

31 Initial Coin Offering Issuance of tokens and financial market regulation Acceptance of deposists (bank licence)? Issuance of tokens subject to collective investment schemes regulation (CISA-permit)? Qualification as securities dealer or operator of trading plattform? Qualification as financial intermediary (anti-money laundering obligations)? Legal qualification depends on characteristics of specific token!

32 Initial Coin Offering Today most projects using ICO-financing are based on (existing!) blockchain technology (e.g., Ethereum-based) Side note: Trend for Swiss foundations What about the future of the ICO? External funding of specific projects across industries (e.g., development of a drug)? Is tracking the success of projects (rather than companies) more interesting for investors? Consequences for the work of inhouse lawyers?

33 Discussion: Exchange of Experiences For whom in here is blockchain technology already a reality? Who expects to become exposed to blockchain based applications in the near future?

34 How may blockchain change our profession? Some random quotations - let s discuss, what s your take? > Unless your work is repetitive, no blockchain or smart contract will replace lawyers > But blockchain may eliminate standard contracts and may facilitate contract recording - work that is not carried out by persons sitting in this room > Is your company s «disruptor» around the corner? Blockchain does not only provide start-ups the technology (to try) to disrupt traditional business models, it also provides them a way to obtain funding: ICO (or TGE)

35 Thank you! Let s have drinks! 35

36 Team Beat Schwarz Partner Loewenstrasse Zurich, Switzerland beat.schwarz@ Beat Schwarz focuses on corporate and commercial law as well as on corporate and finance transactions, in particular M&A, private equity, joint ventures, restructurings and debt capital markets. His experience includes numerous transactions involving listed and non-listed companies in different industries. As part of his domestic and cross-border corporate/m&a practice, he is regularly involved in insurance and other financial services regulatory work as well as in merger control proceedings. Christian Leuenberger Partner Loewenstrasse Zurich, Switzerland christian.leuenberger@ Christian is a partner of Pestalozzi s Corporate / M&A Group in Zurich. He specializes in domestic and international M&A transactions, with a focus on public takeovers. He also advises Swiss and foreign companies, investors and executives on stock exchange and capital market regulation, as well as on general corporate law and issues of corporate governance. Christian is a leading expert on insider trading regulation and advises on the prevention and investigation of white collar crimes.

37 Team Lorenza Ferrari Hofer Partner Head IP&TMT Group, Co-Head Life Sciences Group Loewenstrasse Zurich, Switzerland lorenza.ferrari@ Lorenza Ferrari Hofer is head of Pestalozzi's IP&TMT Group and co-head of the Life Sciences Group. She specializes in intellectual property, unfair competition, data protection and contract law. She has profound knowledge in the development, licensing, trade and distribution of technology, as well as of therapeutic, health and food products (including product liability matters). Florian Mohs Partner Loewenstrasse Zurich, Switzerland florian.mohs@ Florian Mohs is a partner of Pestalozzi s Litigation & Arbitration Group in Zurich. He acts as counsel in international commercial arbitrations and in court proceedings in Switzerland. Florian handles a wide range of commercial disputes, having broad experience in advising trading companies in commodities disputes, industrial companies in engineering and construction disputes, and pharmaceutical companies in licensing matters.

38 Team Lukas Rusch Associate Loewenstrasse Zurich, Switzerland lukas.rusch@ Lukas Rusch is an associate and member of Pestalozzi s Litigation & Arbitration Group in Zurich. His practice focuses on the resolution of commercial disputes through litigation and arbitration. He represents clients before Swiss courts and in both institutional and ad hoc arbitrations. His practice further covers the enforcement of foreign judgments and arbitral awards as well as attachment and insolvency proceedings. Janine Demont Senior Associate Loewenstrasse Zurich, Switzerland janine.demont@ Janine Demont is a senior associate and member of Pestalozzi s IP & TMT, Litigation & Arbitration and Life Sciences Groups in Zurich. She focuses on litigation and arbitration matters in the life sciences industry. Janine also has broad experience in regulatory matters concerning medical devices. She further advises and represents clients from a broad range of industries in intellectual property, unfair competition and data protection law matters.

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