Blockchain and legal industry adoption

This article was written for the Gibraltar Bar Council's Quarterly Magazine.

The flavour of the month and of the season is undoubtedly cryptocurrencies and distributed ledger technology in Gibraltar. If you haven’t heard, Gibraltar is one of the first few jurisdictions globally that is looking to regulate DLT and blockchain businesses. Prospectively Gibraltar may also look to regulate businesses raising capital using cryptographic tokens and/or crypto currencies, otherwise referred to as virtual currencies. An interesting question to consider is what will be the real world examples of adoption of this technology for legal practitioners? One thing is assisting these technology businesses receive investment, get set-up and become regulated – but once all that is said and done how will we as legal practitioners and intermediaries adopt the very technologies that we are flying the flag for? We will likely end up using the very technologies our clients are developing – let’s consider just a few examples of how that might happen.

Firstly recognition of where Gibraltar is as a jurisdiction in the space needs to be given to the years of work from the working group, the regulator, those who have participated in the consultation and those who have supported by marketing and servicing the industry otherwise.

Whilst the current boom of interest (otherwise referred to in the industry as ‘hype’) in DLT and blockchain in Gibraltar is interesting for a number of reasons including for (i) the technology enthusiasts among us who have personally followed the industry over the past few years; (ii) the interesting problem solving that legal practitioners (and other advisors) face in this field; (iii) for the jurisdiction – let us take a real step back. How will this technology affect our day to day practice and work apart from assisting technological pioneers and entities scale the unknown legal, accounting, regulatory and applicable landscape?

In this article I’ll look to scratch the surface on just one of many examples to consider in the adoption of distributed ledger technology (“DLT”) and blockchain (DLT and blockchain being synonymous for the purposes of this short article) for legal practitioners and intermediaries (regulated under the Financial Services (Investment and Fiduciary Services) Act as director, nominee and/or secretarial), particularly for us in Gibraltar. The article will consider a few use cases and problems of adoption including cost as well as legislative considerations that will need to be hashed out.

Blockchain Stock Ledgers

Delaware, renowned as the US capital of company incorporations, this summer was highly praised as one of the first jurisdictions to pass a law making it explicitly legal for Delaware entities to use blockchain for stock trading and record-keeping.

What ills do blockchain stock ledgers and the legislative changes in Delaware deal with? To name just a few examples, (i) share issuance - blockchains if implemented correctly (with, for example, appropriate replay protection) will not issue the same shares twice; (ii) share certificates - people continually find new, weird and wonderful ways to lose share certificates and bodies of case law have been created to be able to prove ownership, blockchain can eliminate the ability to lose a share certificate; (iii) preemption & other covenants – shares are sometimes held with particular protections and restrictive covenants, with the most commonly known being preemption or the right of first refusal. The blockchain can ensure that transfers or share issuances can only take place once such terms are complied with; (iv) duediligence – a whole company’s history can be viewed end-to-end on a blockchain – say hello to reducing the time spent waiting for clients to provide their KYC packs on shareholders and ultimate beneficial owners before being able to retain them.

Clearly it is evident that there are a few benefits to having blockchain technology to support share ledgers and it is a matter of time before we start to see these uses trickle in to the legal industry and corporate intermediaries. It will first happen with companies already looking to be listed on crypto-exchanges or those companies who are able to afford proprietary blockchains. Legal industry adoption and involvement will depend on mass market adoption/demand, cost to implement these technologies and also regulatory treatment and recognition/validation of such digital functionalities.

On a glance of the Gibraltar Companies Act 2014, regulated corporate intermediaries are arguably able to record their register of members and/or books by way of a blockchain stock ledger. This can be seen on a reading around sections 182, 187 and 485 of the Companies Act 2014. This is particularly the case considering that intermediaries in Gibraltar already use centralised database systems such as viewpoint, albeit at the Company’s registered office (s183). Any such applications would not cause the corporate management providers already regulated to be required to be separately regulated as a DLT business. Any such applications would still however need to consider data protection implications.

Whilst it is arguably possible for company intermediaries or companies themselves to store company information and records on a blockchain, this does not have much of a practical bite as using this technology for the sake of record keeping, at this point in time, would not be money particularly well spent. The application of blockchain technology for stock ledgers is particularly interesting and of practical benefit where the blockchain can execute share transfers and provide the official record of such transfers. On this point it appears the Companies Act in Gibraltar may not arguably permit the use of blockchain for share transfers.

Notwithstanding that shares of a company are transferrable in the manner provided for by the articles of association of the Company, ultimately the Companies Act determines the validity of share transfers and share certificates as per the provisions of the Act (ss151-154). Such provisions require share transfers to be duly stamped and the certificates to be executed in accordance with the provisions of the Act (ss73-78).

In summary therefore, just looking at one application of blockchain to the legal industry and corporate intermediaries in respect of a blockchain stock ledger, there are already reviews and changes of existing legislation that will need to occur in order to legally recognise and validate such technologies performing more than merely recording functions. Functions that require execution will require some legislative change or a very wide interpretation of existing legislation. Any legislative review would not be light hearted and would require various considerations as to who may be responsible for the execution of particular automated actions, who will be responsible for verifying or recording automated elements of the transaction and to what extent can such risks be addressed in the companies constitutional documents.

Other examples

In addition to blockchain stock ledgers as a relevant example of blockchain being used in the legal industry, other applications of blockchain to the legal industry include concepts of smart contracts which are self-executing programmable events that are dependent on hard-coded variables; protection of intellectual property as IP can be registered on the blockchain and accredited to its creator whenever used. Blockchain technology can also be used prospectively in wills and probate and the distribution of digital assets in relation thereto. Other examples include land registries as well as other registries that track ownership of assets.

Ultimate adoption

Implementation of blockchain and DLT systems to the legal profession and other professional intermediaries will be dependent on factors of technological capability, cost, as well as legal recognition in case law and statute of new legal concepts in relation to execution of documents, liability and digital assets. We are already seeing and receiving enquiries on litigation fall-outs of ICOs and bodies of case law are forming on interpreting existing legal principles under new paradigms.Whilst Gibraltar is leading on the task of regulating a part of the DLT and blockchain industry in their setup and ongoing operations, legal practitioners and intermediaries need to consider prospectively how the very technologies being created will affect our business, daily work flow and how such technologies themselves will come to be recognised when we advise.

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