After the genesis of blockchain technology in 2008 in support of the cryptocurrency Bitcoin, a new technological dimension for digital transactions quickly took shape. With this public, transparent, decentralized – and encrypted – record of online transactions available to all who were willing to participate, arrived a novel set of possibilities as well as challenges for dealings in cyberspace. As uses for blockchain develop and diversify, the technology’s underlying structure continues to be both promising and troubling in terms of its business applications.
One of the growing areas for the blockchain platform, smart contracts, puts together code and data recorded on the blockchain that is accessible by the parties involved.[1] Sometimes self-executing, smart contracts tend to be more programs than actual contracts, and they can be used to automate processes as well as agreements.[2] Currently, smart contracts are still a developing use of the blockchain technology that have not gained universal acceptance, nor are they constantly held in the highest regard when used for contractual agreements.[3] Issues with breaches of contract and enforcement are potentially amplified by difficulty in identifying parties when a problem arises.[4]
Ethereum was the first major smart contract platform for building decentralized applications using blockchain.[5] Ethereum offers its own cryptocurrency called Ether, and it promotes the opportunity for developers to build decentralized applications (or “dapps”) that can do anything from creating new digital assets to building collectively governed virtual worlds.[6] The Ethereum platform gained widespread notoriety in January 2019 when it was the victim of a three-day “51% attack” that resulted in losses of approximately $1.1 million.[7] Smaller 51% attacks to Ethereum blockchains were reported as early at 2016.[8] A 51% attack is accomplished by a group of hackers who work together to control more than 50% of a blockchain network’s computational power, preventing the validation of new transactions and reversing transactions made during their period of control. The reversal of transactions, including their own, results in the hackers’ ability to double spend cryptocurrency.[9] The purported inability to double spend on the decentralized distributed blockchain ledger is one of its key advantages; to know that hackers can circumvent this protection on occasion keeps the financial and non-financial promises of blockchain in limbo. However, Ethereum’s 2019 hack was not fatal to the platform, and it continues to trade its cryptocurrency Ether and promote the benefits of its smart contract platform for building decentralized applications.
Supply chain management is another developing domain for blockchain technology. Observers have lamented the lack of transparency and risk of fraud in the traditional supply system as significant obstacles.[10] The ability to use blockchain’s distributed, immutable, digital ledger for agreements, tracking, and payment solves the transparency issue. Businesses including vehicle manufacturers and food distributors – such as Walmart, Nestle, Tyson, Unilever, and Dole – use blockchain to record product and source information.[11] Suppliers of diamonds and other gems use blockchain technology to track stones from mining to sale, helping to assure authenticity and avoid gems that were obtained through conflict or child labor.[12]
Blockchain technology has attracted the attention of businesses and entrepreneurs seeking new levels of efficiency, security, and reliability through smart contracts, supply chain management, and many other developing applications including retail loyalty rewards programs, intellectual property protection, digital voting, title transfers, medical record keeping, and the tracking prescription drugs and legal weapons.[13]
Unfortunately, cyber criminals have also taken advantage of the blockchain system. In the US and the EU, most laws that address criminal evidence and investigations online focus on centralized services and do not specifically address online providers.[14] When a peer-to-peer network such as the type driving blockchain technology is the source of critical evidence necessary to support a criminal indictment, forensic experts are doubly challenged; not only is access to the encrypted, anonymized data difficult without the benefit a centralized server and service provider, but laws relating to the access to – and collection and storage of – this encrypted digital data might be untested. Legal uncertainty will make the investigation process relating to blockchain technology more tentative, just as it makes the use of the technology potentially risky. Countless criminal actors have not only exploited the most promising features of blockchain technology in support of illegal activity, they also have exposed worrisome vulnerabilities to the integrity of blockchain systems.
However, considered comprehensively, the opportunities to embrace blockchain technology as an important part of digital record-keeping are promising. Education of all legal industry players and focused efforts toward a globally consistent legislative and regulatory approach to its use is the key to its successful integration. Many nations have made progress in considering all aspects of distributed ledger technology from a financial and legal perspective.
Patience, cooperation, targeted research, and education will be necessary to move this promising technology to the next level and to outpace the significant risks that blockchain brings. It is difficult to know if the benefits to digital investigations ultimately will outweigh the overall inherent peril. But the upside is significant, so the efforts to integrate blockchain technology into business transactions will likely forge ahead.
[1] T Lyons, L Courcelas, K Timsit, ‘Legal and Regulatory Framework of Blockchains and Smart Contracts,’ The European Union Blockchain Observatory & Forum, Thematic Report (27 September 2019) 22.
[2] Ibid.
[3] See D Black, ‘Blockchain Smart Contracts Aren’t Smart And Aren’t Contracts.’ (Forbes.com, 04 February 2019) < https://www.forbes.com/sites/davidblack/2019/02/04/blockchain-smart-contracts-arent-smart-and-arent-contracts/#486485501e6a>.
[4] Ibid.
[5] See ethereum.org.
[6] Ibid.
[7] A Lielacher, ‘ETC 51% Attack: What Happened and How it was Stopped,’ (bravenewcoin.com, 14 January 2019) <https://bravenewcoin.com/insights/etc-51-attack-what-happened-and-how-it-was-stopped >.
8] Ibid.
[9] J Frankenfield, ‘51% Attack,’ (Investopedia.com, 6 May 2019) <https://www.investopedia.com/terms/1/51-attack.asp>.
[10] B Marr, “How Blockchain Will Transform The Supply Chain And Logistics Industry,” (Forbes.com, 23 March 2018) < https://www.forbes.com/sites/bernardmarr/2018/03/23/how-blockchain-will-transform-the-supply-chain-and-logistics-industry/#2f2572c5fecd>.
[11] Ibid.
[12] B Marr, ‘How Blockchain Could End The Trade In Blood Diamonds – An Incredible Use Case Everyone Should Read,’ (Forbes.com, 14 March 2018) <https://www.forbes.com/sites/bernardmarr/2018/03/14/how-blockchain-could-end-the-trade-in-blood-diamonds-an-incredible-use-case-everyone-should-read/#4cc1942c387d>.
[13] S Williams, ‘20 Real-World Uses for Blockchain Technology,’ (motleyfool.com, 11 April 2018) <https://www.fool.com/investing/2018/04/11/20-real-world-uses-for-blockchain-technology.aspx>.
[14] C Brown, ‘Investigating and Prosecuting Cyber Crime: Forensic Dependencies and Barriers to Justice,’ International Journal of Cyber Criminology Vol 9 Issue 1 ]2015] 56, 78; R Houben and A Snyers, ‘Crypto-assets: Key developments, regulatory concerns and responses,’ European Parliament’s Policy Department for Economic, Scientific and Quality of Life Policies. PE 648.779 – April 2020, 8, 11, 25.