The value of blockchain stems from its ability to share data in a fast, secure way among entities, private or governmental, without any one entity having to take responsibility for safeguarding the data or facilitating the transactions. However, blockchain-based applications require everyone within the ecosystem to use the system. That in turn requires everyone to make the investments in the technology implementations and process changes that go along with the move to the new blockchain-based application. Many do not believe blockchain can yet deliver high enough returns to justify the cost of replacing existing systems at this point.

Aiming to establish an effective breeding ground to promote blockchain technology, Malta enacted three new pieces of legislation in 2019: the Virtual Financial Assets Act, the Malta Digital Innovation Authority Act, and the Innovative Technology Arrangements and Services Act, which together form a comprehensive framework regulating the cryptocurrency and blockchain space. The Government of Malta and key relevant institutions are open, curious, but somewhat cautious in their attitude towards blockchain technology. Such caution, however, is not unreasonable at all, more so given that a number of legal problems and dilemmas have been flagged in a number of situations.

While automation is a positive aspect of distributed ledger technology (DLT), there is a chance that errors in the code result in wrong behaviour or outcomes. Although this is rare, it is not impossible. Indeed, there have been cases where violations have occurred due to errors in the code or software. The negative aspect of all this is the legal uncertainty of who will be held accountable. Is it the person writing the code? The software developers? Maltese regulations have tried to minimise the risk of these potential technological glitches occurring by obliging firms to get their technology arrangements audited by specialised registered systems auditors and certified by the Malta Digital Innovation Authority.

In line with modern legal developments, our blockchain framework has given legal recognition to smart contracts. Smart contracts would be assessed and treated with the same laws as traditional contract law principles, and a court should now feel legally comfortable recognising these codified agreements when settling disputes, although to date there has not been any judicial consideration of blockchain concepts or smart contracting in our jurisdiction. Be that as it may, I anticipate that our courts will deem information recorded on the blockchain or DLT admissible in court and also treat smart contracts as having legal contractual force, given that such concepts are well described in local regulations.

With smart contracts, legal issues of data protection come into play. In their current state, most smart contracts are not entirely confidential. Some of the biggest advantages of blockchain may also be some of its biggest drawbacks, such as when it comes to data protection legislation. There is uncertainty as to whether blockchain technology violates the EU General Data Protection Regulation (GDPR). Since blockchain is an immutable ledger, it is incompatible with the concept of the right to be forgotten. Furthermore, the development of blockchain projects does not always carefully assess what sort of data is being stored and whether such data could be personal data.

Jurisdiction and intellectual property rights are two major legal issues that theoretically can hamper the smooth set-up of blockchain technology. Parties to contracts may be in different jurisdictions, so unless a jurisdiction clause is specifically mentioned in the smart contract, determining jurisdiction could be a complicated battle. One of blockchain’s core values is the fact that code is open source by nature, so people may freely copy it and improve on it for the benefit of all. This decision is in stark contrast to the beliefs that surround intellectual property laws, where owners want to be in control of their work. Blockchain has many advantages to offer in this context since its ledgers create time-stamped records that may not be altered retrospectively. If one would like to protect one’s source code, there is, however, a concept called ‘proof of authorship," which can provide authors of digital data with evidence proving their ownership. The Maltese government is currently exploring the creation of a DLT-based proof of authorship IP register.

Cybersecurity is also a major legal issue when it comes to DLT practices. Since, surprisingly, most ledgers are permissionless, this entails that all counterparties can download the ledger, meaning that they can see a person’s transaction history. Yet, that notwithstanding, one potential solution is using hyperledger technology, which can allow for certain customised security protections. Furthermore, the use of public and private keys as a means of authorization to access a wallet or account has its own problems. A few cryptography-based programmes have been identified as weak, and there have been a number of cases of people losing their private keys. A possible option to keep one’s keys safe in case of loss is to entrust them with a licenced custodian.

Malta’s early implementations of blockchain have exposed some of the technology's disadvantages and challenges. The technology’s core value is its decentralised nature, but uses of blockchain often require some central control, and there is still a question about who will address breaches in trust and protocols. Our government has tried to implement blockchain, with mixed outcomes. It can still harness the full potential of blockchain by finding the right use cases. The more you have a lack of visibility or potential for corruption, the bigger the use cases. That is where blockchain becomes a solution.

It is hoped that blockchain will become a game-changer for issues such as security and operational challenges. If we manage to successfully implement blockchain, it could increase citizen trust and generate value for both the government and its citizens. Blockchain has yet to reach widespread adoption at scale. Blockchain is not a short-term technology, and it will not transform society today. Too often, our government skips the assessment of potential barriers and jumps right into implementation.

 

Mark Said is a lawyer