LSTD 517 AMU Adoption of Cryptocurrencies Discussion

In a minimum of 600 words, assume that you are the chief legal administrator for a hypothetical law firm that is considering accepting cryptocurrencies from its clients for the legal services that it renders.The senior law firm partner has asked you to design and explain a proposed procedural checklist/outline that addresses how the law firm may be able to accept one or more cryptocurrencies.In keeping with the law firm’s standing internal practices, your proposal should include a discussion of whether the firm should accept cryptocurrencies.

Benchoufi, M., & Ravaud, P. (2017). Blockchain Technology for Improving Clinical Research Quality. Trials, 18(335). doi:10.1186/s13063-017-2035-z

Bitcoin Fundamentals and Innovations Talk (2017). [Motion Picture]. France. Retrieved May 4, 2019, from

Caytas, J. D. (2017, May 30). Blockchain in the U.S. Regulatory Setting: Evidentiary Use in Vermont, Delaware, and Elsewhere. Columbia Science and Technology Law Review. Retrieved May 4, 2019, from

http://stlr.org/2017/05/30/blockchain-in-the-u-s-r…

Cryptocurrency, Bitcoins and the Future of Money (2017). [Motion Picture]. Retrieved May 4, 2019, from

Hacks, Exploits, and Ethical Issues in Cryptocurrency (2017). [Motion Picture]. Retrieved May 4, 2019, from

How a Handful of Tech Companies Control Billions of Minds Every Day (2017). [Motion Picture]. Retrieved May 4, 2019, from

Ross, E. S. (2017). Nobody Puts Blockchain in a Corner: The Disruptive Role of Blockchain Technology in the Financial Services Industry and Current Regulatory Issues. Catholic University Journal of Law and Technology, 25(2). Retrieved May 4, 2019, from

https://scholarship.law.edu/cgi/viewcontent.cgi?ar…

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Blockchain in the U.S. Regulatory Se ing: Evidentiary Use in Vermont, Delaware, and
Elsewhere
Posted on May 30, 2017 by Joanna Diane Caytas
Joanna Diane Caytas*
I. Introduction
In February 2017, the Delaware Court of Chancery faced a conundrum: following se lement of a shareholder action after a contested merger, shareholders representing 49,164,415 shares
claimed se lement proceeds, but the class contained only 36,793,758 shares.[1] By deﬁnition, holders of over 12 million of these shares must have lacked entitlement to se lement
disbursements, yet all claimant shareholders presented valid evidence of ownership. Investigation by class a orneys failed to establish the “current” owners of class shares, as did
investigation at their request by the Depository Trust Company (“DTC”), a subsidiary of the Depository Trust & Clearing Corporation (“DTCC”), the major U.S. clearing house and
equivalent of Euroclear and Clearstream. DTC was created in 1973 to facilitate clearing and se lement of U.S. and foreign securities by retaining custody and changing title by book-entry.
[2] The Court cut the Gordian knot by disregarding present claims and ordering se lement proceeds distributed to holders of record identiﬁed for purposes of merger consideration –
foregoing some valid beneﬁcial owners but also preventing dilution of se lement proceeds by disbursing them to 25% more shareholders than should have existed at the time of merger.
This reﬂects a systemic issue aﬀecting transactions where a centralized ledger held by DTC proves unable to determine ownership of registered shares at a speciﬁc point. An investigation
helped to clarify what had produced a disparity as striking as 25% between holders of record with DTC and beneﬁcial owners able to prove a valid claim.[3] But it was still impossible to
ascertain the valid claimants.
In re Dole Food Co.’s main culprits for the discrepancy were delays in registering trades and short-selling. A U.S. equity market convention based on applicable law, market structures and
technological determinants requires stock trades se led T+3, within three business days.[4] That means even if DTC applies a one-day freeze[5] on trading a company’s stock, pending
merger to determine shareholders of record, this snapshot still does not reﬂect trades within the previous two days. For actively traded stock, this can result in volumes of millions of shares
temporarily unregistered by DTC. Even more diﬃcult to trace are short sales where holders of record are unaware that their stock was borrowed by other investors for sale to third parties
and returned after closing out their short position, which may result in contemporaneous ownership claims to the same share. Ample case law demonstrates similar identiﬁcation issues
with proxy voting and merger consideration payouts.[6]
As Dole Food Co. mentions, in a footnote no less,[7] these systemic issues could be prevented by using a decentralized ledger, where every broker-dealer could instantly record trades
expeditiously made available to all participants, clarifying ownership for every share within the system at every moment with minimal delays. That is one rationale behind blockchain.
Incidentally, Dole Foods Co. is the only court opinion in the entire Lexis Nexis database of every published and the majority of unpublished judicial opinions in the U.S. that mentions the
term blockchain anywhere in its text – and even here, the term is used in a footnote, not in the text of the opinion itself, in the context of Governor Jack Markell’s Delaware Blockchain
Initiative. While a Westlaw search brings up some 75 cases addressing the subject, Dole Food Co. is still the only one that contains the term.
II. The mechanics of blockchain
Blockchain is an algorithm encoding information allowing amendment of a historical record – the “chain” – with subsequent transactions – “blocks” – in a way near-impossible to
alter/forge retroactively. This is achieved by distributed ledgers keeping copies of a record on computers of all system participants (“network nodes” or “miners” in the context of virtual
currencies). In large networks like bitcoin, millions of computers, often assembled in data centers, hold blockchain records. Inconsistencies between individual information chains are
detected and corrected by the majority of the system’s units’ processor power. In this “proof of work” concept, the largest total computing power makes/executes decisions.[8] A record’s
validity is established “democratically”: if the majority of the system’s computing power presents one version of a full blockchain over another, that version prevails and overrides diﬀering
records held by remaining nodes.[9] This self-correcting system applies to historical but not to new records that are added to the chain as blocks encrypted using private and public keys,
documenting every new transaction. Once veriﬁed and added, blocks in a chain become practically unalterable, creating robust security for distributed-ledger record keeping.[10] Forging
an existing record requires simultaneously hijacking vast numbers of networked computers to override a target blockchain.
Public blockchains are not controlled by any private or governmental party serving as record-keeper or accountant. Evolution occurs through user consensus producing publicly veriﬁable
transactions. Public blockchains are accessible to anyone but inherently slow: updating a transaction on thousands of unaﬃliated computers around the world may take hours.[11] Financial
technologies relying on such “unpermissioned” networks[12] include virtual currencies like bitcoin.[13]
Private blockchains, maintained by consortia or private entities and protected by stringent security protocols, restrict access to preselected participants, thus increasing security and
transaction speed. In a private network, it may be possible to alter blockchains after the fact, perhaps to correct errors.[14] This type appears more suitable for government-maintained
record-keeping, which could be used, for example, to track ownership of assets such as real estate, securities, or gems.
Before expanding to general record-keeping transactions, blockchain was ﬁrst used in bitcoin,[15] a virtual currency. Then, blockchain evolved towards self-executing smart contracts using
ethereum technology[16] and may eventually reach an “Internet of Agreements.”[17] Smart contracts are self-executing contracts wri en into lines of code that extend the utility of
blockchain from keeping a record of transactions to automatically implementing the terms of the contract.[18] Ethereum provides an open-source, public distributed platform that oﬀers
smart contract scripting functionality through a Turing-complete virtual machine that can execute scripts through an international network of public nodes.[19] While its promise for
applications such as virtual currencies and payments is obvious and currently explored by major ﬁnancial institutions,[20] blockchain’s real strength lies in authentication and keeping
records up-to-date, especially for valuable, highly liquid assets like securities.
III. Regulatory responses
A. Federal government
Regulatory responses to emerging technologies, and to blockchain in particular, range from excitement to suspicion to indiﬀerence. The U.S. government’s approach to blockchain and
bitcoin issues exempliﬁes this: Congress held altogether seven hearings involving blockchain and digital currencies – all between 2013 and 2017 – addressing concerns ranging from
Caribbean development to U.S.–China relations, to the impact of virtual currencies on protecting small business and national security from the impact of disruptive technologies and
cybersecurity threats.[21] Still, just one federal bill on blockchain, regarding virtual currencies, was proposed: On December 1, 2014, and January 2, 2015, Congressman Steve Stockman (RTX) proposed, within a month of each other, two virtually identical bills, the Cryptocurrency Protocol Protection and Moratorium Act [22] and the Online Market Protection Act of 2014.[23]
Even these bills were far from revolutionary: they just proposed a ﬁve-year moratorium on federal and state regulation of cryptocurrencies.[24]
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Additionally, the bills proposed a puzzlingly inconsistent tax treatment of virtual currencies: on the one hand, it required cryptocurrencies to be treated for tax purposes as currency rather
than property.[25] On the other hand, it allowed taxation only upon monetization of cryptocurrency, i.e., upon conversion into dollars or other government-issued currency,[26] which
would also apply to taxing income from mining of cryptocurrencies, i.e., from processing and recording cryptocurrency transactions in a distributed ledger.[27]
Referred to the Commi ee on Financial Services, to Ways and Means, and to Agriculture, the bills, unsurprisingly, never saw the light of day again.
Another federal legislative a empt mentioning blockchain (once) was a Congressional resolution proposed July 14, 2016, tabled after forty minutes’ ﬂoor discussion and never resumed,
formally titled “Resolution expressing the sense of the House of Representatives that the United States should adopt a national policy for technology to promote consumers’ access to
ﬁnancial tools and online commerce to promote economic growth and consumer empowerment.”[28] In the ﬁnal paragraph of its preamble, this draft resolution recognized blockchain
technology’s potential of ﬁnancial services, payments, health care, energy, property management, and intellectual property management.[29]
Since the federal government has not exercised its constitutional preemptive power to regulate blockchain to the exclusion of states[30] (as it generally does with ﬁnancial regulation) or
even expressed intention to do so, regardless of the interest of federal agencies,[31] states remain free to introduce their own rules and regulations. Some have a empted to do that, however
haltingly.
B. State jurisdictions
1. Arizona
In 2017, without much media a ention, Arizona fast-tracked a blockchain records recognition bill amending existing legislation on electronic records.[32] Arizona House Bill 2417,
introduced February 6, 2017, passed both state chambers and was signed into law March 29, 2017.[33] It amended Title 44, chapter 26, Arizona Revised Statutes, by adding article 5,
Blockchain technology. This amendment recognized a signature secured through blockchain technology as an electronic signature; a record or contract secured through blockchain
technology as an electronic record; smart contracts[34] as valid; and ownership and other rights in interstate or foreign commerce as remaining valid if subsequently secured by blockchain
technology.[35]
2. California
California, home to Silicon Valley, failed to pass its virtual currencies bill after much media hype. California Assembly Bill 1326, an act to add Division 11 to the Financial Code
(commencing with Section 26000), relating to virtual currency, was introduced on February 27, 2015, but failed in the Senate on August 11, 2016.[36] California has a empted no further
regulation of blockchain or digital currencies to date.
AB 1326 tried to improve on New York’s regulation of virtual currency businesses by nominally relaxing its requirements, exempting such businesses under certain circumstances from
needing a money transmission license (as required by New York) in addition to a virtual currency license; and by exempting network administrators, software providers, and exchange
services from California’s proposed virtual currency law. But during public hearings, smaller ﬁntech companies[37] voiced especially strong opposition, understandably considering the
proposed regulations’ reach: AB 1326 prohibited engaging in digital currency business without enrolling in the program by obtaining a license from the Commissioner of Business
Oversight unless speciﬁcally exempted. It speciﬁed, inter alia, capital requirements, customer receipt requirements, cybersecurity information reporting, audit reports, and fees, as well as
regulations on advertising.
3. Delaware
In May 2016, Delaware’s then-Governor Jack Markell announced a state initiative to adapt regulations to blockchain technology.[38] In response to the Governor’s request, the Delaware
State Bar Association’s Corporation Law Council presented, among other proposals, an amendment to the Delaware General Corporation Law that would allow Delaware entities to use
distributed ledger technology to record stock transfers.[39] The initiative was enthusiastically welcomed by Delaware Chancery Court Vice Chancellor J. Travis Laster who, in his keynote
address to the Council of Institutional Investors in September 2016, called blockchain “a plunger that you can use to clean up the plumbing” of capital markets for the beneﬁt of investors.
[40]
The initiative comprised three steps: “smart records” using distributed ledger for archival recording (implemented), “smart UCC ﬁlings” (implementation pending), and distributed ledger
shares (the project’s most ambitious part).[41]
“Smart records” technology implemented at the Delaware Public Archives in cooperation with Symbiont, a blockchain startup,[42] uses distributed ledger to automate compliance with
document retention laws pertaining to destruction and retention of archival documents.[43]
“Smart UCC ﬁlings” will replace slow, error-prone paper ﬁlings by distributed ledger using the technology tested at the Delaware Public Archives. “Smart UCC ﬁlings” will automate the
release or renewal of UCC ﬁlings and collateral, increase the speed of UCC searches, increase the accuracy of ﬁlings and thus prevent fraud and cut costs. [44]
Distributed ledger shares issued and tracked through blockchain render central accountants and custodians like DTC superﬂuous, reducing delays and improving accuracy of recordkeeping, preventing many class actions in the current system where determination of beneﬁcial owners or voting rights is possible only in a probabilistic manner. [45]
However, the DGCL amendments would only facilitate issuance of new shares registered on a distributed ledger. For existing shares, transition to distributed ledger would be more
complicated, since only uncertiﬁcated shares would qualify.[46] Although DGCL Section 158 allows boards of directors to issue resolutions to qualify some or all of their corporation’s stock
as uncertiﬁcated shares, existing certiﬁed shares would not be covered until certiﬁcates were surrendered to the company.[47] Thus, a corporation unable to recover share certiﬁcates would
be unable to transition to distributed ledger shares.
Furthermore, trading shares on secondary markets would not be subject to Delaware’s new law, since trade registration is regulated separately and DGCL only aﬀects transfers of record.
[48] It remains unclear how secondary markets will respond to distributed ledger share registration since real-time clearing and se lement using blockchain would require participation of
traders in record-keeping of distributed ledger transactions.
4. Hawaii
Hawaii introduced on January 25, 2017 House Draft “An act relating to economic development.”[49] The bill establishes “a working group consisting of representation from the public and
private sectors to examine, educate, and promote best practices for enabling blockchain technology to beneﬁt local industries, residents, and the State of Hawaii.” Hawaii’s bill recognizes
industries potentially aﬀected by blockchain: (1) identity and access management (digital IDs); (2) health care (health care records); (3) legal (“tracking, veriﬁcation, authentication, and
record keeping of court orders, contracts, titles, and records”); (4) ﬁnancial services (blockchain already in use); (5) manufacturing (provenance of goods and services and authentication of
goods); and (6) tourism (local bitcoin payments).[50] It awaits ﬁnal vote in the Senate Ways and Means Commi ee.
5. Illinois
On March 21, 2017, the Illinois House of Representatives passed House Joint Resolution 25, which created a task force to study blockchain beneﬁts for recordkeeping by local governments.
[51] It went to the Senate Commi ee on Assignments on March 28, 2017 and is still pending. If adopted, this task force study would be a ﬁrst step for Illinois to transferring record keeping
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to distributed ledger.
The bill was partly a response to Chicago’s Cook County exploration of blockchain-based records of property title transfers and liens, the ﬁrst such a empt by a local Recorder’s Oﬃce in
the U.S.[52] The program was announced in October 2016.[53]
6. Maine
Maine’s draft bill introduced March 7, 2017 under emergency procedures, would have established a Commission to Study Using Blockchain Technology in Conjunction with Paper Ballots
in Maine Elections.[54] The proposed Commission’s purpose was to “study the potential uses for blockchain technology to support and enhance Maine’s current paper ballot election
system for the purpose of improving paper ballot security, increasing election transparency and reducing costs.”[55] The bill failed at ﬁrst vote.
7. Nevada
On March 20, 2017, the Nevada Senate introduced Bill 398, a bill with a high likelihood of passing at least the ﬁrst commi ee vote.[56] It amends NRS Title 59 relating to electronic
transactions and provides for recognition of validity of blockchain records, blockchain-enabled electronic signatures, and smart contracts. More interestingly, the act prohibits taxation or
regulation of blockchain or smart contracts, including through licensing, permits and certiﬁcations.[57] This is the opposite of the New York and California approach and may reﬂect
Nevada’s pro-business ambitions along continuing a empts to compete with Delaware as incorporation jurisdiction of choice.
8. New York
Although New York did not enact state-wide legislation recognizing blockchain for record-keeping purposes, in June 2015 it became the ﬁrst state in the U.S. to regulate virtual currency
companies[58] through state agency rulemaking.[59] Entities engaging in virtual currency business not covered by an exemption from New York’s virtual currency rules must obtain a
BitLicense from New York’s Department of Financial Services.[60] In almost two years, exactly three such licenses were granted.[61] New York requires virtual currency businesses to hold
both BitLicenses and money transmission licenses (MTAs), further increasing regulatory burden on smaller companies and prompting start-ups unable to comply to withdraw from
operations in New York.[62]
9. Vermont
Vermont gained considerable tech media a ention on June 13, 2015, when then-Governor Peter Shumlin signed into law Act 51, “An act relating to promoting economic development.”[63]
The Act contained a section, titled “Study and Report; Blockchain Technology,” mandating a report on “recommendations on the potential opportunities and risks of creating a presumption
of validity for electronic facts and records that employ blockchain technology.”[64] Vermont was rumored to contemplate switching to blockchain-based public record keeping. But the
January 15, 2016 report[65] quelled the tech community’s excitement[66] with ﬁndings such as: “[i]n light of the very limited possible beneﬁts and the likely signiﬁcant costs for either
entering into a private or public blockchain or se ing up a state-operated blockchain, at this time, blockchain technology would be of limited value in conducting state business.”[67] This
damning assessment appears to have indeﬁnitely tabled prospects of distributed ledger public record keeping.[68]
In June 2016, Vermont passed “An act relating to miscellaneous economic development provisions,”[69] adding an entire section[70] on recognizing validity of blockchain records and their
admissibility in courts as evidence without need for authentication:[71] “A digital record electronically registered in a blockchain shall be self-authenticating pursuant to Vermont Rule of
Evidence 902, if it is accompanied by a wri en declaration of a qualiﬁed person, made under oath…”[72]
Although far from the revolutionary switch to distributed ledger public records discussed in tech media, the bill was unique in explicitly aﬃrming the evidentiary value of blockchain
records. The relevance of blockchain records in Vermont judicial proceedings remains to be seen. While no ﬁnancial center or cu ing-edge jurisdiction, Vermont’s precedent might be
adopted by New York, California, and especially Delaware, where such evidence is more likely to be used.
IV. Implications
Delaware’s however hypothetical project to maintain corporate records by distributed ledger, Vermont’s bill on authentication and evidentiary value of blockchain, and Arizona’s
recognition of smart contracts present new trends for states employing originally purely ﬁnancial technology for legal purposes. While regulation by restriction or prohibition of blockchainbased virtual currencies was a given in the ﬁnancial industry’s expansive regulatory environment, state recognition of blockchain’s value for authentication of title to personal and real
property constitutes a step towards incorporation of distributed ledger technology into the legal sphere, where “code is law” might adopt a literal meaning.
Blockchain has downsides: besides the cost and technical diﬃculties of implementing distributed ledger record-keeping, risks of network hacking or fraudulently obtaining private or
public keys could jeopardize this record system and all blockchains contained therein.[73] The facial anonymity of users may facilitate money laundering and terrorist ﬁnancing, a main
regulatory concern with virtual currencies. Widespread blockchain network access could contribute to herding behavior and increase market volatility under ﬁnancial system stress,[74]
while “kill switches” similar to those used by stock exchanges to prevent market collapse when share prices plummet may prove near-impossible to implement across distributed ledgers.
But overall, the increased robustness and security of blockchain record keeping is diﬃcult to match by existing technologies. Especially for corporate record keeping, the time has come to
ﬁx a system failing to serve its purpose, as demonstrated by the Dole Foods share incident and others with similarly unresolvable shareholder identiﬁcation issues.
V. Conclusion
The most important developments for blockchain’s regulation and implementation in an evidentiary context occurred in Arizona (recognition of smart contracts), Vermont (blockchain as
evidence), Chicago (real estate records), and, most importantly, Delaware (pending initiative authorizing registration of shares of Delaware companies in blockchain form). Since 64 percent
of Fortune 500 companies and over 1 million entities are incorporated there,[75] the Delaware initiative’s enactment will change regulatory landscape for securities by se ing precedent in
the most important corporate jurisdiction of the U.S. Other states competing for corporate taxes and fees would be sure to follow.
* J.D., Columbia Law School, 2017, Harlan Fiske Stone Scholar. M.Sc. Candidate (Nanotechnology), University of Oxford, St. Catherine’s College, 2017. Global Alliance Program in Global
Business Law and Governance, Sciences Po and Université Paris I Panthéon-Sorbonne, 2017. B.A. (Mathematics), Columbia University, summa cum laude.
[1] In re Dole Food Co., No. 8703-VCL, 2017 Del. Ch. LEXIS 25 (Del. Ch. Feb. 15, 2017)
[2] The Depository Trust Company (DTC), DTCC, h p://www.dtcc.com/about/businesses-and-subsidiaries/dtc.aspx (last visited May 27, 2017).
[3] Dole Food Co,, 2017 Del. Ch. LEXIS 25, at *2-12.
[4] DTCC, A White Paper to the Industry, Embracing Disruption: Tapping the Potential of Distributed Ledgers to Improve the Post-Trade Landscape 3, 16 (Jan. 2016),
h p://www.dtcc.com/en/news/2016/january/25/blockchain-white-paper.
[5] Fast Answers: DTC Chills, U.S. Sec. & Exchange Comm’n, h ps://www.sec.gov/fast-answers/answersdtc-chillshtm.html (last updated Aug. 2, 2012).
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[6] See, e.g., In re Appraisal of Dell Inc. (Dell Continuous Ownership), 2015 WL 4313206 (Del. Ch. July 30, 2015).
[7] See Dole Food Co., 2017 Del. Ch. LEXIS 25, at *11 n.1.
[8] Vinay Gupta, A Brief History of Blockchain, Harv. Bus. Rev. (Feb. 28, 2017), h ps://hbr.org/2017/02/a-brief-history-of-blockchain.
[9] David Yermack, Corporate Governance and Blockchains, Harv. Bus. Rev. (Jan. 6, 2016), h ps://corpgov.law.harvard.edu/2016/01/06/corporate-governance-and-blockchains/.
[10] Id at 14.
[11] Joanna D. Caytas, Developing Blockchain Real-Time Clearing and Se lement in the EU, U.S., and Globally, Colum. J. Eur. L.: Preliminary Reference (June 22, 2016),
h p://cjel.law.columbia.edu/preliminary-reference/2016/developing-blockchain-real-time-clearing-and-se lement-in-the-eu-u-s-and-globally-2.
[12] Tim Swanson, Consensus-as-a-Service: A Brief Report on the Emergence of Permissioned, Distributed Ledger Systems, R3 CEV (Apr. 6, 2015), h p://www.ofnumbers.com/wpcontent/uploads/2015/04/Permissioned-distributed-ledgers.pdf.
[13] Marco A. Santori, Governor Jack Markell Announces Delaware Blockchain Initiative, Global Del. Blog (June 10, 2016), h p://global.blogs. delaware.gov/2016/06/10/delaware-to-createdistributed-ledger-based-share-ownershipstructure-as-part-of-blockchain-initiative/.
[14] Caytas, supra note 11.
[15] For a thorough overview of bitcoin technology and history, see Notice of Rulemaking, 81 Fed. Reg. 45,554 (July 14, 2016).
[16] Gupta, supra note 8.
[17] World Gov’t Summit, Building the Hyperconnected Future on Blockchains (Feb. 2017), h p://internetofagreements.com/ﬁles/WorldGovernmentSummit-Dubai2017.pdf; see also Vinay
Gupta, The Promise of Blockchain Is a World Without Middlemen, Harv. Bus. Rev. (Mar. 6, 2017), h ps://hbr.org/2017/03/the-promise-of-blockchain-is-a-world-without-middlemen.
[18] Eric Piscini, Gys Hyman, Wendy Henry, Blockchain: Trust Economy, Deloi e U. Press (Feb. 7, 2017), h ps://dupress.deloi e.com/dup-us-en/focus/tech-trends/2017/blockchain-trusteconomy.html.
[19] Travis Patron, What’s the Big Idea Behind Ethereum’s World Computer? CoinDesk (Mar. 13, 2016), h p://www.coindesk.com/whats-big-idea-behind-ethereums-world-computer/.
[20] The boom for blockchain companies is reﬂected in their overvaluation reaching as many as ﬁve times their performance-based value, resulting in a “frothy market” for ﬁnancial
technology (ﬁntech). See Oscar Williams-Grut, Fintech Investor: ‘Anything That Has Machine Learning or Blockchain in it, the Valuation Goes up, 2, 3, 4, 5x’, Business Insider (Apr. 20, 2017),
h p://uk.businessinsider.com/motive-partners-andy-stewart-on-frothy-ﬁntech-investment-market-2017-4?r=US&IR=T. See also John Ream, Yang Chu & David Schatsky, Upgrading
Blockchains: Smart Contract Use Cases in Industry, Deloi e U. Press (June 8, 2016), h ps://dupress.deloi e.com/dup-us-en/focus/signals-for-strategists/using-blockchain-for-smartcontracts.html.
[21] LexisNexis Advance search results for query: blockchain, in: Legislative Histories, jurisdiction: U.S. Federal.
[22] H.R. 5777, 113th Cong. (2014) (“CryptPMA”).
[23] Online Market Protection Act of 2014, H.R. 5892, 113th Cong. (2015) (summarized as “A Bill to Protect Cryptocurrencies.”).
[24] Id. § 2(a):
Neither the Federal Government nor any State or political subdivision thereof shall impose any statutory restrictions or regulations speciﬁcally identifying and governing the creation, use,
exploitation, possession or transfer of any algorithmic protocols governing the operation of any virtual, non-physical, algorithm or computer source code-based medium for exchange
(collectively, “cryptocurrency” as deﬁned herein) for a period beginning June 1, 2015, and extending ﬁve years after the enactment of this Act (such period, the “moratorium period”),
except for statutes already enacted and eﬀective prior to the date of enactment of this Act, and further suspending the enactment and eﬀectiveness of any and all pending statutes and
regulations until the end of the aforementioned moratorium period, except as otherwise provided in this section.
[25] Id. § 5(c).
[26] Id. § 5(d).
[27] Id. § 5(e).
[28] H.R. Res. 835, 114th Cong. (2016).
[29] “Whereas blockchain technology with the appropriate protections has the potential to fundamentally change the manner in which trust and security are established in online
transactions through various potential applications in sectors including ﬁnancial services, payments, health care, energy, property management, and intellectual property management.” Id.,
Preamble.
[30] See U.S. Const. art. VI, cl. 2 (“This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the
authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary
notwithstanding.”). Furthermore, federal law preempts conﬂicting state law. See, e.g., Maryland v. Louisiana, 451 U. S. 725, 746 (1981) (“Consistent with that command, we have long
recognized that state laws that conﬂict with federal law are ‘without eﬀect.’”).
[31] See, e.g., Notice of Filing of Proposed Rule Change, 81 Fed. Reg. 45,554 (July 14, 2016); FTC Announces Agenda for March 9 FinTech Forum on Artiﬁcial Intelligence and Blockchain Technology ,
Fed. Trade Commission (Feb. 27, 2017), h ps://www.ftc.gov/news-events/press-releases/2017/02/ftc-announces-agenda-march-9-ﬁntech-forum-artiﬁcial.
[32] The Arizona bill deﬁnes blockchain and smart contracts as follows:
1. For the purposes of this section:
2. “Blockchain technology” means distributed ledger technology that uses a distributed, decentralized, shared and replicated ledger, which may be public or private, permissioned or
permissionless, or driven by tokenized crypto economics or tokenless. The data on the ledger is protected with cryptography, is immutable and auditable and provides an uncensored
truth. 2. “Smart contract” means an event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger and that can take custody over and
instruct transfer of assets on that ledger.
2017 Ariz. Sess. Laws 97 § 2(E).
[33] H.R. 2417, 53d Leg., 1st Reg. Sess. (Ariz. 2017), 2017 Ariz. Sess. Laws 97 (amending Ariz. Rev. Stat. § 44-7003; adding Ariz. Rev. Stat. § 44-7061).
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[34] See supra note 32.
[35] Ariz. Rev. Stat. § 44-7061 (2017).
[36] A.B. 1326, Gen. Assemb., 2015-2016 Reg. Sess. (Ca. 2015).
[37] Fintech describes companies seeking to apply new technology in the delivery of ﬁnancial services to compete with traditional ﬁnancial institutions. See Tom W. Lin, Inﬁnite Financial
Intermediation, 50 Wake Forest L. Rev. 643 (2015).
[38] Santori, supra note 13.
[39] Jeﬀ Mordock, Delaware Be ing Big on Blockchain, Del. Online (Apr. 7, 2017), h p://www.delawareonline.com/story/money/2017/04/07/delaware-be ing-big-blockchain/100162782/.
[40] J. Travis Laster, Vice Chancellor, Del. Chancery Court, The Block Chain Plunger: Using Technology to Clean Up Proxy Plumbing and Take Back the Vote, Keynote Speech at Fall 2016
meeting of Council of Institutional Investors (Sept. 29, 2016), h p://www.cii.org/ﬁles/09_29_16_laster_remarks.pdf.
[41] Andrea Tinianow & Caitlin Long, Delaware Blockchain Initiative: Transforming the Foundational Infrastructure of Corporate Finance, Harv. L. Sch. F. on Corp. Governance & Fin. Reg. (Mar.
16, 2017), h ps://corpgov.law.harvard.edu/2017/03/16/delaware-blockchain-initiative-transforming-the-foundational-infrastructure-of-corporate-ﬁnance/.
[42] Governor Markell Launches Delaware Blockchain Initiative, PR Newswire, May 2, 2016, h p://www.prnewswire.com/news-releases/governor-markell-launches-delaware-blockchaininitiative-300260672.html.
[43] Tinianow & Long, supra note 41.
[44] Andrea Tinianow, Mark Smith, Caitlin Long & Marco Santori, Delaware’s 2017 Resolution: Make Blockchain a Reality, Coindesk (Jan. 3, 2017), h p://www.coindesk.com/what-expectdelaware-blockchain-initiative-2017/
[45] Tinianow, Smith, Long & Santori, supra note 39.
[46] Ma hew J. O’Toole & Michael K. Reilly, The First Block in the Chain: Proposed Amendments to the DGCL Pave the Way for Distributed Ledgers and Beyond, Harv. L. Sch. F. on Corp.
Governance & Fin. Reg. (Mar. 16, 2017), h ps://corpgov.law.harvard.edu/2017/03/16/the-ﬁrst-block-in-the-chain-proposed-amendments-to-the-dgcl-pave-the-way-for-distributed-ledgersand-beyond/.
[47] Id.
[48] Id.
[49] H.R. 1481, 29th Leg., Reg. Sess. (Haw. 2017).
[50] Id.
[51] H.R.J. Res. 25, 100th Gen. Assemb., Reg. Sess. (Ill. 2017) (creating the “Illinois Legislative Blockchain and Distributed Ledger Task Force to study how and if State, county, and municipal
governments can beneﬁt from a transition to a blockchain based system for recordkeeping and service delivery.”).
[52] Kyle Torpey, Chicago’s Cook County to Test Bitcoin Blockchain-Based Property Title Transfer, NASDAQ (Oct. 6, 2016), h p://www.nasdaq.com/article/chicagos-cook-county-to-test-bitcoinblockchain-based-public-records-cm689901.
[53]Id.
[54] S.P. 305, 128th Leg., 1st Reg. Sess. (Me. 2017).
[55] Id.
[56] S.B. 398, 79th Leg. Sess. (Nev. 2017).
[57] Id. §§ 4, 6.
[58] Nathaniel Popper, Bitcoin Exchange Receives First License in New York State, N.Y. Times, May 7, 2015, h ps://www.nytimes.com/2015/05/08/business/dealbook/bitcoin-exchange-receivesﬁrst-license-in-new-york-state.html?_r=0
[59] N.Y. Comp. Codes R. & Regs. tit. 23 § 200.1 et seq., h p://www.dfs.ny.gov/legal/regulations/adoptions/dfsp200t.pdf
[60] Pete Rizzo, New York Releases Final BitLicense, Coindesk (June 3, 2015), h p://www.coindesk.com/new-york-releases-ﬁnal-bitlicense/.
[61] Despite 22 initial ﬁlings, Circle, Ripple, and Coinbase were the only three companies holding a New York BitLicense in January 2017. See Michael del Castillo, Bitcoin Exchange Coinbase
Receives New York BitLicense, Coindesk (Jan. 17, 2017), h p://www.coindesk.com/bitcoin-exchange-coinbase-receives-bitlicense/
[62] Yessi Bello Perez, The Real Cost of Applying for a New York BitLicense, Coindesk (Aug. 13, 2015), h p://www.coindesk.com/real-cost-applying-new-york-bitlicense/
[63] Brian Cohen, Vermont Considering Blockchain Tech for State Records, Smart Contracts, The Cointelegraph (Aug. 5, 2015) h ps://cointelegraph.com/news/vermont-considering-blockchaintech-for-state-records-smart-contracts.
[64] S. 138, 2015-2106 Leg. Sess. (Vt. 2015), 2016 Vt. Acts & Resolves No. 51.
[65] James Condos, Vt. Sec’y State et al., Blockchain Technology: Opportunities and Risks (Jan. 15, 2016), h p://legislature.vermont.gov/assets/Legislative-Reports/blockchain-technologyreport-ﬁnal.pdf.
[66] See Stan Higgins, Vermont Says Blockchain Record-Keeping System Too Costly, Coindesk (Jan. 20, 2016), h p://www.coindesk.com/report-blockchain-record-keeping-system-too-costly-forvermont/
[67] Condos, supra note 65, at 14.
[68] Alec Liu, Vermont Realizes They Don’t Need the Blockchain, Ripple (Jan. 20, 2016), h ps://ripple.com/insights/vermont-realizes-they-dont-need-the-blockchain/.
[69] H. 868, 2015-2016 Leg. Sess. (Vt. 2016), 2016 Vt. Acts & Resolves No. 157.
[70] Id. § I.1. (“12 V.S.A. § 1913 is added to read: § 1913. Blockchain Enabling . . . .”).
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[71] Vt. Stat. Ann. tit. 12 § 1913 (2016).
[72] Id. § 1913(b)(1).
[73] Angelos Delivorias, Brieﬁng: Distributed Ledger Technology and Financial Markets, PE 593.565 EN, European Parliamentary Research Service (Nov. 2016),
h p://www.europarl.europa.eu/RegData/etudes/BRIE/2016/593565/EPRS_BRI(2016)593565_EN.pdf (referencing Caytas, supra note 11).
[74] Id.
[75] Mordock, supra note 39.
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Benchoufi and Ravaud Trials (2017) 18:335
DOI 10.1186/s13063-017-2035-z
COMMENTARY
Open Access
Blockchain technology for improving
clinical research quality
Mehdi Benchoufi1,2,3*
and Philippe Ravaud1,2,3,4,5
Abstract
Reproducibility, data sharing, personal data privacy concerns and patient enrolment in clinical trials are huge
medical challenges for contemporary clinical research. A new technology, Blockchain, may be a key to addressing
these challenges and should draw the attention of the whole clinical research community.
Blockchain brings the Internet to its definitive decentralisation goal. The core principle of Blockchain is that any service
relying on trusted third parties can be built in a transparent, decentralised, secure “trustless” manner at the top of the
Blockchain (in fact, there is trust, but it is hardcoded in the Blockchain protocol via a complex cryptographic algorithm).
Therefore, users have a high degree of control over and autonomy and trust of the data and its integrity. Blockchain
allows for reaching a substantial level of historicity and inviolability of data for the whole document flow in a clinical
trial. Hence, it ensures traceability, prevents a posteriori reconstruction and allows for securely automating the clinical
trial through what are called Smart Contracts. At the same time, the technology ensures fine-grained control of the
data, its security and its shareable parameters, for a single patient or group of patients or clinical trial stakeholders.
In this commentary article, we explore the core functionalities of Blockchain applied to clinical trials and we illustrate
concretely its general principle in the context of consent to a trial protocol. Trying to figure out the potential impact
of Blockchain implementations in the setting of clinical trials will shed new light on how modern clinical trial methods
could evolve and benefit from Blockchain technologies in order to tackle the aforementioned challenges.
Keywords: Blockchain, Transparency, Reproducibility, Data sharing, Privacy
Background
Fixing methodology issues is one of the great challenges
in contemporary biomedical research. Indeed, lack of
reproducibility, related to a wide range of scientific misconduct aspects, from errors to frauds, compromises the
outcomes of a clinical study and undermines research
quality. Lack of reproducibility has been extensively
studied, and medical scientific publications have been
found on the whole to be not reproducible: they are full
of “bugs”. Ioannidis et al. estimated a rate of about 80%
non-reproducible studies [1–3]. This rate may be related
to several types of errors, misconduct or fraud. Improving quality of research by better reproducibility and
empowering both researcher communities with secure
data sharing and patient communities with tools
* Correspondence: mehdi.benchoufi@aphp.fr
1
INSERM U1153, Paris, France
2
Assistance Publique-Hôpitaux de Paris, Centre d’Epidémiologie Clinique,
Hôpital Hôtel-Dieu, Paris, France
Full list of author information is available at the end of the article
guaranteeing their privacy are desirable goals that can be
achieved in part with Blockchain technology [4, 5].
Blockchain can have a global impact on clinical research
because it allows for tracking, sharing and caring for data.
Indeed, it involves a decentralised secure tracking system
for any data interactions that could occur in the context
of clinical trials, with a peer-to-peer inclusive network that
enables data sharing on the research side and ensures all
the needed transparency and care for privacy concerns on
the patient community side.
In turn, this system can lead to more trust in clinical
research, whose credibility has been considerably undermined with repeated scandals in recent years [6, 7].
Blockchain technology can be considered a basis for
improved clinical research methodology and a step
toward better transparency to improve trust within
research communities and between research and patient
communities.
© The Author(s). 2017 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0
International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and
reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to
the Creative Commons license, and indicate if changes were made. The Creative Commons Public Domain Dedication waiver
(http://creativecommons.org/publicdomain/zero/1.0/) applies to the data made available in this article, unless otherwise stated.
Benchoufi and Ravaud Trials (2017) 18:335
Page 2 of 5
What is Blockchain?
Historically, Blockchain is known to be the technology
powering Bitcoin, as an open, distributed public ledger
recording all the Bitcoin transactions in a secure and
verifiable way, without the need for a third party to
process payments. In this context, Blockchain can be
considered a full history of banking transactions.
More generically, Blockchain is a huge, public, secure
and decentralised datastore [8, 9] of ordered records, or
events, called blocks. Each block contains a timestamp
and is linked to a previous block [10]. Events can be
updated by only a majority of users. Information cannot
be erased. The datastore is owned by no one, is controlled by users and is not ruled by any trusted third
party or central regulatory instance. In fact, trust is
encoded in the protocol and maintained by the community of users.
In practice, the Blockchain architecture allows for storing proofs of existence of data. As the only proof of data
is the data of proof, we believe that this is a paradigm
shift for medical research methodology.
Regarding inviolability and historicity of data, it follows
that Blockchain ensures that events are tracked in their
correct chronological order, which largely prevents a
posteriori reconstruction analysis.
First, data integrity is ensured by the cryptographic validation of each transaction [11]. This is key to ensuring
the sincerity of data — limiting data falsification, data
“beautification” and in some sense data invention. Second,
traceability and historicity of the data are among the core
functionalities of the technology: each transaction with
Blockchain is timestamped [12]. This information is publicly transparent; any user owns a copy of the proof of the
time-stamped data. Figure 1 shows the complex flows of
heterogeneous data and metadata that circulate in a clinical trial, implying numerous healthcare stakeholders, and
all documents whose proof of existence can be stored in
Blockchain. Thus, the existence of data becomes provable
while the data remain confidential.
Below, we list non-exhaustive examples of key information that can advantageously “sit on the top” of the
Blockchain:
Building reliable clinical studies: at each step,
keep track and timestamp
Inviolability and historicity of data are two major features of data at the functional level, “the data level”.
– The data-sharing plan, including the schedule,
dataset documentation and data-sharing agreement, if any, must be disclosed before the clinical
trial begins, so this metadata can be timestamped
Fig. 1 Clinical trial complex data workflow encoded in Blockchain
Benchoufi and Ravaud Trials (2017) 18:335
in a chronological order in the unfalsifiable
Blockchain.
– Before the clinical trial begins, consents and clinical
trial protocol, including type of study, primary and
secondary outcomes and inclusion and exclusion
criteria, can be bundled into data structures stored
on the Blockchain [13–15]. Data structures are then
in one-to-one correspondence with consents and the
protocol and its revisions, which accounts for robust
proof of their existence. This feature can help
prevent typical issues related to non-traceable
clinical trial protocols, such as selective reporting
outcomes related to selective reporting of harm,
under-reporting of non-significant outcomes and
mismatches between planned outcomes in the
protocol and final publication. These issues are a
well-documented source of bias [16–19]. In the
Blockchain metadata set, we can also store information such as the mode of data collection, attribution method, dates of withdrawals to distinguish
between early and late ones and dates of recurrent
events.
– The statistical analysis plan is a critical need and is
timestamped before the analysis is completed and,
for a blinded study, before the data are unblinded.
This plan includes the statistical methods, definition
of harm events and multiple variable adjustments, if
any. For example, sample size is a key item to
compute to ensure that a study has enough power.
Research teams often have no precise idea of the
outcomes, so estimating the needed power in
advance is difficult, which leads to an a posteriori
calculus bias [20–22]. Here, we can imagine
timestamping a set of metadata on the Blockchain:
sample size, type I and type II errors, estimated
event rate and treatment effect of interest.
Timestamping will constitute a landmark in the
Blockchain that will testify to the a priori-computed
sample size.
– The analytical code [23] should be shared and made
open to prevent analytical errors [24, 25]. Taking
into account that scripts continue to evolve and that
a fixed state of the code is used to process the data,
this precise state of the code must be “frozen” and
timestamped to ensure that conditions under which
data were checked and analysed are reproducible.
Numerous tools enable the collaborative sharing of
different versions of the code: “git” is by far the most
used. It provides for version control, but git (or any
version control system such as mercurial or svn)
cannot prevent a timestamp alteration [26]. The
timestamp code on the Blockchain is, for todays’
state of technology, the only robust unalterable
timestamping method.
Page 3 of 5
Privacy by design and data sharing in communitydriven medicine
At the experience level, “the community level”, Blockchain is sometimes described as “trustless”, which can
offer the right conditions for data sharing. In fact, trust
is built inside the protocol. Blockchain can be considered as a “privacy-by-design” peer-to-peer infrastructure.
With the level of trust it can enforce, it should be
considered a path through the age of community-driven
methodologies. Polls consistently show that about 80%
of consumers are eager to share their medical information [27], provided privacy and security can be ensured.
With the transparency of the Blockchain database —
owned by no one, publicly writable by anyone and with
strong crypto-oriented consistency of the database
transaction — users do not need any third party to trust
the system. Thus, the database opens a wide path to the
data user’s control or differential privacy, data sharing
and community-driven clinical study [23]: in a trusted
environment, clinical research teams can “crowd-recruit”
people to be enrolled in protocols with the help of community management techniques, and people can also
volunteer to participate in such studies. Indeed, the Estonian e-Health authority has just implemented a Blockchain solution enabling storage of a million health
records, letting patients control data access through a
“Keyless Signature Infrastructure” [28, 29].
On the researcher side, data sharing is a subject of
great interest and can provide many benefits. Indeed,
sharing anonymised raw data, analysable datasets or a
statistical analysis plan is a strengthening factor for
reproducibility in science, opening clinical trials to secondary analysis or meta-analysis [24, 30–32]. Blockchain
implementations can enable distributed, secure cloud
data sharing. The advanced Massachusetts Institute of
Technology (MIT) project Enigma, still under testing
and not officially released, is most promising. Enigma’s
Blockchain approach enables secure data sharing on a
large scale and on a perimeter, finely controllable by the
user who is sharing the data. With this kind of implementation, the data can be shared among any users or
group of users, whether investigators, publishers or
patients. The idea behind the technique is differential
privacy: the user can fine-tune the equilibrium dose between publicly transparent data and control of the
shared part between approved entities. Blockchain
enables differential privacy in a secure way.
Clinical trial phase control: Smart Contracts
Besides archiving clinical trial-phase-compilable metadata on the Blockchain, we can also chain together different clinical trial steps so that each step depends on its
predecessor. Blockchain technologies bring tools to
achieve these “slicing” and “chaining” processes, called
Benchoufi and Ravaud Trials (2017) 18:335
Smart Contracts, and can enforce the level transparency,
traceability and control over clinical trial sequences.
According to Wikipedia, “Smart Contracts are computer protocols that facilitate, verify, or enforce the
negotiation of a contract” [33], and their execution can
be implemented by using cryptographic hash chains.
Practically, Smart Contracts enable the validation of a
step with the only condition that every preceding step
has been fully validated. For example, the chain of successive blocks could verify that the designed methodology has been followed, and the material presented to
publishers would consist of the publication itself and the
set of blocks that constitute the Smart Contract, whose
correct execution indicates proof that the study was well
conducted.
Figure 1 shows that the Smart Contract represents a
piece of code that holds a programmatically written contract between as many parties as needed, without any
trusted third party, and that executes algorithmically
according to the terms provided by the contracting parties. Examples of Smart Contracts are allowing for patient inclusion with the only condition that they have
consented or for enabling data analysis with the only
condition that the database is frozen. Each of the clinical
trial steps detailed in the figure can be chained together
in a preceding order, consolidating a transparent trial
and preventing a posteriori reconstruction or beautification of data.
A proof of concept for collection of consent
In a proof-of-concept experimental study, we implemented a Blockchain system to collect participant
consent for a clinical trial ([34] (under review), [35]). Indeed, the US Food and Drug Administration reports that
almost 10% of the trials that they monitor feature issues
related to consent collection: failure to obtain written informed consent, unapproved forms, invalid consent
document, failure to re-consent to a revised protocol
and missing institutional review board approval to
protocol changes [36, 37]. Precisely, in a fake experimental study, we timestamped each patient consent on the
Blockchain and asked again for consent renewal with
each revision of the protocol. We obtained a unique
master document that holds, in a single data structure
or piece of code called Chainscript [38], all the consent
collection data, each bound to a version of revised
protocol versions. In fact, these data are “hashed”, that
is, formatted into a sort of cryptographic form of the real
consent and protocol document data. Of importance,
this master document represents a secure, robust
proof of existence of the whole consent-collection
process because of a strict one-to-one correspondence
between hashed data and effective consent data. Also,
Page 4 of 5
this proof of existence can be checked on any dedicated public website.
Conclusions
Blockchain technology is a major opportunity for clinical
research: it can help in structuring more transparent
checkable methodology and, provided a set of core
metadata is defined, can help check clinical trial integrity, transparently and partly algorithmically. Ultimately,
Blockchain can lead to the structuration of some kind of
community-driven Internet of health data, gathering researchers and patient communities, social networks and
Internet of Things data flows, at a global dimension,
with features of individual granularity, decentralisation
and security and with transparent interactions to ensure
easier and more transparent analysis.
Acknowledgements
Not applicable.
Funding
The authors declare no funding for this commentary article.
Availability of data and materials
Not applicable.
Authors’ contributions
MB designed the work and brought together the Blockchain tools and clinical
trial methodologies. He explored the possible generic implementations of
Blockchain in a clinical trials context. PR defined and validated the concrete
clinical research situations for which Blockchain may be a beneficial tool. He
focused the scope of issues on which Blockchain can act. Both authors read
and approved the final manuscript.
Competing interests
The authors declare that they have no competing interests.
Consent for publication
Not applicable.
Ethics approval and consent to participate
Not applicable.
Publisher’s Note
Springer Nature remains neutral with regard to jurisdictional claims in
published maps and institutional affiliations.
Glossary
Bitcoin
A cryptocurrency and a payment system running on a peer-to-peer
decentralised network, called Blockchain, enabling transactions between
users without any third-party approval. Any of these transactions are
stored on a shared datastore called a Ledger and validated through a
complex cryptographic system.
Blockchain
A peer-to-peer network of users sharing a datastore. This datastore is the
assembly of blocks of data, linearly chained together using cryptographic
signature. The chaining process is validated by each node of the network.
Hash
A mathematical process to generate a fixed-length string of data from
variable-length data.
Ledger
The public datastore, shared by all the users. It is an “append-only” datastore
in that its restricted usage allows data to be stored only in an immutable way.
Node
Designates any computer connected to the Blockchain network.
Benchoufi and Ravaud Trials (2017) 18:335
Smart Contract
A piece of code that allows automatic transactions with the Ledger.
This program executes when any general-purpose conditions defined
by the contracting parties are met.
Transaction
An asset transfer between contracting parties, whose trace is registered
in the Ledger.
Author details
1
INSERM U1153, Paris, France. 2Assistance Publique-Hôpitaux de Paris, Centre
d’Epidémiologie Clinique, Hôpital Hôtel-Dieu, Paris, France. 3Université Paris
Descartes-Sorbonne Paris Cité, Paris, France. 4French Cochrane Centre, Paris,
France. 5Department of Epidemiology, Mailman School of Public Health,
Columbia University, New York City, USA.
Received: 25 January 2017 Accepted: 19 May 2017
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30. Sharing Clinical Trial Data: Maximizing Benefits, Minimizing Risk. Committee
on Strategies for Responsible Sharing of Clinical Trial Data; Board on Health
Sciences Policy; Institute of Medicine. Washington, DC: National Academies
Press; 2015.
31. IOM. Workshop on principles and best practices for sharing data from
environmental health research. Washington, DC; 2014.
32. Jasny BR. Again, and again, and again…. Science. 2011;334(6060):1225.
33. https://en.wikipedia.org/wiki/Smart_contract.
34. Benchoufi M, Porcher R, Ravaud P. Blockchain protocols in clinical trials:
Transparency and traceability of consent. F1000Research. 2017;6:66.
35. Nugent T, Upton D, Cimpoesu M. Improving data transparency in clinical
trials using blockchain smart contracts [version 1; referees: 3 approved].
F1000Research. 2016;5:2541. doi:10.12688/f1000research.9756.1.
36. Office of Scientific Investigations, Metrics. US Food and Drug Administration.
2014. http://www.fda.gov/downloads/AboutFDA/CentersOffices/CDER/
UCM256376.pdf.
37. Barney JR, Antisdel M. Common problems in informed consent. Human
Research Protection Program (HRPP). 2013. http://your.yale.edu/sites/
default/files/commonproblemsininformedconsent_2013_vf.pptx.
38. Chainscript documentation. Chainscript is developed by a Blockchain solutions
provider, Stratumn SAS. http://chainscript.io. Accessed 25 Jan 2017.
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Catholic University Journal of Law and Technology
Volume 25 | Issue 2
Article 7
2017
Nobody Puts Blockchain in a Corner: The
Disruptive Role of Blockchain Technology in the
Financial Services Industry and Current Regulatory
Issues
Elizabeth Sara Ross
The Catholic University of America, Columbus School of Law
Follow this and additional works at: http://scholarship.law.edu/jlt
Part of the Communications Law Commons, First Amendment Commons, Intellectual Property
Law Commons, Internet Law Commons, Privacy Law Commons, and the Science and Technology
Law Commons
Recommended Citation
Elizabeth S. Ross, Nobody Puts Blockchain in a Corner: The Disruptive Role of Blockchain Technology in the Financial Services Industry and
Current Regulatory Issues, 25 Cath. U. J. L. & Tech (2017).
Available at: http://scholarship.law.edu/jlt/vol25/iss2/7
This Notes is brought to you for free and open access by CUA Law Scholarship Repository. It has been accepted for inclusion in Catholic University
Journal of Law and Technology by an authorized editor of CUA Law Scholarship Repository. For more information, please contact edinger@law.edu.
NOBODY PUTS BLOCKCHAIN IN A
CORNER: THE DISRUPTIVE ROLE OF
BLOCKCHAIN TECHNOLOGY IN THE
FINANCIAL SERVICES INDUSTRY AND
CURRENT REGULATORY ISSUES
Elizabeth Sara Ross †
“Technology changes. Economy laws do not.”1
INTRODUCTION
Recall the old VISA commercials portraying a modern consumer’s synchronized and effortless credit card transactions undermined by the one Luddite
with the audacity to bring the marketplace to a grinding halt by presenting cash
(or worse, a check).2 By visualizing faster and more efficient payments, consumers would transition to credit cards for their convenience, not because it
was a safer or more secure option. Rather than emphasize the credit card itself,
VISA’s viscerally engaging and forward-looking advertisement allowed consumers to imagine heightened human experiences made possible because of
technology. Fast-forwarding to our modern brave new world, our financial
ecosystem and definition of “trust”3 have rapidly changed.4 People engage
†J.D. Candidate, May 2018, The Catholic University of America, Columbus School of Law;
B.A. 2015, Rhodes College. The author would like to extend her deep gratitude to Professor
Heidi M. Schooner for her mentorship, expertise, and invaluable guidance in drafting this
Note. The author is also grateful to her colleagues on the Catholic University Journal of Law
and Technology for their contributions to this Note. Lastly, the author wishes to thank her
parents for their unwavering love, patience, and support during the writing process and
throughout law school.
1 HAL R. VARIAN & CARL SHAPIRO, INFORMATION RULES: A STRATEGIC GUIDE TO THE
NETWORK ECONOMY 1-2 (Har. Bus. Sch. Press 1999).
2
See Allen N. Berger et al., The Economic Effects of Technological Progress: Evidence from the Banking Industry, 35 J. OF MONEY, CREDIT AND BANKING 141, 149-50
(2002).
3
See OLIVER E. WILLIAMSON, THE MECHANISMS OF GOVERNANCE 256-57 (Oxford
354
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[Vol. 25.2
socially,5 take food from,6 get into cars with,7 and inhabit the homes of
strangers.8 The invention of the Internet, paired with the mass proliferation of
mobile phones,9 has transformed consumer financial conduct10and cultivated a
Univ. Press 1996) (arguing that it is misleading to use of “the term ‘trust’ to describe commercial exchange for which cost-effective safeguards have been devised in support of more
efficient exchange. Calculative trust is a contradiction in its terms … Trust is made more
transparent and operational by treating calculated trust as a subset of calculated risk.”).
4
See Somini Sengupta, The Post-Cash, Post-Credit-Card Economy, N.Y. TIMES (Apr.
28, 2012), http://www.nytimes.com/2012/04/29/sunday-review/the-post-cash-post-creditcard-economy.html.
5
Aaron Smith, 6 new facts about Facebook, PEWRESEARCHCENTER (Feb. 3, 2014),
http://www.pewresearch.org/fact-tank/2014/02/03/6-new-facts-about-facebook/.
6
Heather Haddon, Grocers Feel Chill From Millennials, WALL ST. J. (Oct. 27, 2016),
https://www.wsj.com/articles/grocers-feel-chill-from-millennials-1477579072?mod=e2fb
(identifying that millennials preference toward online grocery delivery services, including
Instacart, Inc. suggests a “permanent shift in [consumer] shopping patterns”).
7
See From zero to seventy (billion), ECONOMIST (Sept. 3, 2016),
http://www.economist.com/news/briefing/21706249-accelerated-life-and-times-worldsmost-valuable-startup-zero-seventy. The ride-hailing startup Uber carries a valuation close
to $70 billion. See From zero to seventy (billion), ECONOMIST (Sept. 3, 2016),
http://www.economist.com/news/briefing/21706249-accelerated-life-and-times-worldsmost-valuable-startup-zero-seventy. “No technology firm in history has raised more money
from private investors before going public.” From zero to seventy (billion), ECONOMIST
(Sept. 3, 2016), http://www.economist.com/news/briefing/21706249-accelerated-life-andtimes-worlds-most-valuable-startup-zero-seventy. Investor optimism is supported by Uber’s
position at the intersection of three linked disruptive trends: first, the emergence of assetlight business models; second, the shift to the sharing economy—for without which, the
success of peer-to-peer service based business models would be non-existent; and third,
consumers’ willingness to pay for access to things is increasingly outweighing their will for
outright ownership. From zero to seventy (billion), ECONOMIST (Sept. 3, 2016),
http://www.economist.com/news/briefing/21706249-accelerated-life-and-times-worldsmost-valuable-startup-zero-seventy.
8
Air BnB is an online marketplace for people to list, discover and book accommodations at any price point in more than 34,000 cities and 191 countries. See about us, AIRBNB,
https://www.airbnb.com/about/about-us (last visited Nov. 11, 2016).
9
The steady increase in the adoption of smartphone users has resulted in the prevalence of services that allow consumers to obtain financial account information and conduct
transactions with their financial institution (“mobile banking”) and that allow consumers to
make payments, transfer money, or pay for goods and services (“mobile payments”). See
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, CONSUMERS AND MOBILE FINANCIAL SERVICES 11 (Mar. 2016), https://www.federalreserve.gov/econresdata/consumers-andmobile-financial-services-report-201603.pdf; see also Hal Varian, Intelligent Technology,
INTERNATIONAL
MONETARY
FUND
7
(Sept.
2016),
http://www.imf.org/external/pubs/ft/fandd/2016/09/pdf/varian.pdf (acknowledging that
computer mediation can impact economic activity through five channels: (1) data collection
and analysis, (2) personalization and customization, (3) experimentation and continuous
improvement, (4) contractual innovation, and (5) coordination and communication).
10 See BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, CONSUMERS AND MOBILE FINANCIAL SERVICES 2016 (Mar. 2016).
2017]
Nobody Puts Blockchain in a Corner
355
societal expectation of progress as determined by the level of convenience.11
Why? Companies are cognizant of the new peer-to-peer services (“P2P”) code
of the sharing economy:12 get rich or adapt trying.13
Following the global financial crises of 2007-2009,14 the world’s trust in
banks was at an all-time low.15 Capitalizing on this time, Satoshi Nakamoto16 (a
person or an entity) pseudonymously released Bitcoin17 to replace the traditional role of the banker18 and provide a more transparent, equitable, and efficient
payment system.19 The range of Bitcoin’s initial negative publicity, including
price volatility,20 hacking,21 fraudulent investment schemes,22 and black market
11 Consumers cite that “convenience” is the most common reason motivating their adoption of mobile payment activity. See BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, CONSUMERS AND MOBILE FINANCIAL SERVICES 2016 (Mar. 2016).
12 ARUN SUNDARARAJAN, THE SHARING ECONOMY: THE END OF EMPLOYMENT AND THE
RISE OF CROWD-BASED CAPITALISM (2016). See also DON TAPSCOTT AND ANTHONY WILLIAMS, WIKINOMICS: HOW MASS COLLABORATION CHANGES EVERYTHING (2006).
13 CHRIS SKINNER, VALUEWEB 162 (2016) (“Apps and mobile are changing the retail
experience; [Application Program Interfaces] are shifting the operations to real-time processing; and cloud, combined with data analytics are changing product and service.”); see
also David McBride, General Corporation Laws: History and Economics, LAW & CONTEMP. PROBS. 1, 9-10 (2010) (analyzing the economic evolutionary effects of how physical
technologies, social technologies, and business organization interact and coevolve); ERIC
BEINHOCKER, THE ORIGIN OF WEALTH: EVOLUTION, COMPLEXITY AND THE RADICAL REMAKING OF ECONOMICS 15 (2006) (recognizing “social technologies” as “ways of organizing
people to do things”).
14 See HAL SCOTT, CONNECTEDNESS AND CONTAGION (MIT Press 2016).
15 See generally The origins of the financial crisis: Crash course, ECONOMIST (Sept. 7,
2016), http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-arestill-being-felt-five-years-article (explaining how the dissolution of “trust, the ultimate glue
of all financial systems” combined with central bankers and regulators failure to exercise
proper oversight of financial institutions spread panic throughout the market and led to increased government intervention). See also What causes financial crises?, ECONOMIST
(Sept. 8, 2016), http://www.economist.com/blogs/economist-explains/2016/09/economistexplains-economics-2.
16 It has been theorized that “the name might be a portmanteau of four technology companies: SAmsung, TOSHIba, NAKAmichi, and MOTOrola.” DAVID LEE KUO CHUEN,
HANDBOOK OF DIGITAL CURRENCY: BITCOIN, INNOVATION, FINANCIAL INSTRUMENTS, AND
BIG DATA 11, n.1 (2015).
17 Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN 8
(2009), https://bitcoin.org/bitcoin.pdf. See also History of Bitcoin: The World’s First Decentralized Currency, HISTORYOFBITCOIN, http:// historyofbitcoin.org/ (last visited Oct. 26,
2016) [hereinafter Bitcoin History].
18 BRIAN KELLY, THE BITCOIN BIG BANG 79 (2015).
19 DAVID LEE KUO CHUEN, HANDBOOK OF DIGITAL CURRENCY: BITCOIN, INNOVATION,
FINANCIAL INSTRUMENTS, AND BIG DATA 12 (2015). The centralized core through which
virtual currencies, like bitcoin., seeks to disrupt traditional legacy payment methods, including banknotes and bank-wires, checks, and all forms of card payments, credit. See RICHARD
D. PORTER AND WADE ROUSSE., REINVENTING MONEY AND LENDING FOR THE DIGITAL AGE,
in BANKING BEYOND BANKS AND MONEY 147 (PAOLO TASCA ET AL. eds., 2016).
20 Jonathan Todd Barker, Why is Bitcoin’s Value So Volatile, INVESTOPEDIA,
http://www.investopedia.com/articles/investing/052014/why-bitcoins-value-so-volatile.asp
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for the deep web,23 conditioned the public’s perception of all cryptocurrencies
with illicit purposes.24 Despite bitcoin’s “growing pains,”25 venture capitalists,26
software developers,27 and technology start-up companies28 continued to assert
(last visited Feb. 20, 2017).
21 Laura Shin, Hackers Have Stolen Millions of Dollars in Bitcoin—Using Only Phone
Numbers,
FORBES
(Dec.
20,
2017),
http://www.forbes.com/sites/laurashin/2016/12/20/hackers-have-stolen-millions-of-dollarsin-bitcoin-using-only-phone-numbers/#50df2f9222db.
22 See also SEC v. Shavers, Case No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D.
Tex. Sept. 18, 2014).
23 The currency’s association with Silk Road created the misconception that all bitcoin
is linked to money launderers and terrorists.
24 Simon Taylor, Blockchain: understanding the potential, BARCLAYS 2 (July 2015),
https://www.barclayscorporate.com/content/dam/corppublic/corporate/Documents/insight/bl
ockchain_understanding_the_potential.pdf. “[A]longside … [Bitcoin’s] hype, many clichés
and misconceptions have grown up around the digital currency and its underlying technology. These misconceptions can hinder discussions about the future direction of development
and the way in which initiatives are presented in the media.” Blockchain: Understandig The
Potential, CONTRACTSIT, http://contractsit.com/blockchain-understanding-the-potential/ (last
visited Feb. 20, 2017).
25 Michael Casey and Paul Vigna, Bitcoin and the Digital-Currency Revolution: For all
bitcoin’s growing pains, it represents the future of money and global finance, WALL ST. J.
(Jan. 23, 2015), https://www.wsj.com/articles/the-revolutionary-power-of-digital-currency1422035061 (quoting former U.S. Treasury Secretary Lawrence Summers: “substantial
inefficiencies” of an outdated financial system make it “ripe for disruption”).
26 “Bitcoin represents not only the future of payments but also the future of governance.” CHRIS SKINNER, VALUEWEB 99 (2016) (quoting Dee Hock, Founder of Visa). See
also Marc Andreessen, Why Bitcoin Matters, N.Y. TIMES (Jan. 21, 2014),
https://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/. The practical consequence
of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user
to transfer a unique piece of digital property to another Internet user, such that the transfer is
guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough
are hard to overstate.
27 IBM Launches First Highly Secure Blockchain Services for Financial Services, Government and Healthcare on IBM Cloud, IBM (Apr. 29, 2016), https://www03.ibm.com/press/us/en/pressrelease/49632.wss (announcing a new framework for blockchain networks to operate securely in addition to meeting current regulatory and security
requirements).
28 Edward Robinson and Matthew Leising, Blythe Masters Tells Banks the Blockchain
Changes
Everything,
BLOOMBERG
(Aug.
31,
2015),
http://www.bloomberg.com/news/features/2015-09-01/blythe-masters-tells-banks-theblockchain-changes-everything. Blythe Masters is the CEO of Digital Asset Holdings. See
Edward Robinson and Matthew Leising, Blythe Masters Tells Banks the Blockchain Changes
Everything,
BLOOMBERG
(Aug.
31,
2015),
http://www.bloomberg.com/news/features/2015-09-01/blythe-masters-tells-banks-theblockchain-changes-everything (“[Blockchain is] analogous to e-mail for money.”). See
generally Edward Robinson and Matthew Leising, Blythe Masters Tells Banks the Blockchain
Changes
Everything,
BLOOMBERG
(Aug.
31,
2015),
http://www.bloomberg.com/news/features/2015-09-01/blythe-masters-tells-banks-the-
2017]
Nobody Puts Blockchain in a Corner
357
that the true value of Bitcoin is the blockchain,29 the distributed ledger technology (“DLT”) in which the bitcoin currency operates.30 Previous discussions
surrounding blockchain were initially constrained to educating others on how
the technology worked and hype” over the potential applications that might be
implemented in the distant future. 31 While it was previously speculated that the
financial services and banking industries would have to wait five to ten years
before the potential of blockchain technology was actually turned into a reality,
IBM released a report stating that “2017 looks to be the year banking on
blockchain’s shifts from zero to sixty.”32 Accordingly, the global competition
to service distributed ledger technology by incorporating it into the existing
financial services industry is advancing in real time.33 The World Economic
Forum34 estimates that more than 25 countries are investing in blockchain
technology, filing more than 2,500 patents35 and investing $1.3 billion.36 Regublockchain-changes-everything.
29 Bitcoin’s cryptographically secure blockchain protocol provides the ability to record
and transfer value without intermediaries. See CHRIS SKINNER, VALUEWEB 190 (2016). At a
high level, the blockchain “combin[es] peer-to-peer networks, cryptographic algorithms,
distributed data storage, and a decentralized consensus mechanisms [sic]” to “provide[sic] a
way for people to agree on a particular state of affairs and record that agreement in a secure
and verifiable manner.” Aaron Wright & Primavera De Filippi, Decentralized Blockchain
Technology and the Rise of Lex Cryptographia, SSRN 4–5, 5 & n.15 (Mar. 12, 2015),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664.
30 See Jeff John Roberts, The Crisis in Bitcoin and the Rise of Blockchain, FORTUNE
(Mar. 4, 2016), http://fortune.com/2016/03/04/crisis-in-bitcoin-rise-of-blockchain/.
31 See Nicole Bullock, Blockchain starts transition from hype to everyday use in markets, FIN. TIMES (Oct. 10, 2016), https://www.ft.com/content/08d54cdc-74e2-11e6-bf48b372cdb1043a; How Coin Center Is Helping Define The ‘Big Fuzzy Gray Area’ Of Blockchain
And
Cryptocurrency
Law,
TUNEIN
(Oct.
18,
2016),
http://tunein.com/embed/player/t109377177/ (discussing how one of the ways CoinCenter
represents bitcoin blockchain technology, includes ensuring that policy makers “understand
the technology and don’t do anything stupid” by “mak[ing] easy to avoid mistakes”).
32 Jemima Kelly, Banks adopting blockchain ‘dramatically faster’ than expected: IBM,
REUTERS (Sept. 28, 2016), http://www.reuters.com/article/us-tech-blockchain-ibmidUSKCN11Y28D.
33 J. Christopher Giancarlo, Commissioner, U.S. Commodity Futures Trading Comm’n,
Address to the American Enterprise Institute, 21st Century Markets Need 21st Century
Regulation
(Sept.
29
2016),
http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-17 (acknowledging that
in comparison to international regulatory efforts that have been effected to address distributed ledger technology, the United States is “falling behind”).
34 Disruptive innovation in financial services: A Blueprint for Digital Identity, WORLD
ECONOMIC
FORUM
(Aug.
12,
2016),
http://www3.weforum.org/docs/WEF_A_Blueprint_for_Digital_Identity.pdf.
35 See Megan M. La Belle & Heidi Mandanis Schooner, Big Banks and Business Method Patents, 16 U. PA. J. BUS. L. 431, 477-87 (2014) (discussing the underlying motivations
and implications of increased big bank participation in the patent system). See also Bailey
Reutzel, The Looming War for Blockchain Patents, COINDESK (Sept. 24, 2016),
http://www.coindesk.com/looming-war-blockchain-patents/ (noting the scope and enforceability of bank’s blockchain patents is currently unknown). For example, On November 15,
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latory interest in financial technology (“FinTech”)37 in the United States represents a turning point,38 in which the focus shifts from attempting to prevent the
previous crises, to looking at how to support future market developments while
maintaining financial stability. 39
Blockchain technology has been frequently, and appropriately, analogized to
the Internet Protocol.40 The potential of each respective protocol is realized
after the application of a new layer of services on top of the technology.41 Similar to how the Internet fundamentally changed the way we share information,
blockchain is an open source innovation that is going to revolutionize the
transactions among individuals, governments, businesses, and machines.42
2015, Goldman Sachs filed a patent for “methods for settling securities in financial markets
using distributed peer to peer and cryptographic techniques,” using a proprietary coin called
SETLcoin. DON TAPSCOTT & ALEX TAPSCOTT, BLOCKCHAIN REVOLUTION: HOW THE TECHNOLOGY BEHIND BITCOIN IS CHANGING MONEY, BUSINESS, AND THE WORLD 70 (2016).
36 Philip Stafford, Banks struggle to make blockchain fast and secure, WALL ST. J.
(Sept. 26, 2016),
http://www.ft.com/cms/s/2/e0a32840-4f68-11e6-8172-e39ecd3b86fc.html#axzz4LNglVau0.
UBS, Deutsche Bank, Santander, BNY Mellon and interdealer broker ICAP pioneered a
blockchain-based digital token, which they hope could form the industry standard to clear
and settle trades. See generally Disruptive innovation in financial services: A Blueprint for
Digital
Identity,
WORLD
ECONOMIC
FORUM
(Aug.
12,
2016),
http://www3.weforum.org/docs/WEF_A_Blueprint_for_Digital_Identity.pdf.
37 See generally J. Christopher Giancarlo, Commissioner, U.S. Commodity Futures
Trading
Comm’n,
Address
to
the
Cato
Institute,
Cryptocurrency: The Policy Challenges of a Decentralized Revolution
(Apr.
12,
2016),
http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-14#P35_11428 (“Regulation of DLT [distributed ledger technology] must indeed be coordinated on a multilateral
level based on the principle of ‘do no harm.’ Just as many financial services firms are joining together in broad DLT consortiums, regulators must do the same.”). See generally OFFICE OF THE COMPTROLLER OF THE CURRENCY, SUPPORTING RESPONSIBLE INNOVATION IN THE
FEDERAL BANKING SYSTEM: AN OCC PERSPECTIVE (Mar. 2016).
38 DON TAPSCOTT & ALEX TAPSCOTT, BLOCKCHAIN REVOLUTION: HOW THE TECHNOLOGY BEHIND BITCOIN IS CHANGING MONEY, BUSINESS, AND THE WORLD 299 (2016).
39 Id.
40 Beyond Silk Road: Potential Risks, Threats, and Promises of Virtual Currencies:
Hearing Before the S. Comm. On Homeland Sec. and Gov’t Aff., 113th Con. 5 (2013)
(Statement of Patrick Murck, General Counsel, The Bitcoin Foundation). “Bitcoin is a protocol. It is like TCP/IP, which enables all the different uses people around the globe invented for the Internet. And it is like HTML, which enables all the different uses people invented for the World Wide Web without having to ask anyone’s permission. We envision
Bitcoin as a driver of global change that rivals these other protocols in terms of the benefits
it delivers to humankind across the globe.” Beyond Silk Road: Potential Risks, Threats, and
Promises of Virtual Currencies: Hearing Before the S. Comm. On Homeland Sec. and Gov’t
Aff., 113th Con. 5 (2013) (Statement of Patrick Murck, General Counsel, The Bitcoin Foundation).
41 See KELLY, supra note 18, at 77. Services include social engagement, (Facebook),
entertainment (iTunes), information (Google) and marketplace (Amazon).
42 See Perianne Boring, The Beauty Of The Blockchain, FORBES (Jun. 17, 2016),
2017]
Nobody Puts Blockchain in a Corner
359
This Note proceeds in three parts. Part I identifies the tripartite characteristics of Bitcoin: the blockchain, the protocol, and the currency. It examines the
processes within the Bitcoin ecosystem and demonstrates how a bitcoin transaction operates and explains the layout of the blockchain ecosystem in terms of
the transaction, recording, and verification. Part II addresses how blockchain
technology will disrupt the financial services industry. First, it addresses the
digitization of the banking industry. Second, it identifies the need for collaboration between banks and FinTechs. It explores what precautions need to be
taken to ensure consumer protection and security of one’s digital identity and
why it is in the government’s best interest to endorse blockchain technology.
Third, it examines the regulatory challenges that banks and FinTechs face prior
to the implementation and widespread adoption of blockchain technology can
take place. Part III evaluates the legal and regulatory issues that may arise as a
result of blockchain’s disruptive role in the financial services industry. First, it
identifies the current state of regulation for the application of distributed ledger
technology as a virtual currency. Second, it analyzes how a disjointed regulatory emphasis on virtual currencies and failure to endorse blockchain technology
in the financial services industry directly threatens to stifle innovation, capital
formation, consumer protection, and national cybersecurity. Third, it compares
the rules-based regulatory approach to money licensing regimes in the United
States with the United Kingdom’s principles-based regulatory sandbox. Fourth,
it argues why a national FinTech charter would be possible to implement in the
United States and how it would correspond with joint proposed rule by the Office of the Comptroller, Department of Treasury and Federal Deposit Insurance
Corporation for cybersecurity standards.
I. IT’S ALL ABOUT THE BLOCKCHAIN
Bitcoin is the first and largest cryptocurrency.43 A cryptocurrency is a peerto-peer (“P2P”) version of electronic cash that allows payments to be sent directly from one party to another without the need of an intermediary. 44 There
are three phases of the global financial technological revolution: Blockchain
1.0 emphasizes virtual currency,45 Blockchain 2.0 isolates technology and prohttp://www.forbes.com/sites/perianneboring/2016/06/17/the-beauty-of-theblockchain/#499aa2af4489.
43 For a list of other cryptocurrencies to data, see Crypto-Currency Market Capitalizations, COINMARKETCAP, https://coinmarketcap.com/ (last visited Nov. 6, 2016).
44 DAVID LEE KUO CHUEN, HANDBOOK OF DIGITAL CURRENCY: BITCOIN, INNOVATION,
FINANCIAL INSTRUMENTS, AND BIG DATA 16 (2015).
45 Melanie Swan, Decentralized Money: Bitcoin 1.0, 2.0, and 3.0, INSTITUTE FOR ETHICS
AND
EMERGING
TECHNOLOGIES
(Nov.
10,
2014),
http://ieet.org/index.php/IEET/more/swan20141110. The deployment of cryptocurrencies in
applications related to cash, such as currency transfer, remittance, and digital payment sys-
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tocol applications as to contracts,46 and Blockchain 3.0 is the expansion of the
technological applications beyond finance and markets.47 This Note is limited
to addressing the transition between Blockchain 1.0 to Blockchain 2.0. First,
this Section answers the question, “What is the difference between bitcoin and
blockchain?” by explaining the properties of the blockchain ecosystem. It accentuates the special properties of this technology and how it can be applied in
the financial services industry. Finally, it analyzes why the application of
blockchain technology will disrupt the financial services industry.
A. Bitcoin Ecosystem: Blockchain, Protocol, and Currency
Blockchain technology enables secure electronic transactions of bitcoin
through the Bitcoin protocol, which employs cryptography to validate transactions before recording them on a decentralized48 public ledger.49 The ledger in
which all network transactions are displayed is the blockchain.50 Bitcoin is
trustless technology51 that exists through a decentralized peer-to-peer (“P2P”)52
consensus network of Bitcoin clients (also known as nodes).53 The Bitcoin protems.
46 Id. Blockchain 2.0 space can include Bitcoin 2.0 protocols, smart contracts, smart
property, Dapps (decentralized applications), DAOs (decentralized autonomous organizations), and DACs (decentralized autonomous corporations). Melanie Swan, Decentralized
Money: Bitcoin 1.0, 2.0, and 3.0, INSTITUTE FOR ETHICS AND EMERGING TECHNOLOGIES (Nov.
10, 2014), http://ieet.org/index.php/IEET/more/swan20141110.
47 See id.
48 GARETH W. PETERS AND EFSTATHIOS PANAYI, UNDERSTANDING MODERN BANKING
LEDGERS THROUGH BLOCKCHAIN TECHNOLOGIES: FUTURE OF TRANSACTION PROCESSING AND
SMART CONTRACTS ON THE INTERNET OF MONEY 4 (2015). “Decentralization” describes
conditions under which the actions of many agents cohere and are effective despite the fact
that they do not rely on reducing the number of people whose will counts to direct effective
action.
49 Id. at 3-4. The word “ledger” refers to a book or set of records.
50 Id. at 4; see also Bruno Campenon, Fintech and the future of securities services, 8 J.
SEC. OPERATIONS & CUSTODY 107, 111 (2016) (“[B]itcoin acts as a decentrali[z]ed depositary, messaging system and settlement platform rolled into one.”)
51 Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN.ORG
(Nov. 8 2008), https://bitcoin.org/bitcoin.pdf.
52 A P2P network is a “network of personal computers, each of which acts as both client
and server, so that each can exchange files . . . with every other computer on the network.”
Peer-to-peer Network Definition, DICTIONARY.COM,
http://dictionary.reference.com/browse/peer-to-peer%20network (last visited Sept. 30,
2016).
53 Aaron Wright & Primavera De Filippi, Decentralized Blockchain Technology and the
Rise
of
Lex
Cryptographia,
SSRN
4
(2015),
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664. See Andreas M. Antonopoulos,
Mastering
Bitcoin,
Chapter
2
(2015),
http://chimera.labs.oreilly.com/books/1234000001802/index.html (“Nodes in a peer-to-peer
2017]
Nobody Puts Blockchain in a Corner
361
tocol employs public-key cryptography54 to verify and secure bitcoin transactions.55 As a publically distributed ledger, the blockchain ensures that all computers in the “Bitcoin network”56 have an updated and verified record of transactions within the network.57 Thus, the transparent nature of transactions in the
Bitcoin network that are recorded on the blockchain prevents fraud and the
“double-spending” problem58 by ensuring that every cryptocurrency can be
spent only once.59
1. Public Cryptographic Key
Bitcoin’s decentralized public ledger is the blockchain.60 The blockchain is a
“chronological database”61 of all transactions that have been validated by
network both provide and consume services at the same time with reciprocity acting as the
incentive for participation.”).
54 The word “cryptography” is derived from the Greek words kryptos (hidden) and
graphein (writing). Monica Pawlan, Cryptography: The Ancient Art of Secret Messages,
PAWLAN (Feb. 1998), http://www.pawlan.com/monica/articles/crypto. Cryptography is “the
scientific study of techniques for securing digital information, transactions, and distributed
computations.” JONATHAN KATZ & YEHUDA LINDELL,
INTRODUCTION TO MODERN CRYPTOGRAPHY: PRINCIPLES AND PROCOCOLS 3 (2007).
55 See KELLY, supra note 18, at 23.
56 Andreas
M. Antonopoulos, Mastering Bitcoin, Chapter 2 (2015),
http://chimera.labs.oreilly.com/books/1234000001802/index.html (referring to the “bitcoin
network” as the collection of notes running through the bitcoin P2P protocol).
57 JERRY BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS 7 (2nd ed.
2016) (detailing the life cycle of a bitcoin transaction).
58 SATOSHI NAKAMOTO, BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM 8 (2009),
https://bitcoin.org/bitcoin.pdf [https://perma.cc/4HCA-UUSR]. The double spending problem
is
also
called
the
“Byzantine Generals problem” – generals who are circling the enemy need to either simultaneously launch their attack or retreat; some attackers may be traitors, spread misinformation and effectively foil the attack. See Leslie Lamert et al., THE BYZANTINE GENERALS
PROBLEM, 4 ACM Transactions on Programming Languages and Systems 382-401 (1982)
(addressing reliability concerns computer communications). Satoshi Nakamoto’s “Bitcoin
solution” to this Byzantine Generals Problem” cannot be understated – it is simply revolutionary.” KELLY, supra note 18, at 57.
59 ANDREAS M. ANTONOPOULOS, MASTERING BITCOIN, LOC. Chapter 1 (2015) (ebook),
http://chimera.labs.oreilly.com/books/1234000001802/index.html. See also KUO CHUEN,
supra note 44, at 12 (detailing the technical aspects of a bitcoin transaction). See generally
KELLY, supra note 18, at 23 (earliest known banking ledgers date to 9000 BCE when transactions were literally written in stone).
60 See also Paul H. Farmer, Jr., Note & Comment, Speculative Tech: The Bitcoin Legal
Quagmire & the Need for Legal Innovation, 9 J. BUS. & TECH. L. 85, 88–89 (2014) (“The
Bitcoin peer-to-peer network that allows for miners to generate Bitcoins also serves as a
public ledger for all Bitcoin transactions . . . The full record of transactions [within the network] is called a block chain, a sequence of records composing a virtual ledger.” (footnotes
omitted)).
61 Aaron Wright & Primavera De Filippi, Decentralized Blockchain Technology and the
Rise
of
Lex
Cryptographia,
SSRN
6
(Mar.
10,
2015),
362
THE CATHOLIC UNIVERSITY
JOURNAL OF LAW & TECHNOLOGY
[Vol. 25.2
Bitcoin network participants.62 Each block63 that is added onto the blockchain
represents a transaction between two network users that manifested their intent
to transact by exchanging a minimum amount of public information, and is
verified by network participants, who compete to the decrypt puzzle of transaction consisting of private information.64 Once computers in the network reach a
consensus on the transaction’s validity, it is recorded and timestamped65 as a
new block on blockchain.66
Network users are given67 one public key, also known as a “public address”
that is shared to the network, like a social media profile page, and one private
key, the content of which is kept secret, like a password.68 The address informs
network participants where to transfer value.69
In order for bitcoin transactions between Bitcoin network users to appear on
the blockchain, parties must first manifest their intent to transact through the
exchange of their public key. In a bitcoin transaction, an individual proves authentication of bitcoin ownership through their private key and transfers the
value to the new owner’s address though the public key.70 Transactional securihttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=2580664.
62 KUO CHUEN, supra note 44, at 16.
63 Blockchain, BITCOIN, https://en.bitcoin.it/wiki/Block_chain (last visited Oct. 31,
2016), (providing that “[a] block chain is a transaction database shared by all nodes” on a
network).
64 Mining Bitcoin Has Become A Ruthlessly Competitive Business, BUSINESS INSIDER
(Jan. 11, 2015), http://www.businessinsider.com/mining-bitcoin-is-a-competitive-business2015-1 (providing that the cryptography competition ends when one node decrypts the
transacting parties puzzle –the decrypted puzzle verifies that the public identify of the parties corresponds with private information of the deal, namely the sufficiency of funds between the parties which underlies the parties transaction); JERRY BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS 8 (2nd ed. 2016 (explaining that mining involves the search is to find a sequence of data that produces a particular pattern when the
Bitcoin “hash” algorithm is applied to the data”).
65 See Joseph Bonneau et al., Research Perspectives and Challenges for Bitcoin and
Cryptocurrencies, IEEE SECURITY AND PRIVACY (forthcoming May 2015),
http://www.jbonneau.com/doc/BMCNKF15-IEEESP-bitcoin.pdf.
66 KUO CHUEN, supra note 44, at 22. See also GARETH W. PETERS & EFSTATHIOS PANAYI, UNDERSTANDING MODERN BANKING LEDGERS THROUGH BLOCKCHAIN TECHNOLOGIES:
FUTURE OF TRANSACTION PROCESSING AND SMART CONTRACTS ON THE INTERNET OF MONEY,
in BANKING BEYOND BANKS AND MONEY 239, 243 (Paolo Tasca et al eds., Springer Int’l.
Pub., 2016) (describing how final hash functions combine to form a new published block).
67 Bitcoin uses the public-cryptographic keys to maintain the “creation, use, and transfer
of digital value.” KEVIN C. TAYLOR, FINTECH LAW: A GUIDE TO TECHNOLOGY LAW IN THE
FINANCIAL SERVICES INDUSTRY 12-2 (2014).
68 JERRY BRITO & ANDREA CASTILLO, BITCOIN: A PRIMER FOR POLICYMAKERS 7 (2nd ed.
2016) (detailing the life cycle of a bitcoin transaction).
69 See KEVIN C. TAYLOR, FINTECH LAW: A GUIDE TO TECHNOLOGY LAW IN THE FINANCIAL SERVICES INDUSTRY 12-2, (2014).
70 KEVIN C. TAYLOR, FINTECH LAW: A GUIDE TO TECHNOLOGY LAW IN THE FINANCIAL
SERVICES INDUSTRY 12-2, (2014).
2017]
Nobody Puts Blockchain in …

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