Businessmans crew working banking investment project modern office.Man holdingAn increasing number of financial institutions and fintech companies are coming together to create consortia or shared utility service providers that will identify, design, build and provide emerging technologies like blockchain and the possibility of using decentralized, distributed ledger technology that can be accessed and used by market participants to record information.

Rather than keeping its own record of numerous relevant events about a transaction each bank could instead, using blockchain technology, hold a copy of a ledger that is used to record this information according to a common standard, with every change in the information about a client, ownership to an asset traded or action performed between participants recorded in each copy of the ledger held by those participants. So the potential benefits of using blockchain to ensure that transactions are recorded accurately, that contracts are automatically performed according to their terms and that information about clients has been provided correctly by every market participant are clear. However, there are a number of challenges for any consortium trying to launch this technology to overcome.

Building a Consortium and Establishing the Benefits from Participating in it

Defining the objectives of the consortium and the role that each member will have in its success can be difficult to establish, with each participant often having different and competing interests. While some financial institutions will try to influence the consortium in that way so that the outcome will satisfy their particular standards and legal requirements, others may focus more on the potential financial return resulting from the successful exploitation of the technology. Still others may have joined to obtain a seat at the table. Service providers meanwhile may be interested in creating, marketing and launching the solution as quickly as possible in order to establish themselves as the preeminent players within the industry, to maximize the return on their investment and to expand their business into other areas with or without the partner banks. These differences can often create tension over the direction and operation of the consortium between members. To keep this system functioning properly it is very important to clearly define the rights and obligations of every participant in a memorandum of understanding executed at the start of the project.

Establishing Ownership and Exploitation of the Technology

Agreeing who will own and will be able to exploit the developed technology is critical to the success of any initiative. While the foundations of blockchain and similar technologies may be built on open source software which allows quick and free development, the project consortia will frequently require their members to contribute their own software, materials and know-how to the project, which may result in complex and thorough negotiations between the participants regarding the use of each other’s intellectual property. Otherwise consortium members risk losing control over their intellectual property, with rivals potentially able to use it to develop, monopolize and exploit the technology created from it, to the detriment of the contributing participant and others in the industry and the success of the initiative.

Understanding the Regulatory Environment in which the Technology will Operate

As banks and other financial institutions cannot outsource their responsibilities to regulators, the understanding of how new adapted technological solutions can be used in compliance with the laws and existing regulatory framework is crucial.

For example, while blockchain may allow financial institutions to share, validate and update information about the identities of the ultimate shareholders of common clients, it is important to protect privacy rights of individuals in different countries, such as the right to object to the distribution of information about them and the so called “right to be forgotten”. Similarly, although financial institutions may be willing to share information about the identity of its clients, a bank may not be able to accept any liability to other banks for any inaccuracies in the information it has provided, preventing those other banks from relying on it for anti-money laundering, client onboarding and other compliance purposes.

A Look Ahead

So while there are many potential benefits of using blockchain and other similar technologies in the financial services industry, there are also a number of strategic and legal challenges which the consortia developing them will need to overcome.

A version of this article was first published in Financial IT on 7 December 2016 – https://financialit.net/pdf/view/11782

Photo business team brainstorming.Finance department managers working new globalGenerally speaking, a Blockchain is a peer-to-peer operated distributed digital ledger that records all transactions executed for a particular asset. The ledger is “distributed” because each user of the network has its own copy of the blockchain, and each user’s copy is updated with new information simultaneously. The greatest benefit of distributed ledger applications, in comparison to conventional financial networks, is that exchanges of a particular asset can be verified, monitored and enforced without the presence of a trusted third party or a central institution.

Currently, Blockchain-based technologies almost entirely cover so-called virtual currencies, with Bitcoin being the most prominent example. However, the technology could have applications well beyond cryptocurrencies and is evolving to be applied to a broader range of assets. The asset being transferred could be a nominal amount of currency, like the Euro, or it could be a unit in a securities issue, or something unrelated to the finance sector like intellectual property rights or plots of land.

A (growing) number of legal questions need to be answered, if Blockchain applications are to be put into practical mainstream use. The nature of these questions has, however, yet to be fully grasped. A small number is briefly outlined below.

The Applicable Legal Rules

There is no European Union law that specifically addresses the use of distributed ledger technologies. However, what is evident is that the applicable legal framework will – to a large extent – depend on the particular asset that is being transferred using blockchain technologies. Depending on the asset, different rules are involved.

Legal Effects of an Entry in the Blockchain Ledger

A Blockchain is a distributed network of Information; a digital record of all transactions executed for a particular asset. However, the legal effects of an entry in the Blockchain ledger that describes a transfer of a particular asset from one address to another are, so far, unclear. A question that has been pointed out by authors is, for example, whether the acquirer of an asset that has been transferred through Blockchain has obtained property.

In Germany, various registers provide us with information on the ownership of assets (e.g. land titles) or on the entitlement to rights. While, for example, the patent or trademark register do not have constitutive effect because the entry itself does not confer the right to exclude others from making or using the patent or trademark, the entries still have presumptive legal effect. Pursuant to section 28 para 1 of the German Trademark Act, for example, “[i]t shall be presumed that the party recorded in the register as the proprietor is entitled to the right arising from the registration of a trade mark.”

In the absence of a specific legal framework, a presumption of ownership or of entitlement to rights cannot be derived from distributed ledgers; and, more importantly, an entry in the ledger cannot have constitutive effect on the transfer of rights or ownership. Pursuant to section 873 para. 1 of the German Civil Code, for example, the transfer of ownership of a plot of land requires the registration of the change of ownership in the land register. Thus, an entry in the Blockchain ledger would, by itself, not be sufficient to obtain property in a plot of land. However, it is conceivable that an entry in the ledger could trigger a contractual obligation, if the formal requirements of the law which governs the contract were satisfied which, by way of example, might require notarization in cases where the contractual obligation to transfer ownership concerns a plot of land.

 

This article was originally published on AllAboutIP – Mayer Brown’s  blog on relevant developments in the fields of intellectual property and unfair competition law. For intellectual property-themed videos, Mayer Brown has launched a dedicated channel available here.

iStock_000057858038_XXXLargeAny digital record of bank deposits opens up the possibility that its underlying set of data may be copied and that the nominal amount deposited may be spent more than once. With conventional bank deposits, banks monitor the digital records and are trusted to ensure their validity. With so-called “digital currencies” like Bitcoin, by contrast, the ledger containing the record of all transactions by all users is available to the public. Rather than requiring users to have trust in a central third party, reliance is placed upon the network and the algorithmic rules established to reliably change the ledger. The authentication technologies underpinning Bitcoin – known as distributed ledger or Blockchain-technologies – enable multiple instances of data to be synchronized and updated.

The attractions of this technology for processing and accounting for transactions look set to move further into the mainstream of commerce. In January 2016, the UK government published a report setting out how this technology could transform the delivery of public services and boost productivity. On 15 February 2016, the German Financial Supervisory Authority (BaFin) issued a statement regarding possible fields of application of distributed-ledger-technologies (DLT). In addition, a number of banks have already been exploring the possible uses of Blockchain in the financial services market with several of them investing in companies developing the technology. For example, the Bank of England even stated in its Quarterly Bulletin 2014 Q3 that it was “at least conceivable that a financial institution could issue IOUs [I Owe You] to the public that were denominated in a digital currency.” Moreover, the Australian Stock Exchange recently announced that it is looking at using distributed ledger technology for clearing and settlement services in the cash equities market. We also expect application of this technology in the healthcare industry to be developed further in 2016.