Over the past several years, interest in distributed ledger technology (‘DLT’), such as Blockchain, has exploded. Regulators, consultants, technology firms and academia are promoting DLT for financial services. Blockchain technology has moved beyond cryptocurrencies like Bitcoin, and its application is now being considered for all parts of the financial system. Capital raising, trading, clearing and settlement, global payments, deposits and lending, property and casualty claims processing (‘InsurTech’), digital identity management and authentication, and RegTech solutions (such as automated compliance, administration and risk management, and anti-money laundering and client suitability checks) have all been identified as significant potential DLT use cases, and as areas that will benefit from the advantages DLT offers. Many financial institutions are investing heavily in proof of concept demonstrations and in the rollout of pilot applications of DLT technology.
However, caution is warranted. As we argue in a recent working paper titled 'The Distributed Liability of Distributed Ledgers: Legal Risks of Blockchain’, part of the attraction of distributed ledger systems, such as Blockchain, lies in transcending law and regulation. Focusing on the potential liability of DLT participants, we show that factoring in law in the calculus will lead to surprising results.
From a technological perspective, DLT is generally seen as offering unbreakable security, immutability and unparalleled transparency, so law and regulation are seen as unnecessary. We argue that these preconditions do not hold if closely scrutinized. Further, while the law may be dull and the technology exciting, the impact of the law cannot be simply wished away. With data distributed among many ledgers, legal risks will remain. DLT projects may well be found by courts to constitute joint ventures, with liability spread across all owners and operators of systems serving as distributed ledgers. Regulators seeking to support appropriate approaches to twenty-first century financial infrastructure must focus on these legal consequences.
Dirk A. Zetzsche is the ADA Chair in Financial Law (Inclusive Finance) at the University of Luxembourg, Ross P. Buckley is a Scientia Professor and the King & Wood Mallesons Chair of International Financial Law at UNSW Australia, and Douglas W. Arner is the Kerry Holdings Professor in Law at the University of Hong Kong.