Worlds within worlds: navigating a digital heterotopia

Answer

Heterotopia is a concept of space, first used by French philosopher Paul-Michel Foucault to describe places where hegemonic rules and restraints do not apply. It follows the framework of concepts preceding it: utopia, a place where everything is good; dystopia, a place where everything is bad and heterotopia, a place where everything is different.

Blockchain is a form of distributed ledger technology which creates a “digital heterotopia” (according to D Kavanaugh and G Miscione) by allowing for “the disintermediation and decentralisation of all transactions of any type between all parties on a global basis”. In 2015, Melanie Swan likened the impact of these technologies to that of the Magna Carta, a cornerstone of the modern world. Whether the impact of blockchain has been quite that profound is debateable to say the least. However, the possibilities emanating from blockchain and associated technologies such as cryptocurrency and smart contracts are transformative and have extensive public policy ramifications.

Digital heterotopia (Blockchain) explained

Blockchain is a digital database where transactions and value can be recorded. However, to simply call it a database would be to strip it down to its most elemental form and would not do justice to its sophistication and breadth of functionality. Blockchain comprises units of data (blocks) which link with one another to form chains (hence block-chain). When a transaction occurs, information is stored on a distinctive and identifiable block. Every time a new transaction occurs, a new block is added onto the previous block and is linked chronologically to the last. This means that anyone is able to view both the newest block as well as all the previous connecting blocks, giving them a chronological history of the transaction.

The very nature of blockchain is such that the blocks cannot be easily altered or disfigured. Manipulating a transaction would require that all the blocks after it be distorted as well. The more blocks there are following a particular transaction, the more difficult this becomes. It has also been said that after six to 10 blocks, the processing power required to tamper with a transaction is practically unattainable.

At the heart of the concept of blockchain, as well as the industries it serves, is the theme of trust. Our entire financial system is predicated on trust. We use our bank cards because we trust the banks to execute our transactions and we use cash because we trust that the value of our cash will not be vicissitudinous. But what happens if the central databases and institutions that drive our society cease to be the indefatigable sources of trust that we perceive them to be? What happens if the economy crashes again? What happens in states where the central governments are morally bankrupt or fundamentally untrustworthy?

Blockchain deviates from this matrix and provides an answer to these questions for three main reasons.

• It diminishes reliance on centralisation, institutions and intermediaries by creating an incontestable peer-verified record on a public ledger that is “pseudonymous, resilient and immutable” (Primavera De Fillipi 2018). In a world where technological advances and innovation are playing a central role in tackling social and financial inequality, it can be argued that blockchain serves the function of redressing the perceived prejudice of the trust-based systems which allow banks and states a controlling and sometimes-inequitable role.
• Blockchain mainly operates outside the regulatory purview of the state, as opposed to the state-sanctioned institutions designed to operate under the rule of law. Naturally, this raises the question of how policy makers ought to interact with this pervasive yet juxtaposing technology, since it rejects the state while operating through and within its framework.
• Blockchain has laid the foundation for the development of cryptocurrency. Cryptocurrency, the most famous of which is bitcoin, is a decentralised digital currency based on blockchain technology which is nearly impossible to counterfeit or double-spend. Bitcoin was designed by Satoshi Nakamoto (pseudonym) partly to reduce the involvement of state-controlled institutions and intermediaries, which Nakamoto described as corrupt.

Public policy and regulation

By design, blockchain consists of built-in autonomous, decentralised and borderless governance mechanisms that make it almost tamperproof. In and of itself, it remains relatively uncontroversial, especially when applied in non-financial contexts. However, it poses significant problems from a public policy and regulations standpoint when used in financial settings:

• It serves as an effective method of evading and undermining state-backed financial institutions which have proven deficient on several occasions, such as the 2010 financial crash.
• Cryptocurrencies and crypto-assets (which use blockchain technology) are transferable across jurisdictional boundaries.
• Blockchain and cryptocurrency have become entangled in the conversation on illicit digital activity, epitomised by the Silk Road (online black market) scandal and the dark web.

These issues pose a unique challenge for national regulatory authorities and some states have elected to ban crypto-assets and cryptocurrencies altogether.

This is particularly important because regulatory interaction directly impacts cryptocurrency valuations, transaction volumes and user bases. In other words, the establishment of legal frameworks that govern cryptocurrencies could determine the direction of the market. 

There have been three general regulatory approaches in response to this.

• The first, which has been adopted in the UK and parts of the EU, has been to exclude cryptocurrency from the remit of substantial regulation, for the moment. It does not fall under the scope of the Financial Services and Markets Authority or the Markets in Financial Instruments Directive. Cryptocurrencies are therefore not regulated by the Financial Conduct Authority.
• The second has been to impose existing regimes onto cryptocurrencies such as in the United States where cryptocurrencies have been classified as both ‘securities’, meaning that they are caught by the Securities and Exchange Commission, and commodities, meaning that they are regulated by the Commodity Futures Trading Commission.
• The third main approach, which has been proposed and experimented with in France, has been to adopt an entirely new regulatory framework that oversees and monitors cryptocurrency-based transactions in exchange for regulatory approval. The Financial Markets Authority in France has introduced regulatory schemes for Initial Coin Offerings and digital asset service providers. They have also proposed to incorporate tax mandates, consumer protection tools and capital requirements which, if voluntarily obeyed by firms, would lead to their integration into the regulatory sphere.

Nonetheless, there is yet to be a global standard approach and any attempt to do this would require standard-setting organisations such as the Financial Stability Board to play a role in regulation.

Impact of blockchain on business - the examples of the insurance and retail industries

Insurance

The insurance claims and underwriting processes could be revolutionised using smart contracts. Smart contracts are blockchain-based contracts with self-executing clauses. They are being used to automate underwriting and claims to create a more seamless system with greater transparency, quicker pay-outs and lower costs.

This has led to a rise in non-traditional insurance models such as parametric insurance, where an insurer pays out if a certain parameter is satisfied, rather than if a certain risk is realised. For example, if a hurricane occurs that satisfies a pre-determined wind speed, the insurer will receive a pre-defined pay-out irrespective of loss.

Blockchain facilitates these types of contracts as the claim (and concomitant pay-out) is triggered on the happening of the pre-determined event without the intervention or authorisation of a third party. This has the effect of increasing transparency, certainty and expediency.

Blockchain could also be used as an inter-industry distributed database which verifies ownership, authenticity and customer history. This would make fraud more easily detectable and lead to lower insurance premiums.

Retail

The retail sector is particularly amenable to the integration of blockchain technology. Consumers have a reputation for prioritising and staying loyal to retailers who source ethically and in a way that is environmentally friendly across the supply chain. Blockchain could be used to comprehensively capture and store data relating to the history of a product.

It could also be used in the struggle against counterfeits, as the provenance of a product would be incontrovertible. The same concept could apply to intellectual property, as blockchain would make it easier to verify and distinguish between the various components in a design process.

What does this mean for junior lawyers?

In a recent panel at the International Legal Technology Association meeting it was noted that the introduction of blockchain to the legal system would be the most significant change since the establishment of a cohesive society in medieval Britain. Blockchain is decentralised, industry fluid and international. As lawyers, we must understand the way blockchain both impacts and can be used by our clients.

As junior lawyers, we should attempt to differentiate ourselves by building expertise in emerging and disruptive technologies, such as blockchain. One way to do this is to learn about the type of legal work that relates to blockchain and the issues that arise when businesses integrate this technology into their working systems. For example, blockchain providers and users would require legal advice on IP licences, service agreements and IP assignments. They would also need to be aware of the relevant GDPR and regulatory considerations, depending on the jurisdiction. This type of expertise would help junior lawyers serve their internal clients – their colleagues – and help them build an external network that can later be translated into clients.

Abdul Wali is a solicitor at RPC.