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Europe: Blockchain – Practical and legal challenges

The increasing digitization of the private as well as economic realm is undeniable. The European Commission is constantly pushing the Digital Single Market forward. In the same breath as the ubiquitous phenomenon of digitalization, blockchain technology is all too often mentioned. A bright future is predicted for it even if the actual applications have, admittedly, been rare in practice so far. A closer look at this technology and its economic potential – but also the legal implications of the technology – is worthwhile. In a series of blog posts, we will therefore examine the current state of play regarding blockchain technology and take a look at the legal setting with a European and German focus.

What is Blockchain? 

Simply put, a blockchain is a decentralized “register”, which is distributed on several computers and serves as a comparatively secure digital protocol for transactions and information. In this register, which is sometimes validly referred to as a database, the data is stored in a chronological order, unaltered and thus traceable, and linked together. It is a chain of transactions which digitally maps a uniform economic process between two or more participants.

The characteristic feature of a blockchain is the renouncement of a controlling, trustworthy entity, a so-called intermediary. In the blockchain the “Trusted Third Party” is replaced by a transparent network, which is technically and cryptographically secured. A common example is a bank, which usually takes over the processing of a payment transaction. In the blockchain, however, trust is established without any intermediary by the combination of cryptography (digital signatures), computing-intensive coding tasks and peer-to-peer networks (P2P) merely between the parties involved.

How does Blockchain work?

First of all, the public key and a private key technology of the geographically distributed users is significant for blockchain. The private key serves as the digital signature of a transaction, which then can be checked by the other users of the blockchain network via public keys. The privacy of the participants is protected since they perform under a pseudonym.

According to a consensus process, the individual transactions are written into so-called blocks, which step-by-step form the chain. Each computer in the blockchain network saves a copy of the entire blockchain and compares new transactions to each other in the validation process. This ensures system-immanent transparency and counterfeit security.

The validation process, also referred to as “mining”, takes place via a hash function, thus, via the cryptographic assignment of a letter-number sequence. The hash forms the link between the transactions and continues the chain. If the hash corresponds, the next transaction is approved. In this way, the blocks are linked in such a way that any subsequent modification of a block immediately stands out. Unauthorised manipulation is therefore excluded.

However, it has to be noted that the generating of a hash by the decentralized computers requires considerable computing power. Every miner who carries out a validation must provide a so-called “proof of work” and circulated it in the system every time. According to the incentive principle, the respective miner receives some kind of reward for the successful insertion of a validated block; in the case of the bitcoin blockchain, for example currently 12.5 BTC (bitcoins).

What legal aspects need to be considered?

The legal implications are manifold and arise partly from the above-described characteristics of the blockchain itself, and partly from the specific areas of application. Common areas of tension arise, for example in data protection law. The network-wide transparency, the sustainability of the stored data and the lack of a centralized responsible office are examples of those challenges. Moreover, the inalterability of the blockchain does not reflect the basic understanding of the German civil code that legal transactions can be void, reversible or conditioned. The respective architecture of the blockchain also raises several patent issues.

Furthermore, there are legal topics that depend on the specific application of blockchain such as general compliance, compliance with regulatory requirements or the protection of intellectual property rights. In the financial world, for example, the Law on Credit Management (KWG) and the MaRisk of the Federal Financial Supervisory Authority (BaFin) must be observed, while in the case of blockchain use in the music and media industry, copyright regulations and the Telemediengesetz (TMG) need to be considered. Additionally, there are the provisions on e-commerce and consumer protection.

We will dedicate a series of blogs posts to these questions with a European and German perspective as Blockchain is not only very interesting from a technical point of view but the resulting legal questions are just as exciting. Watch this space!

For more international information, please visit our Blockchain: Linked Ledgers topic center.