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From the beginning of blockchain technology appearance there were many discussions about transfer possibilities of ownership rights to the blockchain. It came true by developing asset tokenization and issuing security tokens. Tokenization as such is the process of converting an asset, or ownership right over an asset into a token that can be moved, recorded, or stored on a blockchain system. [1]

In other words, by using tokenization people strive to gain more liquidity of its property. Given to blockchain technology which makes possible the trading of items that don’t really lend themselves to easy trading now tokenization of even huge assets it is real. At the same time depending on jurisdiction there can arise certain issues mainly about the legal link between the ownership rights over asset and digital tokens.

What is Asset Tokenization?

The idea behind asset tokenization is very simple allowing to convert the legal rights to assets with economic value into a digital Token. Such digital tokens can be stored, recorded and managed on a blockchain network. Due to its nature this kind of Tokens are treated by authorities as Security Tokens which in case of tokenization represent shares in a company, interest in a fund or trust, a home, an art collection, a farm, or essentially any asset that a person can own. In very simple words tokenization of assets and issuing of security tokens representing that assets is to take something that is on paper, and start tracking ownership of it digitally.[2] Security tokens are a digital representation of value that are subject to regulation under security laws of many jurisdictions.

Given to very promising capacity of greater transparency, liquidity, data integrity and exchange potential, so many investors are interested in asset tokenization and on how to move real world assets into a blockchain aiming to make their lives easier by getting investment process quicker. Digital tokens backed by tokenized assets can represent participation rights in form of decentralized protocols and this way allows investors of all sizes to purchase shares, rights etc. in given resources.[3]

How does it work?

Imagine, that you take an asset and tokenize it, thus you create its digital representation that is transferred on Blockchain distributed network and now it lives its own life without being altered or hacked, at the same time potential investor has guaranty that the ownership information is immutable. Such technology makes possible to “liquify” millions worth assets into certain number of digital tokens which make easier investment process. For instance, imagine you want to invest in real estate, but you don’t have enough amount of money to buy that building or apartment. Tokenization allows investors to invest gradually by investing 5000 or 10000 per month by purchasing digital tokens which represents a share of the tokenized assets and not property over the entire the building (asset). In other words, you cannot buy 5 o 10 square meters in a building or apartment, but you can buy a limited number of tokens backed by tokenized property.

Due to the fact that tokenization is a method that converts rights to an asset into a digital token[4] it can transform the building or apartment, for example, into 1,000,000 tokens, each token representing a 0.0001% share of the underlying asset. Following that, tokens shall be issued on an online platform supporting smart contracts, so that the tokens can be freely bought and sold on different exchanges. [5] When you buy one digital Token, you actually buy 0.0001% of the ownership in the asset. Buy 500,000 tokens and you own 50% of the assets.

Concerns

The tricky thing is that even if you buy all tokens, you are not becoming a legal owner of the property. And this is the moment when legal issue appears, due to its nature of security tokens investor can claim his rights in court if offering papers are properly drafted and tokens purchase transaction was completely legal. Nevertheless, there are many jurisdictions where such offerings and even tokens are not regulated by authorities, so investors rights are completely not protected, and this fact can lead to scams.

Benefits of assets tokenization

To understand why the market will move towards this technology, we need to understand the benefits that tokenizing an asset brings[6] the features that could be very attractive for investors. Assets tokenized on blockchain are:[7]

Immutable –  once an investor buys tokens, nobody can “erase” the ownership.

Accessible  – tokens can be accessed from any place in a world, 24/7, via laptop, smartphone app etc.

Divisible  – tokens hold a promise of greater liquidity which increases the expected value from trade and eliminates the need for minimum investments.

Cost-effective – tokens eliminate the middlemen, which often limit investment accessibility by e.g. restricting investments to accredited investors only, demanding high fees and requiring an access to stock-trading accounts.

Transparent – tokens eliminate asymmetry of information present during the transfer of ownerships.[8]

Legal issues

As mentioned above there are some legal concerns and problems need to be solved before business environment will successfully tokenize assets on Blockchain. But even nowadays there are jurisdictions where tokenization is perfectly legal, and investors are protected by law.

Ownership – The main problem is still the same – lack of regulation. Despite some authorities across Europe have undertaken certain steps to regulate tokens given to some categories are treated as securities, in most of cases smart contracts are still unregulated. At the moment in European Union only Malta has fully adopted legal framework related to smart contracts, blockchain and tokens. Other countries usually regulate Security Tokens through recommendations and opinions of financial market supervising authorities. For example, what happens if a company that handles tokenization sells the property? Token owners just own tokens. They have no legal rights on the property and thus are not protected by the law. Therefore, legal changes are needed to accommodate these new business models in more jurisdictions in order to get more reliability.

Legal linkOne of the most important issues is to create a legally binding connection between tokenized asset and generated security tokens. This brings new challenge due to its new and unregulated nature.

Lack of judicial practice – The lack of comprehensive judicial practice given the early stage of its development and the insufficient number of business decisions based on aforementioned legal practice makes difficult creation of a legal framework related to this field.

Nature of Tokens – In case of tokenization of assets digital tokens typically are issued. This type of digital tokens represents an asset, equity or a stake of value, giving rise of a debt or claim on the issuer. Asset tokens are backed by a promise to get a share in future company earnings or capital. In other cases, this type of tokens is backed by company’s equity or certain material goods. A security is a tradable financial asset which commonly refers to any form of financial instrument[9] that holds some type of monetary value, representing an ownership position in a company (stocks), a creditor relationship with a governmental body or a corporation (bonds), or rights to ownership as represented by an option (option).[10] Legal regulations of securities are intended to ensure that market participants can make their decisions whether to invest or not in stocks of companies, bonds, shares etc. on predictable, reliable and transparent set of information.

References*:

[1] https://blockonomi.com/tokenization-blockchain/

[2] https://hackernoon.com/tokenized-assets-security-tokens-and-stos-ae72dc0e275e

[3] https://blog.softwaremill.com/asset-tokenization-on-blockchain-will-disrupt-the-asset-management-landscape-befbd71639b1

[4] https://medium.com/coinmonks/asset-tokenization-on-blockchain-explained-in-plain-english-f4e4b5e26a6d

[5] https://medium.com/coinmonks/asset-tokenization-on-blockchain-explained-in-plain-english-f4e4b5e26a6d

[6] https://hackernoon.com/tokenized-assets-security-tokens-and-stos-ae72dc0e275e

[7] https://blog.softwaremill.com/asset-tokenization-on-blockchain-will-disrupt-the-asset-management-landscape-befbd71639b1

[8] https://blog.softwaremill.com/asset-tokenization-on-blockchain-will-disrupt-the-asset-management-landscape-befbd71639b1

[9] https://en.wikipedia.org/wiki/Security_(finance)

[10] https://www.investopedia.com/terms/s/security.asp

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1. What is a Smart Contract?

According to an opinion smart contract is a special protocol intended to contribute, verify or implement the negotiation or performance of the contract.[1] The key element of smart contracts as well as one of most attractive things is opportunity to perform reliable transactions without intermediaries or any third parties. These transactions are trackable, transparent and irreversible. Smart contracts contain all the information about the contract terms and execute all envisaged actions automatically.[2]

According to another opinion smart contracts are self-executing electronic instructions drafted in computer code.[3] Smart contracts self-execute the stipulations of an agreement when predetermined conditions are triggered.[4] The parties “sign” the smart contract using cryptographic security and deploy it to a distributed ledger, or blockchain.[5]

Considering both information technology and legal aspects of the smart contracts’ nature, the smart contract application issue frequently rises many complex questions currently being unregulated in most of jurisdictions.

2. Legal issues related to Smart Contracts

Previous post mirrored certain of major legal issues related to smart contracts. Nevertheless, it is not possible to cover absolutely all aspects of pros and cons or drawbacks of new technology in general and smart contracts particularly. In this regard it is important to notice that legislative bodies of the countries willing to legally regulate of smart contracts will have to pay attention also to following questions:

Smart contract equality to traditional contract. [6] Legislators will have to identify smart contracts as an act equal to a traditional contract or it will be identified as the tool for enforcement of obligations;[7]

Certifying Authority. States most likely will need to create a regulator dealing with certification keys and monitoring of involved parties into transaction in order to create a reliable mechanism and avoid any fraudulent actions or misconduct of the contracting parties.

Understanding of coded terms. If a contract is partly expressed in code, then the understanding of that code by the parties is relevant. [8] This relevance can be a matter of regulation, such as whether particular parties (such as consumers) can be bound by terms which they do not understand, or it can be a matter of fundamental contract law, such as whether there was sufficient mutual understanding of the terms to form the contract at all;[9]

Evidence of coded terms. Even though the parties can agree to express specific terms of their relationship in computer code, it is important that that expression is admissible in any judicial and arbitral proceedings which arise out of that relationship. [10] An inability to admit this record of the parties’ agreement would impair its legal effectiveness.[11]

 3. Smart Contract’s Structure

Each smart contract has a small database and provides methods for changing its data. Since contracts are replicated across all nodes, their databases also are. Data changes occur via transactions.

A smart contract usually has at least the following structure[12]:

  • Transaction sender
  • Transaction recipient
  • The amount of sending currency
  • Gas limit per transaction (it’s the maximum amount of units of gas you are willing to spend on a transaction)
  • Price per gas unit (the payment received by the network participant for calling a smart contract code)
  • Arbitrary data (optional) – If you’re told that you can sendarbitrary data yourself, it means you can send anything you want. [13]

ERC stands for “Ethereum Request for Comments”, while ERCXX are technical standards used for smart contracts on the Ethereum blockchain. Most of the major tokens on the Ethereum blockchain are ERC20-compliant. ERC20 tokens must use ‘gas’ to process transactions. Gas represents the work needed to perform a computation, for example a smart contract. Gas is not a token or a cryptocurrency. Gas is paid out in Ethereum. Transactions with more gas will be prioritized by the blockchain network, and processed more quickly.

4. Gas[14] & Price

Every transaction in Ethereum requires Gas to be mined, and the Gas costs Ethers. So, each Smart contract transaction requires Ethers (which is paid not by the Smart Contract itself but rather by the users)[15]. Gas is an abstract number that represents the relative complexity of operations. While gas is fixed per operation, the amount a user pays per gas — gas price — is dynamic and dictated by market conditions. Gas price is a value representing how much Ether the user is willing to pay per gas. When a user sends a transaction, they specify the gas price, and the total fee that they pay is equal to formula: gas_price multiply to gas_used. Miners are paid out this fee and so they prioritize transactions with a higher gas price. The higher gas price you are willing to pay, the faster your transaction will be processed.

5. Stages of Smart Contracts creation

To create a Smart contract, you need to go through several stages as follows[16]:

CreationTo write smart contracts there are a few different languages: Solidity, which is like JavaScript and has .sol as a file extension, Serpent, Python-like with extension .se, and a 3rd, LLL, based on Lisp. Serpent was popular a while back but Solidity is the most popular right now and more robust, so just use Solidity. [17]

CompilingAfter writing a contract in Solidity, use Solc to compile it. It’s from the C++ libraries (different implementations complementing each other again) which can be installed here.

DeploymentOnce a Solidity contract is compiled with Solc and sent to the network, you can call it using the Ethereum web3.js JavaScript API and build web apps that interact with contracts.

Testing – The tests needs to cover the features of your code and assert that everything is working as predicted. As we are writing smart contracts that can deal with money, writing tests is a really important task for us. This includes: a) code review; b) testing audits; c) correctness proofs.

6. Language for writing Ethereum Smart-Contract: Solidity

A contract in the sense of Solidity is a collection of code (its functions) and data (its state) that resides at a specific address on the Ethereum blockchain. Solidity is a contract-oriented, high-level language that is designed to target the Ethereum Virtual Machine (EVM – The Ethereum Virtual Machine or EVM is the runtime environment for smart contracts in Ethereum). The code is statically typed, supports inheritance, libraries and complex user-defined types among other features[18].

7. Deploying smart contract in Ethereum blockchain

Once you have written a contract, you need to test it by actually deploying it and testing if they are functioning as expected. This is where testnets come to the rescue. Testnets simulate the Ethereum network and EVM. They enable developers to upload and interact with smart contracts without paying the cost of gas.

References*:

[1] https://cointelegraph.com/explained/smart-contracts-explained

[2] https://cointelegraph.com/explained/smart-contracts-explained

[3] SAMUEL BOURQUE & SARA FUNG LING TSUI, A LAWYER’S INTRODUCTION TO SMART CONTRACTS 4 (2014).

[4] Reggie O’Shields,Smart Contracts: Legal Agreements for the Blockchain, 21N.C. Banking Inst.177 (2017). Available at:http://scholarship.law.unc.edu/ncbi/vol21/iss1/11

[5] INST. OF INT’L FIN., GETTING SMART: CONTRACTS ON THE BLOCKCHAIN 2 (2016).

[6] https://medium.com/smartz-blog/smart-contracts-key-legal-issues-a2af15f50c2a

[7] https://medium.com/smartz-blog/smart-contracts-key-legal-issues-a2af15f50c2a

[8] https://medium.com/smartz-blog/smart-contracts-key-legal-issues-a2af15f50c2a

[9] https://medium.com/smartz-blog/smart-contracts-key-legal-issues-a2af15f50c2a

[10] https://medium.com/smartz-blog/smart-contracts-key-legal-issues-a2af15f50c2a

[11] https://medium.com/smartz-blog/smart-contracts-key-legal-issues-a2af15f50c2a

[12] https://medium.com/@smartum.pro/ethereum-smart-contracts-insight-into-smart-contract-development-9627f3cc8111

[13] https://medium.com/@smartum.pro/ethereum-smart-contracts-insight-into-smart-contract-development-9627f3cc8111

[14] https://hackernoon.com/ether-purchase-power-df40a38c5a2f

[15] https://x-team.com/become-blockchain-developer/smart-contracts/

[16] https://medium.com/@ConsenSys/a-101-noob-intro-to-programming-smart-contracts-on-ethereum-695d15c1dab4

[17] https://medium.com/@ConsenSys/a-101-noob-intro-to-programming-smart-contracts-on-ethereum-695d15c1dab4

[18] https://codeburst.io/build-your-first-ethereum-smart-contract-with-solidity-tutorial-94171d6b1c4b

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I. Intro

In simple terms Blockchain is a huge digital database running on the Internet for recording[1] various types of information. It represents a performant distributed technology tool for keeping unaltered information about any kind of transactions or any other information, providing a reliable degree of trust that information will be secured and unaltered. In case of blockchain, each participant maintains, calculates and updates new entries into the database.[2] Before a transaction is considered valid, it must be authorized by each participant of its constituent nodes through the consensus process. [3] When it comes to information about commercial transactions they are cryptographically validated and data are not under the control of any third party person or entity. All information is recorded in a database which is verifiable, secured and transparent having a timestamp.

We have referred to the types of Blockchain, consensus mechanism in previous blog as well as to related legal issues.

II. What is used for?

Blockchain technology has expanded mainly in business environment, especially in the financial services industry, nevertheless the discussions on application of Blockchains in public sector is also widely discussed[4] by many governments as well as European Union. Governments are taking action to learn more about Blockchain technology and to introduce Blockchain concepts in states’ policies and development strategies. For instance, the European Commission considers blockchain as a strategic technology and encourages governments, European industry and citizens to benefit from blockchain opportunities.[5]

2.1. By government:

a) Identity Management

Civil status certificates or citizens’ identity management are other examples of the fields that potentially could benefit from new technological decentralized innovation technology. Nowadays governments are already discussing the possibility of combination of blockchain and biometric technology. Blockchains could be used to establish digital identities[6] for citizens, residents, businesses, and other government affiliates. In addition to using Blockchain technology to manage identity, multiple aspects of the identity could be managed using Blockchain technology. For example, birth certificates, marriage licenses, passport and visa information, and death records could be managed via Blockchains.[7]

b) National Cryptocurrencies

Since blockchain has brought a new stage of development in fintech and revolutionized payment methods, many Governments are considering creation and implementation of own digital cryptocurrency and how they might benefit from blockchain technologies taking into account its advantages as security, transparency, immutability etc.[9] In this regard we notice that Dubai holds the title as the first country to launch its first cryptocurrency called Emcash back in 2017. [10] Emcash operates on the basis of their own blockchain and is being used in various government and non-government activities such as utility bills, coffee charges and purchases we make every day.[11] The government of Tunisia have decided to integrate blockchain technology with eDinar. EDinar is widely used to make money transfers also, and users can pay their bills as well. [12] Senegal has launched its digital currency being inspired by Tunisia example. It is based entirely on the blockchain. It is also designed to be compatible with other digital currencies in Africa. [13] Venezuela has launched own cryptocurrency but later it was ruled unconstitutional by the Venezuelan National Assembly in March 2018.[14] Estonia started a project on issuing own national cryptocurrency but scaled back plans of launching after being criticized by the European Central Bank.[15]

c) Taxes

Blockchain technology has the potential to make taxation systems more efficient by reducing process on tax-related information from weeks or months to a matter of seconds. Governments can create blockchain-based taxation systems that automatically check transactions, tying all the information in one, immutable chain. [16] Blockchain reduces or even eliminates the need for manual verification, allowing businesses to optimize their operations while also ensuring governments don’t lose potential tax revenue in the process. For employees, blockchain-based taxation also means that tax returns are processed much quicker.[17]

d) Digital Voting

The idea of paperless voting is on the table of discussions for a long time but never closer than opportunities offered by blockchain technology. There were so many cases when opposition or people blamed governing parties for cheating voting process and violating fundamental principles of democracy. Blockchain offers the ability to vote digitally, but it’s transparent enough that any regulators would be able to see if something were changed on the network. It combines the ease of digital voting with the capacity to be unhacked at the same time making every vote secured and decisive[18] since votes on the blockchain are immutable and can be tracked in real-time. By implementing new technology governments will have the potential to determine election winners in a more efficient manner. This can enhance the convenience and confidence for citizens. By ensuring that individual votes are eligible and counted correctly, use of Blockchains also has the potential to help prevent voting challenges such as ballot rigging, which still persist in many countries.[19]

e) Official records (medical, real estate, land, auto etc.)

Personal records may be managed with Blockchains. Health records, for example, could be made accessible and interoperable to all hospitals in a network or in a country.[20] Blockchain offers even more safety and convenience, in addition to storing patient records, the patient, who possesses the key to access these digital records, would be in control of who gains access to that data. When someone is buying or selling land, a house, or a car, he/she will need to transfer or receive a title. Instead of handling this on paper, blockchain can store titles on its network, allowing for a transparent view of this transfer, as well as presenting a crystal-clear picture of legal ownership.[21]

2.2. By business:

a) Execute Legal Contracts

Smart contracts are self-executing electronic instructions drafted in computer code.[22] Smart contracts self-execute the stipulations of an agreement when predetermined conditions are triggered.[23] The parties “sign” the smart contract using cryptographic security and deploy it to a distributed ledger, or blockchain.[24] According to another opinion, a smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties, at the same time, transactions are trackable and irreversible[25].

 b) Money Transfers

Money Transfers might become history with new blockchain technology taking into account scenario by offering different forms of Money transfer services. With the advent of digital currency and blockchain technology, companies are not holding back in adopting currencies like bitcoin to enable remittance services. With this service, companies are trying to solve multiple issues such as high transfer cost, limited money distribution methods, limited brand options, limited ways to deal with money, etc. The cryptocurrency market is still in an early development stage to reach the migrant population masses but promises massive potential in the future.[26]

b) Paying Employees

Thanks to blockchain technology and smart contracts running on its base employers are able to pay salaries to their employees by using new technology. In the end of every payment period smart contracts can automatically make money transfers to the bank accounts of each employee proportionally to workload or billable hours.

c) Banking

Blockchain Brings Banks Together, in 2017, a consortium of the world’s largest banks joined forces to exploit the benefits of blockchain technology.[27] The consortium, known as the Unity Settlement Coin (USC). USC is a digital currency created by Switzerland’s UBS bank, in conjunction with UK-based Clearmatics. By exploiting the benefits of blockchain technology, USC partners expect to make it faster and safer for central banks to settle transactions. [28]

d) Issue shares

By using tokenization of assets method companies might “issue” stocks or shares and offer them for sale to the public. This sort of shares is called Security Tokens. Through this public issuance of blockchain-based securities the history of capital markets is entering a new era, the era of blockchain-based securities.[29] Because blockchain networks validate and settle transactions so quickly, it could eliminate the multiday wait time investors encounter when selling stocks and seeking access to their funds for the purpose of reinvestment or withdrawal. [30]

III. Legal issues

a) Lack of regulation & Governing Law

Despite its popularity and large potential that brings blockchain only certain governments across the globe have undertaken certain steps to regulate tokens given to some categories are treated as securities, in most of cases smart contracts are still unregulated. At the moment in European Union only Malta has fully adopted legal framework related to smart contracts, blockchain and tokens. One more country which embraced the legal regulation of everything is related to crypto is Belarus a former soviet country.

b) Liability

Most likely the issue of liability would be a top risk related to blockchain transactions especially when it comes to the security and confidentiality. Deriving from the nature of each type of blockchain certain risks could arise, as inability to control or stop functioning of public blockchain, or in event of breach, malfunctioning or misconduct of private blockchain. In that cases who is going to be liable for the risks occurred or who is responsible if laws are broken using blockchain?

c) The enforceability of smart contracts

Thanks to the blockchain technology a new sort of technical-legal tool has been created, so-called “smart contracts”. Smart contracts are blockchain based mechanisms which are automatically executed when specific circumstances or conditions coded into the smart contract are met. When conditions are fulfilled the execution of the smart contract happens automatically without being enforced by the third party. This creates a new level of development in contract law but at the same time brings new challenges due to its new and unregulated field. Smart contracts twists both legal and technology knowledge.

 d) Data privacy

One of the most important advantages of the blockchain is the protection of data, once data is recorded in blocks it cannot be altered without other participants to the network knowing that one block was altered or hacked. So, blockchain technology has close ties with data privacy, particularly where the relevant data is personal data or metadata sufficient to reveal someone’s personal details as well as commercial secrets. In order to find solution to these risks there is a need to create a tool for privacy-protecting within blockchains. This might include other legal risks especially when it comes to carrying out the Know Your Customer proceedings etc. It remains to be seen how stakeholders involved into the industry will tackle the balance of privacy versus transparency.

IV. Conclusion

When it comes to benefits of blockchain technology UK Government Office for Science stated in its report that it “one of the greatest potential benefits of DLT is its ability to remove barriers and friction in the market and enable the creation of new forms of information marketplaces… The sharing of information between economic entities through distributed ledgers would enable new forms of innovation to emerge. This would allow ministers to achieve policy outcomes centred on assisting [small and medium-sized enterprises] achieve economic growth through effective use of technological innovation.”[31] Now it is up to state authorities whether to take steps and create a legal framework for regulating new technology and its outcomes or leave it and let other progressive countries to move further to economic progress through embracing blockchain opportunities.

—————————————————-

References*:

[1] https://medium.com/coinmonks/blockchain-for-beginners-what-is-blockchain-519db8c6677a

[2] https://www.coindesk.com/information/what-is-the-difference-blockchain-and-database/

[3] https://www.draglet.com/blockchain-services/blockchain-technology/private-or-public-blockchain/

[4] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[5] https://ec.europa.eu/digital-single-market/en/news/information-day-19-december-2017-horizon-2020-blockchain-distributed-ledger-technologies-topics

[6] An example of a Blockchain-enabled identity program is the ID2020 initiative (https://id2020.org), as discussed in OPSI’s Embracing Innovation in Government: Global Trends 2018 report. See http://oe.cd/innovation2018 (page 22).

[7] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[8] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[9] https://minergate.com/blog/countries-with-national-cryptocurrency/

[10] https://cryptoverze.com/national-cryptocurrencies/

[11] https://cryptoverze.com/national-cryptocurrencies/

[12] https://cryptoverze.com/national-cryptocurrencies/

[13] https://cryptoverze.com/national-cryptocurrencies/

[14] https://www.coindesk.com/venezuelas-national-assembly-declares-petro-cryptocurrency-illegal/

[15] https://www.ccn.com/estonia-scales-back-plans-of-ambitious-state-cryptocurrency-estcoin/

[16] https://coincentral.com/blockchain-in-government/

[17] https://coincentral.com/blockchain-in-government/

[18] https://www.fool.com/investing/2018/04/11/20-real-world-uses-for-blockchain-technology.aspx

[19] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[20] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

[21] https://www.fool.com/investing/2018/04/11/20-real-world-uses-for-blockchain-technology.aspx

[22] SAMUEL BOURQUE & SARA FUNG LING TSUI, A LAWYER’S INTRODUCTION TO SMART CONTRACTS 4 (2014).

[23] Reggie O’Shields,Smart Contracts: Legal Agreements for the Blockchain, 21N.C. Banking Inst.177 (2017). Available at:http://scholarship.law.unc.edu/ncbi/vol21/iss1/11

[24] INST. OF INT’L FIN., GETTING SMART: CONTRACTS ON THE BLOCKCHAIN 2 (2016).

[25] https://en.wikipedia.org/wiki/Smart_contract

[26] https://gomedici.com/11-money-transfer-companies-using-blockchain-technology-2/

[27] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[28] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[29] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[30] https://igniteoutsourcing.com/publications/blockchain-business-applications/

[31] https://www.oecd-ilibrary.org/docserver/3c32c429-en.pdf?expires=1542019271&id=id&accname=guest&checksum=3F10E36836FE94FFA0AB82CD09CA5D53

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     1. What is Token?

Blockchain technology completely revolutionized traditional ways of raising funds by business, especially by startups through launching Initial Coin Offerings (ICO). A real boom of ICOs has risen last year, attracting more and more companies into blockchain revolution and issuing own tokens as instruments for easy investment. Given to this new twist of technology development companies involved in launching ICOs have raised millions using new crowdfunding method. Due to many scams and lack of regulations investors’ legal interests happened to be uncovered or even worse they lost all the invested money.

Government authorities from many jurisdictions have taken an in-depth look at the ICOs as such and ICOs’ main tool of raising funds – “Tokens” and decided to implement sort of tests for appreciation whether they are simple consumer tokens or financial instruments (which are strictly regulated).

ICO organizer usually sells blockchain-based coins (well known as Tokens) created and stored in a decentralized form either on a blockchain specifically created for the ICO or through a smart contract on a pre-existing blockchain. ICO investors transfer funds when purchasing tokens whether in fiat money or cryptocurrency accepted by the ICO organizer, in return they receive tokens. In computer security and cryptocurrency, the term token is generally referring to a cryptographic string of numbers and letters that contains no real data but relates back to real data. A token might look something like this[1]:

947153d332beaf39dec6ebae8883bfb84eda47abccccbc2d61436d8d1e81584d.

From legal perspective Token is a cryptographic decentralized proof of certain rights over promised assets, values, profit or any other possibilities by using that token.[2]

  1. Types of Tokens

There is no generally recognized classification of Tokens in Europe or internationally. Following a comprehensive analysis of authorities’ positions related to ICOs and tokens there is possible to distinguish that Tokens are a form of digital currency and usually refer to virtual assets offered through an ICO, being divided into two categories: utility tokens and securitized tokens. Security tokens falls under category of financial instruments, on the other hand, Utility tokens are deemed to be treated as such if those tokens provide online platform or application utility rights without any underlying assets.[3] There are several types of smaller categories or hybrid types of tokens but in front of the law they finally are treated whether utility or security.

2.1. Utility tokens: Utility tokens are used for getting access digitally to an application or service offered via online platform based on blockchain infrastructure.[4] A Utility token is basically a token that used to unlock and acquire a service provided online. [5]

2.2. Payment tokens: Payment tokens are used as means of payment for purchasing services or goods expressing a sort of value transfer. Cryptocurrencies are payment tokens per se, and these coins give rise to no claims on their issuer.[6]

2.3. Asset tokens: Asset tokens representing an asset, equity or a stake of value, giving rise of a debt or claim on the issuer. Asset tokens are backed by a promise to get a share in future company earnings or capital. In other cases, this type of tokens is backed by company’s equity or certain material goods. If we take a look from its function perspective asset tokens are similar to bonds or derivatives.[7]

At the same time there are some mixed types of tokens twisting both payment and asset criteria while being known as hybrid tokens. In these cases, the requirements are cumulative, in other words, the tokens are deemed to be both securities and means of payment. [8]

  1. Utility tokens

In very simple words Utility token is a “digital key” to unlock or provide access to online provided services usually offered by the organizer of the ICO. Utility tokens are usually distributed through smart contracts of an ICO when company’s project is launching. ICO project is launched in order to raise funds for development while investor by purchasing tokens would acquire the right to use the product or service developed by the startup. Utility tokens give a user the ability to use a Blockchain-based platform or an app that provides a certain service while tokens are designed to grant access these services.[9]

Summing up opinions of majority of authorities from various jurisdictions regarding types of tokens and ICO legal status Utility tokens carries absolutely no rights with them other than to access to a service. Some would consider this as a pre-payment for services.[10] Also, this type of tokens can be used as a type of discount or premium access to the goods & services of the ICO project.[11]

From legal perspective of regulating authorities by simply naming tokens as utility tokens as such is not enough in order to treat them like “utility”. Some of regulators issue guidance publications in order to set out the rules to distinguish the legal nature of tokens whether utility or security. Other regulators lay down tokens’ classification in law as well as their specific features, this brings a clear vision and understandability of the rules regulating classification of tokens. Utility tokens are a preferred choice by many companies launching ICOs due to its flexibility and lack of necessity to follow complex and rigid securities regulations. 

  1. Payment tokens (Digital Currencies or cryptocurrency)

Cryptocurrency is the most well-known type of digital token. Cryptocurrencies are digital tokens also known as digital coins that run on a Blockchain. Payment tokens have no central issuer and are not regulated by a specific entity and have no further functions or links to other development projects or ICOs. The only function of the payment tokens is to enable purchases, sales, and other financial transactions.[12]

There are various legal opinions as to whether tokens of this kind constitute securities. Given that payment tokens are designed to act as a means of payment and are not analogous in their function to traditional securities, regulating authorities don’t treat payment tokens as securities.[13]

  1. Security tokens

Term of Security tokens is broad classification that refers to any kind of digital tradable asset through Initial Coin Offerings, which are offered to investors having various forms ranging from coins redeemable for precious metals to tokens backed by real estate.[14] A security is a tradable financial asset which commonly refers to any form of financial instrument[15] that holds some type of monetary value, representing an ownership position in a company (stocks), a creditor relationship with a governmental body or a corporation (bonds), or rights to ownership as represented by an option (option).[16] Legal regulations of securities regulation are intended to ensure that market participants can base make their decisions whether to invest or not in stocks of companies, bonds, shares etc. on predictable, reliable and transparent set of information.

5.1. Asset tokens

In very simple words asset-backed token is a digital token that represents a physical asset.[17] The main advantage of this type of tokens is that they allow for the digitizing of traditional assets such as commodities. Another category of Asset-backed tokens is connected to fungible goods. This category has both advantages as well as drawbacks, last one specifically refers to the lack of investment growth due to their value is linked to physical asset’s price. However, these tokens have a high level of flexibility in terms of ease of use when it comes to physical assets that are difficult to purchase or store such as gold, silver and other commodities.[18]

5.2. Equity tokens

Acquiring Equity tokens the buyer is promised to purchase ownership rights over a part of project’s assets or equity of the company. Usually distributed through ICOs, equity tokens are essentially giving the buyer the right to a portion of the project. This is in proportion to how many of the tokens acquired. In other words, equity tokens can be viewed as digital shares in a company.[19]

5.3. Profit backed tokens

By purchasing this type of tokens investor acquires tokens backed by real profit of existing company or start up profit being generated in future. This category of tokens has similarities with equity tokens.

References*:

[1] https://cryptocurrencyfacts.com/what-is-a-cryptocurrency-token/

[2] https://www.cbr.ru/Content/Document/File/47862/SmartKontrakt_18-10.pdf

[3] https://www.gvzh.com.mt/malta-publications/virtual-currencies-icos-malta-state-play/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

[4] https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

[5] https://ellulschranz.com/service/tokens-defined-icos/

[6] https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

[7] https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

[8] https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

[9] https://blog.icoalert.com/tokenomics-what-are-the-different-types-of-tokens-you-can-buy-in-icos-d6518d7bebb1

[10] https://ellulschranz.com/service/tokens-defined-icos/

[11] https://medium.com/swlh/types-of-tokens-the-four-mistakes-beginner-crypto-investors-make-a76b53be5406

[12] https://medium.com/swlh/types-of-tokens-the-four-mistakes-beginner-crypto-investors-make-a76b53be5406

[13] https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/

[14] https://strategiccoin.com/3-types-ico-tokens/

[15] https://en.wikipedia.org/wiki/Security_(finance)

[16] https://www.investopedia.com/terms/s/security.asp

[17] https://cryptonews.com/exclusives/tokenomics-discover-five-types-of-digital-tokens-1315.htm

[18] https://cryptonews.com/exclusives/tokenomics-discover-five-types-of-digital-tokens-1315.htm

[19] https://blog.icoalert.com/tokenomics-what-are-the-different-types-of-tokens-you-can-buy-in-icos-d6518d7bebb1

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Most likely the best thing the Blockchain brings is decentralized technology allowing all the connected participants to have access to existing information records (in case of public Blockchain) and be well informed when it comes to transparency issues. Thanks to decentralized system there is no need to have intermediaries in many transactions, and using Blockchain you save time, money, and benefit of more secured system than traditional ones. Based on aforementioned new technology smart contracts have appeared, bringing a new evolution step in enforcement of the matter was negotiated eliminating third parties and intermediaries.

I. Definition of Smart Contract

Smart contracts are self-executing electronic instructions drafted in computer code.[1] Smart contracts self-execute the stipulations of an agreement when predetermined conditions are triggered.[2] The parties “sign” the smart contract using cryptographic security and deploy it to a distributed ledger, or blockchain.[3] According to another opinion, a smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties, at the same time, transactions are trackable and irreversible[4].

Considering both information technology and legal aspects of the smart contracts’ nature, the smart contract application issue frequently rises many complex questions currently being unregulated in most of jurisdictions.

II. How do Smart Contract work?

Among various questions regarding the nature and features of smart contracts is whether they are really contracts, what are their utility and how do they work? In this regard, we would like to note that smart contracts are software programs that run on distributed ledger technology (“DLT”). Smart contracts are usually part of an application running on DLT, rather than standing alone as a DLT application, being governed by the event functionality principle. In event that coded command occurs (usually triggered by external data or event) smart contracts will become functional and will carry out modification of other data. The tool which connects the real world with smart contracts are “oracles”. In this way the external data can be delivered by “oracles” triggering the mechanism of smart contract to act in some way it was originally coded.

In this regard oracles play a major role in smart contracts functionality despite not all types of them need oracles to be fully operational. Once the information is provided by oracles, a smart contract enforces a particular command showing that certain condition was met. Smart contract runs based on principles “if” a condition is met, “then” a certain action occurs.

Smart contracts are distributed because they exist as software running on a DLT protocol that itself is distributed across a variety of network nodes, at the same time acting in autonomous manner, and executing contemplated transactions.[5]

III. Types of Smart Contracts

Most of the smart contract types are running on the Ethereum blockchain being compliant with technical standard ERC-20. ERC-20 contracts come with several functions and actions. The basic differences in each contract is in number of mentioned functions and actions. Usually smart contracts are used for dealing with tokens. Tokens are issued within Initial Coin Offerings (“ICO”) to raise funds for financing start-ups, but we will refer to tokens’ their legal side, types and utility in our upcoming blogs. Basic types of Smart Contracts are following:[6]

Basic Token Contract – a token contract is a smart contract that contains a map of account addresses and their balances. The balance represents a value that is defined by the contract creator.

Crowd Sale Contract – is a program for the development and distribution or sale of the project’s tokens. Crowd sale contract is needed for the token sale. That contract takes Ethereum and generates tokens.

Mintable Token Contract – consider the case when the number of tokens issued at the beginning of crowd sale have been completely consumed and you still have investors coming in for your crowd sale, you need to mint tokens now. Minting is only available during crowd sale.

Terminable Contract – contract that can be killed by owner. This terminates the contract and sends any Ethereum held by the contract back to the owner. To terminate a contract, you need to call self-destruct (address).

Refundable Crowd Sale Contract – During an ICO, in case the soft cap decided at the beginning of your crowd sale is not reached, you need to refund your investor’s money. Contract does it by creating a refund vault, which stores money while the crowd sale is in progress. It refunds money if the crowd sale fails.

IV. Legal issues

The concept of smart contract was introduced by Nick Szabo in 1996, conceived as “a set of promises, specified in digital form, including protocols within which the parties perform on these promises”[7] The main question regarding smart contracts if they are really agreements per se. It is well known that a contract has to meet a number of conditions to be valid from legal perspective as: at least two parties, capacity of the parties to conclude a contract, mutual consent, will of both sides to conclude a contract.

4.1. Form of smart contract

Given to lack of specific regulation regarding smart contracts, such an agreement shall meet all classical requirements applicable to paper-based contract in order to be enforceable and valid. A special attention in case of smart contracts must be paid to the mutual consent which according to law can be manifested in writing or orally. Traditionally mutual consent is based on the concept of offer and acceptance by the parties to the contract.

4.2. Lack of regulation

As stated before, smart contracts have close ties with tokens sold in ICOs, usually they govern almost all lifecycle of that tokens. Despite some authorities across Europe have undertaken certain steps to regulate tokens given to some categories are treated as securities, in most of cases smart contracts are still unregulated. At the moment in European Union only Malta has fully adopted legal framework related to smart contracts, blockchain and tokens. One more country which embraced the legal regulation of everything is related to crypto is Belarus, a former soviet country.  

4.3. Jurisdiction

By its decentralized and global scale nature blockchain rises a lot of jurisdictional questions, as the nodes on a blockchain can be located anywhere in the world. Due to this fact a every transaction could potentially fall under the jurisdiction of the location where the node in the network is located. This can generate a number of complex legal issues with a special focus on governing law, taking into account that every jurisdiction has own specific contract law principles and identification of appropriate legal regulations is quite important.

4.4. Enforceability

Smart contracts are blockchain based mechanisms which are automatically executed when specific circumstances or conditions coded into the smart contract are met. When conditions are fulfilled the execution of the smart contract happens automatically without being enforced by the third party. This creates a new level of development in contract law but at the same time brings new challenges due to its new and unregulated field. In case any disputes will arise related to the enforceability of smart contracts it might be complicated to identify the proper jurisdiction which has to trigger the enforcement of the contract and guarantee fulfillment of obligations between parties.

4.5. Lack of judicial practice

The lack of comprehensive judicial practice given the early stage of DLT development and the insufficient number of business decisions based on aforementioned legal practice makes difficult creation of a legal framework related to this field. Certain central and national banks of a number of countries, including the European Central Bank and the US Federal Reserve System, note that the regulation of smart contracts is inextricably linked to the regulation of DLT.[8]

4.6. Technical errors

One of main risks when it comes to the smart contracts are eventual technical errors. Errors might occur accidentally, and their elimination will be more difficult to perform due to the interrelation of various elements within the distributed ledger.[9]

P.S.* This blog is the first part of a series of articles related to smart contracts’ technical and legal side:

Part I:

Definition of Smart Contract

How do Smart Contract work?

Types of Smart Contract

Legal issues

Part II:

Structure of Smart Contract

Language for writing Ethereum Smart-Contract: Solidity

Stages of Smart Contracts creation

Technical requirements for realizations of Smart Contract(s).

Part III:

Regulation of Smart Contracts

——————————————————–

References*

[1] SAMUEL BOURQUE & SARA FUNG LING TSUI, A LAWYER’S INTRODUCTION TO SMART CONTRACTS 4 (2014).

[2] Reggie O’Shields,Smart Contracts: Legal Agreements for the Blockchain, 21N.C. Banking Inst.177 (2017). Available at:http://scholarship.law.unc.edu/ncbi/vol21/iss1/11

[3] INST. OF INT’L FIN., GETTING SMART: CONTRACTS ON THE BLOCKCHAIN 2 (2016).

[4] https://en.wikipedia.org/wiki/Smart_contract

[5] https://www.virtualcurrencyreport.com/wp-content/uploads/sites/13/2017/05/Perkins-Coie-LLP-Legal-Aspects-of-Smart-Contracts-Applications.pdf

[6] http://inaword.ru/blokchejn/pishem-smart-kontrakt-ethereum-eto-prosto-chast-7-ico/

[7] Szabo, N. (1996). Nick Szabo — Smart Contracts: Building Blocks for Digital Markets. [online] Fon.hum.uva.nl. Available at: http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwintersc hool2006/szabo.best.vwh.net/smart_contracts_2.html

[8] https://www.cbr.ru/Content/Document/File/47862/SmartKontrakt_18-10.pdf

[9] Ibidem

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  1. What is Blockchain?

The simplest way to explain blockchain is that it is a decentralized technology for recording information including transactions, property rights, identities, money balances, etc.[1] Particularly, blockchain is a huge list of records containing information known as “blocks”, which are linked to each other by a code “hash” and secured using advanced means of cryptography. Blockchain represents a high-performance tool for maintaining integrity of information, specifically about any kind of transactions, providing a reliable degree of trust that information will be kept unaltered. Thanks to the distributed mechanism once the transaction is validated taking form of a “block” it automatically becomes available to all participants of the network and can not be altered or modified, otherwise all the participants to the network will notice that chain was hacked or altered.

  1. How does it work?

Blockchain is a particular type of so-called distributed ledger technology “DLT” which in fact is a mechanism of recording and sharing information across multiple ledgers.[2] Each of that ledgers have the exact same data records and are collectively maintained and controlled by a distributed network of computer servers. Blockchain uses specific mathematical algorithms to create and verify a continuously growing data recording in form of blocks. Once these blocks are added they can not be removed due to this fact all records take form of a chain of blocks.

A new addition to the chain (database) is initiated by one participant to the network, who creates a new “block” of data, containing all sorts of information. A new block is shared automatically to all participants in the network being in the same time encrypted and secured.[3] A specific feature of the blockchain is validation of the block by other participants to the network. They collectively determine the block’s validity in accordance with an algorithmic validation method, known as “consensus mechanism”.

Collective determination of block’s validity as well as high degree of security of such data recording in addition to full transparency of transaction records which can be easily checked across the network, makes blockchain an extremely advanced and useful tool for new generation of technology, including fintech, commerce etc.

  1. Key element – Consensus mechanism

There are many ways of structuring blockchain consensus mechanisms, but two of them which are best-known examples of consensus mechanisms are Proof of Work (PoW) mechanism and the Proof of Stake (PoS) mechanism.

3.1. Proof of Work – this mechanism is most commonly used in cryptocurrency industry. Participants to the network solve a sort of sophisticated mathematical calculations or algorithms in order to get permission to add a new block to the blockchain. Each new block is the result of these calculations and after every block calculation becomes more and more complicated, so Proof of Work mechanism requires more electricity for processing information which brings significant amount of expenses. This sort of sophisticated calculations is called “mining” due to such calculations are carried out, new coins are generated taking form of a digital reward. The cryptocurrency as Litecoin, Bitcoin Cash, Monero etc. are based on PoW mechanism

3.2. Proof of Stake – within this mechanism, a participant must prove ownership of a certain asset (in case of equity transactions) or an amount of coins (in case of cryptocurrency) in order to be allowed to participate in the validation process of transactions. For instance, when it comes to the cryptocurrencies, a validator of any transaction has to prove his “stake” (a certain amount) of all existing type of coins in order to be allowed participating in validating transactions. The chances to become a validator of future blocks are higher depending on the amount of stake (or coins) the participants own, if stake is larger, chances are higher to become validator, in a way the degree of reliability is more significant. The benefit is that the validator gets paid a transaction fee for his validation services by the transacting parties.[4]

  1. Types of Blockchain

There are three different types of blockchain:[5]

4.1. Public – is completely decentralized and uncontrolled, which means that nobody has control over the network, ensuring the data can’t be changed once validated on the blockchain.[6] Anyone can view the ledger and participate in the consensus process to determine which transaction blocks are added. Public blockchains are built to be accessible by anyone with access to the Internet.[7] Some well know examples of Public Blockchains would be Bitcoin and Ethereum.

4.2. Consortium – this network is not under private control or public, it is usually operated by a group of entities without having a decisive leader. The consensus process for new transaction blocks is controlled by a fixed set of members, such a platform provides many benefits as efficiency and transaction privacy. According to some experts this platform is optimal for organizational collaboration.[8]

4.3. Private – this network is controlled by one organization or person having very limited access permission. The private blockchain typically requires a trustful agent to reach the consensus even when using the same blockchain technology, for which it adopts consensus object different from the public blockchain.[9] The transaction speed of a privately run blockchain can be faster than other blockchain solutions because there are fewer nodes on the chain and trust levels are high.[10] This sort of blockchain is often used in database management.

  1. The Legal Side

5.1. Governing Law

By its decentralized and global scale nature blockchain rises a lot of jurisdictional questions, as the nodes on a blockchain can be located anywhere in the world. Due to this fact a every transaction could potentially fall under the jurisdiction of the location where the node in the network is located. This can generate a number of complex legal issues with a special focus on governing law, taking into account that every jurisdiction has own specific contract law principles and identification of appropriate legal regulations is quite important.

5.2. Liability

Most likely the issue of liability would be a top risk related to blockchain transactions especially when it comes to the security and confidentiality. Deriving from the nature of each type of blockchain certain risks could arise, as inability to control or stop functioning of public blockchain, or in event of breach, malfunctioning or misconduct of private blockchain. In that cases who is going to be liable for the risks occurred or who is responsible if laws are broken using blockchain?

5.3. The enforceability of smart contracts

Thanks to the blockchain technology a new sort of technical-legal tool has been created, so-called “smart contracts”. Smart contracts are blockchain based mechanisms which are automatically executed when specific circumstances or conditions coded into the smart contract are met. When conditions are fulfilled the execution of the smart contract happens automatically without being enforced by the third party. This creates a new level of development in contract law but at the same time brings new challenges due to its new and unregulated field. Smart contracts twists both legal and technology knowledge.

5.4. Data privacy

One of the most important advantages of the blockchain is the protection of data, once data is recorded in blocks it cannot be altered without other participants to the network knowing that one block was altered or hacked. So, blockchain technology has close ties with data privacy, particularly where the relevant data is personal data or metadata sufficient to reveal someone’s personal details as well as commercial secrets. In order to find solution to these risks there is a need to create a tool for privacy-protecting within blockchains. This might include other legal risks especially when it comes to carrying out the Know Your Customer proceedings etc. It remains to be seen how stakeholders involved into the industry will tackle the balance of privacy versus transparency.

5.5. Intellectual property

Protection of intellectual property rights is one of common question related legal issues referred to blockchain. Despite of various opinions blockchain offers new possibilities for intellectual property protection and registration and as evidence which can be used as probative material in court. Potential use cases include: evidence of creatorship and provenance authentication, registering and clearing intellectual property rights; controlling and tracking the distribution of unregistered or registered intellectual property rights.[11]

With regard to the above mentioned legal issues related to the blockchain technology we will refer in our next blogs.

References:

[1] https://medium.com/coinmonks/blockchain-for-beginners-what-is-blockchain-519db8c6677a

[2]http://www.europarl.europa.eu/cmsdata/150761/TAX3%20Study%20on%20cryptocurrencies%20and%20blockchain.pdf

[3] https://haavind.no/content/uploads/2018/03/Legal-sides-of-blockchain_Haavind.pdf

[4]http://www.europarl.europa.eu/cmsdata/150761/TAX3%20Study%20on%20cryptocurrencies%20and%20blockchain.pdf

[5] https://www.cbr.ru/Content/Document/File/32967/101-103_%D0%9D%D1%83%D1%80%D0%BC%D1%83%D1%85%D0%B0%D0%BC%D0%B5%D1%82%D0%BE%D0%B2.pdf

[6] https://hackernoon.com/public-vs-private-blockchain-4b4aa9326168

[7] Blockchain – The Legal Implications of Distributed Systems, The Law Society, http://www.lawsociety.org.uk

[8] https://www.blockchaindailynews.com/The-difference-between-a-Private-Public-Consortium-Blockchain_a24681.html

[9] https://medium.com/7sevencoin/types-of-blockchain-public-private-and-consortium-blockchain-e190604df820

[10] Blockchain – The Legal Implications of Distributed Systems, The Law Society, http://www.lawsociety.org.uk

[11] http://www.wipo.int/wipo_magazine/en/2018/01/article_0005.html

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M|L|B by M|l|b - 1y ago

What is the Cloud?
Most likely there are no people who haven’t heard about cloud technology, but not so many have asked themselves about what exactly is that? The cloud is an information technology and software applications that allow keeping data stored remotely, or separate from the device being used, and can be accessed securely by using the internet connection from anywhere.

Most relevant examples, familiar to most of us are Google Drive or Drop-box. You have 24/24 access to your files and data from any computer or device if you have an internet connection and you are logged into your account. So, you don’t need anymore to keep your files and data on physical hard disk on your computer or carry it in your bag.

How can Lawyers use the Cloud Lawyers?
Using the cloud technology lawyers can store their files online, and be all the time able to access that information from anywhere as office, home or being far in another country on vacation, and react immediately on some important issues having internet connection.

When it comes to online storage, there are two main options. First one is a type of cloud that simple uploading, storage and online backup for documents. Pretty often this tool is sufficient for many lawyers. Others require a more sophisticated approach, such as cloud based legal practice management software which provides a secured storage of the company’s data so important for your legal practice, including: client and case management, email management, invoicing, file notes, response tracking, document text searching, secured client communication etc.

The essence of this technology is to provide a business solution that allows lawyers to have network infrastructure, applications, and data system located in the cloud. If you have it you don’t need anymore to keep the information on physical supports and you connect via the internet.

Why should Lawyers go to the cloud?
Most likely, many among lawyers are wondering why should they go to the cloud? Why should they change the well-known rules of the game? Because technological trend cannot be wrong. Big players on the market will never bet on something not functional and bringing loses instead of advantages. Here are the most important advantages of using cloud technology for lawyers:

1. Low costs
1.1. No need to buy hardware. Cloud computing saves your money for buying costly hardware. You just can use the free cloud services offered by Google Drive or Dropbox, increase the space in the case you need more, or pay and use a cloud based legal practice management software. Anyway, it is cheaper than all the hardware you need for proper functioning of the law office.
1.2. No costs for software updates. You never have to worry about the timely updates of the soft because your service provider will do it on regular base, including security aspects. So, you will never think about spending time for this issue and can focus on what is really important for you and your team – law practice.
1.3. Premises. One more advantage is saving money for space renting if you take a look at this problem from the angle that you don’t need more space for you own servers’ location.

2. Mobile
With cloud computing and internet connection you can do your job from anywhere. No matter what kind of device you have if your data is in the cloud you have quick access to them from almost all devices. This feature is pretty convenient when lawyers are away from the office, business trips or even on vacation, it keeps you permanently connected to your colleagues and clients in case something important appears.

3. Security
3.1. Information is secured. Cloud computing provides a high security level in terms of data storage. Many companies providing the cloud computing services invested a lot of money and efforts into keeping the clients’ data free of any hacker interference or other type of monitoring and control from third parties. That is why the cloud is likely a lot safer than your own servers.
3.2. Automatic Backup. Undoubtedly, the information is the most important for many companies and their business, in this respect a special attention is paid to protection of the data and avoiding of its permanent loss. In this regard Cloud technology ensures a regular backup, so whenever you make an edit on your computer, it is updated on the cloud, as well.

Other people believe that there is a list of hazards keeping the company’s data in the cloud, as: potential data breaches, compromised credentials and broken authentication, account hijacking, permanent data loss and others. We will approach the issue from this perspective in one of next our blogs in order to have a non-biased approach and analyze the problem from different angles.


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