As the name suggests Blockchain is a chain of multiple blocks. These are not ordinary blocks. Each block has a piece of data or information stored in it. When all these blocks are connected to each other in a specific manner, a desired transaction or communication of information takes place.
Blockchain is basically a means of storing information or data in decentralized form. At its nucleus, Blockchain is a decentralized, distributed ledger that records transactions across many computers so that the record cannot be altered retrospectively. It is a database which is distributed over multiple computers. The information on a blockchain is stored in an electronic format in bits and pieces on a particular computer.
Blockchain Technology is also known as the Distributed Ledger Technology (DLT). With the help of this Distributed Ledger Technology, anything of value can be converted to digital form be it traditional contracts or paper currency, be it games or the entire education system, so on and so forth. Blockchain allows recording and distribution of information & data in digital format. Any information stored in digital format on a blockchain cannot be altered, modified or deleted. It stays there for eternity until and unless the data blocks forming the blockchain are destroyed. Output of one data block is the input for the next connected data block and in this way the entire information is stored. If any of these data blocks are removed from the chain the entire blockchain will get destroyed.
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Key Characteristics of Blockchain Technology:
These are the main features of blockchain technology:
1. Decentralization: Data stored on blockchains are decentralized in nature. This means that no single person has the entire control over it. It operates on a peer-to-peer network. It reduces the risk of data leakages.
2. Transparency: Owing to this decentralization, all the transactions embedded on a public network blockchain are visible to all the participants in that network. Anyone from that network can audit the transactions thereby fostering trust and openness among the network.
3. Immutability: Once an information or data is stored in a digital format on a blockchain, it is almost impossible to alter, change, modify or delete that information or data in any manner. This is because the information in a blockchain is stored in bits and pieces on multiple data blocks. Output from one data block is produced in the form of a cryptic hash i.e. a cryptic code, and this output becomes the input for the next connected data block. So, if the information in any block is changed, this will change the entire cryptic hash of that block which will become undesirable for the next connected block and in this way the entire block chain will get destroyed.
4. Security: Security is one of the best features of blockchain technology. Any information or data digitized through the blockchain is not under the control of a single entity. Further it uses cryptic codes to encrypt the transactions thereby increasing the security.
5. Efficiency: Blockchain improves the efficiency through the automation of the transactions by using Smart contracts which are self-executing contracts with the terms of the agreement directly written into code.
6. Privacy: While blockchain provides transparency, it also offers advanced cryptographic methods to protect users’ identities and data. Users can remain anonymous, and their data can be kept private, enhancing security and privacy.
Shortcomings of Blockchain Technology:
1. Network Speed and Efficiency: Blockchains, especially those that prioritize security and decentralization, often process transactions more slowly compared to traditional databases. This can be a significant drawback for applications that require high-speed transactions and real-time processing.
2. Regulatory Uncertainty: Although blockchain technology is being used by millions of people now , the regulatory norms governing these transactions are yet to be announced. The views of the legislation are still not clear. The regulatory environment of blockchain is evolving continuously thereby posing new challenges every day.
3. Complexity of Transactions: Blockchain Technology is not everyone’s cup of tea. It requires specific coding knowledge and experience. This may result in resistance in adopting specifically from the individuals and entities who lack technical expertise.
4. Energy Consumption: Today the world is dealing with the severe impacts of Global Warming. Blockchains require significant power to solve complex problems, leading to high energy consumption. This raises environmental concerns and makes such blockchains less sustainable in the long term. Bitcoin Mining is its most significant example.
5. Data Privacy Concerns: While blockchain provides transparency, it can also pose privacy challenges, especially when dealing with sensitive information. Public blockchains make transaction data accessible to anyone, potentially exposing sensitive information unless proper privacy measures are implemented.
6. High Cost: Implementing and maintaining blockchain systems can be expensive, especially when considering the costs associated with energy consumption, hardware, and skilled personnel. These costs can be a barrier for small businesses and startups, limiting the broader adoption of blockchain technology.
Use Cases of Blockchain Technology:
1. Finance and Banking: Blockchain simplifies the Cross-Border Payments replacing the traditional methods. Ripple is a platform the uses blockchain to make international payments in a very less time. This not only save time but also the cost is also reduced. The traditional banking channels used to charge multiple types of commissions which can be eliminated through the use of Blockchain.
Crypto-currencies based on blockchain technology like Bitcoin have replaced the traditional currencies in multiple domains. For example Burger King in Venezuela accepts Bitcoin as payment. Microsoft, Twitch, Gyft, Express VPN etc. are some of the example of entities that accept bitcoin as payment. This is clear evidence of wide acceptance of Crypto Currencies around the globe.
Blockchain has facilitated decentralised lending and borrowing through the Decentralised Finance (De-fi) Platforms like Uniswap, Sushiswap etc. These platforms use cryptocurrencies for peer-to-peer lending and borrowing thereby reducing the role of intermediaries and their corresponding cost.
2. Supply Chain Management: Blockchain is widely being used now in the management of supply chain. Through the use of blockchain the complete record of a products journey right from it being a raw material till the time of its delivery as a finished good can be maintained. This record being based on blockchain cannot be manipulated.
Walmart itself used the IBM’s food trust blockchain to track a product’s movement from farm to shelf. This result in ensuring food safety, fast processing, efficient inventory management, managing logistics and other dispatch efficiently.
3. Health care: In healthcare sector the Blockchain technology can be used to manage the data of the patients in a very efficient manner by providing secure sharing of data about the medical history of the patient with other healthcare service providers. Blockchain can also helps in tracing the origin of drug its genuineness and other details. This can be a boon for the entire healthcare segment.
4. Voting System: There has been a debate around the world regarding the free and transparent voting system that cannot be tempered. This issue can be resolved by the blockchain technology. Because of its decentralised nature it will not be possible for anyone to temper the result of voting thereby ensuring fair election system. Countries like Switzerland, USA, Japan are doing their trails on voting through the block chain system.
Blockchain can also helps in the management of records & evidences. Once these records and evidences are digitized into the code, no one can temper them. This ensure the safety and genuineness of the records. Through blockchain the custody of the documents can be provided to a limited individuals & groups.
5. Legal Industry: Transparency, security, efficiency, and trust are the core elements of any successful legal system. Blockchain technology can help to contribute to these elements a lot. The evolution of smart contracts can be a good example of it. These are self-executing contracts with their terms directly written into code running on a blockchain technology. These contracts reduce the cost of executing a contract by eliminating the need of intermediaries and can also reduce the risk of dispute due to its self-executing nature. Since these are self-executing contracts there is no need of human intervention once the code is perfectly written & run.
Regulatory issues associated with the use of Blockchain Technology:
Blockchain Technology is still a new and evolving technology around the globe. People are using the blockchain in multiple domains in multiple ways. The scope of blockchain is unfolding very rapidly. Though this will improve the efficiency in each domain but it will also bring with itself certain regulatory aspects that need to be taken care of. Any negligence can prove to be recipe for disaster. A few regulatory issues that need to be answered are mentioned below:
1. Applicability of Law: Since the uses & impact of blockchain is still uncovering it is very difficult to formulate a universal law for this. Draft a static law for a dynamic technology is a very difficult task. Legislators and Jurists around the globe are brainstorming on these issues to find a possible solution. There is no specific law for the blockchain technology in India yet.
However, in the absence of a specific legislation, it is recommended to follow a general legislation. Statutes like Information Technology Act, 2002, Indian Contract Act, 1872, Evidence Act, CPC, CRPC etc. can be followed to arrive at a decision in case of any confusion or dispute.
2. Jurisdiction: Blockchain enable cross border transactions at the tip of a finger. This gives rise to another major issue that needs to be dealt with immediately is the procedure of determination of jurisdiction in case of international transactions executed through the blockchain technology because every jurisdiction has its own set of rules and manner of dealing with these issues.
At transaction level it gets very easy to determine the jurisdiction when the transaction is entered between two persons of the same jurisdiction. However, when the transacting parties belong to different jurisdiction it becomes a very difficult task. The best way to avoid this issue is the determination of the jurisdiction between the transacting parties upfront at the time of entering the transaction. If, they do not determine the jurisdiction upfront, then the best method to determine the jurisdiction is to identify the jurisdiction under which the major chunk of the transaction has taken place. This will help in determining the jurisdiction of the transaction for further processing.
3. Identity of a Person: In transactions based on blockchain it is not possible to identify the real person who is executing those transactions. Even in a public blockchain it is not possible to find the identity this is because that all the transactions are cryptic and based on hash codes. This anonymity creates problem in the case of any dispute between the transacting parties. For example, two parties are trading bitcoins where one party has transferred double then the intended bitcoins, in this case it will not be possible to trace the person to whom these excess bitcoins have been transferred. In such situation initiating a court room battle is not possible.
4. Issues related to Data Privacy: Since development of blockchain is at a nascent stage, it can either be made a boon or bane for the mankind. One of the biggest advantages of blockchain is that it cannot be tempered or altered. What is once written, it is always going to stay intact. However, this boon turns to bane when it is related to personal or confidential data of a person. Once the personal data of person is leaked through blockchain it cannot be undone. This may result in severe consequences. This is the clear-cut violation of Right to Privacy of an individual. To tackle this situation, it is very important that before entering into or implementing any blockchain transactions, adequate importance is given to maintain the confidentiality of the concerned individuals.
5. Breach of Intellectual Property Rights: While entering into a blockchain transaction, the parties need to share multiple software rights, the underlying technologies, the associated patents, designs, copyrights and many more things. This poses a threat of infringement of Intellectual Property Rights. Once these rights are infringed it gets very difficult to get control over these rights due to the anonymity of the user who is violating these rights. Thus, before entering into these transactions it is recommended to enter into IP Ownership Agreements, IP Licensing Agreement and other binding contracts and agreements.
In conclusion, blockchain technology represents a transformative advancement with far-reaching implications across various sectors. Its advantages, such as enhanced security, transparency, and efficiency, offer significant potential for innovation and disruption. However, these benefits come with challenges, including scalability issues, high energy consumption, and regulatory uncertainty.
The legal landscape surrounding blockchain is complex and evolving, necessitating a careful balance between fostering innovation and ensuring compliance with existing laws. As blockchain continues to mature, stakeholders must navigate its multifaceted impacts, leveraging its strengths while addressing its limitations. Ultimately, the future of blockchain hinges on collaborative efforts among technologists, regulators, and industry leaders to unlock its full potential responsibly and sustainably.
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Disclaimer: The information provided in this article on blockchain and its legal aspects is for general informational purposes only and does not constitute legal advice. The legal landscape surrounding blockchain technology is evolving, and regulations may vary by jurisdiction. Readers are encouraged to consult with a qualified legal professional to understand the specific implications of blockchain technology in their particular circumstances. TaxGuru does not guarantee the accuracy, completeness, or currentness of the information presented. The author and TaxGuru shall not be held liable for any actions taken based on the information in this article or for any losses or damages incurred. Always conduct your own research and seek professional advice when dealing with blockchain technology and related legal matters.
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