7 legal issues startups need to resolve before using blockchain tech

At present, India does not have any specific laws regulating the use/development/operation of blockchain. The Ministry of Finance and the RBI have expressed their misgivings over the use of this technology and the associated risks of the use of virtual currencies that employ blockchain.

It is key to note that cryptocurrencies, which are one of the largest use-cases of blockchain, are not recognized as an authorized mode of payment in India.

A blockchain is a distributed database/ledger that stores information electronically in decentralized computer network. Blockchain has been employed by cryptocurrencies such as Bitcoin in order to maintain a secure and decentralized record of transactions by decreasing accessibility to information.

Legal issues to consider

Multiple jurisdictions: Due to blockchain being a decentralized ledger, the nodes can be located over various geographical locations which would cause multiple transactions to occur over various jurisdictions. Such an entity would be required to be compliant with the applicable laws of various jurisdictions where these nodes would be located.

Force Majeure events: Force Majeure clauses generally cover events such as wars, pandemics, natural disasters, fires, or any other event that is out of the control of the parties to the contract. However, blockchain eventualities such as malfunctioning technology need to be included within the definition of force majeure events.

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Intellectual Property: Key challenge would be the enforcement of the IP rights in the technology, given that the IP may be developed across various jurisdictions. The protection available shall depend on the use-case of the technology. It is key to note that majority of blockchain projects are developed under open-source licenses which are typically non-commercial and royalty free. Entities will be required to understand the limitations of the open-source license in order to be prepared for the associated potential liabilities. Companies developing any new technology need to make sure to patent the technology to hedge any possible liabilities.

Value of databases: While companies do not own the IP rights to separate blocks of information, a collection of these blocks would fall within the definition of IP in various jurisdictions. The databases are often transferred to service providers. If the startup to whom a database is sold decides to use it for a purpose other than what was consented to by the concerned individuals, such change shall have to be consented to as well to ensure compliance with data protection regulations applicable in most jurisdictions.

Data privacy: Blockchains store data for posterity thereby rendering it non-compliant with most provisions of data protection laws. They include the right of data generators to have their data forgotten by the data collectors subsequent to a certain time period having passed, and such data being deleted by the data aggregators upon request.

Smart contracts: Smart contracts are based on computer codes that get executed upon the occurrence of specific pre-set criteria without confirmation by any intermediary. The enforceability of these contracts would be determined by the existence of the basic element of contract law i.e., offer, valid acceptance, meeting of minds, consideration, etc. Organisations may be held liable for poorly written code that results in damages to the users.          

Compliance with finance and tax laws: Various jurisdictions have differing financial laws, mostly applicable to the agent or custodian of financial products. However, in the case of financial products employing blockchain, there exists a non-custodial structure that creates an ambiguity as to the affixing of liabilities for non-compliance.

Entities employing blockchain technology would be required to comply with the laws of multiple jurisdictions where the numerous nodes of the network are located. The innate nature of the blockchain that restricts alteration/deletion of data renders the storage of information non-compliant with the basic principles of multiple data protection laws. Entities need to carry out their due diligence with regard to the technology and the application of law in the jurisdictions.