Blockchain and its Applications: A Conceptual Legal Primer

Blockchain is a potent buzzword and potentially transformative technology. Diverse businesses are looking to leverage blockchain to reap its alleged benefits of increased efficiency, reduced costs, enhanced transparency, and improved traceability. Yet, significant confusion persists about the structure, utility, and applicability of blockchain technology. A clear understanding of what blockchain is and how it works is especially important for lawyers advising clients on the applications that use, or purport to use it. Our recent paper aims to assist lawyers and regulators by providing conceptual clarity about what blockchain is, how it works, and some of its main use cases, from smart contracts to cryptoassets and Central Bank Digital Currencies (CBDCs). These applications will in time transform business practices, and possibly entire monetary and payment systems, so conceptual clarity among lawyers will only become more vital.

The Current State of Confusion

We start by explaining what blockchain is not. To understand blockchain, one must first distinguish it from Bitcoin. Bitcoin is a digital currency with no single issuer, repository, or administrator. Bitcoin operates on blockchain and also uses advanced cryptography and other technologies. Because Bitcoin was the first prominent application of blockchain, many people learned about blockchain in the context of Bitcoin, which tends to distort their understanding.

In light of the confusion surrounding modern financial vocabulary, we propose a new approach to understanding blockchain. Our paper hopes to aid the development of a common understanding of blockchain and its implementations for lawyers advising clients in this area and regulators governing its uses; for if we do not understand how the technology works, then we cannot properly assess the opportunities and risks it poses.

What is Blockchain?

A clearer picture of how a ‘blockchain’ operates can be seen by focusing on its two constituent words: ‘block’ and ‘chain’. ‘Block’ reflects the form in which data exist within the database. ‘Chain’ reflects the process of how the database is formed. Taken together, ‘blockchain’ reflects the structure of the database, whereby electronic blocks of data are joined together. The chain of blocks is created to make the storage of data on the blockchain tamper-evident and thereby contributes to the integrity of the data: as long as each block is linked to an earlier block, the database represents a continuous succession of records.

These features make blockchain potentially very useful for record-keeping, as every change in the data in the blocks is recorded, creating a helpful audit trail, and all users can see changes that occur, as all subsequent blocks will be affected. This could aid the recording of transactions and property rights (eg financial transactions or transactions with valuable assets such as realty), recording corporate actions or recording access to data, among other things.

Our paper distinguishes these essential characteristics of blockchain from other optional characteristics that a blockchain may or may not have, including decentralisation, immutability, and digital data and time-stamping.

For example, because blockchain is most frequently used in a decentralised application, typically via a distributed ledger (a database shared and synchronised across a network, commonly called ‘DLT’), the terms ‘blockchain’ and ‘DLT’ are often used interchangeably. While blockchain and DLT work very well together, they are separate innovations and thinking of them as such promotes conceptual clarity. Blockchain principally reflects how a database is put together (in blocks linked by digital references), whereas DLT is primarily one of the methods of maintaining and accessing a database (however created) by various users.

Blockchain Applications

The novelty of our analysis stems from the clear separation of blockchain-specific features from other technologies, which seeks to eliminate the confusion often encountered in the literature and in practice. The conceptual clarity of this approach makes it possible to understand why and how blockchain is being applied—from smart contracts to new financing models to cryptoassets and some CBDCs—all of which have the potential to revolutionise how we transact. In light of this, our paper examines the principal applications of blockchain in the areas of international trade, finance, and IP protection, to identify the implications of integrating blockchain in each domain.

It is important for lawyers to understand both the underlying technology and its various applications to advise clients that are interested in leveraging its benefits and understanding how it may reshape the commercial landscape. While these benefits are particularly apparent for the financial sector—promising to transform interbank payments, cross-border transactions, clearing and settlements, remittances, and other services — blockchain is increasingly being used commercially across a wide range of other industries.

It seems inevitable that blockchain will continue to drive innovation and disruption for the foreseeable future. Understanding clearly how blockchain and related technologies work will become ever more essential to legal practice and regulatory action.

Ross P Buckley is Scientia Professor and KPMG Law – King & Wood Mallesons Professor of Disruptive Innovation at UNSW Sydney.

Anton N Didenko is a Senior Lecturer at UNSW Sydney.

Mia Trzecinski is a Research Fellow at UNSW Sydney.