Blockchain has gone from a fringe technology known only by people who use crypto-currencies to a fully recognized method of processing transactions by major financial institutions. As blockchain continues its integration into our financial transactions, it is raising a significant number of questions that may change our legal landscape. The biggest questions come from three key areas: contract viability, financial regulations, and issues of anonymity.

Recognizing the Validity of Contracts

An interesting aspect of blockchain transactions is that they do more than just transfer currency from one person to another. Aside from processing transactions, they are also “smart contracts,” meaning that the execution of a transaction can be conditional. As they are, these smart contracts require an additional legal layer to be in compliance with contract law in almost every single state.

smart contractsHowever, in April of this year, Arizona recognized these smart contracts as legally binding, stating, “A contract relating to a transaction may not be denied legal effect, validity or enforceability solely because that contract contains a smart contract term.” This is a significant step forward for blockchain, smart contracts, and their validity as legally binding documents.

Simple introduction to smart contracts on a blockchain :

Financial Regulations

Blockchain may have started as a “crypto-currency only” solution, but major financial institutions are now taking note of its speed and simplicity.

backing blockchainBecause blockchain is borderless, regulations across countries could prove to be a significant headache for governments around the world. For regulators and financial institutions, blockchain’s distributed ledger could actually serve as a way to centralize transactions and contract information, making transactions faster and easier. Just how quickly governments and law enforcement can track these transactions, and if they impose restrictions on their speed or quantity, remains to be seen.

The Issue of Anonymity

For digital payment methods such as PayPal and Venmo, accounts are linked to either an email address, bank account or credit card, making the addition of laws for these relatively simple. However, through blockchain and crypto-currencies, a name is never attached to a transaction, just a number. Because currency is only digital, it can change hands and be swapped from one person to another at random in order to help mask illegal activity like money laundering. Addressing this issue legally has proven to be difficult. As law federal law enforcement makes strides to track illegal activities, coders will attempt to stay ahead. By putting laws in place that could limit the way transactions are performed, blockchain could become safer and more widely used.

privacy modelsSource: nakamotoinstitute.org

For more information on blockchain and how it is disrupting the financial industry, contact Ciklum today! We have offices all over the world with full support teams ready to inform and help.

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