Brian Hall - September 5, 2017 - Business Law
Blockchain, Cryptocurrency, Bitcoin, Ethereum, Smart Contracts…all of these surely make the ears of eager founders perk up. Rightfully so, as Blockchain Technology has been considered the next big thing, destined to revolutionize the Internet and how transactions occur. Opportunities abound, including in stock market trades or other financial transactions, including lending, land registry, smart contracts, supply chain, e-voting, insurance, asset management, healthcare, music, government, etc.
Before going any further, let’s all make sure we understand Blockchain transactions. Generally speaking: (1) a user requests a transaction; (2) that transaction request is broadcast through a network of node computers for validation via algorithms; (3) upon verification, the particular transaction is added to the ledger, which contains a block of data for each prior transaction; and (4) the blockchain is updated permanently, without the ability to change it, and the transaction is complete. It is decentralized, verifiable and incorruptible (theoretically).
So what should you as the founder of Blockchain business know? Wherever you may fall within Blockchain Technology and its use in your business, you should be aware of some things:
- ICOs (Initial Coin Offerings) are a Funding Option. While Ethereum has made ICOs all the rage, and an ICO may be a viable way to raise capital for your business, you must understand that ICOs pose risk. ICOs are increasingly on the SEC’s radar, including being the subject of an Investor’s Bulletin. Be mindful of the ever-changing landscape of regulations, which may impact whether traditional fundraising or crowdfunding may be preferable.
- Beware of Humans. While smart contracts allow for automatic execution when specific conditions are met, they are coded and thus require human creation. This means human error is possible, which means the risk of liability remains. In addition, while it is true that with no central point of failure and being secured using cryptography, Blockchain applications are considered safer from hacking and fraud, hacks have occurred, including the famed DAO Hack, which ultimately modified how Ethereum operated once the hard fork, or change in the code, was implemented. Typical considerations involving indemnification and limitation of liability should be considered in all relevant contracts.
- Intellectual Property Ownership. Consider your intellectual property and whether you can claim exclusivity to your works, particularly in light of the fact that it exists in the distributed public Blockchain network. Patents have been filed and more will follow. Just like any business, you must consider your intangible property (brand, code, methods, works of authorship, etc.).
- Resources are Scarce. Blockchain developers are fetching a pretty penny these days. Surrounding yourself with the proper team and ensuring your employment agreements (including non-competes) are enforceable will be important.
- Lots of Unknowns with Inevitable Disputes. Whether it is the Blockchain’s impact on data privacy or questions surrounding legal enforceability of smart contracts, many areas of law will be developing alongside the Blockchain. As we saw with the explosion of Internet law, advising clients with limited or no legal precedent will be an ongoing challenge.
As with any early adoption, risk abounds, as does opportunity. Understanding how to navigate the Blockchain, both practically and legally, will likely be required of all founders in the coming of what some are calling Web 3.0, regardless of whether you are operating a Blockchain business.
Founders’ Friday is a series published by Austin, Texas attorney Brian A. Hall of Traverse Legal, PLC d/b/a Hall Law dedicated to legal considerations facing founders and start-ups.