20.07.2018 | KPMG Law Insights

Blockchain: Almost all legal questions still open so far

Blockchain: Almost all legal questions still open so far

Decentralized databases for transactions between parties offer many opportunities in the future + Legal aspects have been little illuminated to date + Questions need to be clarified, particularly with regard to liability, consumer protection and money laundering

The possibilities for exchanging values quickly and easily worldwide through decentralized databases seem limitless. Money can be transferred in the process, as with the Bitcoin application form. However, land, shares in assets or movable property could also change hands in this way.

How blockchain works

The technical basis for such processes is always a so-called blockchain. This is a kind of digital cash book, with which every transaction between parties is transparently recorded and stored with every detail.

The network consists of a large number of computers that are connected to each other via the Internet. There is no central location to which information is transmitted. The information is distributed to all computers participating in the network. The integrity of the data is secured by storing the so-called hash value. This is obtained by using a hash function (German: Streuwertfunktion) to create a reordered string with a fixed length from a data set of any length.

Legal challenges

At present, almost all legal issues are open with regard to regulatory classification. For example, there could be a licensing requirement if trading in financial instruments or the provision of payment services is based on blockchain technology. The question of liability must also be clarified. For example, who is liable for blockchain errors or technical problems? Who is liable in case of attacks on the system by hackers?

With a view to consumer protection , it must be clear which processes take effect in the event of reversals and how warranty rights are handled.

In order to exclude money laundering , the identification of the parties involved must be ensured. It can be problematic that the acting party remains hidden behind the so-called “public key,” which acts as a kind of account number.

Conclusion: Blockchain is a technical development with many opportunities, but also with risks. A legally binding assessment is hardly possible, as there is currently no regulation, but an unmanageable number of use cases. It therefore seems practicable to prepare elaborations of possible solutions for the individual case in order to then coordinate these with BaFin with regard to their feasibility.

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