Litigating Blockchain: Not So Simple

Guest post by Derek Borchardt & Alejandro H. Cruz of Patterson Belknap Webb & Tyler LLP

Many believe that blockchain technology will revolutionize the way humans interact, in business and beyond. Though cryptocurrency is the topic du jour, blockchains can do much more than just enable digital currencies: they can be used to transform the way we store and manage many kinds of data, from real property and voting records to intellectual property licenses and medical information, and more. If blockchain is mainstreamed, courts will inevitably be faced with disputes arising out of the differences between blockchain and current methods of managing transactional data.

A central question in a blockchain-related dispute will be how to shape and apply traditional judicial remedies to information that is immutable. That is, what does a legal remedy mean in a world where information is extremely difficult (and in many instances, the true believers behind blockchain platforms would say, impossible) to rollback or modify, absent agreement from multiple and sometimes unknown parties?

To the uninitiated, blockchain is a digital bookkeeping method: a decentralized, digital transactions ledger in which datais distributed across a network of separate and often anonymous users. No single person or entity calls the shots, because the data is not stored in a centralized location or controlled by a single party. It provides a way for large groups to keep a secure record of transactions. Each party with access to the blockchain has the ability to record transactional data on the ledger (e.g.,a transfer of property or rights from one party to another), but to ensure certainty as to ownership and validity of subsequent transfers, blockchains apply a complex “consensus” mechanism, which requires a majority of a network’s computers to “agree” on each new block of transactions. Blockchains a redesigned such that once a transaction is recorded, it is extremely difficult and resource-intensive to erase or modify. There is no central administrator to revise a ledger so modifications to past transactions require the equivalent of technological somersaults.

The immutability of data stored in a blockchain is one source of appeal from a data security perspective. Even if a malicious actor accesses a blockchain, many say it would be extremely difficult for the infiltrator to alter the data recorded on the blockchain and have the alterations validated by the majority of the network.

But imagine a transaction involving intangible property, for example, a copyright license transferred from X to Y using a blockchain network. Y subsequently transfers the asset to Z, but not before a dispute arises involving X’s right to transfer its license to Y in the first place. In today’s world, absent blockchain transactions, if a court were to rule that X never had the right to provide the license to Y, the court’s judgment would be implemented by modifying the record of licensing rights to reflect that the only party holding the license is X. Those “repaired” records would be consistent with judicial process, and the parties’ expectations (as well as those of subsequent transacting parties) would be aligned.

In our hypothetical, however, the chain of ownership is reflected in a blockchain. Indeed, X, Y, and Z may be anonymous to each other and the court. Following the series of transactions, the blockchain reflects that a license is held by Z. Unless Z can be identified – which may or may not be feasible – and ordered by a court to effectively reverse its licensure records on the blockchain, there may be very little a court can do to ensure that the effects of its legal determinations are properly and fully reflected in the records that subsequent transacting parties will rely on. The court would surely issue a judgment adjudicating the rights as between X, Y, Z and others, but the blockchain may continue to tell a different, public, and immutable story.

While immutability is a potential benefit with respect to data integrity, it may also present challenges when it comes to realizing judicial remedies. Introducing a trusted administrator might alleviate some of these concerns by making it possible to resolve disputes or enforce court orders to reverse or implement compensating transactions on the blockchain, but such a central authority might be unacceptable to blockchain users who prioritize decentralization. These issues will matter as (and if)blockchains become a more prevalent means of transferring rights and reflecting ownership in an increasingly decentralized world.

Derek Borchardt, Associate

Derek Borchardt is an associate in the Firm’s Litigation department, where he represents clients in complex commercial litigation.  Mr. Borchardt also maintains an active pro bono practice.

Alejandro H. Cruz, Counsel

Alejandro Cruz is Counsel in the Firm’s Litigation department. Mr. Cruz represents clients in complex commercial litigation in trial and appellate courts, as well as in arbitrations and mediations. His practice includes disputes arising from structured finance transactions, alleged accounting malpractice, antitrust actions, and claims of commodities manipulation.

Patterson Belknap Webb & Tyler LLP

Patterson Belknap delivers a full range of services across more than 20 practice groups in both litigation and commercial law. Our practice groups and attorneys are regularly ranked among the leaders in New York and nationally by the most respected industry guides, based on client and peer reviews. Clients include a diverse group of institutions and individuals: from pharmaceutical and medical device companies to major media and publishing empires; from consumer products companies to financial institutions; from fine art museums to famous entertainers; from foreign companies seeking to transact business on U.S. stock exchanges to U.S. companies doing business abroad.

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