7 Legal Issues Startups Must Solve Before Using Blockchain Technology

Currently, India does not have any specific laws governing the use/development/operation of blockchain. The Ministry of Finance and the RBI have expressed their concerns over the use of this technology and the associated risks of using virtual currencies that use blockchain.

It is key to note that cryptocurrencies, which are one of the biggest use cases of blockchain, are not recognized as an authorized form of payment in India.

A blockchain is a distributed database/ledger that stores information electronically in a decentralized computer network. Blockchain has been used by cryptocurrencies such as Bitcoin to maintain a secure and decentralized record of transactions by reducing the availability of information.

Legal issues to consider

More jurisdictions: Due to the blockchain being a decentralized ledger, the nodes can be located over different geographical locations, which will cause more transactions to happen across different jurisdictions. Such entity will be required to comply with applicable laws in various jurisdictions where these nodes will be located.

Force Majeure Events: Force Majeure clauses generally cover events such as wars, pandemics, natural disasters, fires or other events beyond the control of the contracting parties. However, blockchain events such as malfunctioning technology must be included in the definition of force majeure events.

Intellectual property: The main challenge will be the enforcement of the IP rights in the technology, given that the IP can be developed across different jurisdictions. Available protection shall depend on the technology’s area of ​​application. It is important to note that the majority of blockchain projects are developed under open source licenses that are usually non-commercial and royalty-free. Entities will be required to understand the limitations of the open source license in order to be prepared for the associated potential liabilities. Companies that develop new technology must make sure to patent the technology to secure any liabilities.

Value of databases: Although companies do not own the IP rights to separate blocks of information, a collection of these blocks will fall within the definition of IP in different jurisdictions. The databases are often transferred to service providers. If the startup to which a database is sold decides to use it for a purpose other than that consented to by the affected individuals, such a change must also be approved to ensure compliance with data protection regulations applicable in most jurisdictions.

Data protection: Blockchains store data for posterity, thus making it non-compliant with most provisions of data protection laws. They include the right for data generators to have their data forgotten by data collectors after a certain period of time has passed, and to have such data deleted by data collectors upon request.

Smart contracts: Smart contracts are based on computer codes that are executed upon the occurrence of specific preset criteria without confirmation from any intermediary. The enforceability of these contracts will be determined by the existence of the fundamental element of contract law, i.e. offer, valid acceptance, meeting, consideration, etc. Organizations can be held liable for poorly written code that results in harm to users.

Compliance with financial and tax laws: Different jurisdictions have different financial laws, mainly applicable to the agent or custodian of financial products. However, in the case of financial products using blockchain, a non-custodial structure exists which creates an ambiguity regarding the imposition of liabilities for non-compliance.

Entities using blockchain technology will be required to comply with the laws of multiple jurisdictions where the many nodes in the network are located. The inherent nature of the blockchain which restricts the modification/deletion of data means that the storage of information does not comply with the fundamental principles of several data protection laws. Entities must perform their due diligence with respect to the technology and the application of the law in the jurisdictions.