Yesterday, the UK Government’s Chief Scientist, Sir Mark Walport, published a report titled ‘Distributed Ledger Technology: beyond blockchain’ on Blockchain and distributed ledgers. In the report he sets out how this technology could transform the delivery of public services and boost productivity in the private sector. The report is about the algorithmic technologies that enable Bitcoin and their power to transform ledgers as tools to record, enable and secure an enormous range of transactions. The basic blockchain approach which is described in the report can be modified to incorporate rules, smart contracts, digital signatures and an array of other new tools.
The report is eye-opening and written in a style that should be accessible to non-experts. The report is also highly interesting for lawyers because it highlights potential use cases for the legal industry and familiarizes with the new technologies in an almost entertaining way.
The following sections of the report are the most relevant for lawyers and the legal industry:
„The opportunity is for government to enable a future where the delivery of government services is more personal, immediate and efficient. Wherever appropriate, citizens should have the opportunity to signal their individual preferences and needs through participation in smart contracts. The implementation of distributed ledgers with embedded smart contracts should lead to substantial improvements in compliance, cost-efficiency and accountability.“
„Distributed ledgers have the potential to be radically disruptive. Their processing capability is real time, near tamper-proof and increasingly low-cost. They can be applied to a wide range of industries and services, such as financial services, real estate, healthcare and identity management. They can underpin other softwareand hardware-based innovations such as smart contracts and the Internet of Things. Furthermore, their underlying philosophy of distributed consensus, open source, transparency and community could be highly disruptive to many of these sectors.“
„The development of DLTs and associated technologies also offers the possibility of real time recording of transactions and access, making transactions quicker and cheaper (see SETL case study, p60). For example, motor insurance could be based on the state of both the car and its driver, with insurance provision changing between suppliers depending on behaviour, price and appetite for risk. This could lead to a ‘programmable economy’ involving smart contracts, relying on decentralised networks and agents that require less human involvement, and operating as distributed autonomous organisations that deliver a wide variety of products and services. „
„Moreover, it is possible to create smart contracts that can be used “to create self-enforcing contracts between strangers, offering citizens a framework for transactions independent of the domestic judicial and executive branch”
„The development of an EU-wide series of VAT standards and protocols would enable DLT [Distributed Ledger Technology] to be deployed across Europe, with unilateral alignment of all VAT accounting transactions, from invoices to bank receipts. The system could include smart contracts designed to outsmart the tax quasi-compliant economy, which would also help to address the various threshold differences in VAT applicability across EU member states. With machine-learning devices reading the EU’s VAT transactions in real time, erroneous transactions (including so-called carousel fraud) are far more likely to be spotted than by the current methods of auditing. Increasing traceability and transparency — including payment providers, banks and other financial institutions — would make the black-market economy more difficult to conceal.“
The report also gives a good definition of smart contracts:
„Smart contracts are contracts whose terms are recorded in a computer language instead of legal language. Smart contracts can be automatically executed by a computing system, such as a suitable distributed ledger system. The potential benefits of smart contracts include low contracting, enforcement, and compliance costs; consequently it becomes economically viable to form contracts over numerous low-value transactions. The potential risks include a reliance on the computing system that executes the contract. At this stage, the risks and benefits are largely theoretical because the technology of smart contracts is still in its infancy, and some time away from widespread deployment.“