Recently, we have been hearing blockchain mentioned more and more frequently in the media – what is it actually?

It sounds like an easy question, but the answer is not so straightforward. The best way to describe it is as a sort of decentralised database of records or transactions that are combined into what are referred to as blocks. The basic characteristic of blockchain is its unchangeability, high degree of security, and verifiability of individual transactions in the whole chain. Sometimes, blockchain also directly refers to the technology that facilitates the management of the records database.

The overwhelming majority of the public associates blockchain with cryptocurrencies – however, I assume it is not only about cryptocurrencies?

That is correct – it is a frequent misconception. Blockchain had originally been intended to be used for bitcoin and other virtual currencies. Now that several years have passed, we can see that the blockchain solution often has a better application in areas other than payments. It is considerably slow and expensive for payments. We have seen blockchain solutions applied, for example, in health care or in supplier chains, where the applicability of the technology is much better than in payments.

Can you give specific examples of its applicability?

One of the examples is supplier chains. Companies trading in, say, precious stones or diamonds have their whole supplier chains based on the blockchain technology. It enables them to verify where and at what point each individual record is located: what the current location of the given precious stone is or from which supplier it went to another supplier. This well exemplifies the security and verifiability of each and every stage of the chain.

I assume that blockchain has not been sufficiently addressed in legislative terms. What is the current state of the legislation?

You are right. It is in a sort of vacuum and, at least in the Czech Republic, no specific legal regulations apply. It has already been addressed in other jurisdictions, yet these are exceptions. It is not usual in other countries or jurisdictions. If you need to set out contractual relations among entities participating in the chain or jointly using the blockchain technology, this ideally needs to be arranged through contracts.

Does no regulation exist at the level of international institutions either?

No regulation of blockchain exists. However, virtual currencies have already started to be regulated, the reason being that investors’ interests are at risk in relation to ICOs or “Initial Coin Offerings”. Technological start-ups obtain funds by issuing what are referred to as tokens, whereby they exchange, either for actual money, or another virtual currency, an equity investment in a firm or a share in some of the services provided by the firm. Therefore, regulation has already been adopted in this respect to protect investors or consumers.

You have mentioned that one of the principal characteristics of blockchain is decentralisation. Does that mean that the relations among entities are entirely unregulated?

This is a very frequent mistake. I guess this is owing to the general excitement, because it is a novelty outside the ruling order and outside the establishment. Even the experts are often under the impression that no regulation applies to blockchain relations. However, this is not true. The trouble is that no one knows what regulation applies to them and how to regulate civil-law relations in a blockchain. It is of high importance that entities jointly using the technology address regulation or civil-law and liability relations themselves, be it through a contract or the formation of an entity.

If I understand things correctly the market regulator, be it the Czech National Bank or any other national bank in the world, cannot interfere in the trade in cryptocurrencies?

That depends. The Czech national Bank tends to be passive or, to be more specific, it does not want to actively interfere in the trade. To quote vice-governor Mojmír Hampl, I think its motto is “not to help and not to protect”. However, some institutions and regulators have already been seeking for the trade in virtual currencies to be regulated, be it as a commodity or a currency. There are places in the world where this is regulated; however, there is essentially no regulation at all in here.

Do you yourself swear by cryptocurrencies?

Not really. As a store of value, they are not a suitable commodity or suitable institutes. The initially expected payment function proved to be ineffective. Namely on account of being too time-consuming and expensive per transaction. I am not saying that cryptocurrencies will go down the drain in a month or a year, but I do not think that, going forward, it is a system that could replace the actual currency and established payment systems.

To go back to the legal aspects. Do you think that Czech law is able to absorb the issue of blockchain? 

I think so. We will see how theory or judicial practice will further develop. However, were are talking about distant future here. On the other hand, considering how Czech legislation accepts various other innovative concepts, such as electronic signatures or electronic conclusion of contracts, I am a bit of a pessimist.  Sometimes it is hard for me to imagine that Czech civil law would take such an approach to this concept that would make it work well.

On the other hand, the blockchain solution or blockchain technologies will be often used among companies, businesses. It is not a consumer solution and thus, we always have a possibility to stipulate the relevant legal aspects on our own by establishing a company, association or a multilateral agreement. This is not easy and there have only been very few cases like that. We are at the very beginning. I am really keen to see how the legislation will become clearer in a few years.

You work at an international law office. I suppose you consult the issue of blockchain with your colleagues from foreign law offices. Are there any other interesting problems that you encounter in the context of network? 

These are often the ICO or Initial Coin Offerings where we are addressed by various companies to provide them with legal advice. One of the most common problems we have to deal with is money laundering, or better, the measures preventing money laundering. In terms of civil law issues, we do not just passively accept engagements from clients, in our office we also try to be pro-active. We have established a blockchain workgroup that focuses specifically on such civil law issues and may establish certain practice or basis that might help define the direction in which Czech law could further develop.

And what about liability? Are these relations covered sufficiently?

Given that there is effectively no treatment of substantive rights in this respect in civil law, the issue of liability is very unclear. We must take into consideration what entities or what types of entities exist within the blockchain technology: whether these are common users, or developers of the technology or firms providing the blockchain system as such, for example taken from the perspective of hardware. There are many relations in the area of liability and they have not been clarified yet. Of course, we can use the basis stipulated in the Civil Code, however, I would like to emphasise once more that it is always better to specify the details of the relations between the parties in a contract.

This year, the big issue is definitely the GDPR. How does blockchain go with the GDPR?

It is a kind of dichotomy. One of the characteristic features of blockchain is its unchangeability, which means that records and transactions are kept, in fact, for ever. And this goes a little bit against the concept of the GDPR and personal data protection as there is a right to have data erased. However, the blockchain technology does not make it possible to exercise this right. It is a decentralised technology, as a result of which records of data may be located anywhere in the world. So, once again, this goes against the regulations related to personal data protection under which it is not possible to store data outside the EU.

In your international activities, have you experienced any increased activity from any national office for personal data protection in relation to blockchain? 

Not yet, but we really look forward to that. This is one of the substantial issues that need to be dealt with in order to enable a wider and more common use of blockchain technologies especially here, in the EU area where the GDPR applies.

I would really like to know one specific example related to legislation as we know it from our everyday activities where blockchain could be used.

I would give you the following example: an in-house lawyer of a bank or a financial institution who is addressed by the bank’s director because he wants to use blockchain technology in an association with other institutions for client verification in the area of money laundering. I can image that in such a case, the in-house lawyer of the bank or the financial institution will have to know the relevant legislation very well, or he will have to know how to define contractual relations with, for example, the other entities involved in such a project. Thus, storing data of financial services users for anti-money laundering purposes is only one example of a situation we have to and will have to deal with.

So, in your opinion, it is primarily the corporate lawyers who should be well aware of the issue of blockchain. 

I definitely agree. It is mainly because the issue of liability is very unclear and it is definitely the task of each in-house lawyer to cover the issue properly in contractual terms in order to protect his/her employer against damage and other losses.

Interview was published in the online magazine epravo.cz in August 2018.