A landmark report from Allens will guide potential users through the opportunities and challenges of distributed ledger technology, which is set to transform sectors as varied as the banking and financial services sector, real estate, power and utilities, industrials, government and education, agribusiness and beyond.
Written by a multidisciplinary team of lawyers, the report covers how distributed ledger technology should be governed and regulated, as well as its key concepts, current and potential use cases, and recommendations for businesses.
It also contains detailed insights from clients of Allens and other Australian and international stakeholders. This includes thoughts on global trends from UBS as well as the firm's strategic alliance partner Linklaters, a window into two alternative Australian approaches to clearing and settlement provided by the ASX and Computershare, and a unique sector-specific perspective from Full Profile, winner of the 2016 Westpac Blockchain Hackathon.
'Our prediction is that distributed ledger technology will fundamentally reorder the mechanics of financial and other transactions,' said Gavin Smith, co-lead author of the report and technology, media and telecommunications sector head at Allens.
'Businesses will need to decide very soon if they are going to participate and invest in its ongoing development. There will be significant risk in waiting on the sidelines to see how the technology evolves. While some do that, distributed ledger technology may be deployed by competitors and new entrants alike. That is true for law firms as much as it is for our own clients.'
According to the authors, smart contracts – in which terms of the contract are encoded as part of a computer program and execute automatically – present one of distributed ledger technology's most interesting and potentially transformative use cases.
'Smart contracts are a prime example of how distributed ledger technology is colliding with the legal system,' said Valeska Bloch, managing associate and co-lead author of the report.
'Large international securities exchanges are likely to adopt smart contracts in the near future. From a legal perspective, this will present enormous challenges for governance, contractual arrangements, permissions, liability and dispute resolution. Smart contracts in their current state run fairly basic functions, but as they evolve, what will sit outside the code to make a smart contract a legal contract? How will a dispute be resolved over a smart contract?
'Parties effectively cede control to a digitised process which cannot be reasoned with or influenced. Legal and technical codes represent two diverging approaches to regulating problems. Under legal code, the rules can be broken, but any breach results in consequences. With technical code, the rules are programmed into the ledger from the outset and if broken, the technology simply does not work,' Valeska said.
The authors of the report urge businesses to think with scale when considering distributed ledger technology, even if it means accepting substantial costs in the short to medium term.
They also recommend regulators avoid overly onerous obligations on transaction participants before the full economic benefits of distributed ledger technology are understood.
'In our view, the policy goal should be to develop a functional approach to regulation, which regards distributed ledger technology as "neutral before the law". It should be regulated on a user case basis with reference to the existing legal frameworks governing each industry where it is relevant,' Gavin said.
Notes for editors.
Allens is a commercial law firm working throughout Australia and Asia. Through its integrated alliance with Linklaters it provides clients access to 40 offices in 28 countries around the world.