By now, most of us have heard about Bitcoin. However, familiarity with the technology underpinning this cryptographic currency – colloquially known to coders as ‘the blockchain’ – is far less common.
Cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) were catapulted into public consciousness last year after the former’s meteoric rise to a peak price per coin of almost €18k, representing a market capitalisation of around €268bn.
So widespread was the adoption of Bitcoin that the Revenue issued guidelines on the tax treatment of cryptocurrencies. These guidelines were also the subject of the September issue of our Tax Update, written by expert, James Hughes. He argued that for cryptocurrency gains to be treated as tax-exempt gambling profit, the beneficiary would have to show that the transaction was of a highly speculative nature.
So what drives Bitcoin? Blockchain is in effect a distributed ledger technology which exists across and is managed by peer-to-peer networks, each forming a node or ‘block’ in the proverbial chain through which time-stamped data is exchanged ceaselessly.
Since the data interchanges constantly with other nodes on the network, a ‘hard delete’ is impossible. When coupled with the strong cryptography built into each block, the system becomes an immutable list of records characterised by constant growth. Moreover, the decentralised nature of blockchain increases trust in the network, as it cannot be tampered with by an over-zealous system administrator.
Dr Trevor Clohessy of Galway-Mayo Institute of Technology is one of a small number of academics in the country actively researching blockchain technology. He likens the growth of blockchain to the sudden burst of interest in cloud computing which occurred in the mid-2000s.
Speaking to The Irish Times in May, Clohessy said that the ‘shared ownership’ aspect of the blockchain makes it less vulnerable to cyberattack and that other ‘beneficial uses of this technology would be in voting machines to address electoral fraud… and a blockchain-enabled border identification system which could provide a solution to the current Brexit challenges.’
The immutability of blockchain networks mean they are the ideal technology for industries which require extensive verification processes. The financial sector has been quick to adopt distributed ledger technology because it has the potential to increase payment processing efficiency.
Real-life blockchain applications are in place at financial behemoths like JP Morgan Chase as well as within smaller start-ups like Open Law and Komgo. The ability for companies and law firms alike to adopt blockchain depends on organisational readiness, according to research done by Dr Clohessy.
In one interesting case study, a company called Meridio employed the use of blockchain technology to ‘tokenise’ property sales – allowing investors to purchase property in smaller denominations than would previously have been possible. Under this system, an investor can also reclaim the value of their holding at any stage, as the token is simply re-offered for sale through the distributed ledger system.
That said, the main use of blockchain lies in the advent of smart contracts. In 1994, legal scholar Nick Szabo realised that distributed ledger technology could be used to create self-executing contracts. These contracts can be converted to computer code, allowing the blockchain to recognise when certain obligations have been carried out. It then responds by completing the contract automatically, whether that be in the form of payment or the performance of some form of mutual obligation.
The indelibility of the blockchain network, coupled with the self-executing capabilities of smart contracts, together represent a significant development in what is known as the ‘trust economy’. Open blockchain networks cannot be altered by a central authority, nor can they be hacked or altered. Moreover, smart contracts directly enforce contractual terms and obligations without the need for a middle-man. All of this decreases the cost of trust and moves the arbitration of trustworthiness away from centralised authorities.
It is therefore fair to say that since blockchain represents a huge conceptual breakthrough in terms of the management of information, useful applications will arise in almost every sphere of economic activity – including legal practice, particularly as the use of smart contracts becomes more prevalent.
As with most technologies, adoption will not be necessary for every enterprise. Whether or not the financial investment and time involved in laying a framework for a blockchain network is justified depends on whether or not a problem exists within your organisation which could be rectified by distributed ledger technology. In short, the hype is justified but universal applicability has not been demonstrated as of yet.