Contract and Tort Law (Not Property) Are Required for Blockchain Property Transactions

June 07, 2018 New Jersey Law Journal

By Jonathan Bick Jonathan Bick is of counsel at Brach Eichler in Rose/and. He is also an adjunct professor at Pace and Rutgers law schools, and the author of 101 Things You Need to Know About Internet Law (Random House 2000).

Since the advent, in 2008, of BitCoin—a completely peer-to-peer cash system free of third-party involvement—the interest in "blockchain" technology has increased. Blockchain protocol offers an alternative to the need for trusted third parties to prevent property fraud. However, it also requires the application of law other than property law to police blockchain activity. More particularly, contract and tort law are more applicable than property law to properly adjudicate blockchain property transactions.

When blockchain protocol is applied to property, it offers tangible benefits in comparison with traditional property tracking systems. Specifically, some of the benefits are: the elimination of the need for third parties and the cost of ensuring said parties are trustworthy; irreversible transactions; decreased transaction costs and associated fees; and prevention of record tampering. Since the application of blockchain protocol to property eliminates the role of trusted third parties, it renders property law ineffective for regulating and adjusting blockchain matters because property law requires trusted third parties to process claims properly.

Protocols are procedures that have been agreed upon by users and provide opportunity for actions that will produce a specific result. Blockchain protocols are sets of computer software programs and data formats designed to produce secure messages. The blockchain protocols set the procedures for transmitting data, determining to whom certain data should be sent, confirming that the data has been properly received, determining the routing procedures for moving the data through a network, and setting procedures for lost or missing data.

Property legal rights are traditionally memorialized by writing copies that are held by trusted third parties. These writings typically evidence the identity of property and its owner, as well as when and where the ownership began. Examples include court land deeds, state security interest filing and chattel paper, federal stock certificates and bank records, and federal agency intellectual property accounts, among others.

Blockchain protocol results in a significant distribution of coded anti-fraud information so as not to require trust in other parties or in a central list authority to prevent deceptive transactions. While the initial purpose of blockchain protocol was to allow two Internet users to exchange digital property, without any prior relationship, and in a secure way, without the need of a trusted third party to supply records in the event of a dispute, blockchain protocol is now most often used to certify transactions. For example, blockchain protocol is used to ensure compliance and traceability in supply chains, particularly in pharmaceutical supply chains where errors are more likely to be life threatening.

Existing property law primarily relies on the existence and production of trusted third-party records as a basis for regulating and adjudicating property disputes. Said third-party records are trusted by regulators and the courts to be the standard by which disputed property transactions are judged. Property law governs the various forms of ownership and tenancy in real property (land, as distinct from personal or movable possessions) and in personal property, within the common law legal system generally by comparing property claims to information supplied by trusted record keepers for both movable and immovable property.

By contrast blockchain protocol eliminates the generation of trusted third-party record keepers by employing dual coding and consensus system. By doing so, the use of blockchain protocol eliminates the possibility of applying traditional property-law conflict resolution procedures and processes to blockchain protocol transactions. By doing so, procedures and processes associated with sets of laws other than property law are required to resolve blockchain protocol property disagreements. Specifically, contract and tort law have regularly been used to regulate and adjudicate legal difficulties associated with coded and consensus systems, thus they are applicable to regulate and police blockchain protocol transactions.

Blockchain protocol generates and distributes a series of messages associated with each transaction. These messages, sometimes called "blocks," are connected by the protocol to form longer messages usually termed the "blockchain." These blockchains are distributed widely via the internet and are stored by many unassociated parties. Prior to the transfer of a blockchain, a statistically significant mathematical survey is executed, and a consensus of the validity of the blockchain is established (See Barrett Sheridan, Bitcoins: Currency of the Geeks, Bloomberg Bus. (June 16, 2011), http://www.businessweek.com/magazine/content/11explaining Bitcoin transactions last visited 5/19/2018).

Blockchain protocol eliminates the need for a trusted third party by employing cryptography. More specifically, for each property transaction the blockchain protocol creates a pair of cryptographically related keys, one public, given to everyone in the world to use, and one private, held only by the individual. These keys are interconnected, but so mathematically complex that it is generally not possible to use the public key to guess the private key. Using the public key, a participant can send messages, digital property and data, among other things, that only a person with a related private key can access. Blockchain protocol is frequently analogized to a locking letterbox. The public key enables a user to put a letter in locked letterbox's mail slot. Anyone can put a letter in, but only the owner of the letterbox has the key to unlock it and retrieve the contents.

As subsequent transfers occur, the blockchain protocol updates the private key and prevents prior private key users from accessing items which they have transferred. The widespread publication of the public log of all transactions usually is sufficient to regulate and adjudicate blockchain property transactions and disputes.

Once the transactions in a given block of time are verified, they are integrated into the overall list of transactions, and they become the latest block of transactions in a chain of such blocks, hence the term "blockchain." The blockchain comprises the entire transaction history of all transfers of the asset, as well as other assets recorded in the chain, from the original asset transfer.

Public access to blockchains allows any internet user to see which keys own which assets. Such access to a distributed public ledger of interests makes it difficult to falsify said records, particularly as computers (each associated with a particular blockchain protocol property owner) are added to a particular blockchain network.

Property law is the law of things, not of agreements or acts. Contract law is the law of agreements. And tort law is the law of acts.

As subsequent transfers occur, the blockchain protocol updates the private key and prevents prior private key users from accessing items which they have transferred. The widespread publication of the public log of all transactions usually is sufficient to regulate and adjudicate blockchain property transactions and disputes.

Once the transactions in a given block of time are verified, they are integrated into the overall list of transactions, and they become the latest block of transactions in a chain of such blocks, hence the term "blockchain." The blockchain comprises the entire transaction history of all transfers of the asset, as well as other assets recorded in the chain, from the original asset transfer.

Public access to blockchains allows any internet user to see which keys own which assets. Such access to a distributed public ledger of interests makes it difficult to falsify said records, particularly as computers (each associated with a particular blockchain protocol property owner) are added to a particular blockchain network.

Property law is the law of things, not of agreements or acts. Contract law is the law of agreements. And tort law is the law of acts. An "in rem" right is the right "in a thing." Property law, or "in rem" law, regulates and adjudicates rights with respect to things as against persons generally. Normally, property law considers the physical characteristics of the item in its purview because the objects themselves provide an excellent form of fixed rule. More particularly, property law considers the claims in a dispute with respect to information that is provided by trusted third parties. The elimination of such third-party information renders much property law and associated precedent inapplicable.

Blockchain protocol relies on agreements and acts. The parties to blockchain protocol property transactions agree to the use of specific codes and software transactions. Said parties then take actions to activate blockchain protocol property transactions. Consequently, it is more useful to regulate and adjudicate blockchain protocol property transactions using laws and precedent associated with agreements and acts, rather than using the law of physical things. Particularly, since the law of agreements (contract law) and the law of acts (tort law) do not depend upon trusted third-party transaction records, as does property law.

Unlike property law, wherein courts rely on trusted third-party information, courts applying contract or tort law need only secure information from the parties directly involved, and do not need property systems to apprise them of the terms of their own deal. Courts can adjudicate disputes by applying contract rules, designed to foster bilateral information disclosure, or tort laws, which regulate bilateral duties of care.