Blockchain: Key legal and regulatory challenges with distributed ledger technology

Sue McLean, Of Counsel lawyer at Morrison & Foerster highlights challenges for blockchain adoption


As regularly reported in ComputerworldUK and Techworld, an increasing number of companies are exploring and investing in distributed ledger technology. See also: Which banks are investing in the blockchain?

Governments and international bodies are also discussing the possible implications of distributed ledgers on business, governments and the economy. See also: what is Blockchain?

© iStock/alengo
© iStock/alengo

This transformative technology raises significant questions for policy makers, regulators and lawmakers.

Indeed, during the last 18 months, many national and international bodies (some examples are set out below) have been closely analysing and monitoring distributed ledger developments. (See also: what is a graph database?)

For now, most appear cautiously optimistic about its future. This isn’t surprising - despite its challenges, distributed ledger technology could actually help improve regulatory compliance, and compliance tracking and reporting.

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However, despite calls for regulation from some parties who believe that the current legal and regulatory uncertainty is unhelpful, it’s clear that most authorities are taking a “wait and see” approach.  This seems prudent - until the technology has been properly tested, any regulation of the technology could be premature and hamper its development. 

  • In February 2015, the Bank of England acknowledged the promise of decentralised ledger technologies and has since created a distributed ledgers team.
  • In January 2016, the IMF issued a report considering the benefits and risks of distributed ledgers and stated that achieving a balanced regulatory framework that guards against risks, without suffocating innovation, is a challenge that will require extensive international cooperation.
  • In February 2016, the FSB, which sets global standards for the G20 countries, announced that it will be assessing fintech innovations including distributed ledgers to ensure that the regulatory framework is able to manage systemic risks without stifling innovation.
  • In February 2016, Christopher Woolard, the FCA’s Director of Strategy and Competition, said that the FCA was monitoring the development of the technology, but wouldn’t take a stance until its application is clearer. He also commented that regulatory and consumer issues will need to be examined as the technology evolves and the FCA intends to work with firms developing distributed ledgers solutions via Project Innovate to ensure consumer protections are factored in during the development phase of the technology. The regulator is also examining ways that distributed ledgers could assist regulatory compliance.
  • In February 2016, the European Parliament’s Committee on Economic and Monetary Affairs called for a proportionate approach to be taken to distributed ledgers until they become systemically relevant. It also proposed creating a distributed ledger task force under the leadership of the European Commission to provide the necessary technical and regulatory support at both EU and Member State level. In terms of existing law, the Committee stated that it believed key existing EU legislation would apply irrespective of technology, but recommended a review of EU payments legislation.
  • In January 2016, the UK Government’s Chief Scientific Officer, Sir Mark Walport, issued a report, “Distributed Ledger Technology: beyond block chain,” recommending that the UK Government considers how to put in place a regulatory framework for distributed ledger technology which evolves with the development of the technology, using technical code as well as legal code.

Legal and regulatory issues

In essence, a project to create or adopt a distributed ledger solution will be similar to negotiating any large scale technology development or outsourcing arrangement, but there are some key additional issues that will need to be considered.

  • Accountability/responsibility: Control over the ledger is necessarily distributed, so how do you control or regulate the ledger, its users or other parties in the system? Who is accountable in a decentralised system? Whom (or what) do you regulate?
  • Who would regulate? Given the cross-border nature of the technology, who would regulate? It’s very likely that there would need to be agreed international regulatory principles and cooperation among regulators.
  • Definitions: Various definitions under existing laws may need to be reassessed, e.g., in terms of the classification of assets (e.g., are virtual currencies really just commodities?).
  • Smart contracts: How would existing contract law need to change to take account of automated or “smart” contracts? Would they be valid and enforceable? Moreover, is legislation sufficient, or would regulators need to regulate distributed ledgers via the technical code which defines the rules, rather than purely by legislation?  Who would check that the operation of the technical code actually reflects the requirements of the legal code?  If there is a problem with the code, how would this be identified and how would remedies be enforced and against whom?  It’s likely that smart contracts would still lead to disputes, and there will be limits on what smart contracts can do. Lawyers, regulators and the court systems would need to become familiar with smart contracts. Recordkeeping requirements and evidentiary rules would need to be adapted to enable access to underlying data by courts and other authorities.
  • Consumer protection: Consumer protection will be a key concern of regulators. With such transformative technology, how do you ensure consumers understand what they are agreeing to, and their legal redress for failures?
  • Privacy and security: The technology relies on an assumption that it is very secure because records would be almost impossible to decrypt. However, with the continued development of quantum computing, this may not always be the case.  There are other security concerns, for example, that it could be possible to trace or deduce a party’s identity from transactions or through access to a party that has permission to decrypt the data.  In theory, at least, a ledger might also be “captured” if someone were able to control the majority of participating computers.
  • Competition/anti-trust: If private distributed ledgers are created that are equivalent to consortia, there could be arguments of monopolistic or cartel activity. Also, there could be a risk that algorithms are set up in a manner which produces anti-competitive results that are secret or not readily detectible.
  • Decentralised organisations: There are various issues that would need to be considered in terms of liability and accountability as existing legal systems are primarily designed to assign responsibilities and liabilities to persons (human or legal) rather than to a mechanism such as a distributed ledger that involves automated contracts. Lawmakers may need to consider how to adapt the existing law related to liability in the context of unincorporated associations to deal with the operation of distributed ledgers, which may be particularly challenging to the extent that these are likely to operate across borders.
  • Reputational damage: Although much of the original scepticism with distributed ledgers has gone away, until distributed ledger applications have been rigorously evaluated, organisations will need to be mindful of the risk of reputational damage resulting from distributed ledger applications that don’t work or don’t provide the benefits envisaged.


It’s clear that distributed ledger technology has significant potential to transform a variety of sectors and scenarios, and an increasing number of organisations are considering how this technology could be used in their own businesses. The law is going to have to try to keep pace with this fast moving technology!

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