Introduction to Blockchain
Blockchain is a technology for recording and storing information, first introduced by a person or a group of people under the pseudonym Satoshi Nakamoto in 2008. Initially, this technology was developed as a fundamentally new way of working with data that would not be subject to retroactive modification. This principle of operation was necessary to protect the data stored in blockchains. However, on the market, blockchain was presented as a system that allows you to work with cryptocurrencies – the latest invention of digital money with a decentralized deposit guarantee system. This paper aims to discuss the blockchain decentralized system in terms of its potential to become a pathway to intellectual property globalization.
In terms of technology, a blockchain is a list of records, each of which is formed into a block and contains information, a cryptographic hash, about the previous block. In the case of cryptocurrencies, this is the timestamp and transaction data, which is usually represented as a Merkle tree (Salmensuu, 2019). The timestamp ensures that the previous and current transaction data existed when the block was posted. Without reference to time and information about previous transactions, it is impossible to get into the block hash and create a new block.
Each block contains data about the previous block and that, in turn, about the previous block. Therefore, the blocks form a chain, and in such a way that each subsequent block strengthens this chain. Such a system is very reliable and presents the possibility of decentralizing data control. In other words, the chain system ensures that blockchains are resilient to data modifications or retroactive changes since such changes require transformations to all subsequent blocks (Salmensuu, 2019). In the case of cryptocurrencies like Bitcoin, given that information about each transaction is entered personally by an individual user in a unique, single format, it is impossible to make changes to the data, which guarantees the system stability.
Then, in technological terms, blockchains are operated by a peer-to-peer network that looks like a publicly distributed ledger. Throughout this network, nodes adhere to a single communication protocol, including checking new blocks. When the blockchain was popularized by Satoshi Nakamoto, whose true identity is unknown, it was presented as a public ledger of transactions for bitcoin, a cryptocurrency developed by Stuart Haber, Scott Stornett, and Dave Bayer (Salmensuu, 2019). Thanks to the blockchain system, the idea of decentralized control was implemented in Bitcoin, providing convenience from a maintenance point of view. Subsequently, many blockchain-based cryptocurrencies and applications similar to bitcoin were created. Therefore blockchain is sometimes considered a system that was used to create cryptocurrencies.
Interestingly, the business uses independent private blockchains developed by programmers using the initial blockchain principle. The emergence of independent private models fits well with the ideology of decentralization, which was probably one of the important motivating factors for the creation of the blockchain system. Proponents and defenders of the system also argue that authorized independent or private systems should be more secure since then there is an element of control in granting permissions to create the system and in its ownership.
It should be added that the blocks of the chain have a certain storage capacity and are closed after filling this capacity, communicating with the next block. All new information from the previous block is compiled into the next block, which remains empty until it is filled with information and stored with information about the previous block. In this way, a stable chain is formed, from which any parts cannot be removed without being noticed.
Benefits of Blockchain
The advantages of the technology are described in scientific studies, which indicate its security, transparency, decentralization, democracy, verifiability. There is a high potential for transforming multiple sectors, depending on the use of certain attributes of the blockchain system (Porras-Gonzalez et al., 2019). Equally important are the global economic implications of blockchain proliferation, especially, given the huge potential in emerging markets for online commerce and B2B service businesses.
The most critical advantage of blockchain is increased security, as the system protects sensitive transaction data when used as a cryptocurrency platform. A system of records that consistently duplicate each other and the idea of continuity eliminate the possibility of unauthorized actions (Porras-Gonzalez et al., 2019). Moreover, this system allows anonymizing personal data and preventing access by third parties through the use of permissions. Since the entire blockchain – that is, the entire chain in aggregate is stored on the network of computers of the participants using the service; this minimizes the risk of hacking. Therefore, from a security point of view, the blockchain system is a better alternative to storing all information on multiple servers.
Equally important, the blockchain offers the possibility of greater transparency, because all participants in the chain simultaneously see the overall picture of the records. This creates transparency in the conduct of transactions within the system, including monetary transactions. Moreover, all participants can see the time and date of transactions, which are recorded without the possibility of post-factum changes. Traceability of transactions is another advantage of this distributed computing system.
Control of transactions is carried out through the creation of a journal that keeps records of the nature of transactions at each step of its implementation. Therefore, the blockchain system can become a convenient alternative in industries that require confidentiality, a tool for intellectual property rights protection, and can be applied in industries that are more susceptible to fraud risks, since every financial step in this system is uniquely recorded (Salmensuu, 2019). Customer access to the system is an additional security factor. Interestingly, if the system is used by private companies to keep track of business transactions, it can be applied to identify problem areas in supply chains, for example, during the transit of goods across borders (Porras-Gonzalez et al., 2019). Streamlining reporting and moving it from paper to digital is another benefit of blockchain.
Working with data in traditional paper form is associated with errors in reporting. The blockchain system allows documentation storage along with transaction details. Finally, the automation of transactions using smart contracts, that is, special templates, further optimizes and accelerates the reporting process (Porras-Gonzalez et al., 2019). Smart contracts are also convenient, as they do not require third parties to intervene to verify the fulfillment of the conditions – after all, the contract can be automatically approved only when the specified conditions are met.
The blockchain distributed computing system creates many benefits for industry applications. First, the blockchain system is actively used in supply chains. Blockchain allows for greater trust between supply chain partners, as it provides greater transparency and data security. The introduction of the blockchain system also enables customers and suppliers to resolve supply chain disruptions faster. Equally important, when a food business is involved, the blockchain system helps deliver food faster.
The advantages of the blockchain in the banking and finance industries include faster reporting and documentation processes and increased effectiveness in working with clients. To be more precise, blockchain-based service systems are used in banking, trade, finance, clearing, invoicing, client service, credits, and transactions processing (Arner et al., 2019). At the same time, the benefits of the blockchain in the healthcare industry are ingrained in computing systems that improve the safety of patients’ data.
Many EHR systems utilize the blockchain principle in their work. Moreover, in healthcare, implementing blockchain computing systems allow patients to get access to their data constantly, increasing the service quality and improving patient outcomes. The clients of the healthcare facilities feel more confident regarding their data safety when the blockchain systems are used to process online documentation. Notably, smart decisions and electronic reporting have become a widespread trend in the industry that relies on the blockchain greatly.
Nowadays, healthcare facilities, patients, and researchers benefit from a better exchange of patient health data. The blockchain system is also used in the pharmaceutical industry delivery chain. It is very conveniently introduced to enhance reporting on delivery steps (Arner et al., 2019). The advantages include the higher shipment and delivery speed, improved logistics, and targeted client delivery. Blockchain allows the development of shorter pathways between the storehouses, drugstores, and clients due to fewer delivery stages.
Blockchain systems are also actively used in the government-industry, and empower the local and state governments in their everyday work. Often governments have to exchange a lot of data between the government offices, citizens, and other third parties like media and NGOs. Since the blockchain system has a high level of trust among the citizens it has become widespread lately (Arner et al., 2019). More importantly, the blockchain system allows increased data control and enhances adherence to the normative regulations in the documentation and daily work decisions.
It is used in managing contracts when cooperating with contractors, and when providing citizen services. Finally, blockchain distributed computing systems are used in the insurance industry. The insuring companies widely use smart contracts that are popular among SMEs. They also benefit from the automatization of the reporting and accounting processes (Arner et al., 2019). The paper reporting is replaced with smart online reporting and supported through more options of controllable data exchange, which allows eliminating data fraud and misuse.
In general, blockchain computing systems can be seen as a comprehensive decision used in most industries nowadays. The Healthcare sector, banking and finance, insurance industry, pharmaceutical supply, and food supply chains, all benefit from the increased opportunities for data processing and reporting. Moreover, a blockchain system is more reliable and trustworthy than paper reporting, since it guarantees data safety and prevents data fraud and abuse, which is especially valuable for sensitive data.
Legal Challenges Inherent in the Technology
To start the explanation of legal challenges related to the technology, the particular technical aspects of the blockchain should be discussed, since they should be further addressed by the legislators. In general, the blockchain ensures that a hacker attack on data is possible only if 51% of computers connected to the network and located in the blockchain system decide to attack the data integrity. Such a scenario is extremely unlikely, therefore the data security is considered high. Despite the benefits of robust security and control, blockchain also faces many legal challenges (Salmensuu, 2019). This is due to the nature of the technology, which has several types of architecture (Song et al., 2021). The essence of the differences between these architectures is related to access and data security.
In particular, from the perspective of the GDPR law, depending on the type of architecture, the forms of control and data transparency are changing. In other words, programs and applications that use blockchain at their core can work with data offline or online (Song et al., 2021). These are two approaches to blockchain operation, which are associated with the need to implement two types of functions that are offered to users. For example, most industries that deal with sensitive data choose programs that work offline. It deals with such forms of data as securities, stocks, debt, intellectual property, property rights, as well as tracking pharmaceuticals or commercial flights.
Working with data offline has such advantages as limited access. But the other side of such a system is data control problems: working offline assumes that data exists in the material or virtual reality of data outside the blockchain system, and the system cannot guarantee their deletion through the destruction of the registry if necessary (Song et al., 2021). Therefore, such data can be exposed to any possible external virtual attacks or threats.
Notably, the legal aspects of protected confidentiality include the confidentiality of clients or network participants and also the confidentiality of the nodes that are checked during the transaction (Salmensuu, 2019). Interestingly, the more there is a need to ensure user privacy, the fewer privacy validators are required. In conclusion, the listed nuances of the complex management of blockchain-based technologies and the unpredictability of their further development are one of the defining reasons why the legislation regulating their use is constantly under development.
A common cause of legal problems associated with blockchain is the necessity to protect them from criminals. For example, crimes can be associated with the anonymous exchange of money, which is possible due to the confidentiality of transactions, the sale of counterfeit goods, and the anonymous implementation of aggressive virtual actions in the defense sphere (Chen, 2021). Therefore, the legislatures of European countries and the United States may insist on reducing the confidentiality and anonymity of cryptocurrency transactions and bringing the activities of financial blockchain platforms in line with general legislation.
In general, the issue of confidentiality is one of the central and most widely discussed. On the one hand, lawmakers are concerned about eliminating the tools that cybercriminals use to conduct their business. On the other hand, the crypto community protects the privacy rights of network participants (Chen, 2021). Moreover, attempts to introduce legal requirements to reduce anonymity and privacy are perceived as a violation of privacy.
Another fundamental issue relates to blockchain regulation and conceptual definition. For example, if cryptocurrencies are legally recognized as securities, then they will be subject to general SEC rules. This solution simplifies the legislative regulation of the issue, although it violates the principle of reliability since the blockchain and securities have many variations (Chen, 2021). In this case, financial companies whose business is associated with the provision of services for the purchase, sale, and ownership of cryptocurrency will comply with general legal conditions and obligations, violation of which is fraught with fines and other sanctions.
The fines can be very large, which is a promising signal for the potential of realization of the newly developed laws. For example, in 2020, Telegram paid $ 18.5 million in penalties and returned $ 1.2 billion to investors after the SEC considered the tokens to be subject to general rules of the regulatory settlement (Chen, 2021). This is also a good example of how the absence of the adequate legislation can cause great losses for companies and state budgets.
Notably, in the US, there are a dozen organizations responsible for the legislative regulation of cryptocurrency. These are the Securities and Exchange Commission (SEC), Federal Trade Commission (FTC), Internal Revenue Service (IRS), Financial Crimes Enforcement Network (FinCEN), Commodities and Futures Trading Commission (CFTC) (Chen, 2021). It should be emphasized that, despite the existence of many organizations that can formally become the main regulator, in practice, cryptocurrencies and blockchain practically do not obey any existing legislation (“Intellectual property theft,” 2021). At the same time, the United States is a good example of implementing the legislation at the local level, which can be adopted in the EU, for example, if the provinces adopt laws, which companies can obey if it is convenient for them.
For example, Wyoming is known as a crypto and blockchain-friendly state. Recently, the state passed a law that exempted cryptocurrency from property taxation. Then, Colorado passed a bill to support the use of blockchain in government reporting. Georgia and Arizona already have laws that legalized bitcoin as a tax-friendly currency. At the same time, New York, New Mexico, and California have laws restricting the work with cryptocurrencies.
Anti-money laundering is one of the main legislative concerns in the US and around the world, which is why the ‘know your client’ (KYC) requirement has been introduced everywhere. KYC requires businesses to know and identify customers using cryptocurrencies. Several US laws prevent money laundering offenses, including the Bank Secrecy Act, which controls cryptocurrency exchanges (“Intellectual property theft,” 2021). It should be especially noted that cryptocurrency exchanges, according to the law, must assess risks and develop adequate preventive strategies.
Legal Aspects of Blockchain IPR Protection
Copyright and blockchain intersect in the peer-to-peer P2P site space. It is believed that the way these sites work inspired the creators of the blockchain. This is quite logical since initially P2P was created for the free exchange of information between users (Song et al., 2021). Subsequently, however, outside of the legal space, online information exchange has become a constant source of copyright infringement. Therefore, despite the existence of numerous copyright laws, they continue to be violated due to the impossibility of implementing these laws in practice (Geiger, 2014). Some critics point out that pushing for compliance is difficult due to the technical side of the issue.
However, there is a possibility that the reasons are different, and are associated with political will and the unwillingness of political parties to support bills that will cause a negative reaction among voters. Moreover, the subject of copyright has always been associated with new technologies such as radio, television, or photography (Geiger, 2014). Therefore, comprehensive measures should be taken to implement an anti-abuse strategy with participation of legislators from European and other countries.
Scientists are widely debating the problem of distributing copyrighted works using the blockchain system allowing users to freely upload files to file sharing sites. Because of the wide capabilities of the system, scientists believe that it can be adapted to comply with copyright laws (Pech, 2020). In particular, the technology makes it possible to administer the distribution of copyrighted works. While in such a case the issue of lowering privacy requirements should be raised again, copyright protection may require such measures against users.
It is noteworthy that if copyright protection is implemented at the legislative level, that is, practical strategies for the implementation of laws in the form of a system of fines are developed, this will create an important precedent. Subsequently, based on such a strategy, laws can be developed that regulate platforms using blockchain in terms of copyright protection and preventing disclosed privacy (“Intellectual property theft,” 2019). In particular, the KYC system can be implemented to combat international cyber terrorism in the defense sector, financial fraud, and the sale of counterfeit products in health care, pharmaceuticals, and other types of goods that are particularly sensitive to production quality.
Notably, scholars discuss the potential of blockchain as a system that is used to create business models. Bitcoin cryptocurrency is an example of a business model using a blockchain system. Other examples include computer games using blockchain-based tokens for safer monetization, which can easily be used to avoid paying taxes (Daley, 2021). At the same time, games like Mythical Games or Minecraft offer users the right to buy digital assets (Daley, 2021). Game digital assets are digital elements of a game, such as world-building plugins, playable characters, or additional character superpowers.
This digital ownership provides a unique example of fertile ground for the implementation of copyright laws. On the one hand, legal owners are full-fledged owners of purchased digital goods. On the other hand, such ownership information is not overly confidential, allowing for the necessary flexibility in enacting copyright law. In other words, blockchain-based computer games are an attractive field for testing the application of copyright laws to blockchain-based systems.
In general, the popularization of the blockchain as a system that can use its potential without violating laws and even enhancing legal implementation can lead to a faster spread of legislative practice that will protect the rights of users and rightholders. In particular, after applying the blockchain legislation to business platforms that use the system for different purposes, it is possible to find the best way and balance between data protection and control. As a result, an adequate system of transparency of operations will be presented, that considers the sensitivity of data and privacy issues.
Porras-Gonzalez et al. (2019) emphasize that the technological revolution has already taken place and now the blockchain continues to gain popularity. In particular, scientists see the prospect of the global economic impact of the blockchain as the basis for the transformation of any smart technology, that is, programs that are used to perform smart functions, used by businesses and organizations. In theory, blockchain can eventually completely replace existing centralized storage and data handling systems, given its potential to protect and control sensitive data.
The Regulatory Mindset Today
Data protection is not subject to a single global agreement or regulation. Rather, it is included in a series of laws and acts that present distinct proposals and logical concepts for the management, control, and reporting of sensitive data. These laws are developed and implemented at the regional, international and national levels. A critical challenging aspect is the implementation of laws due to technical difficulties or the reluctance of businesses to use blockchain and cooperate with governments.
There are two sides to this reluctance: on the one hand, there is no guarantee that governments will draft laws that do not violate the right to free exchange of digital data. Since the blockchain largely excludes the possibility of checking the activity of the network by third parties, it is a unique tool for creating independent platforms for working with data. On the other hand, many unscrupulous individuals or criminal groups can use the possibility of data confidentiality to violate laws that protect the life and health of citizens of the countries in which these businesses and people are registered around the world. This regards money laundering, the sale of illegal goods, including counterfeit pharmacies, cybercrime, and the danger of other illegal financial transactions.
The United States has developed and is implementing legislation governing blockchain-based activities at the regional level, or by using the local laws of individual states. This approach can be justified, given the complexities associated with balancing data privacy and data control. European and other countries could also start the development and implementation of legislative initiatives, first at regional levels. Regional laws will create a platform for further efficient revision of legislation in case of failure in terms of technical implementation or inability to reach consensus with businesses and organizations that use blockchain in their work.
In addition, the United States is actively countering possible threats associated with the blockchain, especially considering that there are so many companies in the United States that have adopted the technology. The National Intellectual Property Rights Coordination Center (NIPRCC) of the US Immigration and Customs Service is the primary agent for the implementation of US intellectual property and international trade laws (“Intellectual property theft,” 2021). The NIPRCC protects national security, including health safety, cyber-protection in the defense industry, and unfair trading practices.
The NIPRCC is a working group with the participation of federal agencies, Europol, and Interpol. The NIPRCC oversees several initiatives and operations that ensure that the Internet and other data networks are secure and free from threats. Operation Chain Reaction was launched in 2011 and aims to combat counterfeit goods that enter the supply chains of the Department of Defense and other government agencies (“Intellectual property theft,” 2021). The initiative is helping to oversee the security of federal supply chains through the teamwork of the NIPRCC group of more than a dozen agencies.
This group conducts criminal investigations as part of its mandate. Chain Reaction Group draws on the expertise and experience of 16 defense and control agencies (“Intellectual property theft,” 2021). These are the National Security Investigations Division, the Federal Bureau of Investigation, Customs and Border Protection, the US Department of Defense, the National Intelligence Agency, Interpol, and the Department of Justice’s Computer Crime and Intellectual Property Section (“Intellectual property theft,” 2021). It is noteworthy that recently the initiative helped to stop the distribution of fake Cisco converters for use by the Marine Corps to transmit information about the movement of troops and intelligence data, which proves its ample opportunities in the protection of digital data.
Another important NIPRCC initiative that can serve as a model for the international data security system is the “Apothecary.” This initiative aims to control the supply of drugs that customers order online. The initiative stops criminals who pretend to be legitimate suppliers and violate laws related to the sale of drugs, such as selling over-the-counter drugs or offering uncertified cheaper alternatives manufactured without meeting the quality requirements.
Since criminals hide their data and require confidentiality, blockchain may be one of the technical solutions chosen by the attackers. Therefore, there are government services that require the disclosure of confidentiality when conducting investigations (“Intellectual property theft,” 2021). Equally important, “Apothecary” is testing the technical capabilities of online drug-selling platforms for vulnerabilities and is fighting local and foreign organizations to stop illegal import or manufacture. It is noteworthy that the blockchain system can be successfully used to sell exclusively certified drugs and under the requirements for the prescription of drugs by doctors.
Another interesting initiative that can be leveraged with the support of the blockchain system is Operation Engine Newity. It is aimed at combating counterfeit components for the automotive industry (“Intellectual property theft,” 2021). The initiative controls such goods as airbags, tie rods, brake pads, and bearings. Since the quality of these products is critical to the passengers’ safety, their sales must be subject to additional controls. Notably, Ford uses the blockchain system to create a cryptocurrency mutual support business for the owners of their cars. Given its interest in blockchain, this company could participate in popularizing the blockchain system and use it to create a secure system for the supply and sale of spare parts for its cars, and cars with comparable mechanics.
Legal Regulations in EU
The regulation of the digital activities of businesses and organizations that use blockchain systems can be adequately included in the broader system of laws for the protection of privacy and data safety. At the same time, the blockchain system can be used by organizations as an alternative to unsafe methods of conducting financial transactions, maintaining classified documentation and reporting, as well as exchanging sensitive data, such as data on health or property rights.
Of course, when introducing requirements for data openness, for example, about ownership, the level of access and the choice of parties who have access for checking documentation should be established considering the characteristics of the data and the business in which it is used. Noteworthy, it is possible to create separate blockchains that will control the verifying parties, and provide two-way transparency of the verification processes. The two-way transparency is a critical step for reaching the mutual understanding between the governments and businesses since it allows protection of the data privacy and confidentiality disclosure if required by the state agencies all at the same time.
The main regulation document of the European Union is the General Data Protection Regulation (GDPR) document. It went into law on 25 May 2018 and since that time has been widely utilized to control intellectual property rights (IPR) and data safety. International governing documents also include the International Covenant on Civil and Political Rights (Art. 17), and the Universal Declaration of Human Rights (Art. 12) (Salmensuu, 2019). These laws focus on privacy, as UN Resolution 68/167 as of 2013 officially states that “the rights that people enjoy offline should also be protected online” (Salmensuu, 2019, p. 30). Equally important, the resolution claims that international law must provide a universal basis for protection against “interference with individual privacy rights” (Salmensuu, 2019, p. 30). The 1981 Council of Europe Convention is an international data protection agreement signed by most European countries and several non-European countries. Today, any country can become a signatory to the agreement and introduce appropriate legislative practices in its state.
There are also the OECD Guidelines on Protecting Confidentiality and Cross-Border Personal Data Flows, and the International Data Protection Initiative of the Commissioner, which is held in annual meetings and acts as a system of cooperation in resolving international complaints. This document also contains a statement of global privacy principles and guidelines (Salmensuu, 2019). Finally, the 2005 Montreux Declaration calling for data protection, signed by 13 international commissioners, is widely recognized around the world (Salmensuu, 2019, p. 31). Remarkably, Germany was the first European country to adopt the Data Protection Act in 1970. Notably, the EU directive 95/46, which was the main document in this filed before the signing of the GDPR, was adopted only 25 years later. In general, data and information protection laws are under development in the European Union.
This situation is subject to change as soon as possible, as experts predict continued stable and rapid growth in digital data volumes. The development of complex regulations and agreements, which would introduce clear concepts of the blockchain, is needed today since there are no separate laws dedicated to this area of digital technologies yet. At the same time, it is clear that blockchain has excellent potential to protect data privacy and provide verification and control schemes.
Data privacy and intellectual property rights are fundamental rights and should be supported by the legal system. On the one hand, both of these rights lie in the legislative plane as subjects of protection. On the other hand, the implementation of laws to protect these rights can cause a technical internal conflict in blockchain services (Salmensuu, 2019, p. 33). In this regard, legislators should pay particular attention to the potential of blockchains in protecting IPR and data privacy rights, and also support the confidentiality protection on blockchains. The new legislation should specifically regard that blockchains represent the possibility of developing simple systems that will allow realizing data control using double transparency technology.
Amendments to Support Blockchain as a Legal Tool
The use of blockchain in various social spheres, as well as in government institutions and as a key element of business schemes has enormous prospects. The capacity to ensure complete confidentiality of data is a unique tool in the age of technology, especially considering all the potential problems and dangers that centralized systems such as the Internet offer. This centralized data exchange system is depersonalized, and its users have practically no real rights to their data. This system is as well overloaded with information and suffers greatly from the fact that it is impossible to legally regulate constant surveillance of users and collecting information about preferences.
Companies like Google, Facebook, and other mega-corporations do not obey any existing laws, and even after court hearings, they sometimes continue to implement only those policies that are beneficial to the company, that is, help the company pursue its financial interests. Google’s search engine and social networking site Facebook have long evolved into marketplaces where users and their data are the main commodities. Formally, both of these companies could use the blockchain to collect only the data that users would allow them to collect. But companies strive for ultimate power and control, so they are unlikely to align their policies with laws that protect the interests of users, even if such laws are introduced by the state.
Therefore, in theory, blockchain has immense possibilities in terms of bridging the relationship between users and the digital service providers. However, for legislation that protects blockchain to be put into practice, there needs to be healthy competition between companies in technology. So far, this market has been divided among themselves by monopolists who have total power and dictate their terms to everyone who uses the capabilities of the centralized Internet.
The legal certainty regarding the regulation of the blockchain does not have a specific form, since the legal system has not yet managed to regulate technologies that arose before the blockchain. In other words, there are many data protection laws, the main ones being personal data protection laws and copyright laws. However, governments have not yet found a way to implement these laws in practice, so that they can regulate the activities of monopolists who own the lion’s share of the Internet market.
Experts believe that the wait-and-see approach taken by governments and national regulators is holding back the development of blockchain potential. In particular, it is noted that “the lack of regulatory certainty and the evolving legal and regulatory position is a challenge for marketers who must constantly assess their participation in blockchain networks” (Chen, 2021, par. 8). It is believed that due to the lack of a targeted law that would regulate exclusively blockchain technology, lawyers are forced to consider the legislative regulation of the technology only in the context of more general existing data protection laws. This approach probably leads to more vague interpretations and creates unnecessary multivariance in recommendations and requirements due to the lack of clear concepts, concepts, goals, and descriptions of the relationships in which the blockchain system is involved or regulated. In other words, there is legal and regulatory uncertainty around blockchain today.
Therefore, it is necessary to create a unified law on the blockchain or update existing laws on information, personal data, technology, and copyright. There is also an opinion about the need to “properly solve the problem of decentralization”, that is, to shift the focus of user activity from the centralized Internet and popularize the use of decentralized networks (Chen, 2021, par. 9). Experts also expect that “as the scope and breadth of use cases increase, so will legal certainty, but this will take time as it is critical for any project to be compliant from the start” (Chen, 2021, par. 9). In other words, the rise in popularity of blockchain use is likely to soon confront legislators with the need to pay due attention to the system and provide it with legislative support.
Spheres of Application and Implementation of Blockchain and Legislative Regulation
One of the important initiatives that set the vector for the further development of legislation in the field of blockchain is the requirement to know your customer or KYC. This concept assumes that companies must have information about their users and also in some cases about the activity of these users within the blockchain network (Porras-Gonzalez, 2019). On the one hand, this is a very correct approach, as it allows us to fight cybercrime and fraud. On the other hand, companies and government agencies can work with sensitive data, such as customer health data.
At the same time, some businesses that use the blockchain system generate most of their income and create a competitive advantage by providing financial privacy services to fraudsters or tax evaders. In light of the foregoing, the development of bills with clear concepts and concepts will allow separating legal and illegal activities in the blockchain field, ensuring the payment of taxes, and creating a fairer environment in the digital currency market.
KYC can be the first step towards the development and subsequent implementation of blockchain legislation. Arner et al. (2019) note that the KYC commitment system is necessary to “protect against fraud and crime” and “provide quality service” (p. 1). The scholars also point out that identity is important to the integrity of the market and therefore lies in the plane of governance and regulation. At the same time, it is emphasized that the KYC identification rule is a complex issue that will require coordination with individuals and small businesses (Arner et al., 2019). Therefore, scientists propose to consider various options for personal identification in the financial sector, as well as develop technical capabilities for the transition from analog to digitalized and digital identification. According to the authors, this solution will create a space of financial inclusion with double transparency without compromising financial stability and in compliance with the requirements for market integrity and cybersecurity.
Legislative Support for Blockchain
For businesses that receive their income legally, such as from the monetization of video games, the new legislation will look like a problem that requires adapting technologies and efforts to preserve the benefits that companies receive from using the blockchain system. Therefore, experts discuss the range of possible challenges businesses will face, depending on the way the technology is used and industry rules and regulations. In particular, the technical nuances of systems adaptation will relate to various technical areas. For example, there may be a problem with crossing the boundaries of jurisdiction, since unique blockchain users can be located in different countries at the same time, which hints at the need to develop a draft law on blockchain within the framework of international law, or with the formation of uniform rules for the operation of the blockchain when crossing the boundaries of the jurisdiction of different states. One example is the GDPR law discussed above, which applies to all EU countries.
At the same time, the bills will most likely be developed in such a way that the various ways of using the blockchain will not be taken into account, and a unified vocabulary will be used. According to experts, this approach is incorrect, since “neutral wording can make it difficult to interpret how the regulation should be applied and which participants should be caught” (“Complete guide to GDPR compliance,” 2021). Therefore, there is a need to carefully assess the “activities of the blockchain network and its participants” and determine their “position in the regulatory landscape” (“Complete guide to GDPR compliance,” 2021). It is equally important to pay close attention to the requirements for documenting the relationship between the blockchain network, network operators, and their participants through contracts, which must be drawn up competently and take into account the rights and needs of all parties.
It is also necessary to take into account the peculiarities of the nature of the obligations of the parties and protect the intellectual property rights to the technology used in the form of licensing agreements, taking into account the potential for the commercialization of intellectual property rights. Then, in the legislative process, attention should be paid to protecting the confidentiality of personal data, including personal data and metadata used to disclose personal data. Finally, smart contracts that have or do not have legal force, the features of the DAO’s work, and the process of the client’s exit from the blockchain and the further fate of his data, which by default continue to be stored in the blockchain, is an incomplete list of existing technical nuances and features that will need to be paid attention during the development of general and more specific provisions of the blockchain legislation.
Design of an Ultimate Blockchain Device for IPR Protection
Blockchain is popular among companies that provide services for the creation of technologies that underlie the work of businesses and public government and non-government organizations. This system is also used to create games or applications in different directions. In general, blockchain can be compared to a programming language, but it is not a language, but a programming principle, which is associated with the idea of working with data in a decentralized system, which consists of several sequential interconnected nodes. The blockchain can take the form of a decentralized system or a distributed network.
As a rule, blockchains have a specific purpose and solve the set functional questions, therefore, software technological developments and their form depending on the nature of the service provided. It is noteworthy that the legislative potential and the development of a single bill that would regulate the blockchain is associated with the definition of most of the existing forms and types of blockchains that are used in various social and business spheres. This statement is also true for blockchains that protect copyright.
Many blockchain alternatives are copyrighted today: these are services such as GoChain, or Origin Stamp, which offer the use of IP registry blockchains, and dozens of other similar products. Each product is original, but they are all approximately the same in form and function. For example, GoChain “proposes the use of blockchain technology as a tool for managing and storing copyrights in a decentralized ledger” (Porras-Gonzalez 2019, p. 7). The tool also suggests “easy tracking of transactions involving any digital content, from music to art” (Porras-Gonzalez, 2019, p. 7). Such tools are in great demand in the technology market since works of art that are published online are very difficult to register in any alternative way.
It is interesting that the blockchain, given the peculiarities of its function of data immutability, fixes the time when the copyright holder first uploads the work to the network and claims his rights to it. As part of this procedure, the creator’s certificate of authenticity is generated. As a result, all subsequent publications of the work by other users can be tracked as such, which do not have ownership rights. This creates the necessary transparency for subsequent proof of copyright. IP registry systems apply to copyright protection of musical works and can be used on platforms such as SoundCloud, Spotify, and others. Not least, blockchain helps protect copyright and provides an opportunity for authors to receive royalties for their creative work. Otherwise, in the absence of proof of property rights, the author will not be able to defend his rights in court.
Therefore, it is possible to create an owner registration service for the MusicShare music sharing platform under the technical scheme outlined below. This service will protect the rights of authors of musical works that are laid out digitally on the Internet. Authors of musical works will receive a certificate of validity of copyright due to the existence of an IP register with the function of fixing the time of the first publication of a musical work.
System Description
The described service can be built on the example of the system model of the blockchain system for IP protection described by Song et al. (2021) and presented below. The IP registry system applicable to copyright protection will rely on the “hashing algorithm, user information, physical address, timestamp and other information to secure the content and status” of the copyrighted music (Song et al., 2021, p. 4). By uniquely identifying the IP hash value and some other data will be recorded along with the time set. Users who will use the proposed system to protect ownership, copyright or intellectual property (IP) rights will be connected to the network in the form of nodes.
To complete the registration of copyright or intellectual property rights, and to conduct a transaction, the user will send information to the blockchain system and receive the corresponding value of the contribution. Further, “the node with the highest contribution value gets the right to bookkeeping,” that is, the ability to generate a new block (Song et al., 2021, p. 5). The new block will contain “information about all IP registrations and transactions on the network that the node received during the current round of consensus” (Song et al., 2021, p. 5). At the end of the process, “the accounting node will add the newly generated block to the blockchain as the most recent block based on its timestamp to complete the recording of all IP registrations and generated transactions during the current round of consensus” (Song et al., 2021, p. 5). In this way, the system will perform a full cycle of work from entering user data to duplicating this data in the next blockchain node.
Designated Case-Studies
The use of blockchain in various applications and programs is widely studied by scientists today. For example, Zetzsche et al. (2019a) are exploring the legislative potential to regulate and support the Libra system, a private cryptocurrency introduced by Facebook. The existence of Libra is an interesting phenomenon, and the format of using this cryptocurrency creates new questions about the legislative regulation of the product. At the same time, Libra has a lot of potentials provided by the Facebook platform, a recognized monopoly in the centralized Internet market. It is noteworthy that in such a situation prerequisites are created for possible marketing fraud with the attraction of users to the Libra system. Therefore, the existence of this system creates a unique precedent for lawmaking. Zetzsche et al. (2019a) note that Libra, having such a significant potential in the form of future depositors, can disrupt the banking system, since it will not have competitors with equal potential.
Then, Arner et al. (2018) discuss the identity specifics and identity requirements under the KYC principle. Despite the regulatory and governance risks, scholars argue, transparency in providing knowledge of user identity is essential to market integrity. At the same time, legal requirements can disrupt access to many financial services that are not fraudulent and do not violate existing laws in essence. Arner et al. (2018) propose the creation of digital and electronic identity utilities using design tools such as cross-jurisdictional recognition, registration methods, and data accessibility. Scientists emphasize that when reforming blockchain legislation, a balance must be struck between transparency and cybersecurity. Compliance with this requirement will ensure financial inclusion for users and support financial stability as part of achieving broader strategic goals.
Notably, Zetzsche et al. (2019b) digital financial services in Europe from a more generalized perspective. Scientists discussed the concept of the existence of four pillars of financial data control in Europe in terms of legal requirements. The first pillar is the more detailed and expanded reporting requirements that were introduced in the aftermath of the global financial crisis to help control the systemic market and support financial sector behavior change. The second pillar is new, stricter data protection rules related to concerns about the undue influence of dominant players in the field of data processing. The third pillar is support for banking structures to maintain healthy competition in the banking sector. Finally, the fourth pillar is the development of a legal framework for digital identity as part of the development of a single European market.
The article under consideration is especially relevant within the framework of describing the pathway to intellectual property globalization, as it analyzes the digital market in the context of the common European space. Specifically, the authors predict that legislation will underpin digital financial services in the future and anticipate a Big Bang effect in data-driven finance. Scientists also draw attention to the fact that four directions will help overcome existing contradictions in data regulation, including systemic risk, data privacy, efficiency, data security, and customer protection.
Interestingly, Long et al. (2021) presented an up-to-date example of how the lack of regulation of digital data, in particular, working with data on a stock exchange, can lead to a rapid, albeit short-term, financial collapse. Researchers have investigated the role of social networking site Reddit in the sensational spike in shares of the unremarkable computer games store GameStop, which occurred solely by attracting unscrupulous stock players to participate in the event. It is noteworthy that a group of stock exchange players violated some of the indirect rules and laws of the stock exchange to make money by buying and selling stocks. The GameStop precedent is therefore a prime example of how the lack of direct and clear rules for regulating digital finance can create a situation where many digital asset owners will lose money. Interestingly, scientists also noted the likelihood of social networks being included as an active element of this event, since according to their data, statements on Reddit had a direct impact on trading fluctuations.
Protecting the System in Court
It is important to understand that blockchain is a nearly universal system that is applied in many social spheres. However, without a legislative base and the recognition of certificates and data recorded in the blockchain by the courts of independent states, adequate further development of the technology is impossible. It is noteworthy that in China, the first case of admission of evidence that is stored in the blockchain by the local Shaoxing court was recorded in 2019 (“Blockchain in courts,” 2020). This set a precedent for the subsequent recognition of evidence obtained using the blockchain system in courts.
During the court hearings, evidence was used that was stored in the blockchain system. Distributed ledger technology was used to confirm the authenticity of the information. As a result, the court was able to make a decision and respond to the lawsuit in several fraudulent cases. The defendant illegally earned $ 1,400 in the course of his financial transactions and was sentenced to 14 months in prison (“Blockchain in courts,” 2020). The case caused a public outcry and widespread discussion in local, national, and international media. Particular attention in the discussion was paid to the security of the blockchain system as opposed to centralized systems or digital evidence that are stored on hard drive media. Notably, the evidence obtained from the blockchain system was already used by the Supreme National Court of China in 2018 to encrypt and store forensic data. This was the first known case of using blockchain in a lawsuit as a tool for working with internal court documents, but this is the first time the system has been applied to a criminal case.
Conclusion
Thus, the blockchain decentralized system was discussed in terms of its potential of becoming a pathway to intellectual property globalization. Remarkably, blockchains have a wide range of applications, with many functional and technological differences. For example, blockchain can be used as an outsourcing service for creating websites or as standalone applications and start-ups. Blockchain is used in business, mainly for documentation, financial reporting, and storage of meaningful data. These systems are also becoming increasingly common among government agencies, including insurance companies, medical institutions, and courts, helping to optimize their work. Equally important, the data that is stored on the blockchain has proven its applicability to validate information, for example, in the creation of certificates of intellectual property rights or for fixing information that can be used in court hearings as an evidence base.
Blockchain systems are the basis for many platforms that create P2P networks, such as SoundCloud or Spotify, in which users freely exchange data by uploading it to the system. In the data realm, blockchain offers special capabilities for complete privacy and protection of sensitive data. Blockchain soon may face a revolutionary rise in its popularity and demand for blockchain-based technologies. The network participants can be located in any country, so the blockchain is an inherently global phenomenon. Given the above, states should cooperate efforts to develop a unified legislative framework that would regulate the blockchain. This legislation should support the implementation of technological functions that are useful to society and control unwanted activity.
References
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