Acquiring Consortia-Developed Blockchain Solutions

Over recent years, many challenges have placed ever-increasing pressure on organisations around the world to act innovatively to reduce costs and increase the efficiency and effectiveness of operating their businesses. A technology which has established itself as a forerunner in assisting organisations to navigate these new challenges is blockchain.

In this piece, we describe key considerations for customers in onboarding solutions developed by consortia. We begin by introducing blockchain, then discuss how blockchain technology can (and is) being deployed beyond NFTs and cryptocurrency and consider some key issues and practical considerations for customers to bear in mind when onboarding blockchain solutions developed by blockchain consortia. In particular, this piece focuses on the importance of understanding the customer’s blockchain-related objectives, identifying the correct blockchain consortia, identifying some of the intellectual property-related considerations surrounding onboarding consortia-developed blockchain solutions, and considering some regulatory / operational considerations concerning data privacy and smart contract-related issues when onboarding blockchain solutions.

What Is Blockchain Technology and Why Does It Matter?

What Is It?

Blockchain is a shared distributed ledger technology which exists across a peer-to-peer network and allows network participants to run a copy of the software and access a copy of the entire ledger. Blockchain is the technology used for cryptocurrencies but has many other uses. Although Bitcoin and numerous other cryptocurrency blockchains are open for public viewing, the blockchain technology underpinning projects developed and offered by commercial organisations is typically closed and offered only on a permissioned basis by the organizer to customers. Also, although participants are generally synonymous with cryptocurrency blockchains, commercial blockchains generally offer a degree of certainty as to the identities of the participants. However, like cryptocurrency blockchains, commercial blockchains are generally immutable, that is, information can be added but never erased.

Why Does It Matter?

A wide range of industries have discovered the benefits of deploying blockchain technologies. For example:

1. Financial institutions: banks can utilise blockchain in their supply chain financing structures, improving participant visibility across the supply chain and yielding an immutable audit trail. For instance, platforms underpinned by blockchain technology which are developed to allow customers and trading partners to conduct trades and trade financing more transparently.
2. Food industry operators: by allowing food operators to understand each element of the supply chain associated with the food product via a decentralised, immutable ledger, blockchain technologies assist food industry operators to develop a more transparent, decentralised and traceable supply chain. This allows the food operators to respond rapidly to food safety incidents and facilitates regulatory and consumer confidence in their products.
3. Retailers: much like food industry operators, retailers can use blockchain technology to reduce cost and improve efficiency within their internal supply chains. For example, instead of manually extracting data from numerous, unconnected data points to calculate the amounts owed to a freight carrier (i.e., fuel costs, mileage, shipment delays), retailers can leverage blockchain technology to synchronize these points within a network in a way that reliably (and instantly) tracks and reconciles pertinent shipping data.

Key Considerations for Customers When Acquiring Consortia-Developed Blockchain Solutions

Most blockchain technologies are developed by foundations or consortia formed to create and successfully deploy the technology, often for a particular industry. Therefore, the blockchain solutions may have been specifically developed and tailored to the common technological, logistical and even regulatory needs of that customer’s industry. The following passages discuss some challenges which customers seeking to acquire blockchain consortia developed solutions should bear in mind.

Objectives of the Customer – Identifying the Right Consortium

Consumers must understand their objectives surrounding why they are seeking to onboard blockchain technology and to identify whether those objectives are shared by the members of the developing consortia. This can be a difficult exercise, particularly given the perpetually innovating nature of blockchain technology and fluidity in which new solutions may become available on the market. Customers should therefore be alert to the possibility that their objectives with respect to blockchain technology may develop over time, as may the objectives of any given consortium.

Some consortium members may have joined the consortium simply to obtain a seat at the table, looking to hedge their bets on the success of the competing initiatives emerging in the industry and unwilling to make difficult decisions or make anything other than basic contributions to the decision-making process and the financing of the initiative. Therefore, when considering the type of factors which could indicate a consortium’s objectives, besides reviewing the consortium’s publicly available documentation, factors such as the number of consortia members and the levels of investment and roles of each member may provide insight.

In light of the issues identified above, it is important that customers undertake a due diligence process of sorts to limit the potential conflicts which may arise between the customer’s objectives and those of the consortia. For instance, the customer’s supply chains or other business functions may lead the customer to seek a blockchain technology solution which is regularly updated and is accompanied by frequently launched new derivative technologies. By contrast, a particular consortium’s ethos to developing the technology may be less commercially driven - for instance, it may be driven by philosophical principles, or for industry-specific factors - which means the technology is developed at a more conservative rate than the needs of the customer.

Intellectual Property and Confidential Information Considerations

Solution Ownership, Exploitation and Disputes

Agreeing appropriate levels of usage permissions is a critical consideration for customers, such as (i) operationally ensuring appropriate permissioned user numbers and jurisdiction coverage and (ii) technically that any access levels (i.e., internet only access/developer permissions) coincide with the customer’s intended use. Customers who are not provided with an ownership interest in the developed technology should ensure that they are provided appropriate rights to use and otherwise commercialise the technology in light of the customer’s commercial objectives. For instance, such rights may include unrestricted rights to licence the technology in the participant’s required territories and absent the burden of arduous payment, liability and termination provisions on the part of the licensor consortia members.

Customers should also be cautious not to define the instances in which they can use the technology too narrowly, given the speed of development with respect to uses for the technology. Moreover, customers should ensure protections are implemented to minimise detrimental impacts to their business should the blockchain technology fail, or the customer receive third-party intellectual property rights infringement claims regarding the technology. Protections should be sought in the usual manner, such as through appropriate warranty and/or indemnity protection where appropriate.

Protecting Customer Materials

A consortium may require the customer provide proprietary technology to the consortium in order to receive the benefit of the consortia’s blockchain solution. The technology committed by the customer to the consortia is likely protected by copyright and trade secret laws. Consequently, appropriate licensing language should be included in the arrangements between the customer and the contracting consortium whereby the consortium or its members are provided with a strictly limited licence to use the customer’s technology, plus other appropriate provisions surrounding maintaining confidentiality in the software and third party infringement restrictions.

By contrast to technology, copyright protection is unlikely to be available to protect data. Instead, data is likely to be protected only by trade secret laws and contractual confidentiality rights.Ultimately, failure among those parties granted access to the data to maintain confidentiality in that data may impact the customer’s options to exploit (and continue exploiting) the data for other data monetization initiatives. Consequently, customers disclosing proprietary data to blockchain consortia should ensure the applicable contracts contain strong confidentiality and trade secrets protection provisions.

Data Privacy

Customers will need to consider how their own customers, employees and any other associated individuals using the onboarded technology can exercise their data privacy rights under data protection laws. For instance, some countries afford individuals with a right to object to the distribution of information about those individuals, or have information about them corrected, deleted and/or edited.

Customers need to be cognisant of the privacy-related rights available to individuals and how these rights interplay with the underlying mechanics of the onboarded blockchain technology. This includes understanding what personal data is processed by the onboarded technology and ensuring appropriate contractual provisions are in place with consortia members to appropriately apportion roles and responsibilities in light of the data processing taking place and the applicable country’s data protection laws. Considering these rights in the context of blockchain can present potential conflicts. For instance, navigating a data deletion request from the underlying blockchain, which itself is supposed to comprise an immutable ledger, presents challenges in jurisdictions (such as in the EU) whose privacy laws emphasise limited data retention practices and therefore conflict with the concept of immutability.

Smart Contracts

Smart contracts are programs stored on a blockchain which operate automatically on the occurrence of events on the blockchain. For instance, a smart contract could govern the shipment of goods between a vendor and customer. The smart contract may be programmed so that payment is triggered by an entry that happens on the blockchain when the ship reaches its destination. For example, in the shipping container logistics space, actors within a the logistics supply chain – such as port operators and customs authorities - may record activity into the blockchain solution and trigger execution of underlying smart contract terms. This could increase trust and reduce transaction costs.

Operationally, smart contracts present numerous commercial and legal challenges. These challenges include erosion of common and civil law contractual interpretation benefits and the automatic nature of a smart contract trigger event. For instance, in the above example of a shipment of goods, the automatic payment trigger may not account for real world situations possibly affecting payment, such as:

• delivery of the goods may not be on reaching a certain set of coordinates, but instead may include unloading and onward transport of the goods; and
• delivery of any damaged and/or lost goods may not be factored into the price paid to the vendor, given the automatic nature of the payment event.

Ultimately, purchasers of smart contract solutions should commit time to considering how to navigate these challenges prior to onboarding and distributing the technology within their business. For instance, smart contract applications could be supplemented by traditional written contracts, including commercial terms like warranties for goods/services acquired under the smart contracts and provisions providing redress – such as refund mechanisms – should the goods/services fail to meet agreed standards.

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While there are many potential benefits, there are also a number of key legal and operational challenges for businesses to overcome when onboarding blockchain technology developed by blockchain consortia. Doing so effectively helps customers to benefit from the continually evolving blockchain-backed technology landscape.