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Blockchain Basics: Blockchain in Action

This is the final installment of Blockchain Basics, a three-part series that summarizes a roundtable on the burgeoning technology at the ACC Global GC Summit in London. Previously, authors Iohann Le Frapper, group general counsel at Pierre Fabre Group, and Dario de Martino, partner at Morrison & Foerster LLP and co-chair of the firm’s blockchain group, explained blockchain for GCs 101 and global blockchain regulations. In this article, they delve into how the disruptive technology can help in various applications, ranging from supply chain management to real estate transactions.

Where can blockchain assist with compliance? Are there any applications for its use in corporate legal departments? 

A GC is a problem solver who influences corporate strategy and business decisions.1 As such, GCs should consider how to evaluate blockchain in its test phases to mitigate risk and, perhaps eventually, integrate blockchain into the enterprise processes.  

Part of this evaluation involves knowing how new technologies like blockchain can put the company at risk. An example is data privacy, which can be a major concern for blockchain-based solutions if developers have ignored or disregarded “privacy by design” requirements in the product roadmap, such as data subject rights, anonymization, and data minimization mandates.  

Private information on blockchains that isn’t protected by a preexisting regulation and is shared between parties could be captured under the EU General Data Protection Regulation (GDPR) or the similarly robust California Consumer Privacy Act. To avoid triggering the liability components under either of these regulatory schemes, GCs must adopt adequate contract provisions with third parties and strong policies for when and what gets shared and for which purpose.  

Indeed, a key feature of the blockchain is its immutability, and what goes into a blockchain, particularly a public blockchain, is essentially impossible to edit and remove (e.g., the “right to be forgotten”). Therefore, the more public the ledger, the more likely it is to trigger some of these protective provisions. 

Another issue to look out for is compliance with money transmission laws. If a company is considering using any form of cryptocurrency or payment mechanism over a blockchain in the United States, it will need to comply with the Financial Crimes Enforcement Network (FinCEN) regulation under the Bank Secrecy Act (BSA), the US federal anti-money laundering statute. In May 2019, FinCEN released specific guidance regarding Convertible Virtual Currencies or cryptoassets. Complying with this regulation is onerous even for established companies. 

What is valid for the United States is also true in other regions such as in the European Union, where AML directives also now target cryptocurrencies services providers beginning in January 2020. Recently released recommendations from the Financial Action Task Force, an intergovernmental organization of 37 member states devoted to combating money laundering and terrorism, have also raised the compliance burden for customer and payment information sharing requirements similar to those of the banking industry.  

On the other hand, however, blockchain can also be used to reduce risk-management costs. Some of the largest accounting firms are working to provide their clients with new tools that will give auditors fast access to data stored on both private and public blockchains.  

Moreover, having an immutable and dispersed record can be very valuable for legal and compliance departments. Inaccurate corporate records, including capitalization tables, can very easily eliminate the prospect of a deal, whether it’s in the context of M&A, venture capital, or alternative financing. Keeping corporate records on a blockchain removes these risks and the need for cumbersome data rooms when conducting due diligence.  

Similarly, litigation for patents, trademarks, and copyrights often revolves around the tricky question of timing, and GCs can more easily avoid timing-related issues by keeping accurate and immutable records on a blockchain. Binded, Pixsy, TinEye, and Mediachain are just some of the websites that allow for the registration of IP-related information on a blockchain. 

Furthermore, courts around the globe are coming to accept blockchain records as evidence. The Chinese Internet Court, for example, is using blockchain records with artificial intelligence verification to facilitate case settlements, make judgments, and reduce frivolous litigation.  

In September 2018, the Supreme Court in mainland China ruled that evidence authenticated with blockchain technology is binding in legal disputes. The Court declared:

“Internet courts shall recognize digital data that are submitted as evidence if relevant parties collected and stored these data via blockchain with digital signatures, reliable timestamps, and hash value verification ... and can prove the authenticity of such technology used.” 

How can blockchain assist in supply chain management? 

Although the use of blockchain technology for cryptocurrencies has generated the most hype, supply chain management may be the preeminent use for blockchains in business. It is one of the few areas of development where technologies are moving beyond the trial phase and past the hype. Blockchains can be used to monitor and record the movement of all types of different items from individual heads of lettuce to shipping containers.  

Modern supply chains are often opaque and complex, and blockchain technology can make a significant difference. Recently, Starbucks announced that it would begin using blockchain technology to track coffee shipments from around the globe and put that information on its mobile app, allowing customers to verify whether their beans were ethically sourced along with tasting notes.  

Walmart reported that is also requiring its suppliers to implement its blockchain system to track meat and produce from farm to store. This ensures compliance with safety regulations and helps to prevent E. coli and other similar outbreaks.  

In the logistics space, Maersk and IBM have created TradeLens, a blockchain-enabled shipping solution designed to promote more efficient and secure global trade, bringing together various parties to support information sharing and transparency.  

Can blockchain help with more heavily regulated industries such as healthcare?  

Blockchain’s ability to facilitate access to secure information makes it an immediate candidate for application in heavily regulated industries and those with sensitive data needs ⁠— including the healthcare industry. Two areas stand out: first, there has been a considerable push for a blockchain solution to improve pharmaceutical supply chain tracking, and second, blockchain has been employed to both simplify and improve the reliability of, and integrity in, transferring medical records and processing insurance claims.

Pharmaceutical production involves some of the most complex sourcing and verification regimes of any manufacturing enterprise. Even a single misplaced or incorrectly calculated ingredient level can have lethal results. However, dangerous counterfeit pharmaceuticals still fall through the cracks. Drug counterfeiting, which often employs ingredient substitutions or incorrect dosing, is the result of several points of failure hidden in the opacity of global pharmaceutical supply chains.  

By one estimate, 10 percent of the drugs sold in developing countries are counterfeit, and some of that output trickles into American and European markets. To combat this problem, in 2013, the US Congress passed the Drug Supply Chain Security Act (DSCSA) that requires drug manufacturers of pharmaceutical products sold in the United States to serialize, or uniquely identify, those products by Nov. 27, 2023.  

Similar serialization requirements under Directive 2011/62/EU, otherwise known as the EU Falsified Medicines Directive (EU FMD), have come into force in the European Union since February 2019. Blockchain can be used to create a log to track each step of the supply chain, and thus has the potential to offer a unique solution to the hurdles posed by these regulations.  

For example, the MediLedger Project is exploring if blockchain could provide for DSCSA compliance by using a permissioned blockchain to let companies securely send and respond to product identifier verification requests, and only authorized companies are allowed to key in their products. Therefore, the likelihood that bad actors are able to disguise their counterfeits as genuine pharmaceuticals is severely reduced.  

Blockchain offers similar promises for records protections and claims processing. Healthcare data has always been recognized as needing extra protection, and regulatory schemes, including the US Health Insurance Portability and Accountability Act (HIPAA) and the EU GDPR, have been adopted to safeguard what is ostensibly an individual’s most sensitive information.  

However, these schemes can create hurdles for companies sharing information as patients switch from one provider to another, and healthcare data therefore often ends up duplicated across various data siloes. This increases the risk that this data may accidentally fall into the wrong hands as a result of a cyber hack or a case of mistaken identity.  

Blockchain allows for healthcare data to be unified into one distributed ledger that can be more securely shared among providers who would have access to the same information. Indeed, a blockchain-enabled platform could allow providers to directly access and exchange the same set of healthcare records through a secured shared ledger. We are already seeing some of these solutions come online.  

PokitDok has built a blockchain platform that allows different stakeholders to get access to the same healthcare data. Once a user has established an identity on PokitDok’s blockchain network that satisfies HIPAA, the network is able to securely facilitate transactions among providers of all kinds in a fraction of the time that previous HIPAA-compliant authentication methods required.  

Similarly, Change Healthcare and TIBCO Software’s blockchain platform is being developed to enable insurance providers and their partners to easily develop and use automated blockchain-enabled smart contracts to speed up claim resolution and payment remittance processes. As demonstrated, blockchain technology offers multilayered solutions for the healthcare industry to shed its excess yet remain compliant with stringent regulation.  

How does blockchain fit into the world of real estate transactions?  

Real estate has been one of the great hopes in blockchain for at least half a decade, and its immutable storage was identified as a boon to property recordation at least as of 2015. More recently, however, real estate companies have discovered ways to integrate blockchain into their current systems, saving both time and money for developers, real estate agents, and homebuyers around the globe.  

Much of the recent excitement has revolved around the concept of tokenization, which is the recordation of an asset’s ownership onto a blockchain for further trading as digital tokens. In October 2018, blockchain startup Fluidity partnered with digital asset firm Propellr and real estate broker Ryan Serhant to tokenize a US$30 million, 12-unit building located in New York City. The blockchain recordation allowed for ownership units that would not otherwise be feasible, let alone possible.  

As such, this form of tokenization ostensibly allows for micro-investment into tough real estate markets like New York while alleviating the pressure that developers feel with traditional mortgage financing. Fluidity has since gone further in preparing to offer blockchain recorded mortgages in California and New York, another potential supplement to a traditionally illiquid market. A première also happened in France where a mansion house close to Paris was sold for the first time via tokens in June 2019 for a price of €6.5 million by a startup.  

In Germany, the securities and financial regulator BaFin approved a blockchain-based real estate bond backed by a portfolio of properties across several major German cities for issuance by Fundament Group in July 2019. The bond allows the government to provide a jolt to its real estate markets, but securely monitor the process as it takes place over an immutable blockchain network.  

Germany is not alone: Europe is a wonderful example of how a public-private partnership can foster the best in blockchain. Further afield, Lantmäteriet, the land ownership authority of Sweden, paired with blockchain startup ChromaWay to develop the first blockchain-based property transactions for that country in 2018.  

Lantmäteriet managed to reduce the time it takes for the signing and registration from the sale of a home that usually takes from three to six months, theoretically down to a matter of hours. Remarkably, that exponential progress can be entirely attributed to blockchain because the process was already almost completely digitized beforehand. 

However, the badge of honor for the first national government to see the potential for blockchain in land registration belongs to the Republic of Georgia, which partnered with the Bitfury Group back in 2016 to register land titles via a private blockchain, then validate and make that registration verifiable on bitcoin’s public decentralized network.  

As more governments, developers, and owners follow the lead of these thought leaders, blockchain will continue to emerge as both a facilitator of efficiency and a method to combat fraud in real estate markets.  

Parting thoughts 

Blockchain is not the solution to every problem, but its versatility and effectiveness mean that GCs can benefit greatly by familiarizing themselves with the technology and applicable regulation. Blockchain can make a significant difference ⁠— particularly when information accuracy and independence from centralized third parties is of paramount importance.

Apropos, GCs can demonstrate significant value by anticipating how blockchain can help and what regulations may apply in different situations. We hope that this blockchain primer will help increase that value as one of the first steps to ensure that legal departments globally stay ahead of a promising and ever-evolving technology.


NOTES

1 See the 2019 ACC Chief Legal Officers Survey, which is based on the insight from over 1,600 CLOs in 55 countries. According to a recent GC survey by Morrison & Foerster LLP, 43 percent of GCs see their role as being primarily about reducing the company’s risk, and 58 percent see their legal departments as the vanguard in resolving issues that could cause financial or reputational damage.

About the Authors

Iohann Le FrapperIohann Le Frapper is the group general counsel of Pierre Fabre, a French global pharmaceutical and dermo-cosmetics company. He is an advisory board member at Elevate Services and serves as vice chair of the International Chamber of Commerce Corporate Responsibility and Anticorruption International Commission, and he was previously chair of the global board of directors of the Association of Corporate Counsel.

Dario de MartinoDario de Martino is an M&A and private equity partner and co-chair of Blockchain Practice at Morrison & Foerster LLP. He specializes in domestic and cross-border public and private M&As, joint ventures, and private equity transactions, principally in the technology (e.g., fintech, blockchain, AI), healthcare, and financial services industries.



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