Blockchain Griffith University

8/16/2019 Blockchain Griffith University

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Bitcoin & Blockchain

Some Legal PointsDr. Adrian McCullagh

Ph.D. (IT Sec), LL.B. (Hons), B. App. Sc. (Computing), GA

ODMOB Lawyers

Brisbane Australia

[email protected]

Mob: +61401646486

mailto:[email protected]:[email protected]


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Disclaimer PLEASE NOTE: the information disclosed in the presentation is

provision of Legal advice or Professional Services advice. If a reader/attendee has an issue then they should seek approprlegal/technical advice. The author/presenter makes no warrcorrectness of anything contained in this presentation. The topresentation is ever changing at a rapid rate and as such thipresentation is the sole opinion of the author/presenter and m relied upon as either legal or technical advice. Every situatioand as such proper analysis must be undertaken when seekinprofessional advice.

Consequently, the author/presenter takes no responsibility fothat may exist in this paper and certainly takes no responsibil reader/attendee takes any actions based on what is (expresimplication) contained in this paper/presentation.

All readers/attendees take full responsibility for anything theymay do in reliance of anything contained in thispaper /presentation.

Griffith University Blockchain Presentation

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Agenda

The origins of the blockchain

What is a blockchainWhat are the benefits of the blockchai

Proposed Blockchain uses

Why is blockchain a hot topic

Smart Contracts and Legal Implications

Road Blocks in the development of Blocas a disruptive Technology

Conclusion


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The origins of the blockcha


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BUT

Nakamoto defined his vitual currency a

of digitial signatures; that is each owne

each coin to another person by digitall

the hash of the previous transaction an

public key of the next owner.


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He further states “'Nodes always consid

longest “chain” to be the correct one a

keep working on extending it. If two nod

broadcast different versions for the next

The effect of this is that a cryptographic

information (Blocks) is created.


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Hence, blockchain has its origins with the bitcoin pape

Nakamoto, though the actual origins of the concatena

“block chain” like Nakamoto him/herself remain a mys

There are 3 underlying technologies and one specific p

is encapsulated in bitcoin:

Hash Algorithms;

Digital Signatures;

Merkle Trees; and

The Proof of Work Protocol or consensus protocol.


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Nakamoto devised a fiendishly cleaver use of

technologies to create what is now known as

and a new consensus protocol.

The ultimate aspect of bitcoin is that bitcoin is

technology in the digital environment that elim

double spend problem without the need of a

third party.


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The blockchain has been described as being the

disruptive technology in modern society and busin

As disruptive as the internet was in 1992 when the

Science Foundation allowed non defence comm

entities to take advantage of the World Wide Web

OR as the Govenor of the Bank of England has no

“blockchain is the start of the fourth information re


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What is a blockchainA blockchain is basically a distributed led

(multiple copies of the same thing) that hfollowing characteristics:

Once a transaction is recorded in the it cannot be deleted or edited withoutsome trace of such deletion or alteratiobecomes a permanent record for all e

attempted changes to the record willautomatically be identified which will cparties to investigate what has gone wessence, the blockchain becomes a taevident record of transactions (Immuta


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What is a blockchainNo Central party will control the bloc

BUT some private blockchains that ardeveloped will be controlled by a ceauthority. In general, being a distribua number of copies will be establishemakes it difficult for unauthorised thirto successfully hack every copy of thTherefore there is no single point of fawould require a hacker to simultaneoattack at least 51% of all copies whicnot feasible.


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What is a blockchainThe bitcoin blockchain is completely

transparent with every participant haread access to the entire blockchainbeing able to add to the blockchainthey wish to effect an authorised tranThe bitcoin blockchain is known as apermissionless blockchain or openblockchain.

There are being developed permissioblockchains which will only allow autpersons having the right to read andthe blockchain. R3CEV is an exampl


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The technical aspects of the BitCblockchain

Each block will contain multiple transactions.

In BITCOIN a block is set at 1 megabyte. Therecurrently a dispute among core administratorbitcoin code on how to improve the scalabilitbitcoin.

In private blockchains the size of the blocks wthe administrator/creator of the blockchain.

The data structure of a block will be set by theadministrator.


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What is a Block: data structure

Size Field Des

4 bytes Block SizeThe size block, in

following

80 bytes Block Header Several f

the bloc

1-9 bytes (VariableInteger)

TransactionCounter

How matransact

Variable (alpha

numeric)Transactions

The tran

recorde

block


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Single Block data structure


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TX1 TX2 TX3TX number =4Blockheader*Block size – 1 Mega byte

* The Blockcheader field is expanded in next slide


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Block header Size Field Description

4 bytes VersionA version nu

software/pro

32 bytes Previous Block HashA reference the previous

the chain

32 bytes Merkle Root

A hash of th

merkle tree

transactions

4 bytes Timestamp

The approxim

time of this b

from Unix Ep

4 bytes Difficulty TargetThe proof-of

difficulty targ

4 bytes NonceA counter us

of-work algo


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Block-header data structure


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Version Previous block hash Merkle root* Time stamp Target difficulty

* This field is more fullyexplained in next slide

** Target difficuthe proof of wo


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Blockchain: Merkle root


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Block-header data structure


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Version Previous block hash Merkle root Time stamp Target difficulty


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Target Difficulty – Proof of work Proof of work involves the use of Cryptographic hash function

A cryptographic hash function is a mathematical algorithm th

of any arbitrary size to a fixed length bit string (the resultant ishash or message digest of the original document).

That is, a function is infeasible to invert, and thus us one way.

The characteristics of a good hash functions are:

Very quick if calculate;

One way: meaning it should be infeasible to guess the original dosimply knowing its hash result;

Collision free: it should be infeasible to find two documents that rhash result;

Every document should have its own unique hash result which mchange to the original document should result in an entirely diffe


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Target Difficulty – Proof of work From a technical perspective a good hash fu

have the following properties:

Pre-image resistance

Given a hash value h it should be difficult to findmessage m such that h = hash(m). This concept that of one-way function. Functions that lack thisvulnerable to preimage attacks.

Second pre-image resistanceGiven an input m1 it should be difficult to find dif

m2 such that hash(m1) = hash(m2). Functions thaproperty are vulnerable to second-preimage att


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Target Difficulty – Proof of work Collision Free

It should be difficult to find two different message

such that hash(m1) = hash(m2). Such a pair is calcryptographic hash collision. This property is somreferred to as strong collision resistance.

Proof of work is a brute force procedure to changnonce so that the resultant hash will have at least 0’s.

It is energy intensive but once solved is easy to pro


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Version Previous block hash Merkle root Time stamp Target


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Target Difficulty: Proof of Work Because it is not possible to identify from a do

what its hash result will be then to get a resulta

with 64 leading 0’s requires the energy of goinnonce after nonce until the desired hash is cre

It has been calculated that currently the enerrequired to run bitcoin is actually greater thangoogle expends to run its business operations.

In the bitcoin environment, Proof of Work is un

by miners who use specially designed chips (Acalculated the desired hashes.


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What is a blockchain: a cryptographicconnected series of blocks of transacti


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Transaction A Transaction B Transaction C

http://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svghttp://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svghttp://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svghttp://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svghttp://en.wikipedia.org/wiki/File:Bitcoin_Transaction_Visual.svg


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Benefits of the blockchain


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Advantages of the blockchain The blockchain has the following advantages

It is reliable and available due to its extensi

participant involvement;It is transparent as all participants have acc

recorded information;

It is immutable in that once the informationrecorded on the blockchain it cannot be cwithout leaving some trace (its integrity isguaranteed);

It is irrevocable in that the information recocannot be deleted or reversed (this has sigadvantages from an auditing perspective)


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Advantages of the blockchain It is digital and thus can be deployed in non-fa

face transactions and thus can be automate

It can substantially reduce the time between instigation of a transaction and its settlement.

It can be used for any type of transfer of valuebitcoin;

It can eliminate the involvement of a trusted t

and thus reduce friction costs or as Coates idetransactions costs.


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Disadvantages of blockcha


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Blockchain disadvantages Blockchains by themselves do not provide any

advantage. It is only when other applications

layered on top of them that there is a benefit. As Sir Mark Walport UK Chief Scientist noted: “th

implementation of distributive ledgers with embsmart contracts should lead to substantial imprin compliance, cost efficiency and accountab

BUT there are some real outstanding legal issuein so called smart contracts.

Migration of data will be an issue if another syslater developed which is more commercially a


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Proposed Blockchain usesblockchain deployment can be useful in

following:

Supply chain management.

Specific product insurance including m

vehicle insurance;

Lending funds to consumers to purcha

goods;

Product recall arrangements;

Repair of products.


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Supply chain management The blockchain will not prevent counterfei

from entering the market but it will allow th

user/consumer to validate the authenticityproducts and thus it should substantially resize of the end user market and thus reducfraud committed on end users.

This will particularly important in the pharm

industry with counterfeit drugs. Health prowill be able to ensure that authentic drugstime administered to patients.


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Supply chain managementWrite Once Read Many-times (WORM) techno

It is possible for a manufacturer to embed in so

polymer film a key that can be read using a hdevice like a mobile phone that has embodieapp that has been developed by the manufaThe App can be authenticated when downloan authorised website that has extended validcertificates allocated to it. Further the app co

digitally signed by the manufacturer so as to rrisk of false apps be deployed.

It is expected the Pharmaceutical industry to advantage of this technology.


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Insurance FraudHow does the insurance company dete

that the person claiming ownership act

the owner or has an insurable interest?

The insurance company can interrogatblockchain using the serial number/VINreference point to determine ownership

This aspect alone should substantially reinsurance fraud.


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Lending and blockchain interrogThe lender wants to make sure that the

are not already encumbered and so it

interrogates the blockchain using the senumber of the product as a reference

The blockchain is used to record all tranthat involve the relevant product includborrowings and insurance policies issue


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Product recall by a Manufacturer/R

The manufacturer needs to undertake a proddue to some safety fault identified post sale.

The manufacturer can register on the blockchsafety recall notice. Now in some jurisdictionsto transfer a product whilst a product recall nobeen issued.

Once the defect, the subject of the recall no

been corrected then the manufacturer will upblockchain to identify that the product has becorrected.


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Why blockchain is a hot to


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Why is Blockchain a hot topicThere are a number of major industries

expending substantial funds on blockch

research, development and deploymeindustries include:

Finance sector (FIN TECH);

Luxury Goods (Diamond Trades);

Insurance;

Stock Exchanges;

Movie Studios;

Software development.


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Why is Blockchain a hot topic


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Why is Blockchain a hot topic

The insurance sector wants toreduce/eliminate the risk of fraud.

The IP sectors including movies and swant to eliminate piracy.

The blockchain can in each case be usassist in solving these issues.


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Smart Contracts : Legal asp


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SMART CONTRACTS & L l I


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SMART CONTRACTS & Legal Issue A so called smart contract is neither smart or a

Lawyers would call it a humpty-dumptyism. (S

Glanville Williams series of papers on plain Englawyers and the discussion between Alice andDumpty from “Alice through the Looking Glas

What is a so called smart-contract? : it is comthat will be connected to a blockchain. The swill monitor the internal performance of a con

any deviation will cause the software to activresponses.

The Ethereum project has a number of so callcontracts in development.


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SMART CONTRACTS & Legal Issue

The R3CEV group is also investigating smart couses in a number financial transactions.

The difficulties of smart contracts are:

How are equitable principle accommodatinnocent misrepresentation or discretionaryvoiding a contract proper;

How can force majeure events be accomm

as these are usually external events that imperformance. This may be an opportunity gathering organisations that are trusted to information dealing with externalities.


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SMART CONTRACTS & Legal Issue

Assuming that the above can be accommare there certain contracts that should not

monitored by a smart contract?Further investigation / research is required f

area.


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Road Blocks for Blockch


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Road Blocks for Blockchain53


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On 20 April Morgan Stanley issued its report on thedevelopment and deployment of Blockchain solu

This report identified 10 road-blocks that need to baddressed before blockchains become a reality in

1. is there a compelling business case to suppexpenditure?,

2. cost mutualisation/who funds the overhaul systems?,

3. Are there misaligned incentives,

4. How do the lack of standards currently impdevelopment and ultimate deployment espinter-operability,

5. Is the technology scalable without performdegradation,


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6. What governance needs to be develop

7. How will regulators deal with the advanthis new technology,

8. What are the legal risks not only with regalso with clients,

9. Are there any cryptology/security issuesexisting or down the track like the deveQuantum cryptography, and

10. Can a blockchain system be developesimplistic and interoperable with both oblockchain deployments and legacy sy


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It is interesting that Morgan Stanley noted single policymaker they met concerning thresearch for their report would allow an"unpermissioned" distributed ledger.

In general a blockchain is meant to be atransparent recording of transactions but ithat this will be the case for all transactionfinance sector and its customers will not wbusiness transaction to be disclosed acros

blockchain.One issue that still needs to be resolved wi

partial permissioned blockchain where paonly be visible to those with the correct cre


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Conclusion


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Conclusion

Blockchain is clearly at this point in time an imtechnology but is advancing at a rapid rate.

Morgan Stanley estimate that commercial sysRegulatory approval will not occur until 2017/2

There is great promise and investment occurriarea.

The financial sector is leading the way but oth

like pharmaceuticals are rapidly looking at thitechnology.


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Conclusion

Regulators across the world are interested in ttechnology and are greatly assisting in the de

and sandbox deployment of blockchain solut Risk is still an issue and regulatory compliance

outstanding issue as does system liability issues

Smart contracts are code applications that atop of a blockchain and this still needs further

investigation


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Documents

Blockchain Griffith University