Monday 21 December 2015

Blockchain-based electronic transferable record's functional equivalence to endorsement of paper-based transferable documents

A chain of transactions of an electronic record on a blockchain looks like a chain of endorsements on a paper-based transferable document except that the transactions are anonymous. Despite the anonymity, the blockchain technology ensures a far greater security than bearer documents. I think, therefore, that the law should be crafted in such a way as to allow documents made to order (such as order bills of lading) as well as bearer documents (such as bearer bills of lading) to be replaced by blockchain-based electronic records.
From that point of view, this post will examine the draft text of the UNCITRAL Model Law on Electronic Transferable Records. I have noted in my earlier post that the work on the Model Law should be pursued with the blockchain technology in mind so as to facilitate its applications to replace paper-based transferable documents. As of the time of writing, the most recent official documents containing a draft text are A/CN.9/WG.IV/WP.135 and A/CN.9/WG.IV/WP.135/Add.1, both dated August 2015. The draft provisions quoted below are taken from them.

Draft article 19. Endorsement
Where the law requires or permits the endorsement in any form of a paper-based transferable document or instrument, that requirement is met with respect to an electronic transferable record if information [relating to the endorsement] [constituting endorsement] [indicating the intention to endorse] is [logically associated or otherwise linked to] [included in] that electronic
transferable record and that information is compliant with the requirements set forth in articles 8 and 9.

While an electronic record on a registry may include information constituting endorsement, in the case of an electronic record on a blockchain, it is the blockchain (or, to be more precise, a chain of transactions contained therein) rather than the record itself which indicates intentions of endorsement. Accordingly, the expressions "indicating the intention to endorse" and "logically associated with" seem better cater for the blockchain technology. The words “logically associated” was indeed retained "to provide for all possible instances and methods for the incorporation of an endorsement in an electronic transferable record." (A/CN.9/828, para. 80).
A more difficult question relates to compliance with the requirement set forth in Article 9.

Draft article 9. Signature
Where the law requires a signature of a person, that requirement is met [with respect to] [in relation to] [by] an electronic transferable record if:
(a) A method is used to identify that person and to indicate that person’s intention in respect of the information contained in the electronic record; and
(b) The method used is either ...

This provision will not pose problem with respect to a blockchain-based electronic record to the extent it applies to signatures to be included in the record itself, e.g. a "for the master" signature on a bill of lading. 
It is also intended, as indicated by Draft Article 19, to cover signatures for endorsements. It would be natural to impose a signature requirement to ensure functional equivalence to endorsement, especially if we envisage a registry-based electronic transferable record.  But the requirement of identification, if it is read as requiring identification by name, would be incompatible with electronic records on an open, permissionless blockchain since the parties are anonymous. Logistically, it seems possible to build a system whereby the performance of the obligation represented by the electronic record (e.g. the delivery of goods) is effected without the name of the holder of the private key having to be revealed to the obligor (e.g. carrier) by, for example, allowing the record to activate a key in the physical world (e.g. the key to the container). In my earlier post, I have suggested that a blockchain-based bill of lading may, for that reason, be seen as functionally equivalent to a bearer bill of lading. But the present post is considering how to make rules enabling the replacement of order bills of lading (and other documents made to order) with a blockchain-based electronic records. 
The word "identify" also appears in the following provision.

Draft article 17. [Possession] [Control]
1. Where the law requires the possession of a paper-based transferable document or instrument, that requirement is met with respect to an electronic transferable record if:
(a) A method is used to establish exclusive control of that electronic transferable record by a person and to reliably [identify] [establish] that person as the person in control; and
(b) The method used is either ...

The Secretariat notes, "identification should not be understood as implying an obligation to name the person in control" (para. 22) (See my earlier post for a comment). It would aid clarity to say so expressly in the provision. The same could be done in draft Article 19 and it would make it friendlier to blockchain-based electronic records. But it might not be satisfactory for register-based electronic records. That is why I call this a "more difficult question."

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