Legally binding Blockchain transactions
Can we stop using handwritten signatures already?
Blockchain is becoming more than just a way to pass around Bitcoins. It will be medium for registering ownership of all kinds of assets: from real estate to insurance. In most cases now ownership is proven by providing a paper trail in case of a conflict. But what happens if the consent is given on the Blockchain, what exactly are the legal implications of a Blockchain transaction? This blog, based on a thesis completed by Charlotte Salemans at Deloitte, will tell you all about it.
A chain of transactions
Blockchain technology is interesting from a legal perspective because it provides the “paper” trail by default. In its essence, the blockchain is a series of timestamped data records that link together, forming the chain. Each transaction proves that consent was given by the senders of a transaction by providing digital signatures. However, for the trail to be legally binding, the individual signatures need to be accepted in a legal setting.
An analysis of the legal effect of an electronic signature used to sign an agreement in a
blockchain application, under Dutch law.
In July 2016 eIDAS came into effect in the EU. This legislation ensures all its member states do not reject digital signatures just because they are not traditionally used. In addition it provides member states with handholds for assigning legal effect to a digital signature. Concretely, eIDAS defines three tiers of electronic signatures, each tier meeting a higher level of signer ID verification, security, and non-repudiation.
- Electronic signature. Covers all forms digitized signature, an attached image of a signature or the click on an “I Accept” button are forms of electronic signatures.
- Advanced electronic signature. A signature that requires that only the signing party could have created it. In addition the signature is linked to the data so that if the data changes afterwards the signature is invalidated.
- Qualified electronic signature. An advanced electronic signature created using a qualified certificate and backed by a Trust Service Provider (TSP).
As of yet there is no EU legislation that requires when a signer must use a certain level of electronic signature. eIDAS leaves member states free to set their own signature requirements for a transaction. The only type of signatures universally recognized by all EU states are qualified signatures. They are given the equivalent legal effect of a handwritten signature.
Signed certificates for qualified signatures
To guarantee legally binding status within the EU transactions would need to be signed with qualified signatures. eIDAS is designed to be technology agnostic and signatures used on most, if not all, blockchains meet the criteria laid out for advanced electronic signatures.
However, there is a fundamental mismatch between signatures on public blockchains and qualified signatures. Public blockchains provide a way for anyone to approve a transaction regardless of by whom, where or how the signature is created. The author of a qualified signature needs approval from a TSP, meaning to be identified, audited and to implement a number of strict policies.
For blockchain signatures to be qualified signatures every signatory would need to undergo a costly and time consuming process required for obtaining a certificate. They will be under constant scrutiny from the TSP which will have to manage millions of certificates. In summary, qualified signatures defeat the purpose of a permissionless decentralized ledger.
Advanced signatures and local legislation
Instead of seeking EU wide acceptance for an electronic signature we can look at nation state requirements for an electronic signature. For instance, in the Netherlands Section 3:15a of the Dutch Civil Code (DCC) deals with the legal effect of electronic signatures. It states that an electronic signature must meet three criteria to be legally equivalent to a handwritten signature.
- The signature needs to meet the eIDAS criteria for an electronic or advanced signature.
- The electronic signature needs to fulfill the same basic functions as a handwritten signature (footnote? 6 requirements).
- The method used for signing needs to be sufficiently reliable considering the purpose of the agreement.
These three requirements complement each other so that together they provide a reasonable assurance of the quality of a signature. However not all of them are specific enough to be directly enforceable. In case there is a conflict, the assessment of these aspects requires an analysis of the specific circumstances under which a document was signed.
In order for a blockchain transaction to become a universally accepted, legally binding act in the EU it would need to be signed with a qualified signature. Although technically possible, it is practically undesirable to have qualified signatures on a permisionless public ledger. Instead, local legislation on electronic signatures can be leveraged to get the same legal effect from any electronic signature. In case of a conflict, the circumstances of the signing then determine whether the agreement is legally binding.