Banks are `scared` of blockchain - law experts

Source: Fin24, 12/08/2016

Johannesburg - Blockchain - the technology that underlies crypto
currencies such as bitcoin - is grabbing the attention of banks, says
a prominent local law firm.


Blockchain technology acts as a digital distributed ledger to confirm
batches of transactions for the likes of bitcoin.


Blockchain technology, though, has also been used by other
cryptocurrency technologies like Ethereum.


Ethereum taps a worldwide network of computers to enable coding of
smart contracts that, for example, can unlock payments if certain
conditions are met by the parties involved.


But it is the underlying blockchain tech of these cryptocurrencies
that has the potential to disrupt the banking sector by taking over
functions such as verifying payments.


Subsequently, banks are also looking to legal firms such as Norton
Rose Fulbright to help them navigate their way around certain
questions regarding the technology.


And legal experts at Norton Rose Fulbright`s office in Sandton,
Johannesburg say that local banks have started taking notice of the
blockchain.


"All of them have little pockets of R&D (research and development),"
said Nerushka Bowan, a Senior Associate at Norton Rose Fulbright in
Johannesburg.


"There's no large scale banking implementation, yet. They all are very
aware of what blockchain is and they try to see what it can do on a
very small scale," she added.


Just last month, Absa announced that it`s joined the R3 blockchain
consortium.


This global consortium represents over 50 major corporations and Absa
said it would be working with other banks to develop Africa`s first
distributed ledger-based banking solution.


Power to disrupt
Meanwhile, Norton Rose Fulbright`s global operation is looking at the
implications of the blockchain.


And the adoption of blockchain among banks has the potential to
disrupt the global banking industry, said Bowan.


"They [banks] are all very scared.
"Banks are a trusted intermediary for the exchange of funds. And if
you cut the bank out and use the blockchain technology ... we don't
need a bank anymore," said Bowan.


Regulators across the globe, including the South African Reserve Bank
(Sarb), are also looking at the blockchain, said Rohan Isaacs,
Director and Head of Technology and Innovation for Africa at Norton
Rose Fulbright.


"The Reserve Bank is definitely looking at blockchain," Isaacs told Fin24.
"I think regulators worldwide have not really wrapped their heads
around this very well. So, I guess our Sarb is in good company.


"Regulation typically lags innovation. There are good reasons for
that. Before regulation can work out what the regulations are going to
be, they've got to understand what it is they're actually regulating.
"And the blockchain market is frankly not mature enough yet," said Isaacs.
Legal risk, smart contracts
Subsequently, Norton Rose Fulbright says it is helping banks across
the globe with their legal questions around blockchain.


"We've got a lot of information out there on a global level, and we're
especially talking to banks from a kind of risk advisory and legal
risk perspective," said Bowan.


One example that Bowan highlighted regarding legal risk involves smart
contracts on the blockchain.


"Is a smart contract a legally binding contract? If you look at the
way our law is drafted, a smart contract is not actually a contract. A
smart contract is the executable coded version that is from an
obligation from a contract.


"So, you still form a contract and then you code the obligations in
the smart contract which is on the blockchain," said Bowan.


Bowan further said that "there's a range of legal risks when it comes
to blockchain" and that the legal firm is also looking at other issues
such as the supply chain and privacy.


"There's bits and pieces in there that we are now dissecting on a very
detailed level," said Bowan.


"We have other teams looking at intellectual property aspects, data
privacy aspects. We have teams all over the world," she said.