Blockchain — the technology that underlies cryptocurrencies such as bitcoin — is grabbing the attention of banks, says a prominent local law firm.
The 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 Johannesburg say that local banks have started taking notice of the blockchain.
“All of them have little pockets of R&D,” said Nerushka Bowan, a senior associate at the law firm.
“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.
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.”.
Regulators across the globe, including the South African Reserve Bank, are looking at the blockchain, said Rohan Isaacs, director and head of technology and innovation for Africa at Norton Rose Fulbright.
“I think regulators worldwide have not really wrapped their heads around this very well. So, I guess our Reserve Bank 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.
Norton Rose Fulbright is helping banks across the globe with their legal questions around blockchain.
“We have 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.
She 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.