Global law practice Eversheds Sutherland appointed as legal counsel for blockchain trade platform eTradeConnect to help the consortia tackle legal challenges related to the use of blockchain in trade finance.
eTradeConnect, facilitated by the Hong Kong Monetary Authority (HKMA), is the first large scale multi-bank blockchain trade finance platform in Hong Kong. Eversheds Sutherland, a global top 15 law practice, has been appointed as legal advisor for seven leading banks as they join together to launch eTradeConnect.
Michael Yau, Eversheds Sutherland’s Head of Banking and Finance, Asia, says “Trade finance transactions of blockchain platforms involve considerations of various legal issues.”
He goes on to add that the firm has been working with banks and the platform company on these key issues: data protection, competition law, and eContracting with smart contracts.
Blockchain networks, by their very nature and as a core proponent of their value, are distributed and immutable. The distributed ledger system means that transaction data, which could possibly contain personal or other sensitive data, could be openly-displayed for all participants. This, coupled with the data’s inherent immutability, may raise privacy concerns. To compound this concern, blockchain networks allow provisions for new participants to be admitted. Any new participant will need access to a whole copy of the digital ledger, creating a degree of uncertainty for current participants as to who will have access to this data in the future.
These concerns are less prominent with permission networks, like eTradeConnect. This is because controls are placed on entities that can become nodes and see the data, in contrast to public networks such as Ethereum. Despite this, these concerns still need to be addressed and mitigated from a legal standpoint, something that Eversheds Sutherland will have a hand in doing.
While operating in a consortia model allows firms to unlock the full potential of blockchain technology, it also necessitates collaboration between multiple users who are often competitors. Competition law is typically welcoming to collaboration between competitors so long as it allows them to achieve outcomes that they would be unlikely to achieve on their own. That said, companies do still need to be mindful of certain risks. In their article ‘Antitrust pitfalls in blockchain technology: the key issues’, Freshfields Bruckhaus Deringer identifies standardisation efforts, access rights to private blockchains, information sharing or collusion, and merger control as key potential antitrust risks when operating in blockchain consortia.
eContracting with smart contracts
Smart contracts are programmable agreements that are capable of enforcing themselves when certain predefined conditions are met. Fundamentally speaking, they allow legal stipulations to be embedded in computer code, enabling the automatic execution of functions defined by a legal contract.
This superimposition of legal functionality in a digital environment is clashing with the legal landscape. As it stands, there is no regulation or law that recognizes electronic versions of negotiating instruments as such; the legislature requires them to be “signed writings”. Addressing this and creating a strategy to overcome this challenge is part of the work that Eversheds Sutherland will be doing for eTradeConnect.
Each of these key issues, and the others that the firm is working to address, require a solid understanding of the unique features of blockchain platforms in the context of the trade finance practice of banks. They are not merely challenges that will solve themselves, but rather ones that require the dedication and expertise of a globally recognized law firm.
eTradeConnect is an excellent example to demonstrate how technology drives efficiency. Following their lead, as more firms recognize the benefits of new technology initiatives for financial services, legal practitioners like Eversheds Sutherland will need to continue to work closely with clients to see these types of digital initiatives through to the end.