One of the benefits of the blockchain is the verification it provides for many types of activities. The rapid settlement of financial transactions is driving the growth of blockchain-based fintech solutions. But blockchain records as legal evidence may not be something that can be taken for granted.
James Ching, a contributor to law.com, recently wrote that one key component of the Digital Asset plan (and its competitors) is the fact that the patentability of blockchain-based receipt systems, in particular, the “consensus algorithm,” is in doubt.
Why It Matters
Ching noted that the key to a commercial receipting system’s profitability lies not in proprietary software systems but on the admissibility of the receipt in litigation. He writes that if the receipt is not evidence of a transaction for litigation purposes, it is virtually useless.
Blockchain receipts are claimed to be algorithm-produced, cost-efficient, and permanent since they eliminate the middlemen or transaction processors and verifiers. On the other hand, Bloomberg.com blogger Matt Levine claims such a receipt is less useful than a notation on an Excel spreadsheet. Whether the Digital Asset business model is more advantageous than Excel is the core of Digital Asset’s future viability, according to a recent post on bitcointalk.org.
The issue was raised in the case of Lizarraga-Tirado, in which a defendant faced charges of re-entering the U.S. illegally. The prosecution introduced a Google Earth satellite view of the scene of the defendant’s apprehension. In this case, Google Earth information was clearly based on seemingly unimpeachable sources.
Precedent For Blockchain?
Ching raised the question: how would a blockchain receipt regarding a bitcoin transaction fare under the Lizarraga-Tirado case?
Ching referenced the Digital Asset website in discussing the blockchain’s use in commercial activities. Digital Asset Holdings is a New York-based technology company that uses distributed ledgers to track and settle digital and mainstream financial assets, builds distributed, encrypted, straight-processing tools that improve security, compliance, efficiency, and settlement speed.
Digital Asset properly characterizes the process as creating a distributed ledger within a permissionless, or non-proprietary, or public system based on an algorithm, Ching noted. The transactions create an exact chain of titles over time.
Lizarraga-Tirado, Ching noted, postulates computer-produced information can be hearsay or non-hearsay. Because a blockchain receipt is more like a contention than a map, a potential hearsay barrier exists to introducing any result from the distributed ledger.
In Lizarraga-Tirado, information used to authenticate Google Earth would be needed to validate the bitcoin blockchain or its derivatives. Any litigator would introduce identical evidence to authenticate a receipt as a business record through “a…programmer or a witness who frequently works with and relies on the (blockchain) program.”
There is an exception for business records. The key issue in accepting blockchain receipts under the exception is the reliability of the algorithm underlying it. The main legal question is whether the process for producing the receipt has to be proprietary to be accurate and reliable for business purposes.
What Is ‘Hearsay’?
“Hearsay” is the legal term for certain statements—offered as evidence during a trial or hearing for attempting to prove the truth of the matter asserted in the statements—that were not made while testifying at the trial or hearing itself, according to Wikipedia.
The hearsay rule defining hearsay and providing for both exceptions and exemptions. There is no all-encompassing definition of hearsay in the U.S. However, most evidentiary codes defining hearsay adopt the rule established in the Federal Rules of Evidence, which defines it as an out-of-court statement used to prove the truth of an asserted matter.
Litigating the admissability of Internet-based evidence consumes a lot of time and fees, postings on the cryptolawyer.net have noted.
The impact of blockchain technology on evidentiary rules in court raises questions. Will blockchain data be nothing more than another type of evidence lawyers will fight about? Or will the technology create a more efficient evidence standard?
The answer may not be known until blockchain-based record-keeping schemes become mainstream.
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