Recalibrating functional claiming: A way forward
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
Interest and investment in distributed ledger technology (DLT) (and the Blockchain iteration of DLT) has increased dramatically in recent years, and will have a significant impact on many industries. This could also be the case for telecoms. Recently a telecoms group saw its value more than double after it changed its name to include the word “Blockchain”.1 Such an outcome reflects the current perceived market value of the technology, but DLT may also impact upon telecoms businesses more tangibly. The technology may:
DLT may therefore be part of a telecoms business’s arsenal in becoming more competitive. To this end, many telecoms businesses have already started investing in DLT and related research and development.
Such initiatives range from “soft” programmes to encourage telecoms businesses to explore new DLT applications collaboratively, through to more commercially evolved programs, such as projects to develop platforms that host DLT and smart contract-based transactions and the formation of consortia to commercialise the technology.
It has also recently been reported that a telecoms business is pursuing patent protection of security-related DLT patents. (Pursuing patent protection for the technology is now becoming commonplace – see Norton Rose Fulbright’s client briefing, Unlocking the Blockchain: Using Intellectual Property Rights to Protect Distributed Ledger Technology).
As is the case for many technological developments, the technology is developing faster than the law can adapt. In this article we examine the opportunities DLT offers the telecoms sector, how the technology might be deployed in practice, and some of the legal considerations that telecoms businesses should take into account when considering developing or deploying it.
While a detailed description of the technology is beyond the scope of this article (for more detail, see Norton Rose Fulbright’s client briefing, Unlocking the Blockchain: A Global Legal and Regulatory Guide), it is sufficient for present purposes to say that DLT’s most common iteration, a blockchain, “is a digital, distributed transaction ledger, with identical copies maintained on multiple computer systems controlled by different entities”.2
A blockchain is made up of software (coding including algorithms) and data. The software allows data to be transmitted, processed, stored and represented in human readable form. Identical copies of the ledger are downloaded from the Internet and hosted by multiple parties, known as “nodes”. For this reason a blockchain is sometimes referred to as a “distributed” or “shared” ledger.
A blockchain may be “permissioned” (participation and/or the ability to update the then current “state” of the ledger to reflect new transactions, or data entries may be gated in some way) or “permissionless” (entry and/or ability to update current state may be unrestricted). In a fully permissionless iteration, multiple parties can participate and no one participant has ultimate control.
DLT guarantees synchronisation of a ledger (without the need for reconciliation of multiple ledgers) in order to create a shared version of identical data (known as a single version of the truth). Each party has the same version of the ledger, which is updated (to reflect its new state) as new information or transactions are recorded to a block (effectively a software-generated container) or new blocks are added.
Such updating occurs typically automatically via a shared consensus mechanism (that is, computer protocols), in the case of a permissionless blockchain, or according to other pre-agreed rules typically administered by an administrator (in the case of a permissioned blockchain).
Blockchain utilises cryptography to ensure identity authentication for each transaction, and operates on the basis of non-repudiation and immutability to preserve the integrity of the data and create an audit trail. That is to say, each block of a blockchain is cryptographically linked (by a hash) to the previous block in the chain. If any data in a block is later changed, this will be immediately apparent to all participants, as a later block’s hash record of what an earlier block contains will cease to correspond to that earlier block’s contents. In this way blocks are said to be “chained” together and therefore immutable.
As DLT enhances the security of data, it provides an additional security tool, and could assist telecoms service providers in preventing unauthorised users from connecting to their networks.
DLT enables parties who do not know each other to record and distribute information among themselves directly (on a so-called peer-to-peer basis), without the need for third party intermediaries. This can potentially increase efficiency, for example, in areas such as
DLT has been the subject of much discussion in relation to identity management. Anti-money laundering requirements, know-your-client requirements and general account management all point in the direction of the need for efficient and effective customer identity on-boarding and management.
Such requirements in combination with DLT potentially present opportunities for telecoms businesses, both in respect of their own requirements and in relation to the needs of other businesses. For a telecoms service provider’s own business, DLT could be used for identity management to facilitate a seamless “customer journey” across different devices, applications and organisations, removing the need for customers to have separate log-in credentials.
Some telecoms businesses already participate as trusted electronic identity verification schemes. DLT opens up the possibility of “passporting” identity on a verified basis. There are, of course, a number of legal considerations that arise in this context. For more information, see Norton Rose Fulbright’s client briefing, Unlocking the Blockchain: Identity Use Cases and Privacy Implications.
Telecoms businesses already have access to a large amount of customer data. Sometimes that data is unstructured, making it more difficult to extract value from data interrogation and Big Data analytics. DLT has the potential to aggregate the data in a way that makes it easier to extract business insights, providing a competitive advantage.
While telecoms businesses will wish to understand the opportunities in relation to DLT, they will also need to understand the potential risks. From a technical point of view these include
The telecoms industry is highly regulated. Apart from that, DLT gives rise to a number of other legal issues. While it is beyond the scope of this publication to consider all of them (for a detailed discussion, see Norton Rose Fulbright’s various publications here: FinTech Hub), set out below are some of the more pressing legal issues in relation to DLT and telecoms businesses.
In our discussions with clients in a range of sectors, one of the themes we frequently encounter is the desire of some clients, on the one hand, to own and control the technology, and on the other hand, the importance for other clients that they and their industry achieve the benefits of economies of scale through sufficient uptake of the technology, regardless of who owns or controls it (for more information on the question of owning the technology, see Norton Rose Fulbright’s client briefing, Unlocking the Blockchain: Using Intellectual Property Rights to Protect Distributed Ledger Technology). The issues are to some extent akin to well-known disputes in relation to mobile telephony standards that have been playing out globally for some time.
In addition to deciding if it wishes to own or control the technology (which ought to be reflected in the intellectual property rights strategy of a business), a telecoms business wishing to develop or deploy a DLT solution will need to consider whether it has the intellectual property rights to do what it wants to do with the technology. Can it protect such rights if it develops them? Will its deployment infringe the rights of others? (Such issues are considered in the client briefing on intellectual property rights referred to above.)
As with many emerging technologies, it is currently uncertain whether (or to what extent and in what contexts) DLT as a discrete technology might itself be regulated (at least in the United Kingdom, and in many other jurisdictions too). It is also unclear how, say, the English courts will allocate losses when a party (whether a participant of a blockchain or otherwise) suffers loss.
DLT often relies on “smart contracts” to automate aspects of a process or transaction. Despite being called a smart contract, a smart contract (which is computer coding) may only sometimes give rise to legally binding contractual relations. Whether a smart contract does so depends on a range of factors, examined in detail in Norton Rose Fulbright’s white paper, Can Smart Contracts be Legally Binding Contracts?
Some blockchains operate pseudonymously (particularly permissionless blockchains). There is common law authority (for example, in English law) to the effect that, for a contract to arise, there needs to be sufficient certainty over who the other contracting party actually is. The potentially pseudonymous nature of a such platform hosting smart contracts creates uncertainty as to whether such a smart contract gives rise to legally binding contractual relations.
Clearly it will be important for a business relying on the contractual effect of smart contract to ensure that it actually has that effect. Specific legal advice, based on the smart contract model deployed and the arrangements relating to its deployment, will be required to determine this.
If the parties intend that a particular smart contract is to have contractual effect, they will also need to ensure that it complies with other requirements that might apply in relation to the contract. For example, statute or regulation in many jurisdictions requires that certain types of contracts must be in writing and / or signed by the parties in order to be legally valid. The electronic nature of a smart contract may also pose problems in certain jurisdictions (as smart contracts operate without regard to borders, all relevant jurisdictions should be considered).
If a dispute arises, it may be challenging for the aggrieved party to identify the other party to a smart contract (or other transaction) and bring legal proceedings against it where the platform operates pseudonymously. In the case of a permissionless blockchain there will be no central administering authority to decide the dispute. The enforcement of a court judgment or arbitration award in respect of a transaction using blockchain may be problematic in some jurisdictions, as it may be difficult to prove the existence or content of a smart contract (as the evidence may only exist in an electronic format on a distributed ledger).
There are potential solutions to such problems, however. Choosing a permissioned model obviates some of these problems, especially when it is coupled with appropriate participation agreements, dispute resolution mechanisms and governance. It is a case of ensuring compliance by design at an early stage. For more information in relation to DLT dispute and governance see
The security of data held on a DLT platform is of fundamental importance. For example, as with any IT system, a blockchain could be vulnerable to hacking attempts, data loss or corruption, and transactions could also be entered into fraudulently (for example, by the misappropriation of a participant’s private cryptographic key).
Additionally, false information could be included in a distributed ledger, whether through mechanical error or human manipulation. Due to the immutability of DLT data entries, such errors can become locked into the chain. It may also be difficult to determine who would be responsible for operational defects (for example, coding errors, downtime or data lost or corrupted during transit over the Internet).
It is therefore important that those proposing to participate in a DLT platform address such risks in appropriately documented participation agreements or other binding documentation (for more information on what such documentation should provide for, see Norton Rose Fulbright’s various publications here: FinTech Hub).
DLT developments and deployments are often developed as part of consortia or within collaborations. A range of issues potentially arises at the crossroads of technological innovation and competition rules. The development of DLT – in particular by consortia and other groups – requires the businesses involved to carefully consider competition compliance. For more information, see Norton Rose Fulbright’s client briefing, Blockchain: Competition Issues in Nascent Markets.
Personal data (for example, customer data) processed or stored on DLT platforms raises significant and complex cross-jurisdictional data protection issues. These need to be addressed at the design stage so as to ensure compliance by design. The EU General Data Protection Regulation has significantly increased fines applicable to breaches of data protection requirements.
A detailed consideration of the legal position of personal data in relation to DLT is beyond the scope of this article, but a comprehensive analysis is set out in Norton Rose Fulbright’s client briefing, Unlocking the Blockchain: Identity Use Cases and Privacy Implications.
It is likely that DLT and smart contracts will become ubiquitous over time. In combination with the Internet of Things and Artificial Intelligence, they may help to automate a range of formally cumbersome business processes and perhaps even become significant agents for change within the telecoms sector, because they enable more efficient business processes, particularly for inter-organisational workflows, and are likely to lead to business process engineering / re-engineering across many corporate processes.
The fact that in many instances DLT is being developed collaboratively (typically on an open source basis) should not mask the fact that the technology raises significant legal issues that need to be addressed at an early stage.
Financial Times, Telecoms group up 125% on name change to Blockchain Worldwide, January 22, 2018 (https://www.ft.com/content/282d19ea-ff4f-11e7-9650-9c0ad2d7c5b5).
David Schatsky and Craig Muraskin, Beyond Bitcoin: Blockchain is Coming to Disrupt your Industry, Deloitte University Press, 2015, page 2.
What are the misconceptions and what should be done to recalibrate functional claiming standards accordingly?
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