Legal Aspects of Blockchain Technology Part 1 — Blockchain as Evidence in Court

Authors: Markus Kaulartz, Jonas Gross, Constantin Lichti, Philipp Sandner

This article addresses the question how a blockchain transaction must be structured so that it can be used as evidence in court. Based on the following different types of formal evidence — namely (1) expert opinion, (2) documents/deeds, (3) inspection or visual evidence, and (4) witnesses and party hearings — we analyze the evidence assessment of a blockchain transaction in detail. The article analyzed the laws and rules of the jurisdiction of Germany.

Preamble

This article is the first publication of the series “legal aspects of blockchain technology” by the Frankfurt School Blockchain Center (FSBC), Datarella and CMS Hasche Sigle. This research is part of the KOSMoS project, a research project funded by the German Federal Ministry of Education and Research (BMBF) under the funding code 02P17D020. The Frankfurt School Blockchain Center and Datarella GmbH are part of the “KOSMoS” consortium. Together with partners from the industry (Schwäbische Werkzeugmaschinen GmbH, Alfred H. Schütte GmbH & Co. KG, ASYS Automatisierungssysteme GmbH), academia (Universität Stuttgart, Hochschule Furtwangen), and software development (inovex GmbH, Ondics GmbH), they create a blockchain-based solution allowing manufacturing companies to establish a DLT-based framework for producing machines in order to a) execute dynamic leasing contracts, b) provide transparent maintenance documentation, and c) ensure high-quality documentation of manufactured products.

Introduction

Blockchain technology is getting increasingly renowned, as more and more companies develop blockchain-based prototypes, e.g., in the context of payments, digital identities, and the supply chain. One use case of blockchain is often seen in the tamper-proof storage of information and documentation of facts. This is due to the fact that records on a blockchain are “practically resistant” to manipulation as a consequence of the underlying cryptography and the consensus mechanism.

If a blockchain is used for storing information, the question arises whether the data stored on a blockchain can be used as evidence in court. In the following article, we will analyze this question.

Evidence of a blockchain transaction in civil proceedings

First of all, it is important to understand that evidence in court is not necessary in every court case but only when the other party contests a fact. This could, for example, be the case with regard to the immutability of blockchain transactions or the source from which a blockchain transaction has been submitted. Before information from/on a blockchain will be considered by a judge, it must be introduced as evidence in the court case. In civil proceedings in Germany, the principle of the so-called strict evidence (in German: “Strengbeweis”) procedure applies typically. This means that the parties are bound by the formal evidence procedure reflected in the five different types of evidence (§§ 355 et seq. ZPO): experts, documents/deeds, inspection, witnesses or party hearings.

Expert opinion

An expert opinion is one way of using information stored in blockchains as evidence in court. If the court considers this request for evidence to be relevant to its decision, it appoints an expert to investigate the facts. The parties have no influence on the choice of the expert but can typically make suggestions.

After examining the facts, the expert presents his or her opinion, usually in a written report, and is also invited to the oral hearing. Examples of facts that may need to be proven and confirmed by the expert include the immutability of a transaction, information about the person who signed a blockchain transaction or the content of blockchain transactions.

Practical note: The technical structure of the system and the use cases based on the blockchain system should be sufficiently documented so that an expert can easily familiarize herself with it in order to work out the desired result.

Apart from its high evidential value for the court, there is another clear advantage of expert evidences at court: Experts’ opinion may, once written down, be used in other proceedings, too (§ 411a ZPO). This can be useful if the same technical question has to be assessed in different proceedings. This can be the case, for example, if several customers sue a blockchain service provider.

Documentary evidence/deeds

Deeds (in German: “Urkunden”) may prove the fact that the declaration contained therein originates from the issuer (§§ 415, 416 ZPO). A deed has a very high evidential value.

Deeds under German laws typically require a (physically) written form. A blockchain transaction, of course, does not fulfill this requirement. According to § 371a ZPO, however, the provisions of the documentary evidence also apply to electronic documents if these have been signed with a so-called qualified electronic signature.

Since blockchain transactions are signed with a private key, they could, strictly speaking, qualify as such an electronic signature. However, the signatures used in blockchains are generally simple or advanced electronic signatures but not qualified electronic signatures as required by § 371a ZPO.

● A simple electronic signature is data in electronic form which is attached to or logically linked to other electronic data and which the signatory uses for signing (Art. 3 №10 eIDAS Regulation). Example: Email signature but also typically the signature of a blockchain transaction.

Advanced electronic signatures fulfill the following requirements according to Art. 26 eIDAS-VO:

○ They are clearly assigned to the signatory.

○ They enable the signatory to be identified.

○ They shall be created using electronic signature-generating data which the signatory can use with a high degree of confidence under his sole control.

○ They are connected to the data signed in such a way that any subsequent change in the data can be detected.

Qualified electronic signatures are based on advanced electronic signatures and are distinguished from these by the fact that they are created by a so-called “qualified electronic signature creation device” (Art. 3 №23 eIDAS Regulation) and are based on a “qualified certificate for electronic signatures” (Art. 3 №15 eIDAS Regulation). The qualified electronic signature creation device itself comes along with high requirements in practice: It is a configured software or hardware that is used to create an electronic signature. In particular, the keys would have to be created by a so-called “qualified trust service provider”, of which there are currently only a handful in Germany. The reason behind these high requirements are to ensure that private and public keys can actually be assigned to an identified person (Art. 24 (1) subsection (1) eIDAS Regulation).

We believe that blockchain signatures should typically be qualified as advanced electronic signatures in terms of Art. 26 eIDAS-VO. If one assumes immutability of blockchain transactions, the unique public key is suitable to identify the signer and the private key is typically in the sole control by the signer. However, the requirements for a qualified electronic signature may only apply in individual cases. If a blockchain is actually implemented in such a way that transactions are signed electronically in a qualified manner, and if a trusted service provider has been found who is able to provide the necessary infrastructure, the requirements of § 371a ZPO would be fulfilled and a blockchain transaction would have an evidential value similar to a written document. To the best of our knowledge, this has not yet been implemented in practice. Therefore, blockchain transactions “only” have the evidential value of simple electronic documents but not the same evidential value than paper deeds.

The current legal position of blockchain transactions is that they can only be used as documentary evidence if they are provided with a qualified electronic signature.

Visual evidence

The advantage of the visual evidence (§§ 371 ff. ZPO) is, in particular, the low effort and the resulting lower or non-existent costs. All externally ascertainable facts can be the object of such evidence as long as the judge can perceive them on her own. Accordingly, not only visual perceptions but all sensual perceptions are covered, so that the perception of technical recordings, copies, printouts or data output on a computer screen are also covered. This also includes electronic documents, including advanced electronic signatures (see above).

Practical note: Blockchain transactions should be structured in such a way that the stored information is provided to the judge easily and in a way that is comprehensible, clear and sensual. The presentation of information must enable a judge to recognize, understand and appreciate all relevant information. If the blockchain system, through simple, structured and understandable output, allows to check all transactions for authenticity, these data can be used as visual evidence.

In view of the current complexity of blockchains and the little widespread knowledge about them, it can be assumed that a court will use an expert or even documentary evidence. At the moment, visual evidence is unlikely to be of great importance in blockchain transactions.

Proof by witnesses and examination of parties

Last but not least, evidence from witnesses or the hearing of parties are also valid evidences at court. Nevertheless, also this kind of evidence will be of rather minor importance, regardless of the concrete form of the blockchain transactions. Although witness evidence is probably the most frequently used means of evidence in practice, only the witness’s own perceptions are subject to evidence. This means that a witness could only report on her perception of the blockchain transaction and this report would be the basis of the evidence.

It is conceivable, for example, that a developer of a blockchain system could be asked to provide evidence of the functionality and immutability. The court will hear the witness and then assess her credibility. Since solely the testimony of the witness is relevant, the evidentiary value of the blockchain, due to its immutability or the concrete form of the transaction, is not relevant.

Evidence assessment of a blockchain transaction

If the blockchain transaction was brought to court as visual evidence, by a witness or through expert evidence, the court is free in its assessment of the information. Deeds provide full proof regarding their originators’ declarations. It is important to understand, however, that the court may not deny the blockchain transactions’ legal appearance and admissibility as evidence in court proceedings solely with the argument that they have only been presented in electronic form or because they do not meet the requirements for qualified electronic signatures (Art. 25 (1) eIDAS Regulation).

Agreements between the parties on the assessment of evidence

The parties developing and governing a DLT system could agree on a framework agreement on the blockchain’s role as evidence in court. This is advisable as long as the free assessment of evidence by the judge is not limited. The goal of such an agreement could be to bring the evidentiary value of a blockchain transaction close to a paper deed, although a blockchain transaction is no such paper deed (see 1.b, above). This would make it possible to avoid the need for a costly expert opinion.

Of course, such an agreement is more appropriate in private blockchains than in public blockchains, since in private blockchains all parties involved are known and typically expect their relations to be based on a contractual basis.

Practical note: In the framework contracts underlying the DLT-based use cases, expert evidence could be excluded, and it could be agreed, for example, that blockchain transactions, if confirmed by a specific number of nodes, are deemed to have been submitted by the party that signed them.

There may be residual risks in such an agreement, as the court would also be able to take evidence of its own motion. However, this risk seems low if the party burdened with evidence does not, because of such an agreement, file a request for evidence.

About KOSMoS

KOSMoS is a research project funded by the German Federal Ministry of Education and Research (BMBF) under the funding code 02P17D020. More information about the project can be found on the website.

Remarks

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Dr. Markus Kaulartz used to be a software developer and is now a lawyer at CMS Hasche Sigle. He specializes in IT and data privacy laws and focuses on challenges arising from the increasing digitalization (FinTech, Blockchain, Smart Contracts, AI, SaaS, etc.). Since Markus’ clients are both innovative startups and tier one global players, he has gained much experience in advising on legal issues of future technologies and new business models, such as blockchain and artificial intelligence. Markus has particular tech expertise and insights that contribute to his legal advisory practice. His input is often sought where challenges arise at the interface of technology and law. Markus is co-editor of the legal handbook on smart contracts and the legal handbook on artificial intelligence and machine learning.

Jonas Gross is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC) and also works for the KOSMoS research project. His fields of interests are primarily crypto currencies. Besides, in the context of his Ph.D., he has been analyzing the impact of blockchain technology on the monetary policy of worldwide central banks. He mainly studies innovations as central bank digital currencies (CBDC) and central bank crypto currencies (CBCC). You can contact him via email (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/) and via Twitter (@Jonas__Gross).

Constantin Lichti is a research assistant and project manager at the Frankfurt School Blockchain Center (FSBC), and also works for the KOSMoS research project. Furthermore, he is responsible for project proposals and grants as well as studies published at the FSBC. As a doctoral candidate his research interests cover blockchain themes in the light of digital transformation processes, especially the adoption of blockchain technology as well as the emergence of the global token market and digital business models based on blockchain technology. He graduated from the Technical University of Munich with a master’s degree in industrial engineering and management. You can contact him via email (constantin.lichti@fs-blockchain.de) and LinkedIn.

Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner, in particular, includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@philipp-sandner.de) via LinkedIn (https://www.linkedin.com/in/philippsandner/) or follow him on Twitter (@philippsandner).

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