Blockchain and Privacy | Proskauer – Blockchain and the Law


Proskauer -  Blockchain and the Law

Discussions about “blockchain” technology seem to be everywhere these days, with potential applications spanning industries as diverse as banking, healthcare, real estate, law enforcement, entertainment, and even wine and jewelry sales. Different applications of blockchain present different and unique challenges and opportunities for data security and privacy, but there are three general categories currently preoccupying legal privacy experts. The first involves the necessary bridge between the physical-cyberspace boundary; the second involves sensitive information actually stored on the blockchain; and the third involves the very existence of blockchains themselves.

What is Blockchain?

Blockchain is, at its core, a distributed ledger for storing information about transactions. With blockchain, instead of inputting and storing transactional information in some central location (for example, logging a real estate transaction in a central ledger at City Hall), the transaction is uploaded and stored as a “block” of information on thousands of different computers, or “nodes,” located around the world. Subsequent transactions can be input as a new block into any node and, once the new transaction is verified (using a complicated process beyond the scope of this post), the new block is added to the existing blocks on all other nodes housing the information for the original transaction, creating identical “chains” of information inextricably linking the transactions back to the initial block of information, or “genesis block.”

A blockchain network can be public, meaning any computer can function as a node, or it can be private, meaning only certain approved computers are allowed access. The network can be governed by a strong central authority, a weak central authority, or no central authority at all. Meanwhile, the data in the blocks can be public, meaning anyone can see it by looking at the information stored on a node, or encrypted, so that the nodes can all verify that the information contained at each node is identical, but only those with a key can access the information in a readable format. Each of these options provides tradeoffs between security, privacy, speed, and functionality, and different applications will require different blockchain networks to function depending on the particular requirements of each application.

Privacy Issue #1: Physical-Cyberspace Boundary

The “physical-cyberspace boundary” refers to the concept that when a flesh-and-blood person interacts in cyberspace, they do so through an “online identifier.” For example, if you want to interact with users on Facebook, you need to create a username and log on so Facebook’s network knows who you are. The same is true for any online interaction, whether its banking, buying concert tickets or downloading music – in order to take part in a transaction, there needs to be some connection established between you and your online identifier. The identifier can be pseudo-anonymous (e.g. a bank account or e-mail address that doesn’t have a real name attached to it), but at some point, there must be some bridge of the physical-cyberspace boundary. Currently, this bridge is accomplished primarily through username and password combinations, sometimes with the addition of multi-factor authentication procedures. In the near future however, it is likely that biometric identifiers will replace usernames and passwords as the means of crossing the physical-cyberspace boundary.

One issue with this system is that, in order for a physical person to be able to log into a network, the network needs to have a copy of that person’s login credentials paired with that person’s online identifier. In a centralized system, those credentials only need to be stored in one place (e.g. on the central severs of Facebook or your bank). In a blockchain network, those credentials would be stored on all of the nodes containing the blockchains you want to interact with, some of which may be more easily compromised than a secure central server.

This is particularly concerning when it comes to biometric identifiers, which, once compromised by identity thieves, are not easily changed. Compounding this concern is the fact that, as will be discussed below, the nature of a blockchain means that all information stored on a blockchain stays stored as additional blocks are added to the chain, meaning sensitive personal information may be stored in cyberspace forever.

Another issue is that, absent a strong central authority, it can be difficult to prevent hackers from accessing sensitive information once a person’s login credentials are compromised. For example, if someone hacks your bank account or steals your credit card information, you can call your bank and update your login information or cancel your old credit card. In a blockchain network with no strong central authority, it can be difficult to update your login credentials, and even possible for a hacker to lock you out by updating the credential once they have access.

Not only is the potential for hacking of this sensitive information problematic from a security standpoint, but it also creates uncertainty concerning who, if anyone, is responsible for notifying individuals if their login credentials are compromised. Most states have passed data breach notification laws which require the custodians of personally identifiable information (“PII”) notify the owners of PII if their PII is compromised. At this point it is unclear how these laws will be applied to a distributed network like blockchain, or if they are even applicable as written.

Privacy Issue #2: Information Stored on, and Inferred from, the Blockchain

Some of the data which will be stored on blockchains will be particularly sensitive – blockchain networks are currently being explored as means of recording and updating healthcare records, genomic sequences and biometric credentials (as discussed above). While any sensitive information stored on the blockchain will (as a best practice) be encrypted, because of the distributed nature of the blockchain, hackers may target those specific nodes that, for one technical reason or another, can be more easily compromised to access the encrypted information, or where the laws are inadequate to prevent such hacking. This concern is compounded when it comes to government-employed hackers, who may take advantage of the physical location of nodes in countries where information is more easily hacked, or where the laws are inadequate to prevent such hacking. While privacy risks can be mitigated by operating in closed networks, there are benefits to open networks that will require at least some blockchains containing sensitive information to be operated in less than fully closed networks.

Another concern with open networks is that, even if the information itself is encrypted, sensitive information can be gleaned from the fact that transactions are taking place at all. For example, if two large banks engage in a high volume of transactions with each other in a short period of time, information can be extrapolated from that information by other banks or private individuals who can see the transactions occurring, even if they can’t see the details of the transactions themselves. On a more personal level, if a doctor accesses a patient’s health records to make changes, a hacker may be able to see that transaction if they know the online identifiers of the doctor and the patient. While the hacker won’t be able to see the health records or what was changed without accessing and decrypting the records, they can at the very least infer that the patient saw a particular doctor on a particular date, information which a patient might wish to keep private.

Equally problematic is the fact that, at this point, it is unclear who, if anyone might be legally liable in the event this information is accessed and harm results to the owner of the information, or to a third party as a result of unauthorized use of the information.

Privacy Issue #3: Nature of the Blockchain – Eternal Records

One of the great challenges facing privacy in the 21st century is the situation created by the combined advances in data retention, data cataloguing and data search capabilities. As we create more and more data about our lives, and as that data is catalogued and made easily searchable, that data becomes eternal and visible to the general public in a way it has never been before. Blockchain technology is likely to accelerate this trend. One of the as-advertised benefits of blockchain is that it records all transactions back to the genesis block, allowing for near-perfect record keeping. As the types of transactions stored on blockchains increase, so will eternal records of every one of those transactions. In the future, it is possible that every transaction you engage in will be stored on a blockchain, and you will have no control over where that information is stored or how it is used, and no way to have it deleted.

The privacy concerns (and laws) implicated by these eternal records are numerous. For starters, the simple fact that such records exist could pose issues for anyone who doesn’t want a complete record of all of their transactions to exist for all time. Furthermore, at this time there is no clear agreement as to who “owns” the information contained in these records as a legal matter. It is possible that blockchain networks would be able to sell the information contained in these records without any input from the individuals who engaged in the transactions, and those individuals would have no recourse. In the absence of clear rules of ownership, it may also be possible for government entities and private citizens to access this data without the consent of the individuals involved in the transaction. In blockchains with a weak or no central authority, bad data that makes its way into the chain may be impossible to correct.


The discussion above is a brief summary of the privacy issues that are already being noticed and addressed by people thinking about blockchain. As blockchain grows as an accepted technology, and as its potential applications increase, these issues will be fleshed out and new ones will likely appear. Stay tuned for future posts as blockchain continues to grow.

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