J. K. Rowling’s world of Harry Potter included an array of amazing artifacts; our personal favorites were the books and pictures that changed themselves. Two decades later, a world of Kindles and iPads echoes the wonders of Potter. Now imagine that Rowling’s world included a magic ledger. Every human had the same ledger. Any transaction made by any person anywhere would instantly show up on the ledger, and every other person could verify it.

A. What Is Blockchain?
That magic ledger is a simple analogy for blockchain technology. Blockchains consist of networks of users. Participants use the network to conduct transactions with each other. Records of the transactions are distributed throughout the network. This decentralized recordkeeping decouples verification from a central repository. The nature of the system permits, indeed requires, that transaction records be distributed over the network as a whole. The network, rather than an intermediary processor, is the definitive database.

The most high-profile blockchain application is electronic currency, specifically bitcoin. Bitcoin originated in 2008 when a still-unknown individual or group writing under the pseudonym Satoshi Nakamoto proposed a mechanism of digital transmission of payments between two entities without the need of an intermediary. Instead of engaging an intermediary, the blockchain ledger would record the transmission. Each block of transmissions would lie atop previous ones. Sophisticated algorithms and digital structures would ensure the integrity of the jointly held ledger.

Bitcoin has not enjoyed uniformly smooth sailing. The exchange rate has fluctuated wildly. Mt. Gox, a prominent exchange, declared bankruptcy. Providers and exchanges were hacked. It came to be linked with the federal action against the Silk Road “darknet” drug emporium. Nevertheless, bitcoin bounced back and continues to reign as the flagship virtual currency.

The potential implications of blockchain are breathtaking. The analogue is the Internet in 1994: while the exact timing and contours of the change are unclear, significant change looms large and inevitable. The winners and losers are not known, but the Amazons and Pets.com of the blockchain world are being developed as this is written.

B. What Are The Implications Of Blockchain Technology?
So what does blockchain portend? Five potential future implications include:

First, faster settlement. Transactions through the Automated Clearing House take two to three days; blockchain could cut this time to a second.

Second, lower transaction costs. As a frame of reference, companies like Western Union charged approximately $36 billion in fees to move money in 2015 – a blockchain-based funds transfer system would cost a fraction of that.

Third, facilitating bilateral contracts. Blockchain technology can be programmed to permit automatic release of funds upon the satisfaction of certain conditions, functioning as an electronic escrow. Honduras and the Republic of Georgia have been piloting programs to incorporate blockchains into their land registries. Sweden has likewise taken tentative steps in that direction. Other countries will almost certainly follow.

Fourth, corporate governance. Corporate law has long dealt with the fact that publicly traded securities are typically not held in the name of the beneficial owner. The Delaware Blockchain Initiative has launched a pilot project that will soon enable Delaware corporations to issue shares using distributed ledger technology. This change will permit beneficial owners to assert greater control over the direction of the corporation while preserving the ability to efficiently transfer shares in the public markets.

Fifth, global financial change. Billions of people have smartphones, but only a fifth of them have bank accounts. Blockchain technology could potentially open the global financial system to the billions of unbanked who still require financial services. The remote Saharan farmer with a herd of cattle and a smartphone is about to have a vista of potential opportunities open before him.

C. What Are The Legal Issues Surrounding Blockchain Technology?
Blockchain may be yet another area where technology has outstripped the law. The absence of prevailing standards and definitive regulatory schemes leads to piecemeal adjudication that inevitably leads to conflicting results. In fact, courts have struggled with even the basic taxonomy of blockchain-based technologies. For instance, on September 19, 2016, a federal judge in the Southern District of New York ruled that bitcoin was currency. This, of course, conflicts with a July 2016 Florida state court decision that determined that bitcoin was not currency.

Other agencies that have issued guidance include the General Accounting Office, the Securities and Exchange Commission, the Financial Stability Oversight Committee, the Consumer Finance Protection Bureau and the Internal Revenue Service. Perhaps most critically, FinCEN extended Bank Secrecy Act rules to participants transacting in “convertible virtual currencies.”

At the state level, North Carolina recently made history by “providing an alternative, legislative-based model to industry-specific rule-making.” The North Carolina Money Transmitter Act clarifies that the virtual currency transmitters are encompassed within the state definition of money transmitters. This means that money transmission regulations, including licensing, fees, and reporting requirements apply to them. However, virtual currency miners and users – individuals using virtual currencies like bitcoin to buy or sell goods and services – are not.

House Bill 289 went into effect on October 1, 2016. It is the first North Carolina legislation with clear implications for blockchain technology. It will not be the last.

By Saad Gul & Michael E. Slipsky of Poyner Spruill