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Securities Law

What General Counsels Need to Know About Procuring Blockchain Software

Dec. 8, 2020, 9:01 AM

The main consideration for general counsel to bear in mind when procuring blockchain software is that at its core, blockchain is a platform upon which applications are run.

Different software products can be visualized as sitting on top of each other in a stack-like formation, with platforms such as blockchain sitting at the “bottom of the stack,” while applications that utilize blockchain sit at the “top of the stack.”

This is important to note, as a lot of the concepts around procuring platform-level software are transferable to the blockchain space.

The main difference between blockchain and traditional software platforms, of course, is the decentralization associated with the architecture of blockchain platforms. Blockchain allows for multiple computers to receive updated data simultaneously, while operating on different servers.

Similar to other platform software, blockchain in and of itself has no direct-to-customer interface—application companies generally maintain this relationship. Accordingly, GCs of application companies need to make sure that the blockchain software their organizations use is licensed in a way that suits their needs.

There are generally two types of licenses that GCs have available to them when procuring blockchain software: open-source and proprietary.

Open-Source Licenses

Many blockchain platforms and the applications that sit on top of them are licensed under open-source licenses.General counsel should be aware of the type of open-source license a blockchain platform or application uses; they need to know if they are using a “permissive license” or a “copyleft license.”

With a permissive open-source license (e.g., Apache 2.0), an organization has a wide array of actions it can take with the software. It can modify the software, incorporate the modifications into other pieces of software (e.g., applications), or redistribute the software without any modifications (provided they also redistribute a third-party notice with each of these). Most importantly—the organization does not need to distribute the source code of its modifications or applications.

Copyleft (e.g., GNU General Public License) licenses, on the other hand, may force an organization to distribute the source code to its modifications and to its applications.

Here it is important for GCs to recall the overarching premise of blockchain mentioned earlier: If GCs are procuring blockchain software, then the chances are that they are building or operating an application that sits on top of it.

A copyleft license would strike at the heart of the value proposition for their product—if organizations are forced to open source their own applications, then there is no incentive for customers to pay a license fee!

It is also important to note what you don’t get with open-source software: namely, any responsibility on the part of the licensor. Open-source software is generally provided “as-is.”

Proprietary Licenses

GCs may decide that their organizations need more than a permissive “as-is” licensed piece of blockchain software, especially if they need certain representations and warranties and levels of support. Proprietary licenses would be a good fit here.

In a proprietary license, each GC can negotiate the agreement to contain the representations and warranties they desire (e.g., non-infringement, no viruses, etc.) A company offering a proprietary license generally has the financial wherewithal to take on this responsibility and stand behind their software (though of course GCs need to be comfortable that this is true).

Perhaps the most important benefit of proprietary licenses is that the blockchain software vendors generally provide support services.

This is especially important for general counsel of application companies. Application companies make certain representations to their customers regarding the functioning of their applications.

At times, however, the issues that customers experience with their “top of the stack” application may actually be a result of issues with the “bottom of the stack” blockchain software.

If this is the case, application companies would need to go to the blockchain software provider for resolution.

A proprietary license gives GCs the ability to get the representations and warranties they need from the blockchain software vendor to make sure they are delivering a valuable service to their own customers. Here, GCs need to make sure that vendors are committed to suitable turn-around times (generally relative to the severity of the issue) and provide the necessary fixes and patches to ensure that customers’ issues are resolved.

The key takeaway to consider when procuring blockchain is to return to its definition: Blockchain is a platform and the fact that a company “utilizes blockchain” simply means that it is providing an application that sits on top of a piece of blockchain software.

This should prompt GCs to consider the business longevity and wider strategy behind the application their organizations are building. Technology can be challenging since it is constantly evolving, so it’s best to consider a license which is backed by a stable commercial entity that has the technical support on hand to assist, if needed.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Jason Rozovsky is assistant general counsel at enterprise blockchain firm R3. He has helped lead R3’s joint software development projects, which include financial institutions, technology companies, and regulators. He also manages critical negotiations and drafting of enterprise blockchain software licensing agreements.

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