Bloomberg Law
Free Newsletter Sign Up
Bloomberg Law
Welcome
Go
Free Newsletter Sign Up

INSIGHTS: Blockchain Disputes, Investigations on Rise During Pandemic

June 12, 2020, 8:01 AM

The impact of Covid-19 on global supply chains continues to be ubiquitous, rapid, and profound. This crisis creates an urgency for increased supply chain transparency and agility; as a result, many companies are turning to enterprise blockchain technology as the answer.

This transition to enterprise blockchain started well before the coronavirus outbreak, but Covid-19 has accelerated and intensified its adoption. As the use of blockchain increases rapidly, so do the risks for disputes and investigations.

Distributed ledger technology, the backbone of public blockchains such as bitcoin, brings significant benefits to supply chain management via enterprise, or private blockchains. These benefits include preventing fraud, accelerating business processes, and increasing visibility at all stages of the supply chain.

Governments are looking to adopt distributed technology, too. For example, a Covid-19 bill was recently introduced in the House to use a private blockchain to monitor and track medical supplies for a future public health emergency in all 50 states and in the Strategic National Stockpile. This blockchain system will be used to verify the status of the U.S. biodefense capacity in real-time.

Inherent Risks Must Be Addressed

While there are critical benefits of blockchain applications, there are also inherent risks that companies, and their legal teams, must prepare to address. Similar to traditional databases, blockchains are vulnerable to intentional misuse, entry mistakes, and poorly designed or implemented internal controls.

For example, a blockchain, like any system, is only as good as the quality of its data. This is particularly important for private and semi-private enterprise blockchains, which often lack the built-in controls that are a key characteristic of decentralized public blockchains.

As blockchain adoption increases, disputes involving this technology are bound to happen. If a dispute arises, enterprise blockchains offer some benefits versus typical ledgers. For example, the typical supply chain blockchain includes data from many different parts of the supply chain, including producers, manufacturers, carriers, ports, terminal operators, suppliers, retailers and sometimes even competitors. Thus, more information from third-party sources allows for greater insight to identify expected vs. unexpected business activity.

There is also a benefit of having a more transparent audit log of entries on the blockchain. Combining this information with industry trends helps paint a clearer picture and accelerate fraud detection.

Don’t Be Caught Flat-Footed

The current crisis—and the increased use of blockchain technology—will result in increased fraud, disputes, and the need for investigations. Consequently, the demand for attorneys, accountants, and other legal professionals who can navigate the complexities of blockchain technology will likely increase.

Here are three ways to be prepared.

1. Think Like a Criminal

While blockchains may shut the door on some fraudulent activity, novel types of fraud emerge quickly, posing new challenges for corporate investigators and legal teams. Legal professionals must consider a myriad of questions, such as:

  • What legal hurdles exist in seeking discovery from blockchain information that might be owned or maintained by a third party;
  • How parties can ensure that discovery is complete if key data is stored on an enterprise blockchain that may not be known to the requesting party; and
  • If it is believed one party had “two sets of books,” what discovery requests need to take place to ensure the proper analysis of what information was submitted to the blockchain versus what information was known to the submitter.

2. Investigators Must Understand Blockchain

Those performing corporate investigations need to ensure that data on enterprise blockchains is properly vetted during an investigation or dispute. Legal professionals must understand how to use blockchains to identify information relevant to the investigation, how to mine data from these blockchains, and how to combine blockchain data with data from other systems to draw insights and scope investigations.

In the future, investigations that do not consider enterprise blockchains may be viewed as insufficient by boards and regulators.

3. Evaluate Internal Controls

Blockchain is similar to a traditional database in that companies need to evaluate and test the controls in place for data input, validation, and analysis. Yet, given there are multiple players in semi-private blockchains, internal controls and audit rights become even more important.

Legal professionals should consider the design and effectiveness of controls for all parties that are contributing data to the enterprise blockchain, and in some cases, may wish to exercise audit rights on some of these parties. If controls need to be remediated, a cohesive training program for all contributors to the blockchain to set standard protocols may be desired.

In addition, the proliferation of remote work should be taken into consideration as this could potentially increase stress on internal controls.

The effects of Covid-19 will be long-lasting and have impacts we can hardly imagine. However, with some thoughtfulness and planning, legal professionals and investigations experts can prepare themselves for the wider adoption of enterprise blockchain that is certain to be our “next normal.”

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

Author Information

Christopher Riper is a senior managing director in the Dispute Advisory Services practice within the Forensic & Litigation Consulting segment at FTI Consulting. He applies his business and technical experience to lead dispute consulting and forensic investigatory engagements.

Zach Brumbelow is a managing director at FTI Consulting. He uses his experience in accounting, finance, and the securities industry to provide analysis for corporate investigations and complex disputes.