Permissioned distributed ledger technology governance

In a simplistic sense, distributed ledger technology, or DLT, involves spreading the record of transactions or other inputs across a number of participants, so each participant has an identical copy of the transaction ledger, rather than trusting the keeping of a ledger to a single entity. The use of such technology has evolved since the original Bitcoin blockchain was created. Recent uses include systems that maintain the traceability of product from its production to its sale by a retailer.

Bitcoin is a public, permissionless network. Anyone can join it. On the other hand, commercial uses of DLT typically have particular participants with a common interest. For instance, many of the recent systems involve participants in a supply chain. These participants need to limit who can join the network. From this need was born the permissioned DLT network.

In early September 2019, the Depository Trust & Clearing Corporation (DTCC) and US based technology services provider, Accenture, published a white paper (which appears to have been written in June), entitled ‘Governing DLT Networks’. DTCC is a US securities processing and centralised clearinghouse for securities exchanges and equity platforms.
The white paper outlines a governance model for permissioned DLT networks, which they name “DLT-GM”. The purpose of the model outlined is to assist with managing the risks and consequences of a distributed ledger technology landscape. As the white paper notes, many DLT projects involve highly regulated industries. Accordingly, it is crucial that any permissioned DLT network is set up well with good governance at the outset.

The white paper is well worth a read for anyone contemplating involvement in a permissioned DLT network. You can access a copy of the paper here. While not purporting to be exhaustive, the white paper highlights many of the issues that need to be considered before such a network can be launched.

In the remainder of this article we outline the key components of the governance model proposed in the white paper. However, we do not discuss its merits, other than to note that, as with any model, it is important to consider your particular circumstances and whether there are any other matters that you should take into account.

The proposed DLT-GM

The white paper proposes a DLT governance model for a permissioned DLT network that operates with three types of players, a governing entity, a network operator and the network community. There are eight functional areas of the model:

1. Administration: This is where “overall responsibility and accountability for the oversight and strategic decision-making for the DLT network community” sits.

2. Participant Lifestyle: How a participant joins, its interactions are managed, and it leaves the network community.

3. Runtime Operations: Managing the network’s operations day to day, particularly monitoring, reporting, support, and change and release management.

4. Data Governance: This includes defining who has access to what data and the controls around reference data.

5. Third Party Management: To coordinate third parties involved with the network, e.g. providers that participants engage to manage their responsibilities in relation to their DLT nodes.

6. Platform Management: Managing the DLT platform itself and ensuring it is adaptable to participant needs.

7. Infrastructure: This area “addresses oversight of the core network management functions”.

8. Legal and Finance: Covering how legal risks will be addressed and how the DLT network will be funded.

While the white paper mentions a couple of legal risks to be addressed in its legal and finance section of the governance model, it will be important to carefully explore all the relevant legal risks and ensure they have been properly addressed before proceeding with a DLT network.

In addition to the legal risks within the operation of the permissioned DLT network, participants also need to be mindful of how the DLT network will enable participants to comply with the regulatory framework relevant to them.

If you are embarking on a DLT project, your Lane Neave legal adviser can help you to understand the legal risks of the DLT network itself, what compliance elements of the regulatory framework you operate in are relevant to the project, and work with you to assess what you need to focus on for legal compliance when participating in the DLT network.

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