FIDUCIARY DUTY TO THE COMMUNITY: What Projects have to consider

 

Since the inception of blockchain technology, it has attracted a lot of attention across various industries and has transformed the mode of doing business.

Blockchain is one of the core emerging technologies and its disruptive features have brought a lot of concerns surrounding security issues.

Various security vulnerabilities and attacks have been reported over time, and a very recent one is that of OpenSea; the world’s largest NFT marketplace, which recently revealed an email data breach.

Numerous discussions have formed surrounding liability and the extent of the liabilities of blockchain developers or platform operators. The most recent arrest of Tornado Cash developer have sparked further discussion on this.

Technological advancement is moving at a rate that outpaces that of legislation. The new mode of interaction demands the evolution of the regulatory frameworks, tools, and approaches so as to cater to the interests of the stakeholders and spur innovation. Among such liabilities of blockchain technology is the issue of fiduciary duty.

To have a better understanding of this topic, this article will explore the following:

• A brief understanding of blockchain
• The meaning of fiduciary duty
• Whether or not the blockchain platforms or projects have a fiduciary duty to the community when it comes to security
• Security vulnerabilities in the blockchain system
• Blockchain governance and regulation
• Recommendations and Conclusion

“Blockchain” has been defined as a continuously growing list of blocks that are linked and secured using cryptography.

Some of the advantages of blockchain include:

• Security
• Traceability
• Cost-effective
• Fast
• Immutability
• Decentralized
• No intermediary
• Trustless

Fiduciary duty

The meaning of fiduciary duty was described in the landmark fiduciary case of Mothew v Bristol & West Building Society as:

“Someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”

Also, in the Australian case of Grimaldi v Chameleon Mining NL (No. 2), the following was retracted:

“A person will be in a fiduciary relationship with another when so far as that person has taken to perform such a function for or has assumed such a responsibility to entitle that other’s interests to the exclusion of his or her own or third party interests.”

Under the fiduciary duty of confidentiality, a corporation’s directors and officers must keep corporate information confidential and not disclose it for their own benefit.

Fiduciary duties are imposed upon a person or an organization that exercises some discretionary power in the interest of another person in circumstances that give rise to a relationship of trust and confidence.

The U.S. case of Securities & Exchange Commission v. Chenery Corp states:

“To say that a man is a fiduciary only begins the analysis; it gives direction to further inquiry. Who is the fiduciary? What obligations does he owe as a fiduciary?

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Vulnerabilities and risks in the blockchain system

From the inception of blockchain till date, the following risks and vulnerabilities have been recorded:

• 51% Vulnerability

Blockchain relies on distributed consensus mechanism to establish mutual trust, which has a 51 percent vulnerability which can and has been exploited by attackers.

• Private Key Security

The private key is regarded as the ownership and security credential of a blockchain user. When this is stolen, the user’s account faces the risk of being tampered with, leading to loss. The blockchain relies on the need to build trust and peer to peer networking without third party.

Once a private key is stolen, it will be difficult to track the criminal’s behavior and recover the modified blockchain information. The above has presented itself in some real-life cases before the court.

In the case of OpenSea, there was a third party whom OpenSea entrusted customers’ information emails to and whom the customers were to trust that they would not disclose such information to an external party. This email breach has led to panic.  The concern is the breach could lead to tampering with customers’ accounts; including the leak of private and confidential information.

Once again it rings true that the technology is not the issue, but vulnerability comes from the people. Which leads to a question of who you trust and what degree of trust is being given?

You might have control of your private key and assets, but you have to trust that the information is not disclosed by the operators of the platform or their contractors or employees.

• Criminal Activity

The blockchain technology has been used for illegal activity because of its anonymous nature, which makes it hard to track users.

• Transaction Privacy Leakage

The privacy protection measures of some blockchain projects are not very robust. Criminals can leverage smart contracts for a variety of illegal activities, such as leaking confidential information.

• Vulnerabilities in Smart Contracts

Some program defects and lack of proper protocol may lead to security vulnerabilities in smart contracts.

• Under-Utilized Smart Contracts

Some smart contract development and deployment are not adequately optimized.

• Under-priced Operations

It is difficult to accurately measure the consumption of computing resources of an individual operation, and therefore some gas values are not set properly.

 

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Stay tune for Part 2…..

 

 

 

To learn about blockchain join our community at www.bwbc.io/community and gain access to all blockchain related resources.

 

 

Author: Deborah