Blockchain Investment in the Telco Industry

• Blockchain is a technology that enables information to be recorded in a shared database. It is often referred to as a "distributed digital ledger technology".
• Blockchain technology is gaining attention as the new digital economy continues to drive innovation in methods of transaction, increases in efficiency and reductions in manual processes.
• While many of the early proof-of-concepts for blockchain applications have focused on innovation in financial services, blockchain technology has the potential to disrupt and transform all industries, particularly telecommunications.
• Major telcos worldwide are investigating blockchain technology's potential to not only streamline internal functions but to facilitate development of new and profitable products.

In recent years, telcos have sought to benefit from blockchain technology by partnering with other companies to develop and implement blockchain-based solutions and investing in funds dedicated to blockchain technology research and development. We expect that, within the medium term, the use of blockchain technology by telcos will become more prevalent and eventually become the norm. Telcos who seize the initiative to launch their own blockchain-based products are likely to benefit most from the technology.

This article outlines the numerous ways that blockchain technology can be utilised by, and benefit, telcos and the legal issues that telcos should consider when developing and implementing blockchain-based products.

What is Blockchain?

Blockchain is a distributed ledger technology that uses algorithms and strong encryption to record digital transactions or data in a transparent, secure and anonymous way. For more information on how blockchain technology works, please see our insight Blockchain 101.

Blockchain technology offers the following key advantages: 

• transparency, neutrality and trust, as all parties have access to the ledger, and can see a history of past transactions involving the same asset or record;
• efficiency and speed, where the use of blockchain has the ability to exclude the need for expensive infrastructure or third party intermediaries; and
• immutability and security from tampering after the digital transaction has been executed and committed to a distributed ledger.
  
   

Legal Considerations

Blockchain has the potential to change traditional and established business and operational models cross-industry. With the hype associated with blockchain also comes uncertainty around how the new technology will be regulated and what will happen when it goes wrong or a party suffers a loss.
 
It is clear that regulating blockchain is very much on the legislative agenda as use cases are rolled out into the real world. In the UK, regulators have primarily taken a "watch and wait" approach in observing the development of the technology without hindering innovation with premature provisions.  Similarly, the European Parliament voted in June 2016 to take a hands-off approach to blockchain regulation, instead recommending the establishment of a taskforce to monitor blockchain technology, so that it can regulate quickly if necessary.¹ The financial services industry, one of the early adopters of blockchain technology, has implemented the "regulatory sandbox," aimed at supporting innovation and testing in a controlled environment, with regulator input. Other countries, such as the United States, have been more active in seeking to legislate applications of blockchain technology. For example, the US Congress has established a bipartisan blockchain caucus and multiple states have sought or are presently seeking to introduce laws which would both recognise and govern certain uses of blockchain technology.

Despite the uncertainty surrounding the future of blockchain regulation, it should be remembered that the principles of contract law and existing legislation (such as the Data Protection Act and consumer rights law) will need to be complied with from the outset.  Adaptations may need to be made to how some blockchain networks are implemented in order to ensure compliance and these adaptations will be easier to cater for at the design and build stage of the blockchain network.

• Data and cyber security: in the UK, there are a number of standards and requirements that oblige communications providers to take technical and organisational measures to protect the security of data.  These include the EU directive 2002/21/EC on electronic communications networks and services, the Communications Act 2003, UK Data Protection Act 1998 (DPA) and the incoming EU General Data Protection Regulation (GDPR), which comes into effect on 25 May 2018 and which applies to all entities which are "processing" European data in the context of offering goods or services in the EU.  Blockchains have the ability to hold vast amounts of data and, depending on the application of the blockchain, some of this data may be classed as personal data under applicable laws.
  
  However, identifying the party responsible for compliance with the relevant laws or ultimate accountability for non-compliance in a decentralised network is complicated.  Furthermore, even if a responsible party is identified, further questions around enforcement and disputes management may arise (especially if the relevant transaction crosses jurisdictional borders).
  
  Other legal issues that will be relevant for blockchain applications are:
  
  a) International transfers: Principle 8 of the DPA restricts the international transfer of personal data to locations with an "adequate level of protection" of that data.  This is easier to control in a permissioned ledger system as the controlling party can place restrictions to prevent nodes joining the network in certain locations, or require that appropriate measures are in place with participants outside the EEA to ensure compliance.  This could, however, hinder the scalability of the blockchain;  
  
  b) data controller and data processor: under current UK laws and the GDPR, the data controller is ultimately accountable for evidencing compliance with the legislative requirements.  In addition, a data controller is required to maintain a written contract with every data processor, which includes certain key provisions.   The data controller node would thus need a written contract with every other node on the network.  This will be easier to manage over a permissioned network, as the controlling party will be able to ensure service contracts are entered into with the other nodes (akin to SaaS contracts).  One possibility is a "click through" registration when signing up to a public blockchain, which allows consents to be obtained; and  
  
  c) accuracy: a cornerstone of the EU data protection regime is that personal data is accurate, updated and not kept longer than is necessary.  It is unclear how the blockchain, permissioned or permissionless, will comply with these obligations, as all data is recorded and maintained in the chain from the start for verification purposes.  This issue seems resolvable in a permissioned system (the controlling party could use a blockchain editor tool), but immutable permissionless systems are likely to be non-compliant.
  
   
• Smart contracts
  
  Many of the use cases described above would utilise smart contracts. The use of smart contracts present their own legal issues and challenges. The automated nature of smart contracts could mean they are inflexible and do not take into account the nuances of commercial relationships between parties. The contract will be executed regardless of any unforeseen extenuating circumstances, which could be problematic where the parties would want to exercise any discretion or judgment.  Additional legal issues, such as those set out below, should be given further consideration at the outset of design and implementation of smart contracts:
  
  a) lack of capacity: parties should consider what happens if a minor purports to enter into a smart contract and the contract self-executes;
  
  b) mistake of fact: parties should agree how a fundamental error in the coding of the smart contract which produces an incorrect outcome will be remediated;
  
  c) remediation: given the automated and immutable nature of smart contracts, parties will need to consider how transactions could be cancelled, reversed or amended;
  
  d) dispute resolution: as with other specialist areas (e.g. intellectual property and construction), it may be that judges or adjudicators will require technical knowledge in order to manage disputes; and
  
  e) enforcement: the parties may not be known to one another (and may sit in separate jurisdictions), making identifying the defendant, establishing jurisdiction and identifying the appropriate venue very difficult or impossible.

New services, new products, new opportunities

Adoption of blockchain technology could bring significant changes in the telecommunications industry. At present, there are few examples of telcos seeking to commercialise blockchain-based products. However, major players across industries worldwide have been active for many years researching and investing in the development and implementation of new blockchain-based services.

Below is a list of example use cases, highlighting how telcos can use blockchain technology to streamline internal functions and develop new products:

• Identity management services: new revenue streams could be generated by offering blockchain identity management services to subscribers and business partners. Telcos could provide their subscribers with an "eSim" or app that creates unique virtual identities for each subscriber which are encrypted and stored in a blockchain, and which subscribers would use to automatically authenticate their identities when visiting partner websites.²  For example, a virtual identity stored in a blockchain using the teleco's app could be used by a subscriber to sign into Facebook or Gmail on a mobile device. The benefit of such services is that the subscriber would not need to continuously provide his or her personal details to different service providers in order to create new accounts and complex passwords. The virtual identity stored through the teleco's app could be provided to numerous partner websites and apps as a unique identifier;
• Data management services: similar to identity management services, a telco could also use blockchain technology to provide data storage and verification services to subscribers.  For example, a telco could assist a university to digitize and store student certificates on a blockchain.  If a prospective employer needed to verify a student's credentials, the student could simply produce the digital certificate available on the blockchain and the employer would be assured of its authenticity;³
• Fraud prevention services: currently, it is estimated that fraud costs the telecommunications industry over USD 38 billion each year.⁴ Blockchain-based products could be specifically designed to minimise this risk.  In particular, "roaming fraud" and "identity fraud" could be mitigated through the use of blockchain technology:⁵  
  
  a) Roaming fraud: roaming fraud can occur when an individual seeks to actively avoid payment for use of roaming services. It is made possible because of the delay in time between an individual accessing a mobile network while roaming (referred to as Visited Public Mobile Network or "VPMN") and that network being able to pass along the data necessary for the subscribers' home telco provider (referred to as the Host Mobile Public Network or "HPMN") to bill the subscriber the relevant roaming charge (which is then paid to the VPMN under a roaming agreement). The fraud perpetrator can incur the often significant costs of roaming and then avoid payment as a result of the billing time delay.⁶ The HPMN typically cannot detect the fraud until after it has been perpetrated, leaving it with no redress mechanisms.  This type of fraud can be mitigated by establishing a permissioned blockchain by the relevant HPMNs and VPMN partied to a smart contract-enabled roaming agreement.  Every time an individual accesses a VPMN, a smart contract could be executed to automatically send the relevant data to the HPMN, allowing it to calculate and immediately charge (and ideally deduct) the relevant amount, which can then be transferred back to the VPMN;
  
  b) Identity fraud: identity fraud can occur when an individual uses false identification to obtain services (e.g. a physical sim card).⁷ Blockchain's inherent public key cryptography capability can be used to link a mobile device to the owner's identity.  By implementing blockchain technology, a phone-generated public key could be broadcasted instead of an International Mobile Subscriber Identity, which would be used to identify and authorise the device and individual.  This would keep personal information more secure as all private information would be encrypted in a private key known only to the device owner;
• Mobile wallets: a significant opportunity exists for telcos to align themselves with the trend of global investment in mobile money services, which is expected to grow 22.2% globally by 2018 (with significant growth expected in Asia and Africa).⁸ Telcos could partner with other service providers to offer their subscribers "international mobile wallets."  When a subscriber attempts to make a transaction in a foreign country, a telco could immediately validate the identity of a subscriber who is registered with an operator within its blockchain network.  Accurate exchange rates could be provided to subscribers, as the Foreign Exchange Authority could be part of the network;
• Internet of things: telcos could overcome the security and viability issues associated with IoT by adopting blockchain technology, which allows for highly secure peer-to-peer self-managed mesh networks using a sufficiently large number of nodes.  These nodes could be represented by single embedded IoT sensors with the ability to verify every block within the blockchain.⁹ Initially, telcos could create private IoT networks based in mid-range cell-towers with relatively low investment requirements and costs.  Once these have proved viable, a public network could be established (or built on the Bitcoin or Ethereum networks), enabling seamless connectivity and security;
• Smart cities: telcos could get involved in the smart city trend by investing in public blockchain-based solutions, which may be profitable as most smart cities will be run on interconnected IoT devices;
• 5G: telcos could use blockchain technology to provide subscribers with a swift and reliable 5G service.  The 3GPP and non-3GPP access networks could be connected via a blockchain network where each access point (e.g. WiFi router, SP cell tower) can serve as a node in the network, monitoring the devices.¹⁰ A device could then use the access node that can best provide it service.  Telcos could code the rules and agreements between the various access-providing networks as flexible smart contracts which could instantaneously change any time a policy needs to be amended;
• Roaming: blockchain technology can enable telcos to automatically enter into "micro contracts" for roaming services.  There is a trend for many virtual providers to provide SIM cards that can connect to multiple telco networks, which may encourage more roaming and autonomous brokering of prices machine-to-machine.  Telcos could use smart contracts to automatically execute roaming agreements between subscribers who are temporarily using their networks, and accurately track each transaction and charge the subscriber for their limited use of the network; 
• Connectivity provisioning: telcos could use blockchain technology to make public Wi-Fi more readily accessible to subscribers.  Subscribers and telcos could enter into instantaneous and simple "micro contracts" for the supply of public Wi-Fi services, making the authentication and payments more cost-effective through autonomous blockchain-based transactions between devices and access points;
• Digital asset transactions: telcos could use blockchain technology to implement micropayment-based business models for digital assets (e.g. for the purchase of music, mobile games, gift cards or loyalty points).  Telcos may incur lower transaction costs and increase the speed of processing, compared to transactions that involve cash, debit or credit cards or cheques;

• Internal processes: telcos could streamline their operational and business processes by adopting hybrid blockchain networks, which have both public and private features.  Telcos could use a public blockchain platform, such as Ethereum, to establish a private network to create a more efficient billing system,¹¹ accurately track subscribers' use of their networks and instantaneously charge their subscribers;

Telcos have already entered the market

Major worldwide telcos are increasingly investing in blockchain development and implementation by entering into partnerships or collaboration agreements with technology companies and investing in funds dedicated to blockchain technology research and development. 

For example, the following telcos have already invested in blockchain technology projects:

a) Sprint: in February 2017, Sprint partnered with Japanese tech giant SoftBank and software company TBCASoft to develop a blockchain solution for telco carriers;

b) NTT DOCOMO Ventures Inc: in February 2016, ORIX Corporation, ORIX Bank Corporation, The Shizuoka Bank, Ltd, NTT Data Corporation and NTT DOCOMO Ventures Inc. joined together to fund research towards the development of new financial services using blockchain; 

c) Verizon: in May 2016, Verizon filed a patent application for a blockchain to store passcodes for digital content; 

d) Verizon Ventures: in August 2015, Verizon Ventures invested in a blockchain start-up, Filament, that is developing a product that uses both the Bitcoin and Ethereum networks to enable IoT devices to be tracked, and to transact, on a public ledger system; 

e) Orange Silicon Valley: in June 2015, Orange Silicon Valley launched an initiative, ChainForce, to facilitate collaboration between companies and start-ups to develop new blockchain technologies and use cases; 

f) Orange Digital Ventures: in September 2015, Orange Digital Ventures invested in blockchain start-up, Chain, which is developing enterprise-grade blockchain solutions for the financial industry and other transactional services; 

g) Du: in May 2016, Du announced a pilot programme which uses blockchain technology to facilitate the secure transmission of electronic health records; 

h) Telstra: Telstra is currently researching blockchain companies that could assist it in profiting from mobile banking boom; and

i) Telstra Ventures: Testra Ventures has invested in over 25 enterprises that are developing blockchain-based solutions, many of which are fintech ventures.

Looking forward

The use cases above demonstrate the plethora of ways that telcos can invest in the development and implementation of blockchain-based products. We estimate that, within the next few years, the use of blockchain technology by the telecommunications industry will become more prevalent and eventually become the norm.

As is often the case with any advancement of technology, blockchain technology is being developed and implemented at a faster rate than the existing legal framework can be adapted. Despite the uncertainty surrounding the future of regulation of blockchain technology, it should be remembered that the principles of contract law and existing legislation (such as the Data Protection Act and consumer rights law) will need to be complied with from the outset. Adaptations may need to be made to how some blockchain networks are implemented in order to ensure compliance and these adaptations will be easier to cater for if the relevant issues are known and understood early in the process. 

^1. Committee on Economic and Monetary Affairs, Motion for a European Parliament Resolution on the Virtual Currencies (2016/2007(INI), http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+REPORT+A8-2016-0168+0+DOC+XML+V0//EN&language=en.

^2. Deloitte, Blockchain @ Telco: How blockchain can impact the telecommunications industry and its relevance to the C-Suite (2016), p 12.

^3. Deloitte, Blockchain @ Telco: How blockchain can impact the telecommunications industry and its relevance to the C-Suite (2016), p 13.

^4. Communications Fraud Control Association (CFCA) 2015 Global Fraud Loss Survey.

^5. Deloitte, Blockchain @ Telco: How blockchain can impact the telecommunications industry and its relevance to the C-Suite (2016), p 9.

^6. Ibid.

^7. Ibid.

^{8. Preethi Mohan, "Global mobile wallet using blockchain", Blockchain @ developerWorks (17 October 2016), p 1.}

9. Deloitte, Blockchain @ Telco: How blockchain can impact the telecommunications industry and its relevance to the C-Suite (2016), p 17.

10. Ibid, p 15.

11. https://www.linkedin.com/pulse/blockchain-telecom-possible-application-using-ethereum-sawan-kumar