Legal Intelligencer: Impact of Blockchain on Data Preservation and Discovery

As businesses across various industries increasingly adopt blockchain, it will become a critical source of discoverable electronically stored information (ESI). The potential benefits of blockchain for e-discovery and data preservation are substantial, making it an area of growing interest and importance.

In the August 8, 2024 Edition of The Legal Intelligencer, Kelly Lavelle writes, “Impact of Blockchain on Data Preservation and Discovery.”

Expanding Beyond Cryptocurrencies

Originally developed as the foundation for cryptocurrencies like bitcoin, blockchain technology’s potential extends far beyond digital currencies. Its decentralized and secure nature makes it a transformative tool for data preservation and management across various fields, including health care, supply chain management, asset administration, banking, and financial markets.

Traditionally, e-discovery has relied on centralized systems and methods for gathering data. These systems often face challenges related to data security and integrity. Blockchain technology, however, will transform this landscape significantly. Unlike centralized systems, blockchain offers a decentralized ledger that records all transactions from its beginning in a secure and transparent manner. This ledger serves as an indisputable chain of custody, providing enhanced protection against data spoliation and ensuring that all changes are permanently recorded and traceable.

As businesses across various industries increasingly adopt blockchain, it will become a critical source of discoverable electronically stored information (ESI). The potential benefits of blockchain for e-discovery and data preservation are substantial, making it an area of growing interest and importance.

Blockchain networks operate on an immutable ledger composed of individual blocks. Each block is comprised of a header containing a date, time stamp, and other metadata, followed by a chronological list of transactions. Simply put, each block contains three main components:

• Data—The data varies depending on the type of blockchain. For example, in Bitcoin, the data includes information about the sender and receiver, as well as the amount of Bitcoin transferred.
• Hash—The hash is a unique identifier representing the block’s contents, similar to a fingerprint. It is crucial for detecting any changes within the block.
• Hash of the Previous Block—This links each block to the preceding one (forming a chain), ensuring the blockchain’s chronological order and integrity. Once data is recorded, it cannot be altered or deleted without changing the hash, thereby making all of the following blocks invalid.

Blockchain is a decentralized system, which fundamentally differs from centralized systems that have a single point of failure. In centralized systems, data is stored in a single computer or system, making the entire system vulnerable if attacked or compromised. Hackers often exploit the centralization model. In contrast, a decentralized helps mitigate the risk of data loss. However, challenges such as blockchain forking and chain reorganization can affect the immutability of the data, raising concerns about data integrity. Nonetheless, blockchain technology is set to revolutionize e-discovery by introducing new methods of data preservation and transparency.

E-Discovery Legal Landscape

Several jurisdictions have started accepting blockchain records in litigation, recognizing that courts are increasingly likely to admit such evidence under conditions similar to other forms of electronic data. As this technology evolves, several considerations arise, particularly regarding the discoverability of blockchain data. Under Rule 34 of the Federal Rules of Civil Procedure, a party can request access to another party’s data compilations within the scope of discovery. Blocks can be considered “data compilations.”

The process for discovery of a block or blockchain is the same as for other electronically stored data: identification, preservation, collection, examination, and analysis. While blockchain data is fundamentally electronically stored information, its unique security features and public accessibility—allowing users to write and view data without altering previously recorded information—distinguish it from other forms of ESI. Despite these advantages, challenges may arise regarding the discoverability and admissibility of blockchain records in court.

One such challenge that the application of blockchain data may face is related to authentication. The Federal Rules of Evidence address the authentication of ESI in Rule 902. In the last few years, Rule 902 was expanded to include Sections 902(13) and 902(14), which address the self-certification of electronic data. These amendments provide a strong foundation for admitting blockchain evidence by simplifying the process of authenticating ESI, allowing for the self-certification of certain digital evidence, and reducing reliance on expert testimony.

However, the unique aspects of blockchain technology, such as the structure and lack of a single custodian, introduce additional challenges to the authentication process.

Emerging Caselaw

The recent high-profile case against FTX and Sam Bankman-Fried highlighted the critical role that blockchain can play in legal evidence. FTX Exchange, once the third-largest crypto exchange, encountered significant trouble when a hidden vulnerability within its code was discovered in late 2022. The collapse of the exchange and subsequent legal proceedings have demonstrated how blockchain can be used to trace the flow of funds and verify the authenticity of transactions. This transparency helps establish a clear chain of custody for digital assets, making it easier to prove or disprove claims of fraud.

Courts have also been increasingly adapting the Federal Rules of Civil Procedure to accommodate technological advancements in conducting modern discovery. For instance, in a recent money laundering case involving Bitcoin, the U.S. District Court for the District of Columbia allowed expert testimony on blockchain analysis software. This decision acknowledges the growing reliance and reliability of blockchain technology in legal proceedings.

Similarly, in a case in the District of New Jersey, the court permitted expedited discovery, allowing the plaintiff to issue subpoenas to cryptocurrency exchanges for all documents related to the wallet addresses of potential hackers. This included account opening and closing documents and the identity of the account holders. The court, applying a good cause standard, ruled the information discoverable under the broad scope of Rule 26, demonstrating the courts’ increasing willingness to allow access to blockchain technology in the discovery process.

Embracing Potential Challenges

As blockchain becomes a more prominent source of evidence, legal professionals must prepare for the unique challenges it presents in collection and review. While courts are beginning to address issues related to this new form of electronic data, many challenges are still emerging. Issues such as privilege, data privacy, the proportionality of data collection, and blockchain data management across different jurisdictions will need to be carefully navigated. Despite these challenges, the potential benefits of blockchain for e-discovery and data preservation are substantial.

Kelly A. Lavelle is an associate at Kang Haggerty. She focuses on e-discovery and information management, from preservation and collection to review and production of large volumes of electronically stored information. Contact her at klavelle@kanghaggerty.com.

Reprinted with permission from the August 8, 2024 edition of “The Legal Intelligencer” © 2024 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.