Blockchain technology, a type of Distributed-Ledger Technology (“DLT”), offers great opportunities for sectors like finance, healthcare, and supply chain management, where its strengths—decentralization, transparency, and immutability—help build certainty and remove intermediaries. For instance, blockchain can be used in healthcare to securely store and share patient medical records or in trade finance to improve transparency and reduce fraud in international transactions.
However, when combined with the EU’s General Data Protection Regulation (“GDPR”), these strengths can create compliance challenges when personal data is inserted into these immutable databases. For example, storing user identifiers or transaction metadata directly on-chain can unintentionally introduce personal data into the blockchain.
So, how can your business unlock blockchain's benefits while adhering to the GDPR and data protection?
Let’s explore how this can be done in practice.
Why blockchain and the GDPR are at odds
The GDPR is the EU’s flagship regulation for data protection. It focuses on principles such as:
Purpose limitation: Companies must use data only for specific and pre-determined purposes.
Data minimization and storage limitation: They should also only collect, store and use data that is necessary for those purposes.
Accuracy: And personal data must be accurate and kept up to date.
Additionally, the GDPR grants individuals rights like:
The right to erasure ("right to be forgotten"): They can request the deletion of their personal data under specific circumstances.
The right to rectification: They can also request that incorrect or incomplete personal data be corrected.
These basic principles and rights are at odds with the structure of blockchain. For example, blockchain’s immutability—the fact that records cannot easily be changed or deleted—directly clashes with GDPR requirements. Additionally, blockchain’s reliance on historical data for consensus and validation purposes means that even data marked as obsolete cannot simply be removed.
At its core, a blockchain is a database that is jointly managed by a distributed set of participants. Whenever new data is added to the database, all the participants must agree to verify it. In this way, blockchain removes the need for a third-party, such as a bank, to verify transactions.
This way, a blockchain ledger is made up of blocks linked together using cryptographic hash functions. These functions generate a unique code based on the content of the previous block, making it impossible to guess or alter without breaking the chain's consistency. This structure ensures the data is immutable, easily traceable, and auditable.
These qualities make blockchain particularly useful for large networks like the Internet of Things and for organizations working in environments with limited trust between participants.
For example, consider a supply chain network using blockchain to track products. Each step in the chain is recorded on an immutable ledger. If a participant asks for their data to be erased, the blockchain's structure makes this a technical challenge, as reversing or removing data undermines the system's core integrity. However, some private or permissioned blockchains may implement restricted data modifications, offering partial solutions to address GDPR compliance challenges.
Strategies to Balance Blockchain Innovation and GDPR Compliance
The conflict between blockchain and GDPR doesn’t mean you have to choose one over the other. By understanding the core differences and adopting compliance-focused tools and techniques, your business can leverage blockchain while staying within the limits imposed by the GDPR.
If you are using a blockchain, there are some easy steps you can take to reduce the risk of infringing the GDPR:
Understand what data you store in a blockchain: By understanding what you store in a blockchain, you understand your data flows and take your first step to ensure compliance with the GDPR.
Audit node locations: It is also important to map out where your blockchain data resides and apply safeguards for nodes outside the EU/EEA. The GDPR imposes strict conditions for transfers to countries outside this region, so it is important to be aware of where you are sending personal data to.
Keep personal data off-chain: Once you know how you are processing personal data, you can ensure it is not stored there. You should then store it off-chain and use cryptographic hashes or references on-chain. This lets you modify or delete data off-chain while maintaining blockchain functionality.
Use pseudonymization: Additionally, it’s a general good practice to replace personal data with pseudonyms to obscure data subjects’ identities. While GDPR still applies to pseudonymized data, this step minimizes data exposure during early blockchain implementation.
Encryption: In general, it is also advisable to encrypt personal data, so it remains unreadable without the decryption key, protecting it against unauthorized access. Additionally, consider advanced privacy-preserving technologies like zero-knowledge proofs to enable data verification without revealing sensitive information.
If you're developing your blockchain, there are other steps you can take to reinforce these efforts, making your blockchain usage more privacy-friendly:
Governance frameworks: Create clear policies for managing and processing personal data within blockchain systems. Include guidelines for addressing GDPR rights such as erasure and rectification.
Adopt new technologies: Investigate solutions like redactable blockchains, which may allow targeted data modifications without undermining blockchain security. Collaborate with developers and legal teams to implement these tools in a GDPR-compliant way. Leverage chameleon hash functions to enable selective modifications of data while maintaining the overall integrity of the blockchain.
Implement pruning methods: While still under development, this approach is promising for reducing data replication risks.
Integrate smart contracts: Use smart contracts to automate role designation and document accountability, ensuring traceability across the network.
Aligning blockchain with GDPR is a challenge, but it’s achievable with careful planning and action. Take your first steps by auditing your data processing and building toward long-term strategies such as embedding privacy into your design and strengthening governance.
Collaborating with legal, technical, and compliance teams from the start can help identify the challenges you will face early and ensure a robust, GDPR-compliant solution.
At FiO Legal's Corporate Law Department, we assist our clients operating in the field of emerging technologies in navigating legal complexities, ensuring their products and services remain fully compliant with current legislation.
By Francisco Arga e Lima
