Using Bitcoin’s Blockchain Technology In Legal Practice

Although blockchain technology has been around since the 1990s, it was the invention of Bitcoins in 2008 and the rise of cryptocurrencies that began to bring widespread publicity to the technology. Today, many financial technology companies use blockchain and almost all the major banks are investing in itCompanies like Amazon, Samsung, IBM, JP Morgan, Nasdaq, Overstock, and UBS have been exploring uses of blockchain, and the government of Honduras has even started to use blockchain for land title tracking in an attempt to address issues of land title fraud. Blockchain has also come up at the annual LegalTech conference in New York during discussions on the “newest and coolest” legal technology. But what exactly is blockchain technology and how can it be useful in the practice of law?

What Is Blockchain?

In simple terms, blockchain is a digital ledger of transactions. The maintenance of the ledger is decentralized—there is no central authority monitoring, approving, or securing the transactions on the blockchain. There is also no middleman, or trust, which is why the blockchain system is often characterized as “trustless.” This is because the entire network of people using the blockchain (anonymous to one another) receives a copy of the ledger (also publicly viewable) and contributes computing power to maintain and verify the transactions on it by solving cryptographic math problems that can only be solved by the network of computers. The need for the computing power of the network of users to confirm the veracity of transactions means that no one person has the ability to rewrite or tamper with the ledger. In this sense, blockchain record-keeping and security is distributed.

Blockchain is called blockchain for a reason. New transactions are grouped with a number of other transactions and these groupings, or “blocks,” are added together as another “link” to the ledger, or “chain,” which is then distributed publicly and to each user. The addition of the new “block” is verified by the computing power of the distributed network of users thereafter. The “blocks” of blockchain can be currency, but they can also be anything of value, such as property, intellectual property, goods, work, and votes. BNA’s Banking Report on virtual currency explains that “Blockchain can be utilized in any application in which transaction verification or a trusted repository of information is needed.” In other words, blockchain technology can be harnessed to help accomplish any type of task that could use a ledger.

How Can Blockchain Change The Practice Of Law?

Smart Contracts

In the practice of law, blockchain technology allows for the creation of “smart contracts,” which are “self-executing computer programs that automatically fulfill the terms of the programmed arrangement.” These “smart contracts” can involve different types of transactions.

One common and relatively simple type of transaction is the multi-signature transaction (or “M of N” transaction) where “N” number of parties are given digital keys to, say, release funds to the person one is doing business with when certain conditions are met. The parties given the digital keys cannot access the funds, but when “M” of the total “N” number of parties agree that the requisite conditions are met, the funds are released to the person one is doing business with. This type of transaction is useful for managing escrows, mediation, and shared finances. When multi-signature transactions are time-locked, meaning that the release of funds or some other action is automatically executed based on time-based milestones, they can be useful for distribution of funds on a schedule, such as in the context of executing wills and trusts. When multi-signature transactions are data-locked, release of funds or some other action can be automatically executed based on detection of the occurrence of certain real-world events, which can be useful for an even broader variety of contracts.

Proof Of Existence

Blockchain can also have a proof-of-existence function that “enables inclusion in the blockchain of cryptographic information about a document selected by the user together with a timestamp.” The document itself is not uploaded but cryptographic algorithms can verify that the document is not modified after its inclusion in the blockchain. The decentralized nature of blockchain maintenance also makes it impossible to tamper with the information inside the document. The proof of existence function of blockchain can be useful for intellectual property registration, land title registration, recording leases and mortgages, and recording shareholder agreements. Some have also suggested using this function to admit documents into evidence in litigation and to keep time and bill clients.

Blockchain, of course, could contribute more than just simple “smart contracts” and proof-of-existence functions to the practice of law, but other possibilities have yet to be explored in more depth.

Advantages And Disadvantages Of Using Blockchain In The Practice Of Law

Advantages

Using blockchain technology for “smart contracts” could greatly reduce transaction costs because transactions programmed into the blockchain occur automatically and immediately. And because “smart contract” transactions are programmed into the blockchain, the coded nature enables parties to express contract terms in less complex ways than if the terms were written out in plain language on paper. In fact, code libraries of “smart contract” terms could develop, which could further decrease transaction costs by saving time and money associated with contract drafting.

Another advantage of using blockchain for “smart contracts” and proof-of-existence functions is that it is easily accessible because it exists entirely online. And despite its online existence, blockchain’s decentralized cryptographic verification keeps documents associated with it secure, and all users remain anonymous (although some argue that there may still be ways to trace users’ identities if someone really wanted to do so).

Disadvantages

Using blockchain for “smart contracts” and proof-of-existence functions, however, also comes with disadvantages. Since transactions programmed into the blockchain occur automatically and immediately, transactions may be very difficult to alter and may even be irreversible once they are programmed into the blockchain. This presents a problem when one, for example, needs to cancel a contract because it was coerced or unconscionable. Some believe, however, that irreversible transactions today may no longer be irreversible tomorrow and that supposedly irreversible transactions can simply be offset with a subsequent transaction.

Another disadvantage stems from the anonymity of blockchain users. For example, Party A who wants to sue Party B when disputes arise after contracting might have trouble figuring out who Party B actually is. This type of enforcement issue would have to be resolved.

Although blockchain users remain anonymous, the digital ledger itself is publicly viewable, which has brought up privacy concerns. At the same time, however, the fact that the digital ledger is publicly viewable does not mean that all the information associated with an entry on the ledger is publicly viewable. In the proof-of-existence context, for example, a document associated with an entry does not mean that the document is uploaded onto the blockchain.

Finally, the use of blockchain in legal practice may require that future lawyers have basic to intermediate coding skills to “draft” and implement “smart contracts.” These lawyers would also need to understand the intricacies of the blockchain system to properly advise clients. While this may seem like a large hurdle today, it may not be a large hurdle in the future when employees in general are expected to have a more sophisticated coding background.

Will Legal Practitioners Willingly Use Blockchain Technology?

Despite the unknowns and disadvantages associated with using blockchain technology in legal practice, law firms, attorneys, and companies have already started to embrace the idea. The London law firm Selachii, for example, “has announced plans to digitise its legal agreements using blockchain technology.” Attorneys from the United States law firm Holland & Knight have said that blockchain technology “offers a great opportunity for those firms who can innovate” as it can help firms “provide more effective and efficient services, which will lead to a competitive advantage over those firms who do not evolve.” Companies have also started innovating in this area: in July 2015, crowd-sourced Ethereum Foundation began to create a blockchain infrastructure that can support “smart contracts” and peer-to-peer applications. With these kinds of developments, the use of blockchain technology in the practice of law may become a reality in the foreseeable future.

Comments are closed.