Blockchain Technology Will Transform the Practice of Law

There is no shortage of articles written about the application of blockchain technology to the law. The majority of these articles, however, have focused on either regulatory concerns raised by the use of blockchain technology — primarily in the context of cryptocurrencies, such as Bitcoin — or its possible implementation in the field of smart contracts. Less has been written about the impact that this technology will have on the practice of law.

The blockchain is the technological underpinnings of cryptocurrencies like Bitcoin.

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It’s not altogether surprising that the majority of partners at some the largest law firms in the world could not describe or define the blockchain — some of whom, if not most may not even be familiar with the term. What does seem likely, however, is that most of them will be familiar with term in the next few years. Furthermore, those firms that devote resources to being on the cutting edge of this technological transformation will thrive, while those that don’t will operate at a serious disadvantage.

Before proceeding further, here are a few notes regarding terminology for those unfamiliar with the blockchain. The term “blockchain” refers to a decentralized digital ledger that combines powerful cryptography algorithms with a system of decentralized computing power that redundantly verifies transactions, which are ultimately recorded on a public digital ledger available to the world.

The blockchain is the technological underpinnings of cryptocurrencies like Bitcoin. Blockchain technology paired with cryptocurrencies, such as Bitcoin, results in a “trustless” system of transferring assets without any need for a central processor. Think of a payment system with no middle man, where every payment is recorded and verifiable by anyone who accesses the blockchain.

The blockchain will not replace the need for lawyers. It will, however, change how we approach contract drafting, administration and enforcement among other aspects of the practice.

In the future, transactional lawyers may draft contracts that resemble how developers code software applications. In fact, future lawyers will likely need basic-to-intermediate training in coding in order to implement smart contracts based on the blockchain — a phenomenon that is already taking hold in the general population. In addition, lawyers will need to understand the intricacies of how these systems work in order to counsel clients on potential pitfalls and best practices in utilizing these systems for their business. Countries, like Honduras, have already committed to replacing their existing real estate records with blockchain technology — which one day could allow for its citizens to sell or buy a house via an iPhone app.

Countries, like Honduras, have already committed to replacing their existing real estate records with blockchain technology

[caption id="attachment_2946" align="alignleft” width="640"][Image “https://www.flickr.com/photos/zongo/5482882004/in/photolist-9mvd9u-9mvcNm” (src=https://bol.bna.com/wp-content/uploads/2015/06/5482882004_2f859fccdf_z.jpg)]Photo by David Holt (Flickr/Creative Commons)[/caption]

Human interaction through contract is likely to change dramatically. One area of the law likely to erode is the application of equitable principals. For example, most smart contracts are coded to be self-executing, so if conditions A and B occur and are verified by the blockchain, then cryptocurrency is automatically unlocked and becomes controlled by the other party. A transaction like this is virtually irreversible and demonstrably verifiable. This is compounded by the pseudo anonymous nature of the participants in these types of marketplaces.

For more commodity-based transactions, the parties may not even know the identity of the other. As a result, if a party feels aggrieved about some aspect of the execution of the contract (e.g., misrepresentation or fraud), the aggrieved party may not necessarily have redress in our court system. This will raise serious issues for policy makers.

One area of the law likely to erode is the application of equitable principals.

Attempts to regulate many of these perceived shortfalls (which may not be shortfalls for a nation that prides itself as being established by the rule of law and not men), will likely be ineffective because in many cases there will be no individual upon whom the coercive power of the state may be exercised.

Remember, the entire underpinning of the blockchain is the decentralized nature of its structure. So who do you fine? Who do you indict? This is only confounded more by the anonymous nature of the many peer-to-peer economic relations effectuated on the darknet through proxy networks like TOR (the onion relay), which is a network that makes one’s IP address virtually untraceable.

Ultimately, issues regarding redress will not impede the progress of this technology. Built-in arbitration mechanisms and even the ability to avail a transaction to traditional legal systems are concepts that have already been contemplated. These mechanisms, however, will have to be engineered into the code of individual smart contracts at their drafting stage — provisions that a prudent lawyer familiar with the blockchain and code would suggest to his/her client.

Rather than drafting an extensive and lengthy contract using a traditional template and editing with Microsoft Word, contracts will be drafted with a handful of lines of code. For example, a code snippet as simple as the following could do 95 percent of the work in generating a credit agreement:

#include credit library

#include blockchain library

Var Debtor = ABC Corp.

Var Creditor = ABC Lender

New Document = new Credit Agreement.create {debtor:Debtor, creditor:Creditor, type:working capital}

New Document.interest = Libor(30 day)

New Document.fincovenants = Debt_Yield(4), LTV(65)

*****

One benefit to this approach is that as time goes on consensus will develop with code libraries and there will be a uniformity in contracting similar to what ISDA has developed for swap documents. This uniformity will lead to significant transactional savings and expedite the pace at which parties can consummate closings.

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In many ways, these platforms are self-executing (yes, think “Skynet”) and once released operate outside the coercive powers of the state. Take for example an estate contemplated by an elderly father. A future lawyer would code a trust in accordance with the father’s intent and upload it onto the blockchain.

Of course, the content of the estate would be encrypted and coded into an algorithmically encoded alphanumeric string whose sole purpose is to objectively identify the trust. If upon his death the father wishes that his home be devised to the first of his three children to get married, then a program coded onto the trust that scans an online death registry would, upon the father’s death, immediately trigger a search through a marriage registry for each of the three children, thereafter devising the home to the child who is alive and married first. The estate would be disbursed, almost immediately, in accordance with the father’s wishes with no need for the estate to be revisited by an attorney or pass through the auspices of a probate court.

While this technology is only in its infancy, its application to business is developing at a rapid pace. With Goldman Sachs, Nasdaq and many other leading financial firms and companies investing hundreds of millions of dollars into blockchain technologies, one thing is clear — the lasting legacy of the blockchain is likely to be far greater than Bitcoin or any other single cryptocurrency. This has significant implications for lawyers and the business of law. Ultimately, however, this technology offers a great opportunity for those firms who can innovate. Those firms that are willing to adapt and embrace this technology will be able to provide more effective and efficient services, which will lead to a competitive advantage over those firms who do not evolve.

The authors of this post are attorneys at Holland & Knight.