Understanding how to use the blockchain in the legal industry
Recognized as the technology at the foundation of the bitcoin digital currency, the blockchain is making inroads in the enterprise space.
The blockchain is a data structure that makes it possible to create a “digital ledger of transactions” that is shared by all parties participating in a distributed network of computers. It uses cryptography to record and store every transaction that happens in the network – eliminating the need for a central authority or trusted third party such as payment processors. This ability to cut out the middleman has the potential to speed up transactions, reduce costs and lower the risk of fraud: The fewer people who are involved in a transaction, the less risk.
Companies are overwhelmed with data and concerned about security. For some, the blockchain is viewed as potential solution to those concerns.
More than 40 top financial institutions and an increasing number of firms –many still in the experimental phase – across multiple industries are using the technology as a secure and transparent way to digitally track the ownership of assets. Deloitte, which is currently developing 20 blockchain prototypes, recently described the blockchain as a “major disruptive force.”
So, how can we use this technological innovation as part of the practice of law? One intriguing possibility is to use the blockchain to create, verify and enforce contracts – so-called “smart” contracts. Once a smart contract becomes part of the blockchain, the contract requires no further direct human involvement. For example, in a property transaction, there are numerous stakeholders involved to verify various stages of the transaction, with each third party collecting a fee. If the sale were accomplished on the blockchain, the process could be streamlined and third-party escrow services, for example would become redundant, drastically reducing associated transactional costs. The same can be said for any transaction where a third party is directly involved, whether it is wills or estates.
While this may raise myriad questions in terms of contract law and the role of lawyers – especially if something in the blockchain goes wrong or inaccurate information is entered into the blockchain – law firms and legal technology companies would be wise to monitor developments.
It’s clear the blockchain is here to stay. And innovative law firms like Steptoe and Johnson are already adopting blockchain technology. They have expanded their blockchain practice to assist clients looking to develop and deploy blockchain-empowered applications. The firm also co-launched the Blockchain Alliance, uniting blockchain companies, law enforcement and regulatory agencies to promote the application of blockchain technology.
This technology has the potential to completely disrupt our concept of contracts in the future. It is not likely to replace lawyers but will almost certainly require a new approach and new set of skills.