Pick apart the once obscure technology and you’ll find an innovation that stands to disrupt law as we know it.
While widely heralded as one of the “next big things” in legal technology, blockchain technology and its potential effects remain both widely unknown and misunderstood. Now, as enterprises begin looking at the technology and its place in the legal operations process, in-house attorneys stand to benefit by building a body of knowledge around the technology that will play a part in their futures.
To help shed light on this advancement, Legaltech News spoke with two attorneys at the forefront of blockchain development to understand what the technology is, what benefits it offers, and how and when it will effect attorney work product.
What exactly is a blockchain?
Simply put, a blockchain is a digital network of information, complied in a decentralized database shared with users that may have access. Each “block” in a blockchain is a record of information, such as an entry in a ledger, which contains a timestamp and is linked to a previous block. It was first developed as the technology behind the digital currency bitcoin.
Marco Santori, partner at law firm Cooley, explained blockchain by comparing it to “magical pieces of paper” owned by two people at opposite ends of the world. When one person writes anything on their piece of paper, it automatically shows on the other person’s paper as well.
While he notes this may not seem “magical,” given that a central intermediary like a bank or money transmitter can accomplish this feat, the “magic” behind blockchains is that no central intermediary is needed.
Holland & Knight partner Josias Dewey explained that a blockchain functions like “one central hard drive somewhere that everyone is plugging into,” except with a key difference.
“It’s decentralized— everyone has their own copy of the database and every copy of the database is identical,” he said.
What are the benefits?
Santori explained that blockchains allows parties to directly interact on a shared database. This can be a tool for “people who not only don’t know each other, but don’t trust each other, and assume the other person’s out to get them or cheat them. They can now interact based on a single shared ledger, without a central intermediary, and that’s very powerful.”
Just like blockchains allow people to trade bitcoins without a bank, they can also be configured to trade securities without a broker, or execute a contract automatically without a legal intermediary.
Another advantage is that because blockchain exists as a decentralized database, “there is no chance of a single natural disaster taking out a whole [database] and you losing the data,” Santori said.
Nor is there a high chance of a cyberattack, he added, given that the technology is protected by “strong cryptography in way that no other [database] has historically been able to be protected.”
The bitcoin blockchain, Santori noted, “has been running for almost seven years now, and it’s never been breached, never been hacked.”
What it means for corporate attorneys
Blockchain technologies stand to automate many of in-house counsel’s responsibilities around executing contracts and researching and managing compliance-based tasks. The technology is the foundation for “smart contracts,” which are contracts coded to automatically execute in the blockchain.
In practice, when a buyer in one country purchases property from a business across the world using a smart contract, for example, it can send them a contractually obligated payment as digital transaction, such as a bitcoin transfer, through the blockchain. This triggers the blockchain to automatically transfer the property’s title deed to the buyer’s possession.
“The blockchain can rely on real-world developments to trigger developments on the blockchain, and they can also control the issuance of new blockchain assets,” Santori said.
Because there is no need for a centralized intermediary to keep the terms of the contract or act as executor, there is no need for the parties to turn to banks, attorneys, or related professionals for help. This automation can occur no matter how many parties are interacting on a blockchain.
As blockchains also record these ongoing transactions, potentially on an enormous scale, they are in effect a modern ledger that can also be used for compliance reporting.
Banks from all over the world, for example, can use a common blockchain to track the movement of money from one party to another. Because they “only need one system,” to track all transactions, each bank’s proprietary compliance systems and teams will become redundant, Dewey noted.
“Whether or not banks are able to collaborate together in terms of payment processing and settlements, I think the regulators will push them towards some sort of common ledger,” he added.
But while blockchains may shrink attorney’s role in compliance and contracts, Dewey does not believe “lawyers are going away any time soon.”
Like artificial intelligence, the technology will only impact “a lot of the more ministerial tasks. The things that computers can get good at, they are going to start literally doing those tasks, or in some cases you will see an increase in machine to machine contracting,” he said.
Attorneys, therefore, will still be responsible for higher-level work, such as helping to draft and negotiate contracts, and understanding and implementing regulatory compliance processes.
When will blockchain-powered tools be deployed?
“It will be happening in 2017,” Santori said, noting that Delaware, through its blockchain initiative launched in May 2016, already allows the use of smart contracts and the issuance and trading of certain securities on the blockchain.
Beyond the state, however, many financial firms are also leading the way in launching blockchain-powered platforms.
Ron Quaranta, chairman of the Wall Street Blockchain Alliance, previously told Legaltech News that “over the past 12 to 18 months, every major bank, every major financial services firm, has been engaged in either some level of investment in blockchain startups, or in some level of internal investment with their in-house innovation groups focusing on leveraging blockchain technologies across different segments of their business.”
“What we suspect and what we seem to be hearing on the street and in global financial markets,” he added, “is that 2017 will represent the year where these pilot projects, these proof of concept projects, will go into production.”
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