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Litigation News

2013-2018

Blockchain: Technology Rockin' the Legal Industry

Daniel S Wittenberg

Summary

  • As a technology, blockchain is changing the way business and finance are handled, identity is managed, and transactions are validated and tracked.
  • Blockchain is a chain time-stamped and encrypted transactions that are linked to its preceding block. 
  • Each new block must be validated by a consensus among the network of participants, establishing trust between parties. 
Blockchain: Technology Rockin' the Legal Industry
Jasmin Merdan via Getty Images

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Blockchain. Just saying it sounds cool. Kind of like a “cyber gang” or “rock band.” This is no hype: The moniker for this transformative technology returns over 75 million hits on a single Google search. More than that, blockchain is “rocking out” in the world of big business. Venture capital has raised over $4.5 billion to support blockchain; that is in addition to a cryptocurrency market capitalization that exceeds $150 billion.

As a technology, blockchain is changing the way business and finance are handled, identity is managed, and transactions are validated and tracked. Blockchain offers security, immutability, and transparency by design. It holds promise beyond payments or financial transactions, including potentially significant effects on the legal industry over the next few years.

According to Megan Miller, senior account manager, Edge Legal Marketing, “two schools of thought have emerged on blockchain and its potential impact in the legal industry. One view is that blockchain will automate decisions, processes, and contracts, removing the need for an attorney and reducing demand for legal services. The alternate, more optimistic view embraces blockchain as a source of new opportunities for growth in legal services. For those who build a familiarity with blockchain, opportunities are surfacing.” David Fisher, founder and chief executive officer of Integra Leger, says lawyers “need to first understand how blockchain functions before it can be effectively used in the legal industry.” So, what is blockchain?

Blockchain Defined

As explained by Professors Mark Fenwick, Wulf A. Kaal, and Erik P.M. Vermeulen in a recent law review article, “the blockchain is a decentralized immutable ledger of all transactions across a peer-to-peer network.” It verifies and validates these transactions in a decentralized network while maintaining an ongoing list of transactions among participating parties collectively referred to as a “block.” Professors Fenwick, Kaal, and Vermeulen further explain that “[t]he linear and chronological order of transactions in a chain will be extended with another transaction link that is added to the block once an additional transaction is validated, verified, and completed. The chain of transactions is distributed to a limitless number of participants—so-called ‘nodes’—around the world in a public or private peer-to-peer network.” Each transaction is time-stamped, encrypted, and linked to its preceding block, creating a “blockchain.” Each new block added to the chain must be validated by a consensus among the network of participants. The key to blockchain is the establishment of trust between parties. Use of blockchain removes “untrusted intermediaries,” says Fisher.

Blockchain Use in the Legal Industry

Blockchain technology affords significant opportunities for the legal industry, both in the manner in which transactions occur and in the cultivation of new practice areas. Perhaps the most oft-cited example of how blockchain can be integrated into the practice of law is through smart contracts. Smart contracts, otherwise known as self-executing contracts, blockchain contracts, or digital contracts, can be converted to computer code, stored and replicated, and supervised by a network of compatible computers. Smart contracts not only define the rules and penalties around an agreement in the same way that a traditional contract does, but also automatically enforce those obligations. Blockchain technology makes it feasible to create a contract that can automatically generate based on achieving certain variables, such as the triggering of a payment upon the completion of a service or delivery of a good.

Aside from smart contracts, below are additional examples of ways in which the legal industry can make use of blockchain.

Law Firms Cultivating Blockchain Practices

According to Alistair Maughan, cochair of Morrison & Foerster’s Technology Transaction Group, “the firm’s preliminary consideration regarding blockchain wasn’t about using the technology internally, it was about helping clients to understand how they could make use of it.” “Lawyers like shiny things, and so there has been a huge spike in interest in blockchain law, especially over the last year,” says J. Dax Hansen of Perkins Coie, who started his firm’s blockchain practice group in 2013. Back then, according to Hansen, “it was not as sexy.” Now, however, with the emphasis on how this technology can have a transformational effect on the way business can be transacted across sectors and potential regulation, law firms are building their practices and working on blockchain’s legal implications. According to Robert E. Craig, chief information officer at Baker Hostetler, “blockchain, more than any other technology, will drive the next wave of legal innovation and transform the business of law.”

Blockchain directly affects the core businesses of law firms’ corporate and financial clients. So legal questions concerning its potential reach are extensive. “I feel like everybody is talking about blockchain like an industry that needs to be separately regulated, where in fact blockchain is a technology that gets implemented in different industries,” said Lee A. Schneider, head of McDermott Will & Emery’s FinTech practice who counsels clients on blockchain. State, federal, and international agencies are increasingly interested in regulating blockchain activities. The scope of regulatory authority, however, is not yet clear, so blockchain activities can involve the jurisdictions of multiple agencies. Thus, it can be expected that until clarified, blockchain activity will be looked at within a regulator’s traditional jurisdiction. “So, if you’re going to use blockchain in healthcare, you need to figure out what healthcare laws apply; if you’re going to use it in the energy sector, you need to figure out what energy regulations apply,” says Schneider.

“Lawyers are poised to serve as the catalysts for blockchain,” says Aaron Wright, creator of the Blockchain Project at the Cardozo School of Law. According to Wright, “at least once a day I have a call with some firm and they’re interested in getting involved.” This interest is borne out by the Law Firm Innovation Index. The index, which is part of a study by Daniel W. Linn Jr. aimed at measuring law firm innovation, is “based on Google advanced searches for indicators of innovation on law firm websites.” The innovation category that far exceeded all others was blockchain. “Blockchain technology will align law firms, clients and technology companies to transform the business of law,” notes Craig. While some of the changes may augment the traditional role of legal professionals by adopting more sophisticated functions, other tasks typically associated with legal counseling will remain. “The parts of law that are basically mechanical are already being attacked by cloud services and existing software” says Fisher. “Blockchain just continues that trend by making it, in some cases, much more efficient just because of the digital trust aspect of it.” According to Fisher, blockchain “couldn’t possibly render legal professionals irrelevant” and certainly will not eliminate the valued counseling services that attorneys typically render. This is a sentiment legal professionals will be glad to hear and undoubtedly share.

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