Blockchain, the distributed ledger technology behind Bitcoin, could provide the key to a new, method of recording transactions.
Being fully secure, this record would not need external validation. From establishing smart contracts to auditing the supply chain, in-house legal teams will need to keep on top of this fast-moving and exciting but also risky and over-hyped technology.
Blockchain and the modern in-house lawyer
You’ll almost certainly have read about blockchain. It has received a huge amount of media coverage and is the driving force behind many recent start-ups. The 2016 Gartner Hype Cycle, which tracks the progress of emerging technologies, places blockchain almost at the peak of “inflated expectations”.
So, we’ll certainly be seeing and hearing a lot more about it in the foreseeable future. But what exactly is blockchain and how will it affect you, the in-house lawyer?
Blockchain is best known as the technology behind the virtual currency. Bitcoin. Effectively, it’s a distributed “digital ledger” where organisations can independently record and verify transactions and agreements. Because blockchain’s digital ledger is distributed and decentralised, it’s considered tamper-proof, giving those who use it a high degree of confidence.
Blockchain technology was established in the 1990s, however it was the rise of Bitcoin over the last decade that has brought it into mainstream awareness.
How does it work?
Blockchain is, in fact, a database distributed across a network of potentially thousands of computers. This makes it far harder to update or change than a single resource. Everybody with access to the network can view the ledger and see the same record of transactions.
Blockchain gets its name from the blocks of data that, together, form a chronological chain. Algorithms in the background encrypt the data through “hashing”, with each block of data linked to another.
Encryption is enabled by a public key (individual users have unique IDs on the blockchain) and a private key which allows individuals to access their assets.
What are the advantages?
The two main advantages of blockchain are that:
- It’s secure; and
- It has the potential to cut out middlemen.
It’s secure because it’s held over multiple computers, so is almost impossible to hack or alter. Nor can the data in the ledger be changed retrospectively.
However this also means that your data is being held internationally, you will not know all of the places where it is held and you cannot recall, alter or delete it. Which poses many obvious legal issues.
In a world where online fraud is increasingly sophisticated and confidence in the security of transactions paramount, many people are excited about the potential of blockchain.
Another advantage is blockchain’s ability to streamline the process for highly complex transactions. Consider a secure dispersed ledger of financial transactions that needs no external verification by a third party. The speed of these transactions can be increased significantly by removing different steps. The impact of this on business-to-business, and even consumer, transactions could be enormous. In the financial services sector, blockchain could offer significant cost savings. It also offers the potential to create and verify automated transactions based on the satisfaction of predefined criteria.
However using the data requires its entry or exit via an individual device from the blockchain environment (which is how some cyber blackmailers who have taken payment in bitcoin have been caught) and it is not yet clear how future smarter technology may undermine through inference, reverse engineering or other processes, some of the assumptions about security that are currently stated for Blockchain.
Like all cloud systems; the physical network over which the data passes creates a business continuity risk and the system can exercise no control over the quality or accuracy of the data that is entered - if rubbish goes in...
Who’s using or experimenting with distributed ledgers?
There’s a lot going on in the blockchain sector. In financial services, technology firm R3 has organised a consortium of banks to work together on prototype projects. Meanwhile, a consortium of seven European banks will be utilising a platform called the Digital Trade Chain (DTC).
In business, JPMorganChase, Microsoft, Intel and many other organisations have formed the Enterprise Ethereum Alliance (EEA) to make blockchain better suited to commercial applications.
Elsewhere, blockchain is being used for activities as diverse as timestamping documents, supporting the Internet of Things and tracking diamonds. Other potential uses for distributed ledger technology include identity management and supply chain auditing.
Unsurprisingly, the technology giants are scrambling to seize the opportunity presented by blockchain. Already Microsoft and IBM are developing “blockchain-as-a-service” capabilities, paving the way for third parties to develop related solutions.
Blockchain is still in its infancy. There will be challenges along the way and it may be some time before the benefits of the technology can be realised on a scale that makes sense.
Why should in-house lawyers be interested in blockchain?
Blockchain technology’s appeal to businesses and innovators lies in its potential to:
- Reduce costs;
- Accelerate processes;
- Enhance security;
- Reduce fraud, and
- Reduce risk
Of course, these factors will be of greater relevance in some industries and business processes than others. So, if you’re an in-house lawyer in any of these sectors, blockchain could well play a big part in your organisation soon – if it isn’t already:
- Financial transactions. Fintech, the technological innovations that drive financial activities such as banking, payment processing and investing have given rise to an increasing number of blockchain-based companies. Examples of these are innovators of the machine-payable web with Bitcoin (21.co) and builders of a supply-chain network on a blockchain structure (Skuchain). The attractions of blockchain for financial services providers are security, immutability and the ability to execute friction-less transactions;
- Insurance. Blockchain technology can simplify underwriting and claims handling and help providers develop new insurance products;
- Music and entertainment. Blockchain technology can help protect IP rights for the creation and distribution of creative works and increase the control IP owners have over their work. Music platforms such as Bittunes and PeerTracks are, it seems, already using blockchain technology to distribute and monetise their products. The technology also improves the way in which IP rights are enforced;
- Smart contracts. A blockchain supported transaction could start with traditional contract clauses before transferring to a blockchain platform to become self-executing. The differences between smart and traditional contracts raise questions about how disputes will be resolved. Blockchain savvy lawyers are likely to have a role in mediating disputes, focusing on the execution phase rather than issues in drafting. Many law firms are looking into smart contracts;
- Energy. In the USA, the Transactive Grid uses blockchain technology to create a peer-to-peer market for buying and selling energy. This presents challenges for market regulators and their lawyers;
- Real estate. Here, organisations are already using blockchain technology to record, track and transfer deeds and title. Because the systems are secure, lenders benefit from clarity, reduced administration time and lower costs; and
- Healthcare. Organisations in the healthcare sector have identified blockchain as a way to manage patients' medical records and medical data, including for secure transfer between medical professionals, including pharmacists.
Other areas that could benefit from blockchain technology include know your client (KYC) processes, anti-money laundering (AML) and modern slavery and related supply chain auditing.
As the use of blockchain multiplies and its presence inevitably spreads, it’ll become increasingly important for in-house lawyers in all sectors to understand how it works and how it’ll disrupt traditional processes.
Rather than remove the need organisations will have for legal advice, it’ll change the nature of that advice. So, we see an opportunity for in-house lawyers to use their legal and technical knowledge to ensure their senior colleagues understand the legal risks arising from blockchain.
Blockchain technology has the potential to disrupt traditional processes across many industries. In some aspects, the technology may threaten the traditional advisory role of the lawyer as the need for advice diminishes or disappears. However, at the same time, you’ll have the potential to be involved in the development of the technology and advise on the impact of new operational models, probably at more stages in the process than you do currently. To do this, you’ll need to be up to speed with the technology and understand the impact it’ll have in your organisation and across its wider sector.
Blockchain 101 For Lawyers Parts 1 and 2 - Law Technology Today January 2017 (Caitlin Moon)