From the internet of information to the internet of value
The first generation of the digital revolution brought us the Internet of information. The second generation is powered by blockchain to create the Internet of value. Faced with a swift-changing world, law firms are finally embracing modernization and preparing the next generation of lawyers for this digital age.
If internet-based technologies confused lawyers twenty years ago (and continue to confuse), blockchain promises to be a mind-blower.
“Blockchain is a vast, global distributed ledger or database running on millions of devices and is open to anyone, where not just information but anything of value money, but also titles, deeds, identities, even votes can be moved, stored and managed securely and privately. Trust is established through mass collaboration and clever code rather than by powerful intermediaries like governments and banks.” Dan Tapscott, author of Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World.
People usually learn about blockchain in the context of digital currency. Blockchain is the technology upon which bitcoin transactions are built. Basically, blockchain is a distributed ledger (or register) consisting of encrypted records in the form of blocks, which when connected using a distributed network of computers storing the blocks creates the blockchain.
Being dispersed across a network of computers, the ledger is not under any single control and thus operates by agreement. This is quite different from a traditional transaction ledger — one that is typically maintained by one entity (e.g. a bank) and audited by another entity (e.g. a trusted intermediary). In a blockchain, all parties have a copy of the ledger and can confirm in real time the status of the transaction. With blockchain, edited data is being stored in block records. Each block is linked to the earlier block forming a chain record that can be traced back to the first block, the so-called Genesis Block. Only new blocks can be added, existing blocks cannot be changed or deleted.
Significant transformation can be achieved when blockchain technology's unique skill to create secured distributed ledgers among multiple entities is combined with features such as confidentiality, data privacy, reliability, and scalability.
It is important to know that blockchain is the underlying technology. There have been reports of some of the systems built on top of blockchain (such as cryptocurrency exchanges) being hacked, but the blockchain itself has not. Understanding what makes blockchain resistant to hacking is important from a legal perspective.
Remember that blockchain is a distributed ledger, meaning that the blocks of data comprising the ledger are spread across a network that could be located anywhere in the world. Each computer (referred to as a node) holds all or part of the entire blockchain and applies the particular blockchain’s computational algorithm to verify a block and permit it to be added to the chain.
This is happening simultaneously across the network, making it (theoretically, at least) impossible for hackers to attack the chain, since each instance of the data is being held in many places all at one time, and a block may be verified and added to the chain by any number of nodes. The blockchain is also hack-resistant due to how the data in the chain is stored and transferred. Data added to the chain is cryptographically “hashed,” meaning that a short digest of the data is created. It is this hash of data that is stored in a block and transferred in encrypted form via the blockchain — not the actual, underlying data itself.
As a digest, the hashed data can’t be decrypted to reproduce the full underlying document or transaction data. However, within the chain, the hash can verify a copy of the underlying document or transaction existing outside of the blockchain.
What does all this mean, for real-world purposes? Primarily, if a hack to a block in the chain is attempted, it doesn’t expose the underlying data within the document or transaction because the hashed data is simply a digest and not a complete record of the data.
Additionally, because the transaction ledger is stored across a distributed network of computers, redundancy is created.
These characteristics help ensure both the privacy and authenticity of the underlying data within the blockchain, two properties that are highly relevant to legal transactions.
And it’s not just data that can be transferred via blockchain.
Cryptocurrencies use blockchain to transfer economic value. How about transferring energy? Music? Real estate titles? It’s either happening now or about to (see IBM example). That’s why lawyers should care about blockchain. It’s disrupting or has the potential to disrupt several industries that rely heavily on lawyers’ counsel and advice. Being so promising, blockchain presents an incredible opportunity for lawyers to position themselves as trusted strategic advisors to clients navigating the numerous legal, regulatory and logistical grids surrounding the technology and its applications.
This will create prospects for lawyers to help, as industries wrangle with how disruption impacts everything from operations to regulatory and legal structures. These disruptions will create niche practice areas for those lawyers who choose to understand blockchain.
So, knowing this, what can lawyers do now to equally better serve clients and protect business? Imagine a lawyer serving the Media industry (Finance, Music, Real Estate are just some examples) who makes herself an invaluable part of a client’s core team because he understands blockchain, how it affects her client, and how her client can capitalize on the technology.
Why? Because the lawyer, as a trusted counsellor, is situated differently than others most likely to have blockchain savvy (e.g. IT advisors).
Yes, IT knows the technology. But only the lawyer can extrapolate from a technological understanding to what this really means for a client operating in a legal and regulation-bound environment. And blockchain is already entering the legal market, directly and indirectly. And smart contracts? Smart contracts are computer programs which facilitate, verify, execute, and enforce a contract. Basically, these contracts are snippets of code which can change the ledger or a legal contract that is implemented on the blockchain. They can remove friction and provide transparency.
Several benefits and challenges to this innovation in smart contracts:
Smart contracts are coded, so there is less ambiguity than prose;
Verification can be achieved even within a trust-less environment; Smart contracts may reduce the need for litigators, but they become an additional tool for the transactional lawyer to master.
Self-executing; so once released, it is difficult to impede execution; and
Integrates well with IoT, artificial intelligence (AI) and machine learning.
Organization and Infrastructure needs to be updated;
Lack of experience with blockchain technology in IT departments;
Lack of education and understanding of the technology in other departments, including compliance (privacy concerns);
Development of uniform standards and protocols;
Need to overcome custom and tradition. So, a real-world example of how a smart contract was implemented can be seen in how Barclays did it with an interest rate swap prototype. Essentially, the investment bank set up an incubator of coders who worked with their legal department to understand how these swaps (trades) worked legally. They distilled three lines in the process that could be coded — (x) the amount of cash; (y) the interest rate; and (z) the currency. Once this information was garnered, the transaction could be solidified and then stored on a blockchain.
Law firms are also starting to make an incursion into this. Firms are beginning to have multi-disciplinarian practices to help manage the blockchain for clients and some law firms are part of the Blockchain Alliance, a coalition of 25 blockchain companies and 25 regulatory and law enforcement agencies — including Interpol, Europol, the Securities and Exchange Commission (SEC) and the FBI — to educate enforcement agencies about digital currencies and blockchain technology.
Traditional legal services could also be equipped with blockchain technology. These services could include:
Payment of current transactions by communication means (email, text message, instant messengers, etc.): in this case, blockchain ensures secure transactions by making the transfer of values conditional upon a validation key generated by the blockchain.
Creation of obligations within a company: in this case, the use of an email could help trigger the allocation of delegated powers. Effect on existing and new practice areas is barely scratching the surface, and corporate lawyers should be learning about blockchain-based decentralized autonomous organizations (DAOs), and how these may replace traditional business structures. Those with a criminal law practice should be thinking about how “evidence” located in a blockchain impacts a case — for example, what does this mean for application of the third-party doctrine?
However, blockchain remains a highly experimental technology. Although it already ensures money transfers, two major pitfalls directly impact the production of legal services.
The first is related to the sustainability of the technology used. In fact, blockchain is based primarily on the use of massive servers largely located in China, which raises the issue of security guarantees in the long term. Moreover, blockchain is currently a technology that is less than 10 years old. The use of computer code raises the question of the safeguarding of knowledge associated with these lines of computer code. How can we ensure that IT developments will survive in the long term when it comes to transmission of knowledge or data storage?
The second is linked to the security of computer code which is still not guaranteed today. It is hard to foresee what the flaws are in new code or a new programming language, as there has not been a history of specialists examining it for flaws. As a technology platform, it’s positioned to become as ubiquitous as the internet, something we don’t see or even think about, but that affects many, many processes lawyers and their clients deal with on a daily basis. It is quite evident that the future of blockchain is now.
Helder Santos is currently Senior Business Technology Manager at CMS, one of the top international legal firms. With more than 15 years of experience working in law firms, he moved to Frankfurt am Main from Lisbon in 2014. Since then, Helder has helped to improve CMS’ products and services working in a dynamic and multicultural team where technology and use of innovation is a focus for change and evolution.
Helder received his university degree in Multimedia Engineering at Instituto Superior de Tecnologias Avancadas de Lisboa and an MBA in Information Systems and Entrepreneurship in Lusófona Information Systems School.