Blockchain, Bitcoin, and Law: A Distributed Disruption?
Published on October 24, 2019
Rohit Talwar – Futurist Speaker
By Rohit Talwar and Alexandra Whittington
How can law firms take advantage of the new growth opportunities presented by developments in blockchain technology and digital currencies?
The future of the legal industry is being reshaped by a number of rapidly advancing technologies and the disruptive ideas they enable. Today’s lawyers are being advised to learn to code, develop an artificial intelligence (AI) application, and outsource legal discovery tasks to machines.
One of the many new technological drivers impacting law firms is the secure information exchange/transaction ledger platform known as a blockchain. Opinions about its potential impact are divided—some see it as the basis for the reinvention of economies and global governance, while others simply see it as means of secure and incorruptible information exchange between counterparties.
This cloud-based distributed ledger technology provides a source of irrefutable record of every transaction. In legal it is enabling fully automated self-executing “smart” contracts, and has the potential to help attorneys provide new services and create new value for clients and law firms. Blockchain is known as the structure underlying Bitcoin and other digital currencies, but its applications in the legal sector are still evolving. Here we provide an overview of the technology, highlight example applications and case studies, and present a possible timeline of future developments over the next decade or so.
Overview: Blockchain and Bitcoin
Blockchain has gained notoriety lately as a potential solution to an outdated and burdensome system for managing financial transactions between counterparties. Today most financial transactions between counterparties are settled via financial intermediaries, which add time and cost to the settlement process.
Blockchain offers a distributed ledger model whereby the parties settle directly with each other, the transactions are recorded, secure, and immutable, and the counterparty identities remain anonymous. The goal is to use a “trustless” mechanism to enable a simplified and trustworthy financial ecosystem. However, in the process, these digital peer-to-peer networks also challenge the authority of institutions (banks, regulators, and governments) and are thus creating disruption.
According to its advocates, the decentralized nature of blockchain and Bitcoin will cause much-needed disruption, with reverberations far beyond the financial realm. There is an element of social revolution in blockchain, thus it is often portrayed as a conduit for challenging the status quo. Though Bitcoin, a digital currency, is an explicitly financial innovation (i.e. for payments, transfer of funds) blockchain is far less specific. Blockchain serves a critical role in the administration of Bitcoin, and there are similar platforms in place for other digital currencies.
Blockchains can also be used to complete a range of other tasks, and track the movement, transfer, and ownership of all sorts of things besides money. Example applications include luxury goods, education credits, property titles, and patents, to name a few. Blockchain is structured like a traditional accounting tool: at its core is a ledger that tracks deposits in and payments out and maintains a running balance. However, its uses go far beyond counting coins.
Lest we assume blockchain and Bitcoin are solely the tools of the far-left, libertarians, anarchists, and socialists among us, this technology has captured the attention of global business and industry to the tune of millions of dollars. Among banks alone, one source projects spending on blockchain solutions to grow from over US$200 million in 2017, and US$300 million in 2018, to US$400 million in 2019.5 Perhaps ironically, a great wave of enthusiasm for blockchain now emanates from the business establishment, including stalwarts like banking, finance, real estate, and law.
Bitcoin is by far the leading digital currency at present. At the time of writing, its valuation had reached US$18,000—giving it a market capitalization of around US$305 billion. The issue here is that few would use their precious coins to buy goods and services if they expected the value of the coin—and hence the effective cost of the purchase—to increase by 50% within a few weeks.
Applications to Law Firms
While the basic metaphor for blockchain is an automated checkbook register that instantly reconciles transactions, there are several other concepts inherent to blockchain, which are ideally suited for applications in law firms. Current legal industry activity around blockchain ranges from the simple—payment for services rendered, verification of contracts, representing companies conducting business on the blockchain—through to the highly complex, such as formulation of an entirely new legal system altogether.
Clearly, a supranational legal system would usurp local or national laws to create a globally agreed upon set of codes that govern rights during a dispute. Examples like this demonstrate the potential scale of blockchain’s legal sector applications. In terms of contracts and payments, though, the firms now adopting blockchain are attracted to its practicality: It reduces the resources needed to complete day-to-day operations. For example, Goldman Sachs estimates that $US11 to $US12 billion per year could be saved with blockchain-based clearing and settlement of cash securities, with $US2 to $US4 billion yearly savings from moving real estate titles to distributed ledgers.
A growing number of industry examples demonstrate the diversity of applications of blockchain and Bitcoin to legal services:
- International law firm Steptoe & Johnson helps clients in all industries manage application of the Blockchain in their businesses, and accepts Bitcoin as payment for fees.
- King & Wood Mallesons (headquartered in Hong Kong) has several dozen lawyers who have a focus on blockchain, including smart contracts.
- Perkins Coie LLP partner Dax Hansen (US) launched the first blockchain legal industry practice in 2013, which has grown to over 40 lawyers focused on blockchain technology, digital currencies, and distributed applications of all types.
- Selachii (UK) is implementing self-executing smart contracts on blockchain, starting with wills, title registries, and shareholder agreements.
- Allens (Australia) wrote a report suggesting that the future of the legal business model, which profits from an absence of trust between organizations, is imperiled by the rise of blockchain technology.
Outside of law firms themselves, the start-up ecosystem has many examples of services geared toward marrying procedural business practices with blockchain:
- Juro uses blockchain technology on the Ethereum network to underpin the creation and signing of legal contracts.
- The Decentralized Arbitration and Mediation Network (DAMN) operates as a network of smart contracts on the Ethereum blockchain, creating an “opt-in justice system for commercial transactions” as a new form of cross-border dispute resolution.
- CommonAccord is creating global codes of legal transactions, automating legal documents such as master service agreements.
- DAO.LINK is an initiative which facilitates brick-and-mortar business interactions with blockchain-based organizations.
Timeline of Possible Future Blockchain Developments in Law
Based on the pace of developments to date, we see the following as a plausible expansion of the role of blockchain in the legal sector:
Next 18 months: ETA 2018-2019
- Growing use of smart contracts.
- Increasing acceptance of digital currencies as payment for legal services.
- Proliferation of consortiums to integrate blockchain into business practices across different sectors.
- Several blockchain start-ups acquired by large banks, law firms, and consulting firms.
- At least half of the top 200 global law firms working with clients interested in engaging in blockchain transactions.
- A number of case examples of asset owners fighting counterfeits and patent violations with blockchain.
- Multiple instances of real estate transactions, deeds, and new financial instruments being recorded on blockchains.
Next 3 years: ETA 2020-2021
- A proliferation of blockchain-based distributed autonomous organizations (DAOs) with no workers and no bosses, just algorithms.
- Numerous examples of merger and acquisition transactions conducted on “auto pilot” using blockchain and AI.
- Elimination of some jobs and roles (banker, advisor, lawyer).
- Merging of AI and blockchain; robolawyers on blockchain.
Next 5 years: ETA 2023-2028
- Deployment of a DAMN – a global supranational legal system for international dispute resolution.
- Automation of arbitration, dispute resolution, and various legal and banking processes—eliminating more roles in law firms and banks.
- Creation of new professional roles to deal with the legal ramifications of the spread of blockchain.
5-10 years: ETA 2028-2033
- The rise of Algocracy: Law is code, code is law.
- The first distributed autonomous societies (DAS) with automation of services, justice, rights, and laws.
Blockchain and cryptocurrency gained unprecedented ground in 2017. The central bank of China is piloting a blockchain-based cryptocurrency, possibly a very loud signal about the rising status of the technology which will legitimize its use.16 Another indicator comes in the form of headlines screaming about Bitcoin’s price trends, earning investors millions and suggesting that cryptocurrencies are now firmly in the public consciousness.
As futurists, we expect that for every big wave of change, there are dozens or hundreds of small ripples; the revolutionary nature of Bitcoin and blockchain means it will disrupt businesses of all kinds. Because it involves money, contracts, and ownership, this is a special consideration for lawyers and their firms.
Starting now, law firms owe it to their staffs and teams to begin a conversation about blockchain, Bitcoin, and other digital currencies. Information, in this case, is power—blockchain’s distributed disruption of banks, laws, and most traditional social institutions will generate new conflicts, anxieties, and tensions for which a legal remedy may be the only solution. It is a likely topic of future legal matters.
Keep in mind that the best way of describing blockchain is “distributed,” in other words, absent of central authority. A lot of the projects in the works seek to apply this thinking to society at large through DAS’, DAOs, and distributed legal systems. If a distributed mindset prevails, this will be of direct relevance to lawyers, judges, law enforcement, and anyone in occupations that rely on a centralized legal system.
Furthermore, the entire basic model of business conduct stands to be disrupted on the same scale as it was during the rise of the internet as a business tool. Blockchain, in combination with other technologies like artificial intelligence and cloud computing, is likely to lead to the transformation of the very basis of business, productivity, and possibly even money itself. By decentralizing the powers that be, blockchain seems set to be a high-tech disruption that will challenge law at every level and function.
- How might the legal sector react to the decentralization of power in society as a result of blockchain applications?
- What could be the role of law firms in a future where laws are coded?
- How might law firms capitalize on new opportunities and business models enabled by AI, blockchain, and cloud computing?