What is blockchain?
In Deloitte’s Global Blockchain Survey 2020, a sample of nearly 1,500 senior executives revealed that business leaders see blockchain as integral to organisational innovation. At the same time, research published by the Legal Services Board in 2019 recorded that, at the time of publication, only 2% of legal services providers were using blockchain technology, and that most engagement which lawyers had with blockchain (also known as “distributed ledger technology” or “DLT”) was advisory in nature.
As Dr Lee Braine, Barclays Director of Research and Engineering says, in a post from 18 September 2020, “you may not have heard of smart contracts before, but they’re on the brink of changing the way and the speed at which business gets done”.
With the Law Society and Tech London Advocates release of a new paper in September 2020: Blockchain: Legal & Regulatory Guidance, the message from expert contributors to that paper is that use of blockchain by enterprises is growing, and that there are opportunities for lawyers to get involved. These use cases may have originally been focussed on financial services, but are increasingly diversified across all types of business. Examples are varied. Walmart uses blockchain technology to trace the origin of products from its suppliers. Shell has invested in the VAKT blockchain platform, using smart contracts to replace paper based processes in physical energy commodity transactions, and Spotify has invested in Mediachain, which can automate the royalty payments made to artists and creators from tracks played on the Spotify platform. Many other examples of pilot programmes across different industries can be found within the technology and innovation press.
Blockchain is, put simply, a shared database which allows a network of computers to exchange information, updated using a consensus algorithm. It can support all kinds of automated contractual systems, across many different parts of industry and society.
As innovation constructed on blockchain gets nearer to wider launch and adoption, rather than replacing lawyers with robot automated versions running on code-based platforms, lawyers familiar with DLT will be needed to advise on the creation of blockchain consortia, on governance systems, on the legality of smart contracts, digitisation, regulation, data protection implications and intellectual property rights, and many other areas.
Getting up to speed with this technology does not require advanced knowledge of cryptography, computer networks or Solidity coding language. However, it is very likely worth the time to acquire a core understanding of blockchain technology, relevant legal implications and the potential impact on your industry or area of specialism, and being ready to take advantage of opportunities to advise or innovate as they happen.
Blockchain and Smart Legal Practice
On 2 October 2020, the Financial Times reported on the legal services industry’s rapid shift to virtual working practices during the coronavirus pandemic. Whilst recent events have undoubtedly catalysed a much faster pace of change, these shifts in working practice are built upon pre-existing adoption trends in legal technology, with lawyers adopting new skills from related disciplines. This includes operations consulting, knowledge management, data science, artificial intelligence, software engineering and process design, and has allowed the creation of new ways of working with business, including legal design, transactions co-ordinated using cloud e-signature platforms, collaboration software and contract automation.
Compared to these other forms of legal technology, and certainly compared to the presently ubiquitous video conferencing platforms, blockchain is still in a very early phase of enterprise adoption. However, blockchain relies on lawyers and clients having a good understanding of data and how it can be structured and used within existing legal processes. In this way, blockchain’s potential for useful innovation is connected to maturity in use and practical understanding of other forms of legal technology.
Topically, a number of recent papers have been published by regulators and industry bodies which give detailed consideration to blockchain technology’s potential, as well as ways to address regulatory and compliance challenges. The Law Society’s paper which is mentioned above, Blockchain: Legal & Regulatory Guidance, provides examples of ways in which blockchain is already in use within organisations, including banks, large enterprises and business consortia, to solve problems such as tracking information about goods through complex supply chains, or automating financial transactions. The paper also covers a variety of questions related to legal services, including compliance with data protection legislation and some of the challenges of turning legal agreements into “smart” or code-friendly documents. It is useful reading for legal practitioners seeking breadth, depth and practical understanding in getting up to speed with DLT.
If we can categorise legal technology and innovation either by its ability to improve the way that lawyers do their jobs, or by its ability to create new ways of solving legal and compliance problems for clients, blockchain falls mostly into the second category. It transforms a whole process, requiring collaboration between different parties in an economic network in order to agree standards. Innovation built using blockchain technology seldom slots neatly into an existing legal services business model. It might often follow a parallel track, created by technologists, start-ups or industry to solve their own problems, without necessarily involving legal advisers. There are certainly exceptions to this. HM Land Registry’s Digital Street project considers digitisation of the UK Land Register and the potential to automate transfer of title to UK land using blockchain. The project has been piloted in partnership with international law firm Mischon de Reya. Linklaters has considered the potential for smart legal derivatives contracts in collaboration with ISDA in Smart Contracts and Distributed Ledger – a Legal Perspective (August 2017). Other large law firms have similarly considered the potential for blockchain technology to create efficiencies in paper-based volume transactions, such as securities settlement.
As use cases grow, hopefully lawyers will continue to be involved in exploratory projects with business, where it may be useful to add more detailed legal understanding of some of the more complex and changing issues around intellectual property, collaboration and data governance as they relate to blockchain technology.
State of Blockchain use in Legal Practice
Despite recent publications focussing on blockchain’s transformative potential, DLT may nonetheless seem quite far removed from the realities of day-to-day legal practice, as courts and practitioners grapple with the fundamentals of working securely and seamlessly on Zoom and Teams, or with ensuring safe document co-authoring using GDrive and Office 365. However, the volume of serious commentary is growing. In October 2019, Dr Helen Phillips, Chair of the Legal Services Board, stated that, “distributed ledger technology has the potential to drive considerable time and cost savings for both providers and consumers of legal services.” Additionally, in his foreword to the Law Society Blockchain paper, the Rt Hon Sir Geoffrey Vos, Chancellor of the High Court, states, “This sudden acceleration in use has only emphasised our need to understand the ways in which technology is affecting our professional lives. Lawyers face a steep learning curve. They will need to become familiar with DLT, smart legal contracts and cryptoassets – conceptually and functionally.”
It is certainly true that legal and regulatory information is complex, global and fast changing, that sensible and well-planned automation can bring benefits, and that data can be a core part of managing a response to regulatory change. Keeping on top of the volume of requirements in a timely and cost-efficient way is a challenge for global business. Greater automation and data-led solutions in the legal services sector could unshackle business opportunities from prohibitive regulatory and transactional constraints and save costs. Better ways of structuring legal information could permit the creation of more accessible systems for justice and dispute resolution.
Blockchain’s role is to act as a network for transactional data, securing the automated transfer of information consumed by smart legal contracts and compliance applications. It is fed by structured data and information. Blockchain is, however, slow to reach adoption because it is a complex technology. A project utilising distributed ledger technology (DLT) often requires collaboration between different actors in an economic system to agree standardised terms and to invest in longer-term system maintenance after any platform has been launched. This is a challenge, and the cost and effort of gaining stakeholder co-operation may be prohibitive. However, with an increase in use and understanding of other types of data technology to deliver legal services in new ways, such as AI and techniques for data visualisation, blockchain’s potential to underpin and enable innovation may become easier to reach and more relevant in time.
Some innovation may also be created through a continuance of enterprise adoption of open source (FOSS) software. Microsoft’s plans for the future of Office technology, Fluid Framework, are open source at its core. Considerations such as funding, governance, stewardship and succession are common across open source projects, including public blockchains. Enhanced familiarity and practical experience of working successfully with open source projects in an enterprise context (for instance, in managing ongoing project funding, governance and compliance with licence terms) can potentially provide a way for organisations to leverage public blockchain technology and cut the cost of building and maintaining proprietary networks.
Where is blockchain most useful – new and future-thinking applications
Creating usefulness with blockchain technology means looking for gains in efficiency, cost-savings and risk reduction through automating manual processes which involve multiple parties’ access to a set of agreed data. The technology can help to standardise shared data and remove reliance on individuals and organisations for maintenance of digital infrastructure.
Planning for any automation project must involve a careful cost-benefit analysis. Alongside eventual cost-savings or risk reduction, there are also challenges. Some terms of agreement are not suitable for automation at all, for example where flexibility and changes may be needed during a longer-term relationship, or where contractual provisions depend on external factors which cannot be specified at the time of contracting. Recent concerns over the emergence of bias and discrimination within algorithmic systems are also a cause for greater awareness, and, with the increasing importance of climate and sustainability factors, public blockchains based on a proof of work system may be impractical due to concerns over energy consumption.
However, for the right projects, there may be counter-balances and ways of managing these issues. In the right circumstances, a greater drive towards clear and fully specified contractual provisions is no bad thing and, if achievable, should lead to a reduction in the potential for dispute. Alternatives to energy-intensive proof of work systems exist, and systemic bias and discrimination may be overcome through awareness and understanding. Blockchain obviously doesn’t solve every shared data requirement, but a good awareness of its features, benefits and limitations can help to sort potential projects which are good use cases from those which are not.
The heart of blockchain adoption to date has been within the financial sector, but increasingly other use cases are coming into existence: tracking the progress of goods through a complex network of supply chains, by capturing location data and receipt signatures on a permissioned blockchain, for example. There are interesting trends in creating proof of origin for digital assets – an image or piece of music linked to data stored on a blockchain, as implemented by Nike’s CryptoKicks, which are a patented way of linking a physical shoe to a digital representation of the design, uniquely secured by an entry (as a transferable token) on the Ethereum blockchain. Gartner also predicts that, by 2023, up to 30% of world news and video content will be authenticated as real by blockchain, countering deep fake technology.
Alongside this, on 24 September 2020, the EU has launched a new Digital Finance Strategy and legislative proposals on crypto-assets and digital resilience and on market infrastructure. The strategy focuses on the balance between innovation, risk management and consumer protection. Proposals also aim to provide greater clarity and harmonisation of the national approach to regulation of crypto-assets and markets where such assets are traded.
This renewed focus from Regulators and industry bodies provides helpful guidance and clarity for innovators and for legal advisors.
The way ahead
Amidst opportunities for DLT, there are plenty of challenges. Automation using detailed systems may push complexity to a place where few people are equipped to truly understand it. The process of creating fully algorithmically managed processes requires detailed design, collaboration and ongoing maintenance. This is difficult to deliver, may lack transparency for effective oversight, and may be difficult to achieve due to intricate practicalities.
Ensuring clear and proportionate regulation for global, emerging technology is also complex. There are fundamental decisions to be made for blockchain as a technology, not just in terms of sustainability, but also the interaction of use cases with the global geo-political agenda (see, for example, the European Central Bank’s Report on a Digital Euro and the Bank of England’s Discussion Paper on a Central Bank Digital Currency (March 2020).
New technologies, new legal skill-sets
Gartner’s Legal Technology Trends for 2020 highlights that legal practice stands to gain much value by plugging the gap between technology and legal services, and that leaders need to hire and develop those who have a good understanding of both in order to improve performance.
Both transactionally, and within law firm operations, there is great scope for lawyers, with skills in understanding human behaviour and in making nuanced decisions based on fact and circumstance, to be helpful in determining what can be automated and how.
As the philosopher Matthew Crawford points out in Algorithmic Governance and Political Legitimacy, “there is no quantitative model that can capture the multivalent richness of neighbourhood life.” However we go about automation, it is important that the most valuable, intangible and unmeasured things do not disappear within the black box systems of automated decision-making. Technical lawyers, skilled in understanding human behaviour, but also able to speak the language of machines and automation, may be the key to helping clients identify risks and get the most benefit from these new types of automated systems. Ensuring that those skill-sets are given an opportunity to develop and grow is the current challenge for all types of law firm, as well for designers of legal training and qualification standards.
More reading and upcoming events
- UK Jurisdiction Taskforce Statement on Cryptoassets and Smart Contracts (November 2019)
- Andreas Antonopoulos blog and books (including the Internet of Money)
- Blockchain Regulation and Governance in Europe (Michèle Finck, 2018)
- IBM Hyperledger Fabric
- Ethereum Foundation
- OECD Blockchain Policy Forum 16-20 November 2020
Lighter observations and thought-reading
- Why we drive (Toward a Philosophy of the Open Road (Matthew B.Crawford, June 2020)
- You look like a thing and I love you: How Artificial Intelligence works and why it’s making the World a Weirder Place (Janelle Shane, November 2019)
- OECD and European Space Agency’s Φ-WEEK 2020 exploration of the concept of a “digital twin earth”, using earth system modelling to provide new solutions for climate risk, amongst other things.
Lisa is a solicitor, legal technologist and knowledge lawyer, who has led on legal innovation and disruptive technology projects within the UK magic circle and big4 accountancy practices. She works as an independent legal technology and knowledge management consultant through Obelisk Support and also runs a lawtech start-up, specialising in automation and alternative legal services, at fractal.legal.
If you enjoyed this article and would like to find out more about data-driven legal practice, please reach out to Lisa McClory at Obelisk Support.