In recent discussions about the potential disruption of the legal market there is a great interest for new technology to support such disruption. In this context, the blockchain technology is being discussed alongside machine learning, artificial intelligence, big data and others.
Blockchain technology was initially associated with the cyber currency bitcoin. It has now become a technology of equal or greater interest in other parts of the financial sector and beyond with a potential game-changing effect. Some call it the advent of the ‘Internet of Value’ to indicate that we are about to enter an era where financial and other digital assets are exchanged almost exclusively over the Internet, with few – if any – intermediaries between parties.
According to Wikipedia, blockchain is defined as is a distributed database that maintains a continuously-growing list of transaction records hardened against tampering and revision.
In short it can be described as a digital ledger that is maintained through a distributed network. It can be seen as a new method for a trustworthy record-keeper. This is offers the opportunity to eliminate many third parties and ‘disintermediate’ them by no longer needing them to just to ‘hold keys’. These keys are instead built into a chain maintained through a shared network of participants.
They key here is the elimination of intermediaries which so far mainly focuses on the financial sector. With the potential shrinkage of work that can be the result of this, it could be seen as a potential game-changer for the financial sector. Therefore, we can see great interest from large professional services such as PWC, Accenture, Deloitte, IBM Consulting and banks, including Morgan Stanley and Goldman Sachs, trying to develop innovative solutions based on this technology. See the article “Why Blockchain” at SCL.
In December we received the news that the US Securities and Exchange Commission (SEC) had approved plan to issue stock via blockchain, which is an early commercial example of the use of this technology. See “SEC approves plan to issue stock via bitcoin’s blockhain”.
In the context of blockchain we regularly hear the term ‘smart contracts’. Smart contracts do not necessarily mean that we have legal contracts that are self-executing. Instead it is code that contains a piece of business logic that is stored on the blockchain. In the article “Blockchains not Bitcoin: Distributed Ledger Technology” by Andres Guadamuz and Chris Marsden this is defined as “a smart contract uses software code to implement human intentions by dynamically carrying out instructions embedded in tokens associated with a contract, rather than relying on legal texts interpreted by courts, regulatory bodies other legal institutions.” For example, we could have a contract regarding the delivery of goods including variables such as time and temperature whereas during specific conditions payment automatically will be made. We might also receive new types of smart contracts handling for example source code escrow. Most recently banks have started to apply ‘smart contracts’ more literally to agreements. For example, Barclays and the influential R3 consortium of Banks presented in late April a prototype of an Interest Rate Swap agreement running on R3 blockchain technology.
How will all this affect the legal market? The financial regulators are currently thinking through the ramifications of blockchain enabled financial services on regulated areas like anti-money-laundering, ‘know your customer’ and crime prevention provisions. This will initially create regulatory legal work. Once adopted more widely, blockchain technologies are likely to eliminate the need for many finance intermediaries, and reduce the amounts of routine legal work or routine aspects of complex legal work. It will also foster new types of jobs, eg smart contract engineers with a mix of technology, legal and KM skills.