In 2008, an anonymous programmer known as Satoshi Nakamoto created bitcoin, a peer-to-peer trustless digital currency based on the blockchain, an immutable, decentralized network.[1] Since then, the market value of cryptocurrencies and cryptoassets has soared, with bitcoin’s blockchain technology serving as a catalyst for the creation of hundreds of blockchain based tokens and assets.[2] In short, the blockchain can best be conceptualized as a real time, distributed accounting ledger, where all transactions are validated and maintained by a decentralized network of computers.[3] Blockchain technology has the potential to disrupt numerous industries, particularly the banking and financial sectors.[4] However, its potential impact on the legal industry, namely its use for lawyers in their own practices, is not yet fully known.
One potential impact of blockchain on the legal industry is the use of smart contracts hosted on a blockchain based platform, such as the Ethereum network.[5] An Ethereum-based smart contract is a self-executing agreement between two parties. Specifically, it automatically executes when certain pre-established terms or conditions are met, eliminating the possibility of fraud or downtime by either party.[6] Consider the distribution of payouts in a partnership. A contract can be coded to automatically distribute a percentage of the profits to each partner on a certain date, or whenever a certain amount of income has been reached.[7] Smart contracts can be coded and customized by any layman. They are expressly designed to limit the use of an intermediary such as a lawyer or accountant, as well as the attendant litigation arising from a potential breach of contract or vague contract terms.[8] Hence, if smart contracts achieve mass adoption, the demand for legal services may decline, negatively impacting the legal industry.
Alternatively, blockchain technology can also have a positive impact on the legal industry. Industries disrupted by blockchain technology will need specialized attorneys to resolve the regulatory and operational challenges arising from a new technology. Blockchain based companies will need counsel to design a proper legal structure consistent with existing regulatory structures and Know Your Customer/Anti-Money Laundering laws. The need for attorneys is particularly acute for companies planning an ICO, or Initial Coin Offerings. An ICO allows start-up companies to bypass the existing venture capital structure, and raise capital directly from the public by issuing a tradable token. This token can then be used to purchase the company’s product or services.[9] This method bypasses the existing regulatory structure, which generally only permits accredited investors to participate in venture capital investments,[10] among other regulations.[11] Since the SEC has not yet fully clarified if tokens are considered securities,[12] the legal industry will be essential to any company seeking to raise capital through an ICO.
Additionally, practitioners will soon be able to integrate blockchain technology into their own practices. OpenLaw, a newly formed start-up company backed by ConsenSys, anticipates using blockchain technology to create and execute legal agreements by integrating blockchain based smart contracts with traditional legal agreements.[13] OpenLaw asserts that traditional legal agreements suffer from several flaws, including ambiguities inherent in legal prose, the clumsy and time-consuming exchange of signature pages between parties, and the inefficient storage of legal documents.[14] Most notably, formal agreements are essentially frozen in time and cannot be updated in response to new circumstances or real-world events without a formal renegotiation.[15] Blockchain technology can solve these problems. A smart contract integrated in a legal agreement can remove much of the ambiguity surrounding legal prose.[16] The signatures and agreement itself can be securely stored and exchanged on a decentralized blockchain.[17] OpenLaw also plans to introduce “Legal Templates” and “Legal Markup” language, a tool to create dynamic and programmable agreements, as well as “smart legal agreements,” a legal agreement executed by a smart contract.[18]
Blockchain technology is poised to disrupt multiple industries, among them the legal sector. While some of these potential changes may have a negative effect, many of the cryptocurrencies extant are highly speculative and volatile. Although they may never achieve widespread adoption, the use of blockchain technology by newly created companies may result in additional legal work and increased efficiency in contract formation and execution, as well as the streamlining of traditional legal work. Ideally, blockchain technology can positively impact the legal industry as a whole.
[1] Paul Vigna & Michael J. Casey, The Age of Crypto Currency 41-43 (2015). Bitcoin is defined as a chain of digital signatures which can be transferred through the owner “digitally signing a hash of the previous transaction together with the public key of the new owner and adding these to the end of the coin.” A key concept of cryptography is the idea of a public key, or string of code, which can only be authenticated by a private key, another long string of code, known only to the owner. Bitcoin utilizes these concepts with the public-address/private key system. Essentially, every coin is stored on a public address, which cannot be accessed without the corresponding private key. Therefore, one cannot access the coins stored in a “wallet” or public key, without the corresponding private key. Unfortunately, this means that if the private key is lost or stolen, the coins stored in that address will be lost as well.
[2] See Wikipedia, List of Cryptocurrencies, https://en.wikipedia.org/wiki/List_of_cryptocurrencies (last visited Sept. 24, 2017).
[3] Nathaniel Popper, Digital Gold 357-62 (2015). To verify that the coin one is receiving is in fact a legitimate coin, and to protect against hackers, every bitcoin transaction is validated and maintained on the blockchain, through a process known as mining, which is also how new bitcoins are created. When one initiates a bitcoin transaction, the decentralized network of computers will verify that the digital signature was in fact created by the private key/public address and scan all prior transactions sent to that address, confirming that the coins are present in that address. Every transaction is then compiled into a long list or a “block.” Once a block is full, it is sent to the other computers in the network, who then add this block to the chain of prior blocks, hence the term “blockchain.” This process, known as “cryptographic proof of work,” is achieved by forcing all the computers in the network to race against each other and input the block into a “hash function,” a mathematical process which involves numerous attempts to input, or guess the right mathematical digest into the hash function until the answer is found. The computer or miner who guesses the correct answer, is rewarded with new bitcoins. As hashing is an energy and resource intensive process, bad actors are prevented from filling out fraudulent blocks. Proof of work, together with the decentralized nature of the bitcoin network, as anyone who wishes may join the network, makes the bitcoin network practically impervious to hacking or a governmental takeover. For a full explanation of the technical details, see the original whitepaper, Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, https://bitcoin.org/bitcoin.pdf.
[4] See e.g., Don Tapscott & Alex Tapscott, The Impact of the Blockchain Goes Beyond Financial Services, Harv. Bus. Rev. (May 10, 2016), https://hbr.org/2016/05/the-impact-of-the-blockchain-goes-beyond-financial-services.
[5] Ethereum is designed to function as a platform for creating and running smart contracts, decentralized applications and Democratic Autonomous Organizations. See https://ethereum.org/ for a full explanation of Ethereum and its underlying currency, ether. See generally, GitHub, A Next Generation Smart Contract and Decentralized Application Platform, https://github.com/ethereum/wiki/wiki/White-Paper (last visited Sept 24, 2017) (the original whitepaper).
[6] See Alyssa Hertig, How Do Ethereum Smart Contracts Work?, Coindesk, https://www.coindesk.com/information/ethereum-smart-contracts-work/ (last visited Sept. 24, 2017).
[7] Id.
[8]Smart Contracts: The Blockchain Technology That Will Replace Lawyers, Blockgeeks, https://blockgeeks.com/guides/smart-contracts/.
[9] What Is an ICO?, Bitcoin Magazine (Aug. 10, 2017), http://www.nasdaq.com/article/what-is-an-ico-cm830484.
[10] See generally Venture Capital Investment in the United States: Market and Regulatory Overview, Thomson Reuters Practical Law (March 1, 2015), https://content.next.westlaw.com/Document/Ieb4a24ed1cb511e38578f 7ccc38dcbee/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true&bhcp=1.
[11] Id.
[12] SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities, U.S. Securities and Exchange Commission (2017), https://www.sec.gov/news/press-release/2017-131.
[13] Introducing Openlaw, Consensys Media, https://media.consensys.net/introducing-openlaw-7a2ea410138b (last visited Sept. 24, 2017).
[14] Id.
[15] Id.
[16] By using If-then logic, aliasing, multi-variable expressions, hidden variables, and basic calculations.
[17] See Introducing Openlaw, supra note 13.
[18] Id.
