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Understanding Blockchain and Its Impact on the Legal Sector

by Maryam Khan

case management software, practice management software, legal accounting software, legaltech, technology for lawyers, case management, immigration, london, united kingdom

The World Economic Forum survey recently predicted that 10% of the global GDP could be on blockchain-based applications by 2025 [1]. The adoption of blockchain technology is experiencing rapid growth, especially within the legal sector. Its increasing use and impact on law firms have become a hot topic.

However, this accelerating growth has raised some concerns and calls for a better understanding of blockchain technologies. This article breaks down the key benefits of blockchain use within the legal sector, highlights how blockchain is transforming specific practice areas and addresses some of the main challenges regarding its adoption.

The History and Development of Blockchain Technology

Blockchain technology was launched ten years ago and is now taking over the world. The first sign of blockchain technology development was in 1991 by Stuart Haber and W Scott Stornett, who introduced a cryptographically secure chain of blocks [2].

In simple terms, blockchain is a growing list of records called ‘blocks’ that are linked together using cryptography [3]. Each block contains a timestamp which is used as evidence for the existence of the transaction data. Every block further contains information regarding the previous block they have formed a chain with. Each additional block reinforces this chain [4]. Due to this reinforcement, the data within these blocks are resistant to alteration, making sharing information extremely secure and transparent.

It is unknown who exactly invented blockchain technology, but the system was created in 2008 by a group of people or an individual by the name of Satoshi Nakamoto. The purpose of this invention was for blockchain to serve as the public transaction ledger of the cryptocurrency bitcoin [5].

Now, blockchain technology has been defined by Mike Atton, the Chief Architect at Thomson Reuters Westlaw, as a ‘replicating, distributed ledger that creates a record of peer-to-peer transactions without the need for a trusted authority’ [6]. Traditionally, the use of blockchain was often only associated with bitcoin and cryptocurrency. However, it is now being incorporated in the day-to-day operations and transactions of law firms.

How Does This Apply to the Legal Sector?

There are a growing number of practice areas where blockchain technology plays a crucial role. These practice areas range from supporting the changing nature of legal work to enabling new businesses and differentiating service offerings.

Blockchain automates contract drafting and contract management through smart contracts and enables law firms to store large amounts of historical information. Therefore, smart contract programs stored on a blockchain are described as self-executing as they only work when conditions of the contract are met.  They are mostly used to automate the drafting and execution process of a contract.

This storage function is extremely relevant to law firms as each project, case or transaction involves several documents and is often completed after a long period. Incorporating blockchain into these routine tasks ensures that the risk of human error is eliminated and that documents are securely kept over that long duration.

What are the benefits?

Reduction in Legal Fees

The use of blockchain enables lawyers to streamline their transactional work, digitally sign documents and immutably store legal agreements [7]. As a result, scripted text and automated contract management reduce the time spent preparing documents, sorting files and organising paperwork. There are huge cost savings here as the cost of physically storing these documents is eliminated, and clients no longer have to pay for the excessive time lawyers spend preparing these documents. Therefore, incorporating blockchain into the legal sector makes legal services cheaper and more accessible to the public.

Increase in Transparency

The distributed ledger technology within blockchain creates a shared ledger that is agreed upon and can be accessed by all parties [8]. Moreover, contracts created through blockchain have additional built-in compliance, which reduces risk and any chance of misinterpretation. Additionally, due to the highly secure nature of blockchain, it is easy to access the chain of custody with digital documents. Lawyers can easily track and view the movements of digital documents without the fear of them getting deleted or tampered with. Not only does this increase transparency, but it also creates incontestable evidence for court proceedings [9].

Increase in Data Protection

Blockchain technology ensures that a law firm’s data is protected from manipulation. This greater level of security is achieved through the data saved in the blockchain being transparent and immutable [10] The asymmetric cryptography used by blockchain ensures secure transactions between users. Each user also has a public and private key consisting of a random string of cryptographically related numbers, making it mathematically impossible to hack into or guess another user’s key [11].

Moreover, law firms have become an increasingly popular target for ransomware attacks due to the confidential nature of their business. Law firms and legal departments collect and store huge amounts of confidential information such as tax returns and bank statements. Any risk of such sensitive information being leaked could result in the law firm and their clients facing extreme reputational damage and financial loss [12]. Therefore, incorporating blockchain and using programs stored on a blockchain is an essential solution for law firms in tackling this issue and protecting both themselves and their clients.

How can this be seen in practice?

Intellectual Property

Blockchain technology is becoming increasingly popular to assist in creating a record of unregistered intellectual property rights. It is much easier to record and store documents that prove the time of creation, rights management information and any applicable jurisdictional requirements through blockchain. Firstly, blockchain technology enables law firms to record events for a long period. This feature is extremely beneficial for copyright and trademark infringement claims that take years to proceed. Secondly, blockchain provides a publicly visible record of copyright ownership for easily accessible copyrighted material online, routinely downloaded. Blockchain can also record who has viewed and downloaded each copyrighted material in question [11].

Smart contracts

Long before the pandemic, there was a strong move towards digital contracts requiring electronic signatures, which ultimately removed the need for any physical presence from either party. A report by PWC revealed that 70% of law firms surveyed utilise smart contracts for transactional legal services, with 41% using blockchain for transactional legal services [12]. Through blockchain, contracts are now digitised and can be called ‘smart contracts’. Here, smart contracts are auto-executed directly between the stakeholders involved.

Additionally, incorporating blockchain into smart contracts also limits payment disputes as smart contracts only trigger fund payments once every contractual term is met. However, if contractual terms are not complied with, penalties and cease of services are automatically applied. This impact on a lawyer’s workflow means they no longer have to spend long hours simply trying to enforce agreements. Lastly, due to the more streamlined and secured process, the risk of contract disputes is lessened.

Banking and Finance

As a result of the digital revolution, there has been a huge rise in online trading and cryptocurrencies facilitated by blockchain technology. As investing, dealing and making payments with cryptocurrencies become increasingly popular, law firms must also adapt to this change. Moreover, due to cryptocurrency not being strongly regulated, lawyers will play a huge role in advising clients on making crypto transactions legally and ethically.

Blockchain Arbitration

Blockchain is now being incorporated into many forms of alternative dispute resolution, particularly arbitration. Here, blockchain provides an easy, cost-effective and convenient method of dispute resolution. The most common ways blockchain can be seen in dispute resolution is through “on-chain” and “off-chain” block arbitration. On-chain block arbitration involves smart contracts in the traditional dispute resolution process and off-chain is where blockchain is used to appoint an arbitrator [13]. Here, smart contracts will automatically notify the court after analysing and reviewing supporting evidence that is coded into the contract. Only when all the smart contract conditions are met will the funds be released to the other party [14].

Regulatory Compliance

Alongside legal technology and financial technology, there is also regulatory technology, often shortened to RegTech. Research has shown that blockchain technologies can improve regulatory compliance and regulators as a whole. Incorporating blockchain into regulatory compliance practices is beneficial as it helps legal departments track and manage the steps that need to be completed for all compliance regulations to be met. Suppose lawyers carried out the tracking and management manually; in that case, not only is there a risk of human error, but it is also costly for the client and extremely time-consuming for the compliance professional.

Moreover, according to RegTech firm Encompass Corporation, a total of $8.1 billion dollars of fines were issued for only 58 Anti-Money Laundering breaches in 2019 worldwide. Out of these, the UK had 12 fines worth €344 million euro [15]. Using blockchain to make compliance practices more secure can eliminate the risk of such hefty fines, and if the information is already secured in a tamper-proof database, many complicated procedures could be eliminated [16].

What Are The Challenges?

Despite the high accuracy rates, data protection and large data storage capacity, like all new technology, incorporating blockchain into your legal functions can be challenging.

Enforceability of Smart Contracts

Smart contracts are blockchain-based contracts that self-execute given that the agreed-upon terms coded into the contract have been met. While this sounds great, there are concerns regarding which regulation applies to smart contracts, which creates uncertainty regarding the extent to which they can be enforceable.

Education & Misinformation

A major barrier to adopting blockchain technology is the lack of education available on technology in general. The fewer people are aware of how blockchain technology will benefit lawyers and law firms, the fewer the people will be interested in investing in blockchain technology and incorporating it into their business functions.

Misinformation is also a huge barrier to blockchain incorporation as there are many misconceptions regarding its use and benefits. Again, this points towards the importance of education and access to information.

Aversion To Technological Developments

The legal sector is known to be extremely conventional; lawyers have a reputation for always being buried under paperwork. Therefore, some law firms may be averse to new technological developments within the industry. Blockchain adoption is likely to bring about firm-wide structural changes, and some professionals may not be keen on going forward with that.

Client Demand

A lot of investment in blockchain technology and legal technology, in general, is directed by client demand. If clients are not demanding work that law firms can easily do through blockchain technology, firms will see no point in making such investments and changes to their existing operations.

Regulatory Uncertainty

The legal profession being already extremely risk-averse alongside the uncertainty regarding the regulation of blockchain technologies makes blockchain adoption a big challenge for law firms. On a global level, there is major uncertainty regarding how blockchain can be regulated and how such regulations will align with the GDPR and the Securities & Exchange Commission.

Conclusion

The development of blockchain has had a huge impact on the legal sector. While it is extremely important to understand how blockchain technology works and the risks and challenges associated with its incorporation, further advances to blockchain can offer law firms greater benefits, increasing both their capabilities and workflow.

References

[1] World Economic Forum In collaboration with PwC and Stanford Woofs Institute for the Environment, ‘Building Block(chain)s for a Better Planet’, Fourth Industrial Revolution for the Earth Series (2018) at http://www3.weforum.org/docs/WEF_Building-Blockchains.pdf

[2] ICAEU, ‘History of Blockchain’ at https://www.icaew.com/technical/technology/blockchain/blockchain-articles/what-is-blockchain/history

[3] Muve Media & Marketing, ‘Five ways blockchain will change the legal profession’, Law Donut (2020) at https://www.lawdonut.co.uk/business/blog/20/12/five-ways-blockchain-will-change-legal-profession

[4] Wikipedia, ‘Blockchain’ at https://en.wikipedia.org/wiki/Blockchain

[5] ibid

[6] Legal Executive Institute, ‘The application of blockchain in the legal sector’, Thomson Reuters (2019) at https://blogs.thomsonreuters.com/legal-uk/2019/01/04/the-application-of-blockchain-in-the-legal-sector/

[7] Consensys, Blockchain Use Cases, ‘Blockchain in the Legal Industry’ at https://consensys.net/blockchain-use-cases/law/

[8] Ibid

[9] Erika Winston, ‘What is Blockchain’s Impact on the Legal Profession?’ TimeSolv at https://www.timesolv.com/blog/what-is-blockchains-impact-on-the-legal-profession/

[10] Stephen Zimpirch, ‘Data Protection and Blockchain’, Dot Magazine (2019) at https://www.dotmagazine.online/issues/security-trust-in-digital-services/data-protection-and-blockchain

[11] Wikipedia, ‘Privacy and Blockchain’ at https://en.wikipedia.org/wiki/Privacy_and_blockchain

[12] AJ Shankar, ‘Ransomware Attackers Take Aim at Law Firms, Forbes Magazine (2021)’ at https://www.forbes.com/sites/forbestechcouncil/2021/03/12/ransomware-attackers-take-aim-at-law-firms/?sh=40341aaba13e

[13] Muve Media & Marketing, ‘Five ways blockchain will change the legal profession’, Law Donut (2020) at https://www.lawdonut.co.uk/business/blog/20/12/five-ways-blockchain-will-change-legal-profession

[14] PwC, ‘Time for change – PwC Law Firms’ Survey 2017’, 26th Annual law Firm’s Survey (2017) at https://www.pwc.fr/fr/assets/files/pdf/2017/12/law-firms-survey-report-2017.pdf

[15] Katarzyna Szczudlik, ‘On-chain and Off-chain Arbitration: Using smart contracts to amicably resolve disputes’, NewTech.Law at https://newtech.law/en/on-chain-and-off-chain-arbitration-using-smart-contracts-to-amicably-resolve-disputes/

[16] ibid

[17] Ivan Camilleri, ‘Blockchain in compliance’, Deloitte athttps://www2.deloitte.com/mt/en/pages/risk/articles/mt-blockchain-in-compliance.html

[18] ibid

case management software, practice management software, legal accounting software, legaltech, technology for lawyers, case management, immigration, london, united kingdom