The legal potential of blockchain part 1: features and applications
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What I find extremely intriguing about planning a career in law is that right now, the legal industry is being disrupted by technological developments. In my view, blockchain technology is one of the most significant factors that can potentially reshape the role of commercial lawyers by fundamentally changing some of the traditional tasks they have to perform.
There are some serious barriers to the mass implementation of blockchain, such as regulatory uncertainty and, given its decentralised nature, the difficulty of pinpointing the governing jurisdiction when a failure or breach occurs. With this in mind, I suggest an equal dose of caution and excitement when looking at blockchain from a lawyer’s perspective.
Blockchain can be viewed as a database, where information is stored in blocks of data, recorded on a network of computers. Each node, or party to the network, holds a copy of the information exchanged and as a result, there is no one single place where information is stored. Instead, it is verified by all participants. From a legal perspective, there are three major features of blockchain that make it potentially revolutionary.
- No intermediary – First, blockchain eliminates the need of an intermediary. For example, banks and solicitors have the role of providing trust and certainty when managing a transaction, but these intermediary agents also generate friction in trade, simply through the added costs in the form of transaction fees, which add up in a longer supply chain. With blockchain, trading becomes frictionless because the transactions recorded on the blockchain are essentially overseen by an algorithm which fulfils the administrative function. Each new transaction forms part of a ‘block’ which is linked to the previous chain of blocks, thus enabling all participants to have proof of whose assets are where.
- Decentralisation – The second essential feature of blockchain is decentralisation, which makes it almost impossible to hack or tamper with. The distributed nature of blockchain means that it is recorded across the network in synced copies held by all the participants. As a result, there is no single point of failure to make the system vulnerable, as with centralised systems. The risk and the costs of entrusting a centralised intermediary with record keeping are substantially reduced and cybersecurity issues are less of a problem.
- Immutability – The third core feature of blockchain is immutability, which can be both a benefit and a drawback. Immutability in blockchain means that each piece of information is stored in a block of data connected to all the previous blocks. This creates an unalterable trail, encapsulating the history of all processed transactions which ensures trust and transparency, but it also reduces flexibility in dealings between parties. Because blockchain operates with algorithms, there is no central administrator who can intervene and alter recorded transactions, even if required by the parties involved. Introducing an agent with such powers might create a point of vulnerability as far as security is concerned.
Given these three fundamental features of blockchain, its various applications can be very interesting to a lawyer. For example, the property and real estate market could be dramatically transformed with blockchain because it relies on a centralised registry (like the Land Registry) to record title transfers. Sweden and Georgia are already testing systems that secure and validate land title transfers, resulting in official government actions being performed by blockchain. This could potentially save time, decrease costs, and reduce bureaucracy.
Implementing blockchain technology could change the way tax payments are collected. With payroll tax, blockchain could instantaneously transfer the net salary to employees and the corresponding tax amount to the government authorities, freeing employers from calculating and making payments themselves.
However, for me, the most fascinating application of blockchain is with smart contracts. For businesses, smart contracts can increase efficiency tenfold while for lawyers, smart contracts pose a real challenge to the traditional way of contracting. For this reason, smart contracts will be covered in part 2 of this blog.