Blockchain technology has become serious business. It lets people transact and record business in ways that were never possible before. It’s going to mean serious changes for the legal profession. Lawyers will need to keep up with a rapidly changing environment of case law and regulations to understand what’s permissible and what’s enforceable. At the same time, they’ll need to understand how to take advantage of its features for themselves and their clients.
A blockchain is defined as a “distributed ledger.” It contains data blocks which describe transactions. A block uses cryptographic authentication techniques to identify the party that created the block, the time of its creation, and any content that makes up the transaction. Any attempt to modify it will be detected and rejected.
Multiple copies of the blockchain exist on servers belonging to different parties. They’re periodically checked against one another to make sure new blocks meet all requirements and old ones aren’t deleted or replaced.
The oldest and best-known use of blockchains is for cryptocurrencies such as Bitcoin, but the technology’s characteristics lend it to many other uses.
- It’s distributed. Multiple parties have direct access to the same data, and there’s no gatekeeper.
- It’s immutable. Records can’t be altered or deleted. Only new records can be added.
- It has rules for adding records, which are enforced by some form of consensus.
Blockchains may be open to everyone or only to authorized parties. The latter are called “permissioned” blockchains. The contributors may be anonymous or have confirmed identities. Each type has its own uses. The public, anonymous Bitcoin system is very different from a blockchain set up among a set of business or legal partners.
Many, but not all, blockchains use some kind of digital currency or token. Participants acquire tokens by joining up, creating blocks, hosting a blockchain copy, or other means defined for that system. They spend tokens to perform actions. In most systems, they can give tokens to others in return for some consideration.
A term you’ll often hear in connection with blockchains is “smart contracts.” These don’t have much to do with contracts as you understand them. A better term is “distributed application.” Smart contracts are really computer code which can accept inputs and perform actions on behalf of participants. For instance, a smart contract might transfer a certain amount of tokens to another participant on the first of each month. Some distributed applications don’t have even that much resemblance to a contract.
They’re a powerful security feature. They let participants set up transactions in advance and make them contingent on conditions. They’re part of the blockchain, so they can’t be tampered with. The downside is that programming errors could have serious consequences, and they’re difficult to fix.
Uses for Blockchains
Many of the uses for blockchains are especially of interest to the legal profession:
- Documents can be recorded and time-stamped. A document can be presented at a later date as proof that a particular party authorized it as of the time-stamped date and that it hasn’t been falsified.
- A blockchain participant can grant people access to records through a smart contract. For example, a paralegal could receive discovery documents, store them in encrypted form on the blockchain, and send a decrypted version to the lawyers working on the case.
- When goods or supplies pass through many hands, they can each record their actions on a blockchain, providing an audit trail that makes it difficult to conceal substitution or fraud.
Whether such actions have any significance before a court of law is a matter which is still evolving. Given that major participants such as Microsoft Azure and Amazon AWS are investing heavily in blockchain technology, it’s hard to imagine that the courts and regulatory agencies can ignore it. However, the conditions under which transactions will be recognized will take some time to define. This means keeping up with the decisions will be a challenge. The law firms that best understand the uses of blockchain will be the most ready to keep up.