Lawyers Get Ready, There’s a Blockchain Coming

Lawyers have an ethical requirement of competence. Comment 8 to Rule 1.1 of the Model Rules of Professional Conducts specifically refers to technological competence as part of the general duty. Comment 8 says, in its pertinent part, that “[t]o maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.”

A major practical difficulty of the duty of technology competence is predicting the likely impact and relevance of a new technology. It’s one thing to say that a lawyer needs to learn how to understand and use existing technologies like standard Microsoft Office software. It’s quite another to determine when a new technology becomes a “relevant technology” that requires a lawyer to “keep abreast.” What is “relevant technology?” What does it mean to “keep abreast?” What reasonable and practical approaches should you be expected to take?

That makes one of today’s hottest new technologies, “the blockchain,” a very interesting case study.

According to Gartner, blockchain is at the top of the “Hype Cycle” for an emerging technology.  You may know it through references to bitcoin, a cryptocurrency popularized through ransomware and the trial of Ross Ulbricht and the Silk Road. Bitcoin is just one use of blockchain technology. As a technological platform, many smart people believe that it will dramatically change the way business and finance are handled, identity is managed, and transactions are validated and tracked. And some believe that one aspect of the blockchain, called smart contracting, could eliminate the need for lawyers in many types of transactions.

Let’s clarify what “the blockchain” means, as the term is misleading, and then look at it in the context of your duty of technological competence, as well as try to answer the questions of relevance and staying abreast of the blockchain “hype curve.”

What is “the Blockchain?”

The term “the blockchain” is a misnomer. Many blockchains are possible—public, private, and hybrid. Although bitcoin, which was implemented in 2009, is the best example of a blockchain-enabled development, as of the time of this writing, many others have been implemented and that number is expected to grow. For example, blockchain technology is being used to track the transfer of physical assets, such as diamonds.

For our purposes, we’ll define blockchain as a distributed ledger system in the form of a decentralized database that stores linked records in the form of time-stamped blocks. Each block is unchangeable, links to the previous blocks in the chain, is publicly visible, and is confirmed by a consensus-based proof of validity.

That’s a lot to unpack. “Distributed” and “decentralized” refer to the peer-to-peer aspect of the blockchain network—there is not a single central database of the blocks. Each node on the network can have a copy of the whole ledger. The notion of “public ledger” indicates how a blockchain, like any type of ledger book, becomes the official record for tracking the history and validity of transactions and other information. That record is visible to all, even though individual elements of the transactions are encrypted and not publicly visible. For example, you could see and confirm that a transaction happened, but not see any of the details about who made the transaction. Because blocks and the blockchain are not changeable, you will be able to see the full history associated with the ledger, e.g., the full chain of title.

Lastly, blocks are added to a blockchain by a consensus-based proof of validity. In the case of the bitcoin blockchain, complex mathematical problems are solved by “miners” who are rewarded by receiving bitcoins for their work. In recent years, other approaches to proving validity have been tried. The idea is that the blockchain network includes a way to prove validity—sometimes also referred to as “proof of trust”—that replaces the authority of a centralized trust authority.

To add one more important nuance, blockchains can serve as a platform on which code can be executed and apps can be run. In other words, blockchains can process transactions, not simply store information about transactions.

In general, this ability to run apps or execute code is referred to as “smart contracting” and the apps are called “smart contracts.” We like to describe smart contracts as a form of “intelligent agent.” They have a logic built into them that triggers an action if a predecessor event occurs, without requiring a further intervention. A classic smart contracting example is an escrow payment. A validated payment is held until the occurrence of an external event (e.g., last day of a month) occurs, and then the transfer is automatically made. While some have argued that smart contracts can largely replace standard legal contracts (i.e., legal terms are turned into computer code), that is a very complex procedure and not likely to happen soon. Simple contracts are another matter entirely.

We want to make two key points. First, many very smart people believe blockchains are going to have a gigantic impact on everything from finance to trade to identity in the next few years. Second, we fully expect that the vast majority of readers will not fully understand our description of blockchains in the preceding paragraphs. Blockchains are complicated to understand, involve mathematics and cryptography, and it’s easier to picture the results than how they work.

Because of these two points, they are a perfect example to illustrate how to think about the requirements of an ethical duty of competence. It is easy to argue that they will have a growing relevance. The challenge is how to keep abreast of blockchain technologies.

Current Impact of Blockchain Technologies on Lawyers

It has become a bit of a running gag among security professionals that lawyers first learned of bitcoin when their computers and networks were hit with “ransomware.” Payment to unlock your infected computers is usually demanded in the form of bitcoin. A lawyer or law firm then has to learn how to turn cash into bitcoin and make the ransom payment to regain access to data.

Lawyers also might find that they have clients who want to pay in bitcoin, or need advice with transactions, generally international transactions, that involve bitcoin transfers. A relatively small number of large law firms have begun to set up blockchain practice groups. Because many new blockchain efforts are still in the pilot stages, some lawyers might have been asked to give advice about those pilot projects to their clients.

We’ve also seen some criminal law cases involving bitcoins. To the extent people own bitcoins, they can be involved in probate or divorce matters. Finally, disputes, hacking, and other issues involving certain cryptocurrencies and blockchains have already occurred.

Where Blockchains Might Soon Impact Lawyers

If you read the previous section and breathed a sigh of relief that none of these areas seemed to impact you, please read on as we discuss some areas where we think blockchains are highly likely to develop. Remember the key results that intrigue people are decentralized proof of validity, improved speed, ease and costs of transactions (i.e., reducing friction), and an immutable public ledger with all relevant history.

  1. Financial Transactions. While we are already seeing an initial trickle of transactions using cryptocurrencies, the flow of those transactions will increase. Lawyers, especially those involved with international clients and in certain practice areas, such as criminal law, should expect to see more requests for payments and assistance with transactions involving cryptocurrencies that run on blockchains. Practice areas that focus on assets, such as estate planning, probate, divorce and even bankruptcy, will see an increase in bitcoin and other cryptocurrencies as part of the asset mix.
  1. Proof of Title. As a trusted ledger system, blockchains can be used to show who has ownership of property if the transactions are reflected on the ledger. How will you be able to streamline the proof of ownership and resolve disputes?
  1. Chain of Title. A blockchain ledger will provide a definitive way to show the chain of title. You can track the path of ownership of property all the way back to its creation.
  1. Authentication. A blockchain ledger might be used in a way to prove that the property in question is authentic. For a simple example, a sports jersey signed by an athlete might be authenticated and tracked by means of a blockchain. Provenance would be shown by the blockchain ledger, not by a letter of authenticity.
  1. Identity. Some of the most interesting blockchain experiments happening today involve the validation and management of identity. Identity is an area where the division of public and private on a blockchain becomes especially interesting. Your passport or other identity information might be securely private (e.g., encrypted), but the proof of the validation could be used publicly on a blockchain to prove that you are you for purposes of that transaction, without revealing the underlying private data.
  1. Chain of Custody. Imagine that original documents, confidential materials or criminal evidence were gathered and tracked in a blockchain system. Rather than needing testimony about the custodianship record, the blockchain ledger might be used to show the chain of custody.
  1. Evidence and Discovery. As blockchain ledgers and systems become more common, lawyers will need to know that they exist, the possible evidence (and proof of evidence) they create and how to handle that evidence. Discovery requests will need to take into account the possibility of blockchain systems and what specific information to request. Most important, lawyers will need to know how to explain to judges and juries how blockchains work and why they can be relied on.
  1. Client-Driven Expectations. Clients are likely to be well ahead of most lawyers about understanding blockchain technology, especially in certain industries. What conversations do you need to have with your clients? How can you be involved in helping them prepare?
  1. Smart Contacting. Smart contracting is a fascinating area where large changes are likely to happen slowly over the long term. However, the applicability of smart contracting to simple transactions and transactions based on simple logic (e.g., escrow and release) is intriguing and definitely shows potential in the short term. Smart contracting has the goal of reducing transactional friction. Lawyers are an oft-cited example of this type of friction. You can do the math.
  1. More to Come. Many blockchain pilot projects already are happening. Some have called blockchain the “second coming of the Internet” that will transform the way we transfer value and document and track that value.

What to Do? An Action Plan

One of our goals for this article is to convince you that you should “keep abreast” of blockchains as one of the “relevant technologies” described in Comment 8 of Rule 1.1. You will need to make your own decision about that—for you and your clients.

Our second goal is to explore what “keeping abreast” might mean, , using blockchains as an example.

“Keeping abreast” clearly does not mean “becoming a world-renowned expert.” There is an underlying notion of reasonableness. “Relevant” also implies that you need to know about what might actually impact you and your clients. We are inclined to say that there is a “just enough, just in time” element. Knowing when to ask for help and engage experts is also a key part of competence. You have to know your own limitations.

Let’s apply that to blockchains. Most of you will never have to read and understand Satoshi Nakamoto’s seminal 2008 bitcoin white paper, the intricacies of cryptography or how to set up a bitcoin mining server farm. We would predict that most of you, however, will over the next few years, be impacted by some aspect of blockchains, probably not in the form of bitcoins.

So, what should you do if you want to learn about blockchains?

  1. Get a Grounding of General Knowledge. Several good books will give you a history, overview and assessment of blockchain technologies. We suggest Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World, by Don Tapscott and Alex Tapscott; The Business Blockchain: Promise, Practice, and Application of the Next Internet Technology, by William Mougayar and Vitalik Buterin; or The Age of Cryptocurrency: How Bitcoin and the Blockchain Are Challenging the Global Economic Order, by Paul Vigna and Michael J. Casey. If you don’t want to tackle a whole book, look for a podcast with an interview of one of these authors or other blockchain experts talking about the books. A search on Slideshare.com or Google for a PowerPoint deck from a Blockchain 101 presentation might also be a good starting point.
  1. Keep Up-to-date. We like listening to podcasts as a great way to stay up-to-date, but you might like blogs or other text resources. The Forbes podcast Unchained, hosted by Laura Shin, is a great starting point.
  1. Get Some Help. LinkedIn Groups and other resources on blockchain topics are easily found. You might start a monthly or quarterly discussion group or “book club” in your firm or your local legal community. Can you involve some of your clients? Look for CLE seminars on blockchain topics or suggest the topic to your bar associations.

For all but the most specialized lawyers, those three steps alone will put you in a good position to demonstrate that you have “kept abreast.” However, that is a trivial result. Those steps will also help you understand an important new technology, open up opportunities, and help your practice, your clients and your career. The blockchain train is coming—why don’t you climb on board?

About the Author

kennedy monahan
Dennis Kennedy is an information technology lawyer and legal technology trailblazer. He also co-hosts The Kennedy-Mighell Report podcast on the Legal Talk Network and chairs the board for the ABA’s Legal Technology Resource Center. Gwynne Monahan is a writer best known by her Twitter handle @econwriter5, and follows consumer trends in technology and how they may impact the practice of law.

(Feature Image Credit: ShutterStock)

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