The terms blockchain law have mostly been on opposite sides of each other. With increased global cryptocurrency regulations and measures, you will find it very hard to believe that these two spaces can find a synergistic working relationship. However, there is a lot more to the blockchain technology than just cryptocurrencies. So, before we look into the changes that it can bring to the legal industry, let’s get some insight into the blockchain technology.
What is Blockchain Law & Technology?
A blockchain is, in the simplest of terms, a time-stamped series of immutable record of data that is managed by a cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) are secured and bound to each other using cryptographic principles (i.e. chain).
The reason why the blockchain has gained so much admiration is that:
- It is not owned by a single entity, hence it is decentralized
- The data is cryptographically stored inside
- The blockchain is immutable, so no one can tamper with the data that is inside the blockchain
- The blockchain is transparent so one can track the data if they want to
Lawyers’ interest in blockchain grew dramatically in 2017. In fact, according to Ron Quaranta, the founder, and chairman of the Wall Street Blockchain Alliance, the legal industry was one of the fastest-growing sectors to join the Alliance.
Aaron Wright, a professor at Cardozo School of Law, said, “We can use blockchain as a ‘spine’ to manage the entire legal industry, build more efficient systems, decrease the cost of legal services, and make sure people get the legal services they need.”
Now all that is very exciting but let’s look at some real use cases or utilities that the blockchain technology can bring into the legal industry.
Areas where Blockchain can improve the Legal Industry
#1 Property Records
Property fraud is one of the most significant problems in India. In 2013, New Delhi alone had 181 reported cases of property fraud while Mumbai came a close second at 173 cases. Real estate dealings are one of the biggest avenues of investing black money. The most popular way of doing it is to hold property in someone else’s name. This is called “benami” aka “false name.” Since November 2016, benami properties worth over $282 million have been seized.
The Joint Commissioner of Police Satish Golcha told PTI:
“Around 30 percent of all the cases which are reported to us are related to real estate.”
In an infamous case of benami, the Crime Branch discovered that promoters of the Nirmala Krishna Nidhi Fund had purchased property under the name of their nominees, depriving hundreds of people of their life savings.
The crime branch found out that the accused had purchased high-end properties like shopping malls, residential plots, and bungalows in Thiruvananthapuram, Kollam, and Kundara. The overall fraud has been pegged to be around ₹500 crore (~$7.8 Billion)!
In a truly monumental decision, the state governments of Andhra Pradesh and Telangana are partnering with Swedish startup ChromaWay to counter these property fraud cases by applying the blockchain technology.
The Three Main Problems That Blockchain Will Solve
The three main challenges that the blockchain had to solve to be an effective storage unit for land records are as follows:
#1 Digital Units Shouldn’t Be Easy To Replicate
One of the core properties of a valuable product is that it should be hard to replicate. This is the reason why fiat currency can’t be easily replicated at home. If someone can take home a printer and print out $100, the value of the currency would go down by a considerable amount.
The same should go for confidential documents like land registry papers as well. It shouldn’t be possible for someone to have two copies of the same registry but with different details. The blockchain solved this problem years ago. This problem is called “double spending.” Let’s take bitcoin’s example, it is impossible for me to spend the same bitcoin simultaneously in more than one transactions. Using the “double spending protection” in blockchains helps one prevent this from taking place.
#2 Digital Files Should Be Tamper-Proof
Anything that gets stored inside the blockchain is automatically tamper-proof.
Each block in a blockchain has its own unique digital fingerprint called “hash”. Once the files go inside a block, they cannot be tampered with because the cryptographical hash functions will prevent that from happening.
Let’s see how the hashing process works. We are going to put in certain inputs. For this exercise, we are going to use the SHA-256 (Secure Hashing Algorithm 256).
As you can see, in the case of SHA-256, no matter how big or small your input is, the output will always have a fixed 256-bits length. This becomes critical when you are dealing with a vast amount of data and transactions. So basically, instead of remembering the input data which could be huge, you can remember the hash and keep track.
A cryptographic hash function is a special class of hash functions which has various properties making it ideal for cryptography. There are certain properties that a cryptographic hash function needs to have to be considered secure. You can read about those in detail in our guide on hashing.
There is just one property that we want you to focus on today. It is called the “Avalanche Effect.”
What does that mean?
Even if you make a small change in your input, the changes that will be reflected in the hash will be huge. Let’s test it out using SHA-256:
Do you see that? Even though you just changed the case of the first alphabet of the input, look at how much that has affected the output hash.
Since all the blocks are cryptographically connected, changing the hash of one block starts a chain reaction which can freeze up the whole chain. Since that’s an impossibility, the blockchain becomes tamper-proof.
#3 Digital Processes Should Be Tamper Proof
The final problem that the blockchain can solve for property record storage (or the storage of any legal document whatsoever) is securing a trustless process. Every official institution has a process, however, since they are dependent on “humans doing their jobs properly,” there are a couple of roadblocks they may come across:
- Human negligence.
This can be a problem because these documents and records are susceptible and any mishandling can lead to losses of millions of dollars. The best way of handling these records should be to follow a set process which cannot be tampered with or taken advantage of.
The blockchain’s very architecture prevents this from happening.
A blockchain is a distributed system with a large number of actors. The way these actors make decisions in the system is via algorithms called “consensus mechanisms.” Several mechanisms help them to achieve so such as Proof Of Work, Proof of Stake etc.
The main takeaway is, a blockchain can ensure a seamless, secure data storing process which is free from human emotions.
Legal firms are a prime target for hackers since they have so much sensitive data, they are often the prime target for hackers. In 2016, hackers broke into the computer networks of some big U.S. law firms, including Cravath Swaine & Moore LLP and Weil Gotshal & Manges LLP. A few months after the above attack, the Department of Justice punished three men for making millions in insider trading after hacking into the emails of Big Law M&A teams. The law firm DLA Piper got hacked in 2017 by a ransomware attack, where malicious software encrypts a computer and then demands payment, to unlock it.
The reason why these firms make such a great target is because they are silos of extremely sensitive data. The blockchain’s architecture destroys the very notion of silos. Many industries are adopting a blockchain consortium, wherein they are putting their data in a private blockchain. Since the data becomes decentralized, it is impossible for hackers to attack a centralized source.
In the legal space, the Global Legal Blockchain Consortium is attempting to create a private blockchain comprised of over 140 large companies, law firms, software companies, and universities. According to its website, the consortium is focused on:
- Data integrity and authenticity for contracts, documents, and similar data.
- Data privacy and security for contracts, documents, and communications.
- Interoperability between large corporate legal departments and law firms.
- Productivity improvements and cost savings in the operation of legal departments and law firms.
- Use of blockchain to fortify and augment existing legal technology investments adding important functionality to legacy systems to extend their useful life.
In short, their mission is to enhance the security, privacy, productivity, and interoperability of the legal technology ecosystem.
#3 Smart Contracts
Smart contracts are automated contracts. They are self-executing with specific instructions written on its code which get executed when certain conditions are made.
Smart contracts are how things get done in the Ethereum ecosystem. When someone wants to get a particular task done in Ethereum they initiate a smart contract with one or more people. Smart contracts are a series of instructions, which works on the basis of the IFTTT logic aka the IF-THIS-THEN-THAT logic. Basically, if the first set of instructions are done then execute the next function and after that the next and keep on repeating until you reach the end of the contract.
Ok, so that sounds pretty cool. However, what’s its application in the legal industry? The biggest use-case of smart contracts in the legal space is to make the contracting process more efficient. Smart contracts remove the need for middlemen in a transaction and directly connects two parties with each other.
In the legal system, smart contracts can help in a variety of tasks, like:
- Real estate registration
- Commercial transactions
- Artist royalties
- Rendered services
- Contracts demanding a contract or transactional lawyer
A smart contract all the requirements of a traditional contract such as offer, acceptance, consideration, due consent etc. However, the distinct advantage that it has over traditional contracts is that instead of sending certain instructions to escrow agents or third-parties, it is automated or self-executing.
Obstacles to smart contract adoption
There are some obstacles to smart contract adoption:
- The first thing that needs to be worked on is the interoperability between traditional and blockchain agreements. There has to be an efficient way to create human-readable legal contracts that have a correlation in machine-readable smart contracts. Projects like OpenLaw, Accord Project, Agrello and Mattereum are working on this aspect.
- Going ahead from the previous point, new IoT (Internet of Things) devices need to be created which will help in the utilization of smart contracts in the real physical world.
- Contracts, by their very nature, are incomplete. There could be several situations which can’t be foreseen. Smart contracts have very strict enforcement which may result in unfair consequences. So, while smart contracts work for straightforward situations, it may not be the best way to deal with subjective work such as art or writing.
Conclusion – Does Blockchain Need Law?
As you can see, the legal industry has plenty to gain from blockchain integration. Every once in a while we come across a piece of technology which classifies as “horizontal innovation” i.e. technologies that can be applied across several industries. The blockchain technology definitely counts as horizontal innovation. Even though the legal industry and blockchain has seemingly been at loggerheads till now, they have found a fruitful, synergistic partnership which will positively impact both of them.
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