A blockchain is essentially a record or ledger of digital events. It refers to a distributed database that is shared between many different parties. It can only be updated, never erased, unless agreed to by the majority of the participants. It is an ever-growing list of data records that are protected against tampering and revision. It is commonly known for its bitcoin blockchain, whereby, a certain and verifiable record of every single bitcoin transaction executed to date is stored. As the technology behind bitcoins digital currency, blockchain technology was considered one of the most prominent technologies of 2015. However, now it is emerging with a new, solo image. At a time where companies and individuals are looking for every way to improve internal processes, make and verify transactions, and increase data management and security practices, blockchain is exactly what companies are looking for.
It is not surprising that the majority of partners at some of the top law firms will not be aware of blockchain technology and the potential it holds. However, many if not most will be familiar with the term in the next few years. A small percentage of the legal industry has slowly but surely started to implement blockchain technology by starting to digitize legal agreements using the technology. It swaps paper documents for self-executing ´smart contracts´, (self-executing meaning: if conditions A and B occur and are then verified by the blockchain, then cryptocurrency is immediately unlocked and becomes controlled by the other party). Smart contracts are expected to be revolutionary in legal processes around the world. It will change the implementation and execution of contracts, giving contracts speed, ease and immutability, with the added benefit that the smart contracts can never be lost. Any important document can be placed on the blockchain and will always be available to the person who stored the document. Blockchain will not only benefit lawyers, but clients as well by bringing down legal fees (due to time saved) and also, to an extent, lead to automated legal services.
The technology will enable efficiency improvements within the legal industry by verifying the authenticity of legal documentation, approval processes, agreement management or even digital-identity validation — meaning that trusted third parties will no longer be required. It is an innovative programming system that will digitalize and automatically execute contracts that technology will validate, which eliminates the need of a notary. Law firms that prosper from cutting down their time and costs by using new innovative technologies will thrive from blockchain, and the ones who do not will have a serious disadvantage. Many believe it could be used to track and verify almost any digital record.
However, there are disadvantages to the relatively new innovation. As smart contracts are coded to be self-executing, the transaction is virtually irreversible. Additionally, in some contracts, the parties may not know the identity of the other. This means that if a party feels aggrieved by any part of the contract, they may not necessarily be able to have it set right by the court system. This is a major limitation to the technology and will take a lot of development to solve. For some, it may not be worth the risk.
Blockchain will not replace the need for lawyers, but it will change how we approach contract drafting administration and enforcement, among others. Yes, the technology has its limitations — like any, but the advantages at this stage outweigh the limitations. Blockchain could be set to turn the legal world upside down!
Jade Edment & Karl H. Lincke
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