Blockchain, Smart Contracts and Lawyers

by Andreas Sherborne 

Blockchain is a disruptive technology – it has the potential to radically change how we interact and transact with others. This transformative potential is no less true for the legal profession, especially with the advent of ‘smart contracts’ which automatically execute coded contractual terms without requiring a lawyer. Much of the work traditionally completed by lawyers may therefore be automated in the near future. What does this mean for the legal profession? This article navigates the unchartered terrain of nascent blockchain technology and its applications as well as their consequences for lawyers.

A great deal of hype surrounds blockchain. It receives considerable media attention, both positive and negative, and is often the subject of heated debate amongst individuals, corporations and governments alike. Bitcoin, as just one application of blockchain technology, is particularly controversial, as are other cryptocurrencies. Other blockchain applications, such as Ethereum, have also become more prominent in recent years. As this technology becomes more mainstream, it is important to understand its defining features.

Blockchain is a decentralized, immutable ledger operating on cryptographic technology between a peer-to-peer network of computers (‘nodes’).1 In simpler terms, it is a book of records (a ledger) that lists transactions of value2 between individuals. Everyone who is part of the network has an exact copy of that book of records, and can see all the transactions listed within it.3 When a new transaction is made, the book is automatically updated for all members of the network.4 In this sense, it is ‘decentralized’ – no single authority controls, maintains or monitors the record book. This decentralization of control is the ground-breaking and game-changing aspect of blockchain technology. It challenges and disrupts the status quo because it removes the services of intermediaries and central authorities.

Blockchain and legal services 

Blockchain technology is likely to transform the professional legal services industry. Blockchain applications may be used for effecting the service of documents and providing a digital platform for confidential information sharing which is useful for discovery and due diligence. Blockchain also has the potential to digitise registries, such as those recording title of land and property,14 and to facilitate the exchange of ownership without requiring intermediaries (such as lawyers to draft legal title exchange documents). Utilising the immutable storage capability of blockchain technology also means it can provide authentication services which could be of significant practical application in securing the integrity of evidence used in courts.15 Furthermore, as the full capabilities of blockchain technology in the legal sector are not yet known, it is likely that many changes are unforeseeable as yet. However, it is clear that smart contracts integrated with blockchain technology have significant disruptive potential.

Smart contracts – automatically executed contracts bound by computer protocol 

Smart contracts are agreements, written in code, which automatically execute programmed functions in response to certain conditions being fulfilled. In other words, once action A occurs, it will trigger the performance of action B – similar to the way a vending machine works. If you insert money into a vending machine and choose a product it will trigger the release of that product. If you do not insert enough money, the product will not be released and the transfer aborted. This is the simplified idea underlying smart contracts.

Clause as code – the challenge of encoding contracts 

Code is deterministic – when a particular input is given, the programmed output will always be the same. The programming language underlying smart contracts is no different. This means that smart contacts must be drafted using structured and unambiguous language readable by computers. For certain legal agreements, such as ‘A shall pay £10 to B on 1 January 2018’, this is unproblematic.

However, many contracts are not as straightforward because they contain legal concepts and expressions that are difficult to translate to code. A clause, for example, that triggers certain consequences in the event of ‘material adverse change’ is not easily inserted as code into a smart contract. The fundamental legal concepts of ‘good faith’, ‘negligence’ and ‘reasonableness’ are also very difficult to encode. These concepts are employed for the very reason that they give contracting parties flexibility in respect of certain obligations by not specifically determining in advance exactly what those obligations entail. Translating legal contracts into code as self-executing programs would mean losing much of the functionality of traditional legal language. As such, smart contracts perhaps have a restricted application specifically limited to those types of contracts which are easily executed, but not for those contracts which require greater nuance in their functioning.

Conclusion 

Blockchain is certainly a disruptive technology. The many applications of distributed ledger networks will transform the way in which we interact and transact with others in the future. As intermediaries begin to play a diminished role in an increasingly decentralised economy, lawyers will need to adapt to the changing landscape. This is especially true given the advent of smart contracts which have the potential to automate a great variety tasks traditionally carried out by lawyers. Despite this, however, several challenges to the wide-spread adoption of smart contracts mean that the services of lawyers will still be required. These emerging fields and novel questions of law will require the application of human legal minds. Algorithms automating repetitive legal tasks will allow lawyers to focus on pertinent legal issues while expanding their work portfolios. Lastly, law firms will be required to place greater importance on technology and innovation in order to retain a competitive edge in the market.

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