Blockchain and the Future of Legal Contracts
In the past year, there has been a lot of buzz in the technology and financial worlds surrounding blockchain technology, most commonly associated with Bitcoin, a form of digital currency not backed by a central bank. At the moment, a lot of the interest has been focused on the use of blockchain for mobile payments, property ownership, healthcare records, and smart contracts. Its potential applications across multiple industries have led experts to believe that it could be as revolutionary as the Internet. This could be hype, but it’s also immensely exciting – the implication being that it could fundamentally alter how we live our lives and how we interact with individuals as well as businesses.
How Blockchain Works and Its Benefits
Blockchain enables two parties to perform a transaction without the need for a third mediating party (such as a bank, Paypal, etc.). How it works:
Two parties initiate a transaction by exchanging a unit of value (e.g. a digital currency or an asset such as a land title)
The transaction is packaged into a virtual "block" with other pending transactions.
Sent to a blockchain system, these transactions are then verified by a network of computers (called "miners") using mathematical functions.
This record of verification is then added to a "chain" of records using a cryptographic hash, an algorithm used to prevent the falsification of data.
The transaction proceeds.
In theory, blockchain would be able to reduce significant overhead costs and automate certain processes. In an age where it’s a given that businesses have to engage in the virtual or online world in some form, the development of blockchain can be seen as another step towards further expanding the digital economy. The decentralization of currency used in the transactions would also help in creating trust between two parties. Computer-run verification and encryption steps ensure the security and validity of these transactions.
Blockchain and Legal Contracts
Much effort and investment have been put towards developing smart contracts. They are contracts that would be executed by a computer program when certain pre-set conditions – expressed in code – are met. This has the potential to improve the efficiency of legal processes (no more stacks of legal files!) and reduce legal costs. At the moment, an open-source blockchain platform called Ethereum has emerged as a foundational part of this industry. It executes smart contracts by using ether, its cryptocurrency. Ethereum has partnered with financial institutions across the world (including Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corp.) to execute smart contracts on test blockchain systems.
Smart contracts would be a major disruption to the legal profession. In the not-so-distant future, lawyers would have to be trained in a different way, as well as learn how to code. Smart contracts would not completely replace the conventional contracts expressed in natural language, as certain types of terms and agreements will be suited more for one or the other.
All in all, lawyers and businesses alike will have to review common practices in setting contracts. Coin Desk argues that “representing contractual terms in code, rather than natural language, could bring clarity and predictability to agreements”. “A smart contract could be tested against any set of inputs – in other words, against any set of material facts that it takes as inputs - allowing lawyers on either side of a deal to know precisely how the contract would execute in every computationally-possible outcome.” This brings us back to the potential of blockchain in fostering greater trust between parties. The “clarity and predictability” of smart contracts would enforce a certain amount of accountability and transparency on the part of the parties involved, providing a greater scope of protections for both businesses and consumers.
What Next?
The Australian Financial Review notes that “the pace of adaptation in the legal profession may be driven by the pace of blockchain innovation in major clients such as the big banks.”The open-source nature of blockchain platforms (e.g. Ethereum) has attracted the interest of venture capitalists in developing further applications for the technology. Meanwhile, top technology companies (such as Microsoft and IBM) and major financial institutions across the world are also testing their own blockchain systems. As such, there is rapid development to look forward to in the coming years, though it’s still a while to go before blockchain becomes commonplace. Further research and innovation into blockchain will also have the consider the aspect of security and privacy. Blockchain systems will be public ledgers – while identities will be anonymous, anyone can view the transactions made on the system. At the same time, laws and regulations surrounding corporations and financial services will have to be updated in order to adapt to the decentralization of commerce as a result of blockchain.
The Bottomline
The development of blockchain is something worthwhile to keep an eye on, especially for businesses seeking to stay ahead of the game. In the coming years, the way financial transactions, legal processes, and record-keeping are handled will be completely revolutionized.
What Should I Do Next?
Contact us if you would like further legal advice on the future of legal contracts or any other issue. Our lawyers at You Legal will be happy to assist you in any way we can.
"Download Our E-Book "Kingpin: Legal Lessons from the Underworld"
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.