Blockchain: What Is a “Distributed Ledger” and Why Is It Useful to Lawyers?
As the digital age has given rise to newer, more efficient technologies, legal professionals have begun to integrate them into standard legal processes. From video conferencing software to digital voice assistants, these new technologies are the future of law.
Blockchain ledger systems are a standout amongst these new technologies. The U.S. Securities and Exchange Commission reports that these distributed ledgers have the potential to “ensure that compliance and transparency are hard-wired into the very fabric of the market.”
Some lawyers, however, might still question blockchain’s place in the legal field. That said, here you’ll find some information about blockchain technology that will provide some insight into its real-world applications for attorneys.
What Is a “Distributed Ledger?”
A blockchain differs from a traditional spreadsheet or another ledger in that it is a decentralized, distributed ledger. People refer to it as “distributed” because no single entity manages a blockchain ledger system on its own. The ledger is distributed across a network of computers, also known as “nodes,” and each involved party has access to the ledger. This access allows all parties to receive real-time status updates on transactions which occur within the network of nodes.
Each record of a transaction in a blockchain is represented by a timestamped “block.” Whenever a new block is generated on a blockchain, the system appends this block to the previous block using this blockchain’s unique algorithm. The visual result of the process is one of a “chain” of blocks.
Hence the term “blockchain.”
Several organizations have already implemented blockchain technology. Michael Casey, a senior lecturer at MIT, for example, explains how the World Food Program currently uses a distributed ledger to track food distribution in an interview with MIT Sloan Management School. Even smartphone giant Samsung Electronics is now considering employing a blockchain ledger system to “keep track of global shipments worth tens of billions of dollars a year.”
The blockchain system’s applications also extend to the legal field. Blockchain ledger systems provide indisputable records of transactions, so these systems are ideal for managing transactions on both clients’ and attorneys’ ends.
Real estate is one such industry in which transactional history is of the utmost importance, and the presence of immutable records of property ownership and transference help the process run more smoothly. Economists also project that blockchain could significantly alter the financial system, a shift which would presumably keep lawyers busy for years to come.
How Blockchain Is Related to Cryptocurrency
Blockchain is the foundation on which cryptocurrency systems such as Bitcoin and Ethereum are built. As the foundation, blockchain technology stores secure records of transactions involving cryptocurrencies. These digital assets are sometimes stored in digital “wallets” and require private keys to access.
Several of cryptocurrencies have come under fire over the last couple of years, as the SEC has questioned the legitimacy of these assets as securities and the security of programmable currency. The underlying blockchain ledger system, however, is not subject to the same legal scrutiny and vulnerabilities as the systems which use it as a foundation.
Cryptocurrencies might rely on third-party wallet software to allow parties to trade and manage assets. However, blockchains are simply distributed ledgers which keep a record of transactions. In other words, blockchain systems are not always cryptocurrencies. Blockchains have several practical uses outside of the world of digital currencies.
How Does Blockchain Protect Your Clients’ Confidentiality?
Ledger systems powered by blockchain technology can help lawyers safeguard confidential data to adhere to ABA Model Rule 1.6 in an increasingly digital world. Blockchain protects clients’ confidentiality by:
- Providing an immutable, theoretically unhackable data management solution for attorneys.
- Storing records of underlying documents rather than the documents themselves, thereby preventing high-level data breaches.
In order to better understand how blockchain can help you protect your clients’ confidentiality, you must first understand how a blockchain’s structure and hashing technology secure private data.
What Makes Blockchain “Unhackable?”
Theoretically speaking, a blockchain is nearly impossible to hack. Even in past cases in which blockchain-powered systems such as Bitcoin were compromised, the underlying blockchains were not the hackers’ points of entry. Hackers instead focused on attaining users’ private login information to get access to the data referenced in the ledger.
People credit the technology’s structure for this hack resistance. As stated earlier, a blockchain can be described as a “chain” of blocks, each block appended to the previous block via some algorithm specific to the blockchain. Whenever a new block enters a blockchain, each computer in the network runs this algorithm using the previous block’s value and broadcasts its results to the other nodes. This structure boosts blockchain’s security by ensuring that changing one block’s value would mandate changing each of the following blocks’ value as well.
Imagine, for example, that a blockchain has sequential blocks “A,” “B,” “C,” and “D.” If a cybercriminal wants to extract data from the first block (A) by changing its value, this hacker will also have to modify the values of the following three blocks because these values directly depend on the value of the first block. As nodes continue to approve blocks and add them to the chain, manipulating each of the following blocks’ values becomes increasingly more unfeasible for a data thief.
A blockchain system’s redundancy also enhances its security. If a hacker attacks one node in a network, several other nodes will still broadcast their results to the rest of the network, rendering the hacker’s attempt to infiltrate the blockchain unsuccessful.
The blockchain system’s hashing technology protects client confidentiality by obscuring clients’ data. Rather than storing entire documents, hashing technology stores “hashes,” or digests, of those documents.
Each hash value consists of a string of randomly generated numbers and letters, and each hash value is specific to the data it encrypts. Because of this specificity, each node in a network can easily detect changes to hash values in a blockchain.
Moreover, even if a cybercriminal somehow managed to hack a blockchain, the data thief would not be able to access the data because it is stored elsewhere. The thief could try to decrypt the hash data, but hash technology is effective “because of the extremely low probability that two different plaintext messages will yield the same hash value,” meaning that the possible values would be almost infinite.
How Can Lawyers Use Blockchain Ledger Systems?
Many lawyers fear that blockchain will decrease the demand for legal professionals in the future. While blockchain will disrupt the legal industry and cut out the middlemen in several other industries, lawyers can carve out space for themselves in the age of blockchain technology.
Here are just a few of the practical uses of blockchain in the legal realm:
Tracking the Chain of Custody
Because blockchain systems provide an immutable record of past transactions, they are effective solutions for cases in which property owners and transactions come into question.
Real estate lawyers who rely on blockchain, for instance, can easily verify the chain of custody of their clients’ properties, thereby expediting the legal process. A process which would usually take “weeks to months to conduct in person” could be significantly shortened in such cases.
This expedited process is a boon to both lawyer and client. Client satisfaction increases while the legal professional receives a boost in productivity and remains competitive in the market.
Assessing Intellectual Property Rights
Intellectual property rights in the age of blockchain will drastically change, which means that attorneys will be tasked with educating their clients about the advantages and disadvantages of using blockchain technology.
Billboard reports that popular artists such as Bjork, Mariah Carey, and Fall Out Boy have already begun selling their music and merchandise using blockchain-based cryptocurrency systems such as Bitcoin. Without competent teams of attorneys to advise them, however, some artists will be unsure about whether or not to move forward with cryptocurrency.
As blockchain technology begins eradicating middlemen in the entertainment industry, legal professionals could also be called upon to reassess how the industry’s major players are compensated.
Smart contracts, which are key features of some cryptocurrency systems, are a byproduct of blockchain technology. These self-executing contracts are written by code rather than by lawyers.
Once a smart contract’s conditions have been met, the contract automatically triggers, each party receiving any agreed-upon compensation upon its execution. For example, once an employee and employer satisfy the conditions of a smart contract between the two parties, the employee receives payment.
Several proponents of blockchain argue that these contracts have the potential to eliminate third parties such as attorneys. As Columbia University graduate Dr. Ammous writes, these digital contracts have “no possibility for appeal or reversal” and are “beyond the reach of courts and police.”
Despite the optimism surrounding smart contracts, Ammous admits that “the language lawyers use to draft contracts is understood by far more people than the code language used by smart contract drafters.” He also concedes that software developers can “miss glaring software bugs.”
These statements suggest that attorneys could take on the role of smart contract “mediators” in a future in which they become a standardized part of transactions. This new role would entail working closely with smart contract drafters or simply gaining a thorough understanding of the implications of smart contracts.
How Lawyers Can Brace Themselves for the Blockchain Revolution
Despite some lawyers’ fears, blockchain will not spell the end of the legal profession. Attorneys who adapt can carve out new niches for themselves as blockchain technology becomes more widespread. From reassessing intellectual property rights to drafting smart contracts, blockchain technologies will serve various aspects of the legal industry in the near future.
This article first appeared in Law Technology Today on 10/9/2018!