Coding Trust – Blockchain Contracts and the Law of the Future

New research and enforcement technologies are changing the role that lawyers play in the corporate world.

The Law

People can be pretty terrible. We lie, cheat and steal when given the opportunity, so over time we’ve developed a ton of rules to keep each other in check. In the business world lawyers play a key role in creating and managing the enforcement of many of these rules through contracts and litigation. They act as trusted third parties who know how to interpret our complicated legal code.

That legal code is currently stored in lengthy text documents that, until recently, often resided in physical legal libraries. Corporations rely on in-house lawyers or large firms to help them stay on the right side of the law and execute their contracts appropriately. However, new research tools and trust-building technology are threatening to shake this up over the next decade and may fundamentally change the way businesses think about their “legal team”.

The Tech

Two different kinds of technology are shaping the future of the legal profession.

The first is new software that makes it faster for lawyers to search and consolidate information about legal precedent or an active case. Smarter research tools may accelerate the consolidation of labor that’s been occurring in the legal industry since the 1970s, when technology like the Xerox copier changed the speed at which drafts were created. As editing became easier and digital documents revolutionized the nature of litigation research, legal secretaries and junior lawyers became less important. Now a single person often creates and reviews their own contract drafts. In litigation there may be only one senior lawyer supported by a small number of junior staff using research programs like Lexus Nexus and Relativity to quickly scan prior rulings and vast volumes of case documents.

Just as Lexus Nexus has made legal libraries, once a must-have for prestigious firms, extinct and word processing eliminated the functions of many secretaries, junior staff should watch out for natural language processing programs, like IBM’s Watson, as they take on a large role in the research phase of legal cases.

The second type of technology makes it easier for two parties to trust each other in the absence of a third-party enforcer. Blockchain technology enables information to be stored in an uneditable format that is only accessible under the right conditions. This secure system of managing information can be used to code self-executing rules in a way that ensures neither party has the upper hand in the way the rules are enforced. This means that a contract requiring payment on receipt of goods could automatically enforce payment terms (eg, a bank transfer from Company A to Company B) without involving any active choices on Company A’s part (payment triggers when Company B’s inventory system records receipt of goods).

Blockchain technology allows records to be collectively owned and managed across a network. Image courtesy of WSJ.
Blockchain technology allows records to be collectively owned and managed across a network. Image courtesy of WSJ.

Near term use cases for blockchain include smart financial instruments, where terms can be easily baked into the platforms used for trading bonds or derivatives. Elevance and R3’s Corda platform both promise to reduce legal friction in finance, and this April Barclay’s announced that it is working with the ISDA to make this a reality. With secure code executing across a peer-to-peer network of databases, the “trust” function that a legal team currently plays (analogous to the role of AliPay in ensuring digital trust in China) becomes a little redundant. Once more systems are fully digitized like our financial markets, the opportunity for blockchain contracts increases. A couple in Singapore even recorded their prenup on blockchain this June, and startup Attores is encouraging more people to submit their own “social contracts”, digital certificates, and tenancy agreements to its platform.

The Future

Lawyers aren’t known for their lightning-quick adoption of new tech. Many of these changes will be adopted relatively slowly in this conservative industry. It is, however, important to consider the implications of relying more on algorithms to create and execute the terms of our contracts. Without teams of secretaries, junior lawyers and research assistants involved, the burden of proofing falls on a single senior lawyer. There will also be fewer checks for inconsistencies once contract code goes live. Perhaps most dangerously, coding errors and cybersecurity threats could wreak damage when contract rules are enforced instantaneously.

It’s not all downside though. As expensive head count is reduced legal services become less expensive, and some of these new coded contracts may even reduce the level of litigation that’s pursued to punish parties for failure to comply with a set of terms. We may start to use our lawyers as product managers for contractual coding platforms that make it easier and easier for everyone to have cheaper access to simply enforced legal tools. (768 words)

Works Consulted

A special thanks to G. Cooke and P. de Lucio for their expert legal opinions. Until the robots win, we’re lucky to have them watching out for our best contractual interests.

Coy, Peter and Olga Kharif. “This is Your Company on Blockchain.” Bloomberg Businessweek, 8/25/2016.

Kharpal, Arjun. “Barclays used blockchain tech to trade derivatives.” CNBC, 4/19/2016

Norton, Steven. “CIO Explainer: What is Blockchain?” The Wall Street Journal, 2/2/2016.

Stark, Josh. “Marking Sense of Blockchain Smart Contracts.” Coindesk, 6/4/2016.

Withers, Kate. “Smart Contracts: Opportunities and Legal Risks in FinTech.” The National Law Review, 11/8/2016.

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5 thoughts on “Coding Trust – Blockchain Contracts and the Law of the Future

  1. Great topic! The blockchain enables self-enforcing disintermediated contracts and a public general ledger with records of every transaction. This increases reliability and transparency. But what problem does it solve? Taking the example of financial contracts – is trust an issue? As a trader, it’s in my best interest to be honest when executing my contracts if I want to keep trading. Indeed, the penalty for dishonesty is to be cut off from the system.
    I’m also concerned about contract flexibility in such a system. I have many friends who work in trading and they tell me that last-minute changes to derivative contracts are a recurring event on the trading floor. How can I implement such changes in a world where contracts are set in stone through the blockchain?
    More broadly – what are we achieving? Replacing lawyers with coders? It feels like we’re just shuffling the cards around. You did a great job of outlining the risks: The blockchain may be a solid and elegant technology, however, crap in crap out still applies – coders can make mistakes. Finally, cybersecurity threats are an entire new risk we must deal with (just ask the guys at Ethereum: http://www.cbc.ca/news/technology/ethereum-hack-blockchain-fork-bitcoin-1.3719009 )

  2. Great post, Tatiana!
    Indeed, as an ex-lawyer, I agree Law is one of those areas where technology has found the most resistance. The advances of blockchain, however, may generate impacts irrespective of lawyers’ wishes, as I see its use mainly in contracts between unequal parties. Often, people do not have the resources to pay for a good contract lawyer and end up subject to unilateral terms enforced by big companies (banks and insurance companies are the most common cases). Blockchain may, as you mentioned, relieve the weight of that upper hand.
    Regarding reviews of legal documents and the search for applicable precedents, the technology may also exert fascinating results. One of the main functions of a junior lawyer (besides serving coffee and taking copies) is, in fact, doing research. Being removed from this duty, I wonder what consequences this will have on the upbringing of our future lawyers. How are they supposed to learn? In losing their current functions, is there a chance these lawyers will actually start drafting documents earlier on their careers? I seriously believe the Law industry will be severely disrupted by development brought about through digitization.

    1. Thanks Ricardo – I’ve been thinking about the talent pipeline problem in the context of other service-based businesses as well. For example, as more smart analytics startups take over the roles that junior consultants have traditionally played what opportunities are there to understand the building blocks of analytics? I can’t tell how much of this is a “we suffered through it so you should too” kind of problem, but I would be interested to understand how on the job training changes when teams become more top heavy and younger talent is asked to take on responsibilities without having to roll up their sleeves and do thinks like basic research.

  3. Interesting topic Tatiana! As stated, this system is the perfect solution to the research component, but I found it especially interesting in ensuring trust between two parties through coding self-executing rules in a way that ensures neither party has the upper hand in the way the rules are enforced all while reducing cost through automation. The major issue I see here, similar to what we discussed during the IBM Watson case is that the success of this system (like any other that is digitizing) is contingent upon people submitting their own “social contracts”, digital certificates, and tenancy agreements to the platform, thus reducing the system’s potential if limited information is uploaded or increasing the risk of rubbish in = rubbish out.

  4. Thanks for the article. It is very interesting indeed to find out that blockchain technology could be used in evening out the information available and ensuring that the contracts are not touched, creating a trust element. Furthermore, I agree that in certain conditions, Blockchain could help the enforcement of contracts i.e. when goods get delivered and the payment goes through. Nonetheless, I would be interested to find out more about technology that could enforce contracts in conditions where its not as straight forward as the delivery of a good, or when the metrics are more complex and require a human to determine whether the milestones are being reached – in the world of services for example. I am not a lawyer, but from my experience the greatest challenge in contracts is not the contract in itself, it is the detractor. Often a detractor has the power and resources to buy time (delay what he or she should pay) and to take the chance to squeeze the less powerful party into accepting a settlement because the latter does not have the resources to enforce it. Please check this link out about contract enforcement: http://www.doingbusiness.org/data/exploretopics/enforcing-contracts/why-matters. I therefore do not see how Blockchain technology could step in to enforce contracts, it can facilitate certain trading contracts but not all. Nevertheless, I agree that the biggest problem is the implications of decentralization of contract enforcement with input and coding errors, but decentralization is also delegitimization of the central authority . However, I disagree that cyberthreats could affect Blockchain technology, as Blockchain technology is less prone to cyber threats.Please check this link: https://script-ed.org/article/blockchains-and-online-dispute-resolution-smart-contracts-as-an-alternative-to-enforcement/

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