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What Is Blockchain and Why It’s Important for Law Practice

You have probably heard of blockchain. If you didn’t, I am sure you’ve heard of bitcoin. There is a chance you have also heard that blockchain or bitcoin are the next big thing. I believe that blockchain is the next big thing, and the purpose of this essay is to explain why and to show blockchain’s significance for lawyers and law practice.

Blockchain is an escrow of conclusive transaction evidence. That’s it. Don’t worry about hashes, blocks, distributed ledger, encryption and so on for now. Those are implementation details. All you need to know as a lawyer, a banker, a creditor, a vendor, a buyer, and a debtor is that blockchain eliminates transaction disputes. Accordingly, blockchain eliminates litigation over transactions in its escrow and automates enforcement. It’s magic, really, and no lawyers are involved. And a whole segment of the world economy has transacted through blockchain for a few years already—by buying and selling bitcoin.

Blockchain was impossible before the Internet. Lawyers were, actually, the humanity’s original effort to build blockchain. They are trained, vetted professionals with a lot to lose who sell trust and escrow services. Professional trustees are another example. The problem with lawyers is that they are human. It means two things: (1) they make mistakes or lie; (2) they are not scalable.

For a trusted conclusive transaction evidence escrow to be the next big thing, it needs to work over any distance, across all borders, with any amounts or assets, without errors or fraud, instantly and with negligible transaction fees. DOES NOT SOUND LIKE LAWYERS, especially the no-transaction-fees part.

(I am a lawyer and I like lawyers. I believe blockchain is good for lawyers because it means liberation. Freedom from trivial cases that waste lawyers’ enormous creative human potential on what machines can do well enough. One of the promises of evidence and dispute-resolution automation technologies like blockchain is that lawyers can focus on truly controversial cases that advance the law such as liability for self-driving car accidents or the right of governments to put people on secret black lists. If you are a lawyer, would you agree that in your practice many cases are controversial only because the opposing counsel is sloppy, did not do enough research or has a giant ego?)

Bitcoin is an application of blockchain and a kind of value transacted through blockchain. It is value by scarcity and agreement, not by nature—just like dollars or gold. Yuval Noah Harari, the author of a brillian book “Sapiens,” would also probably call assets such as bitcoin, gold, dollars, or law degrees “imaginary.” It means they don’t really satisfy our physical needs directly. But by agreement and complete social faith and due to the natural or artificial scarcity of the assets, we exchange these assets for food, shelter and other true necessities.

There are only two fundamental differences between bitcoin and national currencies: (1) bitcoin is issued by an algorithm rather than a central bank so predictable machines rather than arbitrary humans control the “printing” and the total amount of bitcoin; (2) creditors can sue you if you present bitcoin to settle a debt denominated in national currency but if you present the currency it will be a defence to the creditor’s suit under some form of a “legal tender” statute (Currency Act, RSC 1985, c C-52 in Canada; 31 U.S. Code § 5103 in the US).

By the way, I don’t think blockchain is a “fundamental” difference between bitcoin and national currencies. In theory, nations can switch their monetary systems to blockchain. Technically, nothing even stops nations from replacing central banks with algorithms (no, lawyers will still be human). This will have an ENORMOUS effect on transparency, taxation, and economic activity. But I am digressing, which just shows how deep this subject is.

So back to blockchain being an escrow of conclusive transaction evidence. A bitcoin transaction is a pair of entries in two parties’ digital ledgers: one debit and one credit. That’s how bitcoins change hands. Each ledger is a list of debits and credits with a current balance. Sounds undistinguished? Well, imagine the ledgers are the bank accounts at the same time. No reconciliation needed. Making an entry moves the actual assets. And it’s near instant, near cost-free, regulation-free, pseudonymous or potentially anonymous, direct, machine-vetted to the point of near guarantee against fraud. The evidence of the transaction is conclusive and guaranteed. Making entries (contract) causes automatic transfer of assets (enforcement/performance). Conclusive, transparent, secure evidence eliminates disputes over parties, amounts, and direction of transfer.

Of course, disputes over the background facts are still possible. If the bitcoin transaction was a part of a larger deal the rest of which originated and continued outside of blockchain, you’re back in Kansas. Bitcoin is the simplest application of blockchain. But future applications will move complete deals on to blockchain.

The word “deal” will mean something different just like the word “handshake” means something different in the networking world. Deals will be like the financial electricity. They will flow without human intervention and potentially between non-human parties: machines will enter into agreements, pay, and deliver at machine speed. Blockchain is the first act of that future machine-ready financial infrastructure that is so hard to imagine right now because of the baggage we carry with words like “deals,” “transactions,” “money,” “lawyers.”

Blockchain will be lawyer-free by design. Lawyers will focus on what they do best: structure unprecedented human affairs, translate human facts into legal system/machine-readable contracts, and litigate truly controversial cases. Great for lawyers, great for the world.

Comments

  1. It appears to the consumer, which is me, or a business owner, that we are to believe in the infallibility of the algorithm or the “block chain”.

    Someone owns the blockchain (or the company owns Bitcoin) if this is to happen.

    Algorithms are created by human beings –even if there will be no transaction fee. Who will own this algorithm?

    We need this translated in plain language, for the consumer on what they are going to be told…en masse. Not lawyer to client.

    So let us try translate this: that means ecommerce software platforms, like the Canadian wonderstar, Shopify should not be charging any additional fees for transactions and an e-sales for products listed online on Shopify, which right now a major bank do levy a service fee, would not happy? That a Shopify business owner does not need to go through a major bank to ensure deposit of payment into their bank account?

    I’m lost already. And I’m a test for any consumer, business owner who asks questions.

  2. This is really well done. Milt Capps, Nashville, Tennessee, USA

  3. As a technologist, I am aware that there is something that a blockchain cannot do that a lawyer can do. I am interested in a lawyer’s comment.

    A blockchain cannot forget. Suppose that a court order that all records relating to a particular matter be destroyed or expunged. If some of those records are in a blockchain, none of the participants in the blockchain will have the ability to remove those records. It does not mater if it is something as innocuous as a certificate of authenticity or as illegal is child pornography. Even if the court

    Any speculation on what would happen if a court orders records to be destroyed that are contained in a blockchain? Even if hacker tactics are used, it would require the cooperation of most or all (depending on the blockchain) participants in the blockchain to alter an entry and such an alteration would invalidate everything in the blockchain that follows the altered entry.

  4. Mark, it’s a great question.

    A blockchain is a hive mind. In blockchains that are worth talking about (such as bitcoin or ethereum) thousands of participants make up the respective hive minds.

    What is and is not on the blockchain is a result of the hive mind’s computed consensus. The computation follows this particular blockchain’s rules. Therefore the blockchain’s state depends on the software running the blockchain as well as the actual participant-triggered transactions altering the blockchain ledger.

    A third party (such as a court or a government) can compel a change in the blockchain state in one of two ways:

    1) compel enough individual blockchain participants to enter into transactions that will generate the desired state change (this will still not alter the existing ledger entries), or

    2) compel the publisher of the blockchain software to change consensus rules to cause the desired change in blockchain state and create a new version of the blockchain—also known as a “hard fork” (this will still not alter the existing ledger entries in the original blockchain version).

    So it is impossible to erase the data already on the blockchain, period. Blockchain works in exactly the same way as bittorrent file sharing. No one has been able to remove files from bittorrent networks by force because they are spread out across thousands of computers.

    But it is possible to obscure the data already on the blockchain by compelling a hard fork and creating enough reasons for the majority of the participants to choose the new version of their blockchain. The old version would become a separate blockchain that can support its own transactions but if it’s not popular it will die.

    This last example shows that if governments accept blockchains as evidence admissible in regulatory or court proceedings, another way for the government to deal with the blockchain’s immutability is to withdraw recognition from non-forked blockchains or an entire particular blockchain (especially if alternate competing blockchains are serving the same transaction space).

    This complexity is a result of the blockchain’s original design decision to enable transactions among equal parties unable to compel each other and thus adulterate blockchain’s transactions. This is the foundation of the trust-less nature of blockchain and this is what makes blockchains so powerful. Government (or “private blockchain”) applications will be hard because an introduction of a party with coercive powers undermines the central idea of blockchains as transaction vehicles with zero trust issues.

  5. Your answer makes some assumptions that are true for bitcoin, but not for some other blockchain technologies. I am currently planning to create a blockchain to for the supply chain of a large multi-national manufacturer with suppliers and customers across the globe. The technology being contemplated does not support forking.

    It does support the partial encryption of transactions so that some information in the transactions is visible only to a limited set of parties. This makes it impossible to delete information by just creating a copy of the blockchain that omits the record that whose deletion has been ordered. Because copies of the blockchain will be owned by different entities based in different countries, it would not seem that any court on earth would have enough authority to accomplish the deletion of a record in the blockchain.

    However there are additional layer to the problem that courts could try to work through. In some cases, copies of the block chain may be hosted by a third party. The third party may be based in any country. The physical location of the blockchain copy may be in a single data center in one country or it can be implemented in such a way that the copy of the blockchain is itself spread over data centers in multiple countries.

    In these cases, it would appear that deletion is a practical impossibility.

  6. Why does it matter that entries can’t be deleted? Maintaining a database of criminal proceeding outcomes isn’t really one of the practical applications of blockchain technology; it’s a seperate, distinct matter. Cryptographic audits are hyper-breakout next-level technology. Some applications that come to mind are: contract enforcement, government transparency, and tamper-proof elections.

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