Blockchain has the potential to revolutionize legal. Here’s an in-depth look at just how.
No, that’s not a typo. Before you swing into widespread panic mode thinking that you’ve been HACKED, realize that the HASHED string above translates to: ALA’s Introduction to Blockchain!
It’s something we’ll need to start getting familiar with, as it has the potential to impact the legal industry. And ALA is helping to lead the effort — it’s the first membership association to become part of the Global Legal Blockchain Consortium (GLBC), joining more than 30 large companies, law firms, software companies and universities. The GLBC exists to develop standards to govern the use of blockchain technology in the business of law.
“Blockchain is a game-changing technology for the legal industry and we are excited to be a part of shaping its development for the industry,” says ALA Executive Director Oliver Yandle, JD, CAE.
Before we get into what it means for legal, let’s take a step back and talk about blockchain in a very simplistic way. I think of blockchain as a freeway or interstate — it’s a conduit for transactions, somewhat like telephone lines used to be for telephone calls. The calls could not happen without the line, but the line in and of itself was pretty limited in function.
So, just as sophisticated digital phones now allow us to see who is calling, route calls to voicemail and partake in video calls, applications that operate using a blockchain are being conceived and built to maximize the use of this technology. Many people believe this technology provides a platform to revolutionize all sorts of things, from tracking land purchases to pinpointing from which farm E. coli-contaminated produce originated. And because transactions are conducted without a controlling authority in a decentralized manner, many efficiencies and cost savings can be achieved. Simply put, results can be better, faster and cheaper! But those types of uses are just the tip of the iceberg.
You may have heard blockchain referred to as distributed ledger technology, or DLT. Using the internet, computer nodes participating in a peer-to-peer network receive an exact copy of an electronic ledger on which transactions or information has been encoded. Each time new information or new transactions are submitted to the ledger, all network participants receive an exact copy of the information.
Unlike a database where existing information can be overwritten, information on a blockchain cannot. Also, there is no “master copy” of the ledger held by some third party or central authority such as a bank or governmental office. Instead, each network participant owns a master copy.
In a public blockchain, network participants compute complicated algorithms in order to be awarded the opportunity to commit the next block to the blockchain. If the solution to the algorithm is trusted and determined to be a correct answer by a consensus of group participant nodes, participants approve it by digitally signing and timestamping it. The information is then appended in a new block to the information already in the ledger. This process creates a chain of blocks of information or transactions. Each network participant receives an identical copy of these blocks so there is complete transparency of this trusted information. Participants can leave a network for long periods of time, and should they subsequently rejoin it, they receive an exact copy of the blockchain in its current state.
Because transactions are conducted without a controlling authority in a decentralized manner, many efficiencies and cost savings can be achieved. Simply put, results can be better, faster and cheaper!
Information is secured on a blockchain in a variety of ways. Also, there are various types of blockchains used to grant permissions to access the information contained on them.
First, the information goes through a cryptographic process, creating a digital fingerprint. Using SHA256 hashing technology from this online hash generator, it is easier to understand the hashing process.
As a very basic example, compare the hashes of these simple, yet slightly different, versions of information contained in the items below:
As you can see from this process, changing the text string in items 1, 2 and 3 in the smallest way creates a very different hash (or digital fingerprint). Hashing item 4 (a combination of items 1 and 2) results in yet another new hash. Hashing is used to link or chain together the blocks of information on a blockchain. As transactions are linked to the chain, any attempt to change the data in a prior block causes a break in the chain and means that each subsequent block in the chain has to be rehashed. The block where a change is attempted is highlighted to indicate that rehashing of the block and all subsequent blocks is required — an easy way to identify that a change was attempted. In transaction 5, attempting to change the “!” in transaction 4 to a “#” creates a very different hashed result item 5.
Because each network node participant can sign off on each new transaction before it is saved to the blockchain, the hashing allows for easy identification of an unauthorized attempt to edit data. Network participants decline to approve the edits and the original data is secure. Additionally, each transaction is timestamped for further authenticity, making the contents on the blockchain permanent, indestructible records. This hashing process makes the chain even more secure from intrusion and basically immutable. (For additional information about hashing, check out this video.)
New blockchains are being launched on a regular basis, and many being developed today are focused on specific industries. (Even within a given industry, blockchains tend to be developed with specific uses in mind.) As you might suspect, the financial services industry has been working on understanding and exploring adoption of this technology for quite some time. In the legal industry, for example, you’ll find Integra Ledger, which is governed by the GLBC. Other examples of blockchains include Corda, Bitcoin and Ethereum, to name just a few.
Over the last two to three years, Baker Hostetler has been investing a great deal of time to understand how its clients’ may deploy blockchain as well as understanding how it may use blockchain for its own business needs.
“Law firms may want to think about where they are best equipped to help their clients with this technology,” says Bob Craig, Chief Information Officer at Baker Hostetler. “Should a firm be involved in helping clients in the early design stages of developing blockchain-enabled products, particularly ones involving smart contracts? Or is the firm better suited to assist clients with resolving problems that will occur inevitably once a product is deployed to customers?”
From a client’s perspective, Josh Rosenblatt — BTC Inc.’s Senior Vice President and General Counsel — notes that he would like for any law firm representing BTC to accept payment in cryptocurrency, especially firms handling international work. He also believes the use of blockchain for document collaboration and management will deliver great efficiencies for clients. Other use cases he noted for law firms include evidentiary, establishing proof of existence, escrowing of funds and payroll processes.
As with most other industries, legal’s goal for use cases is to work better, faster and cheaper. Use cases are endless, in my opinion, and many are in development for the legal industry. Here are some examples of big developments that will likely impact the legal industry:
Remember from our phone analogy that the blockchain itself doesn’t really do anything. That said, distributed applications are being conceived and created to promote easy adoption of the blockchain technology in the legal industry. A few examples include:
The world’s fastest blockchain claims to process 1 million transactions per second. For perspective, Visa claims to be able to process roughly 24,000 transactions per second.
And let’s not forget the implications for ALA’s Uniform Process Based Management System (UPBMS). Members of the GLBC are required to initiate a proof of concept (POC) project on blockchain technology. A blockchain POC evaluates an idea for a real-world application of blockchain technology to a legal challenge.
In early 2018, I competed on Team ALA in the Global Legal Hackathon, where we focused on how the UPBMS task classification system can play an integral role in capturing administrative and operational data for the many processes and tasks in delivering legal and operational services. The team programmed a bot to interface with various collaboration applications. Using the bot, we assigned UPBMS codes to these actions, then committed the data to a blockchain, initiated a workflow and created data for time entries. Nicknamed “Lexi,” our “assistant” became ALA’s proof of concept for membership in GLBC.
“I now see how powerful and valuable the UPBMS codes can be to help our legal organizations measure and analyze administrative processes, so we can become more efficient in the management of our operations. I believe there is broad applicability of the code sets in all our legal organizations, regardless of size or practice focus,” says ALA President-Elect and Team ALA Leader James L. Cornell, Office Administrator with Shook Hardy & Bacon, LLP, in Washington, D.C. “Greater efficiency in servicing clients is a priority, and a differentiator for firms, so having data to inform decision making is definitely a competitive advantage.”
I believe blockchain is going to revolutionize the way we live. The legal industry has barely dipped its toe into this water, and new developments are being announced daily. The world’s fastest blockchain claims to process 1 million transactions per second. For perspective, Visa claims to be able to process roughly 24,000 transactions per second. It is hard to contemplate the potential impact of this technology.
Furthermore, with the removal of third parties and their processes that will no longer be necessary to conduct business, one can easily assume that commerce will be better, faster and cheaper. Legal must be there!