Blockchain for Lawyers

Blockchain for Lawyers

American Bar Association

By Andrea Tinianow, Esq. 

Chief Innovation Officer, Global Kompass Strategies

The recent cryptocurrency frenzy has generated much buzz about blockchain technology, and attorneys everywhere are scrambling to get up to speed on the underlying tech and its applications. However, rather than taking a deep dive into the bits and bytes, attorneys would be better served if they focus on how they and their clients can leverage the new technology, and prepare themselves for the risk, disruption, and opportunity that blockchain technology presents.

Blockchain networks, distributed ledgers and smart contracts enable a radically different way of forming commercial relationships and executing transactions. Attorneys in virtually all practice areas must now start to engage with the wider blockchain ecosystem and explore related issues to better serve their clients, and to ensure that their practices remain relevant. The most forward-looking attorneys will consider how to leverage blockchain technology to grow their practices.

The media, thought leaders and entrepreneurs describe blockchain technology as the most important disrupter since the Internet.

Now that blockchain has entered the mainstream, attorneys need begin to understand and address the vagaries of this technology and the key issues that will impact their clients’ businesses, as well as their law practices. How do you best help your clients navigate the blockchain tech terrain, steering clear of minefields and jumping on the brightest opportunities? Finally, and for the most ambitious attorneys, how do you establish blockchain legal practices that set you (and your law firms) apart and attract high value and exciting legal clients and matters?

This article seeks to provide a foundation for this exploration, including a roadmap with guideposts on significant areas for growth and exploration as well as an accompanying toolkit of resources, including links to articles, and suggestions for experts to follow on LinkedIn and Twitter.

Getting Started
You don’t have to be a technologist to grasp the transformative nature of blockchain technology, you just need a little imagination. Picture a Google document that several parties to a transaction are updating at the same time. Now, imagine the very same scenario, but this time, Google is not involved. Instead, the parties’ computers are connected directly via a protocol (software) that both cryptographically secures the information and also enables the parties to review the document in real time and sign off without the need for a third-party administrator or trustee. Once signed off, the document is secure and cannot be changed unless all interested parties have approved it. If you can imagine that, you can imagine how blockchain technology will radically change the way we form commercial relationships and execute transactions, among other things.

Blockchain technology allows parties who normally would not trust each other to transact business directly, securely and efficiently, without the need for a trusted third-party intermediary. The parties review relevant information, including actual legal documents, online in real-time. In fact, every attempt of any party to change something in the shared system is recorded. When the parties approve the terms of the transaction, a permanent and immutable record of the deal is created, including an audit trail of who did what and when. The system can be designed so that only parties who are authorized can review and participate in the transaction. Once agreed upon, a permanent record of all that transpired is generated that cannot later be changed or otherwise altered.

The above illustration employs both distributed ledger and blockchain technologies. Although the terms are often used interchangeably, there is a distinction. While there can be numerous variations, generally with distributed ledger technology (DLT) there is no central administrator. Instead, information is replicated and shared among many different computers (known as “nodes”) that are linked together in a network. Each of these nodes validates the information in a proposed transaction and all nodes together arrive at a consensus regarding the validity (or lack thereof) of the proposed transaction before any data is stored. The term blockchain technology generally refers to a type of distributed ledger database that generates a growing list of append-only transaction records that are linked together cryptographically, which creates protections against later tampering and revision.

Smart Contracts

Another important related concept is smart contracts. Perhaps no tech terminology has caused so much confusion, especially for lawyers. In blockchain parlance, smart contracts do not refer to legal contracts in any traditional sense. While a standard legal contract outlines the terms of a commercial relationship (usually one enforceable by law), a smart contract allows for the enforcement of some or all of the terms of that relationship using code that is “locked” into a blockchain record. In its simplest terms, smart contract code is decentralized software that allows for the automation of commercial relationships.

Consider when you pay your bills online. You input specific information into your bank’s interface, including the name of the payee, the amount to be paid, and the payment date. When the appointed date arrives, so long as you have enough money in your account, the bank automatically makes the payment using the information you input earlier. Of course, the online banking interface is not a smart contract because it is not connected to a distributed ledger (meaning it is dependent on a single party – your bank – to ensure that it actually does what you instructed). In addition, in this example, the money does not go from your bank account directly to the payee. Instead the money travels through multiple channels before it gets to the intended payee. But this gives you an idea of how a smart contract might work if it were part of a distributed ledger.

Smart contracts can be simple, or complex. The French insurance company, AXA utilizes a fairly straightforward smart contract to offer flight insurance. When an insured’s flight is more than two hours late, the smart contract stored on a blockchain is triggered and a payment is made automatically to the insured.

A more sophisticated use of smart contracts is the stock ledger that Symbiont, the smart securities blockchain company, has developed. When shares are issued to stockholders via a stock ledger, the shareholders cannot sell or move the shares unless they have first satisfied the criteria related to the shares set forth in the corporation’s governing documents. So, for example, if the company’s stock has a two-year holding period and a shareholder attempts to sell her shares before the end of two-year period, the shareholder will be unable to move the shares to another stockholder. Similarly, if the company is authorized to issue 10,000,000 shares, the company will not able to issue more than 10,000,000 shares.

Public vs. Permissioned Blockchains

Not all blockchain networks operate in the same way. Some blockchains are public, like Bitcoin or Ethereum, which allow anyone to download the software and connect to a single global network. Other blockchains are private or “permissioned,” which means that only parties that have been vetted can join as a node on the network. And, just because something is called a “distributed ledger,” that does not mean the network is truly decentralized. A truly decentralized distributed ledger means that all nodes on the network have exactly the same rights, and no single node has super authority to make changes to the information once it has been recorded to the ledger. On some systems, certain nodes serve as “administrators” or “trustees.” These nodes have been granted extra power and may have the ability to override what the other parties to the transaction have agreed to. They can change the rules. They can usually see all private data. And, even though they may be, and often are, a trusted party, their presence deprives the blockchain of truly decentralized status.

Blockchain in Practice

Opportunities for attorneys seeking to provide guidance to clients in the blockchain space and examples of how attorneys can deploy blockchain technology to grow their practices.

Working with Blockchain Entrepreneurs

Blockchain entrepreneurs will often come to you with a dream and not much more. There is a lot of (mis)information regarding blockchain technology, so prospective clients may have unrealistic expectations about what the technology can do. These entrepreneurs will need legal counsel on many fronts, including when fundraising through the sale of blockchain-based tokens is involved, how to raise money without running afoul of the regulations promulgated by the U.S. Securities and Exchange Commission (SEC) as well as several other state and federal regulatory bodies.

As the attorney providing guidance and support, an ideal way to service these entrepreneurs would be to convene a multi-disciplinary group in your firm, comprising attorneys from several practice areas, including: business, securities, intellectual property, and others. Ideally, your firm would develop a toolkit for blockchain (and other) entrepreneurs that leverages the firm’s strengths and could be customized for each client.

You will want to be creative and flexible when structuring a payment schedule. Perhaps your firm will be willing to be paid (at least in part) in cryptocurrency, like Bitcoin or Ether. Many blockchain entrepreneurs invested early in bitcoin and would welcome the opportunity to pay even a portion of their legal fees in cryptocurrency.

Entering into Business Transactions

Entrepreneurs are developing blockchain applications in almost every industry. No doubt, sometime soon, your mainstream clients will ask your advice about transacting business on a blockchain. They may ask for guidance on whether they should join a blockchain consortium, develop smart contracts to make their business more efficient or collaborate with others to generate new value and create new revenue streams by deploying blockchain technology.

Your clients may also ask you to help them to transact business via smart contracts. They may want to create a smart contract or work with one that has already been developed. You will need to first discuss the terms of the deal with your clients. Next, you will need to review the computer code in the smart contract to make sure that it accurately reflects your client’s expectations. Yes, lawyers (and/or their experts and/or colleagues) will need to be able to review computer code. They will need to consider the type of comfort they can give clients that the code correctly reflects the terms of a business arrangement written in standard legal prose. Of course, for the more enterprising attorneys and law firms, this could become an area of specialization which could, in return, become a source for referrals and additional fees.

Also, many new venture funds and hedge funds focused on blockchain and crypto-assets are seeking legal advice about structure, jurisdiction, etc. Lawyers need to be prepared for these opportunities. Perhaps this function overlaps within existing law firm expertise. All of the above also comes with tax implications, so attorneys should make sure to seek out taxation advice.

Here are key questions/issues to consider when advising clients considering blockchain:

• Is the blockchain public or private?
• If public, does your client know the identities of the parties to the transaction, or are they anonymous? If the parties are anonymous, help your client assess the additional risks that this could present.
• What is the mechanism for dispute resolution? Is it reasonable? It can be tricky to create effective dispute resolution mechanisms among parties who transact business anonymously.
• Is the smart contract a standard template or was it customized for the specific transaction?  Has a code auditing firm reviewed the code for bugs and other vulnerabilities?
• Will your client be paid in fiat currency or cryptocurrency? If your client is paid in cryptocurrency, you will need to consider issues related to protecting against swings in the value of the currency as well as money laundering considerations.

Distributed Ledger Shares and Forming a Corporation on a Blockchain

In the summer of 2017, the State of Delaware enacted legislation expressly authorizing corporations to maintain their corporate records on a blockchain, including its stock ledger. Other states are exploring or have passed similar or identical legislation.  Since that time, companies have begun to consider how to move their corporate records onto a blockchain. This is fertile ground for attorneys who wish to engage with blockchain-savvy companies.

Symbiont, for example, is developing a smart-contract application that lawyers can use to better manage their clients’ corporate governance activities through the entire lifecycle of the corporation, from incorporation to IPO. They can also use this platform as an opportunity to stay engaged with their clients and provide additional services that will lead to additional revenue streams. A number of other companies are developing suites of tools to help companies manage their business using blockchain tech.

Also, since Delaware’s legislation is geared toward new companies, traditional corporations that wish to maintain their corporate records on a blockchain will need to convert to a “distributed ledger share” model. Corporations will need legal guidance on how to do this.

You can help clients with this transition. If you position yourself as (and actually become) an expert, your clients will appreciate that you are staying current with the most innovative legal trends, and you will become a beacon to new clients that wish to take advantage of all of the benefits that accrue to companies that deploy blockchain technology.

Capital Formation

The immutability of a blockchain, coupled with the relatively easy access to capital through the sale of digital tokens (sometimes rather misleadingly known as “initial coin offerings” or “ICOs”, a term we seek to avoid) have been the impetus for many, many entrepreneurs to develop new, innovative blockchain-enabled applications in virtually every business sector, from banking and finance to healthcare to manufacturing. Behemoth Internet companies such as Uber and Facebook are facing challenges from competitors seeking to provide the same or similar services using blockchain-enabled decentralized business models.

Many of these blockchain-enabled applications utilize digital units (also referred to as tokens) that allow access to specific services, such as cloud storage or WiFi, or which can be exchanged for other tokens or digital currency. Notably, these types of tokens have often been bought not so much for the specific service associated with the offering, but rather for their speculative value, although the SEC and other regulators have been clamping down on this practice.

Nevertheless, because so many tokens have appreciated in value, there has been a torrent of token sales and increasing demand for new and different types of tokens. In fact, according to some estimates, about $5 billion in funds were raised through the sale of digital tokens in 2017. This phenomenon led SEC Chairman Jay Clayton to urge caution on the part of investors, compliance on the part of issuers and, significantly, a rebuke and warning to attorneys who advise clients regarding whether or not token sales implicate federal securities laws.

Sooner or later, clients will ask how they can raise capital through an “ICO”. The overarching question will be whether the issuance and the tokens constitute a “security” in any jurisdiction in which they are offered. This is not always clear cut. The Howey test is the standard for making a determination of whether a particular commercial arrangement constitutes an “investment contract” and, thus, a security. Recent cease and desist orders, testimony and statements from the SEC, the U.S. Commodities Futures Trading Commission (CFTC) and state enforcement agencies provide some guidance about issuing tokens.

When you get your first token sale transaction, don’t go it alone! Consult with one or more blockchain attorneys who have substantial experience working on token sale matters. They can serve as “sherpas” for attorneys who are at the beginning of their journey in this space.

Clients may also turn to you for advice as they consider investing in token offerings. You and your client will want to discuss appropriate corporate governance models and investors’ rights with regard to token offerings.

Blockchain Technology and the Finance Sector

The financial sector would like blockchain technology to fix the problem of duplication and reconciliation of administrative processes and data. The adoption of a distributed ledger solves inefficiencies that financial institutions face in the coordination of their back-office systems. Some estimates of financial market cost savings with blockchain are $20 billion per year.

For example, in the syndicated loan market, a dozen banks will receive the same fax about a loan. Each bank enters the same data contained on that fax into their internal ledgers, and then they reconcile any discrepancies. Blockchain technology solves the need for this duplication-and-reconciliation process by creating a distributed ledger: a single record of financial transactions that are shared among multiple institutions.

One solution might be to appoint a single entity to maintain a master set of records for the entire market to use. However, this third party would then be trusted to keep all records accurately, securely and confidentially. A blockchain, by contrast, allows multiple parties to share records in a manner that all can trust as valid. For a distributed ledger to work, a distributed, decentralized system is needed, one that multiple, independent parties can use to share information — but where there is a single source of truth.

Investment management company Vanguard announced in December 2017 that it is collaborating with the Center for Research in Security Prices and Symbiont to simplify the index data sharing process through blockchain. Investment managers will be able to use the blockchain-enabled platform to instantly distribute, receive, and process index data, to achieve better benchmark tracking and cost savings.

Blockchain solutions are also being developed for structured finance. Blockchain technology in the securitization market could lower risk and lead to greater investor interest, according to a study conducted by Deloitte, resulting in improved prices, volume, and spreads. The report explains that “[with] better and more transparent information, regulatory compliance could also be simplified and market failures would become less likely.”

General Business Advice, Advising Boards

Many attorneys act as sounding boards for their clients on general business issues. Other attorneys serve as directors on their clients’ corporate boards or advise corporate boards of directors. Discerning attorneys add value when they assist their clients to consider all of the issues and opportunities that blockchain technology presents. The business opportunities would include using blockchain technology to develop bold, new revenue streams, platforms, and ecosystems. The most concerning and prevalent risk that traditional companies face is that of disintermediation, especially for companies that create value for their customers by serving as the middlemen in business transactions.

Last year, overall funding for blockchain projects exceeded $6 billion. With each passing day, entrepreneurs and mainstream companies are considering how to use blockchain technology to monetize illiquid assets such as oil and gold ore, even the Rain Forest in Brazil, and leverage and revitalize assets which had long been dormant, such as the KodakCoin, which will allow token holders to store photos on a blockchain. Blockchain technology is being used to determine the provenance of diamonds; track vehicle titles; make supply chains more efficient; and healthcare more cost-effective with better outcomes for patients; and even address environmental risks such as biodiversity loss and ecosystem collapse; and the list goes on ad infinitum.

Attorneys need to recognize that blockchain technology has entered our daily consciousness. It is shaping the way we think and talk about not just business transactions, but everything that we touch that is relevant to our daily existence, from the food we eat, the products we consume, the way we interact with government, to the way we engage with social media. Attorneys who begin to explore blockchain and become part of the conversation will be ahead of the curve.

In-house Applications

Enterprising lawyers and law firms should explore how to deploy blockchain tech to create new efficiencies and revenue streams within and across their entire law practice. Attorneys across most law practices work on documents collectively with multiple parties. Reconciling versions can be a time-consuming and costly process. This is exactly the type of activity that blockchain technology addresses elegantly and efficiently.

Here are additional blockchain applications that attorneys should take note of:

• The city of Berkeley plans to issue a public bond using blockchain technology.
  
• Burlington, Vermont is developing a blockchain-enabled land registry.
• Registries are being developed for the blockchain to establish ownership and management of intellectual property, including Ujo Music where musicians can publish their music on the blockchain and consumers pay to download the song with Ujo tokens. Another is KodakCoin for photographs.
  
• Innovative applications are in development to bring greater transparency, security and efficiencies to supply chains across many sectors.
  
• IBM and Maersk are developing an electronic shipping platform.
  
• Boeing is examining the use of blockchain for resolving aviation cybersecurity
  concerns.
  
• Real estate transactions are moving onto the blockchain. Greenbriar Capital, a Canadian real estate developer launched Realblock, a blockchain enterprise to address the complex legal, title, due diligence and escrow aspects of a complete transaction, solving a comprehensive solution by incorporating all the players in the transaction.
  
• A global public utility for self-sovereign identity is in development which will become a lifetime portable digital identity on the blockchain that does not depend on any central authority and can never be taken away.

How to get Started: The Blockchain Toolkit

By Andrea Tinianow, Esq., Chief Innovation Officer, Global Kompass Strategies

Use these resources to get up to speed on blockchain technology and applications, and to follow the latest developments.

Books

Burniske, Chris and Tatar, Jack. Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond. New York: McGraw-Hill, 2018

Casey, Michael J. and Vigna, Paul. The Truth Machine: The Blockchain and the Future of Everything. New York: St. Martin’s Press, 2018

De Filippi and Wright, Blockchain and the Law: The Rule of Code. Harvard University Press, 2018

Mougayar, William. The Business Blockchain: Promise, Practice, and the Application of the Next Internet Technology. New Jersey: Wiley, 2016

Podcasts

Appetite for Disruption: The Business and Regulation of FinTech by Troy A. Paredes & Lee A. Schneider.

Blockchain Insider by 11:FS. A dedicated podcast specializing in Bitcoin, Blockchain and distributed ledger technology (DLT) hosted by Simon Taylor and Colin G Platt.

CryptoRadio. A podcast about all things blockchain, bitcoin and crypto investing, created by CoSyndicate, a gamified platform for blockchain investors.

UnChained. Host Laura Shin, an independent journalist covering all things crypto, talks with industry pioneers about how crypto assets and blockchains will change the way we earn, spend and invest our money.

Player FM. “Blockchain Podcasts.”

 

Newsletters

“Bandman Advisors.”  Monthly newsletter from Fintech and Regtech expert Jeff Bandman.

“Blockchain News.” Cointelegraph’s blockchain blog featuring news, prices, breakthroughs and analysis.

“Blockchain News.” The latest news and opinion on blockchain and distributed ledger technology, now owned and operated by Token Report.

“CoinDesk.” A digital media, events and information services company covering the crypto asset and blockchain technology community.

“CrowdCrypto Newsletter.” Weekly newsletter published by securities attorney Robin Sosnow, whose focus is on equity crowdfunding, startups, legal innovation, and blockchain technology.

“Medici.” Newsletter from Medici, an independent newswire and information source for the worldwide financial technology community covering payments news and industry trends.

Organizations and Consortiums

Enterprise Ethereum Alliance. The Enterprise Ethereum Alliance connects Fortune 500 enterprises, startups, academics, and technology vendors with Ethereum subject matter experts, in order to define enterprise-grade software capable of handling complex, applications at the speed of business.

Wall Street Blockchain Alliance. The WSBA describes itself as a neutral, unbiased steward of education and cooperation between Wall Street firms whose mission is to guide and promote comprehensive adoption of distributed ledger technology across financial markets.

Chamber of Digital Commerce. The Digital Chamber is a member-based organization whose mission is to promote the acceptance and use of digital assets and blockchain-based technologies. Membership consists of innovators, operators and investors in the digital asset and blockchain technology ecosystem, including start-ups, software companies, global IT consultancies, financial institutions, investment firms and law firms.

Government Blockchain Association. The Government Blockchain Association (GBA) is a non-profit, membership organization that consists of individuals and organizations that are interested in promoting blockchain-related solutions to government requirements.

The Global Legal Blockchain Consortium seeks to organize and align the stakeholders in the global legal industry with regard to the use of blockchain technology to enhance the security, privacy, productivity, and interoperability of the legal technology ecosystem.

R3 is a consortium of more than 200 financial institutions has assembled a team of 10 law firms to create the Legal Center of Excellence (LCoE), a platform for educating lawyers around the world on the fundamentals of blockchain technology and the ecosystem that’s grown up around it.

Thought leaders

Follow these blockchain thought leaders for insightful commentary, links to resources, and to join in the conversation.

Andreas Antonopoulos—Author, Mastering Bitcoin @aantonop

Jerry Brito—Executive Director, Coin Center @jerrybrito

Vitalik Buterin—Co-founder, Ethereum @vitalikbuterin

Susan Chishti–CEO FINTECH Circle & FINTECH Circle Institute @SusanneChishti

Lewis Rinaudo Cohen–Partner, Hogan Lovells; Co-head, Hogan Lovell Global Blockchain Initiative. @NYcryptolawyer

Meltem Demirors–VP, Digital Currency Group; WEF Blockchain Council; MIT MediaLab @Melt_Dem

Jalak Jobanputra–Founder/Managing Partner, Future\Perfect Ventures @jalak

Susan Joseph–Blockchain and Identity Consultant @SusanJoseph1786

Joshua Ashley Klayman–Blockchain and Cryptocurrency Attorney; Chair, Blockchain+Smart Contracts, Morrison & Foerster LLP  @josh_blockchain

Adam Krellenstein–Co-Founder, Symbiont @agkrellenstein

Caitlin Long—Caitlin-Long.com; Co-founder of the Wyoming Blockchain Coalition @CaitlinLong_

Joseph Lubin—Founder, Consensus Systems, Ethereum @ethereumJoseph

William Mougayar—Author, The Business Blockchain; advisor, consultant, lecturer. @wmougayar

Brock Pierce—Serial entrepreneur/founder/investor in tech/virtual currency start-ups; Chairman, Bitcoin Foundation @brockpierce

Sandra Ro–Managing Partner & COO, UWINCorp @srolondon

Ron Quaranta–Chairman of the Wall Street Blockchain Alliance; former CEO – DerivaTrust Technologies; Editor – Blockchain in Financial Markets and Beyond. @ronqman

Naval Ravikant–Co-Founder/Blockchain Practice Leader at 11:FS. @naval

Marco Santori–President & Chief Legal Officer, Blockchain @msantoriESQ

Mark Smith–CEO, Co-Founder, Symbiont.io @symbiontIO

Simon Taylor–Co-Founder/Blockchain Practice Leader at 11:FS. @staylor

Roger Ver—Investor, Bitcoin startups, including Bitcoin.com, Blockchain.com, Z.cash, BitPay, Kraken, Purse.io. @rogerkver