12 March 2018By Uri Snir
On February 1, 2018, the Ontario Securities Commission approved Canada’s first exchange traded fund (ETF) that tracks blockchain-based companies. There appear to be at least two additional blockchain ETFs in the pipeline and more will likely follow. Earlier this year, similar ETFs were launched on the New York Stock Exchange and Nasdaq.
Blockchain is the technology most commonly associated with Bitcoin and other cryptocurrencies. However, this relatively new technology has applications in countless other industries, from banking to finance to retail to healthcare.
It seems inevitable that it will also affect the legal profession. Indeed, LawPro Magazine recognized the blockchain as a potential legal disruptor in its February 2018 Top Legal Disruptions Issue. Lawyers should become familiar with blockchain technology and the various ways it may impact their practice.
What is Blockchain? A blockchain is a distributed ledger that duplicates digital data across a large peer-to-peer network of computers, rather than on a central server.
A blockchain produces a continuously growing list of records, called blocks, which are linked using cryptography. Each block is encrypted and time-stamped, and then verified by a distributed network of computers. Users can only edit the part of the blockchain that they “own”: access is gained through a private key.
A blockchain allows two individuals who do not know each other to transact large amounts of digital currency (like Bitcoin) over a decentralized ledger that is trustworthy and immutable. Each transaction requires verification by all users in the network. It would therefore require collusion on a grand scale to modify data retroactively on a blockchain, ensuring that the digital data in the blockchain is verifiable, trustworthy and permanent. Think of it like a Google Doc for digital data, where new versions are continuously created and revisions can be seen and verified by all other users across a network (private or public). As such, using a blockchain to conduct a financial transaction eliminates the need for a third-party intermediary (i.e. a bank) to clear the transaction.
The Blockchain Revolution: The potential applications of blockchain technology extend far beyond digital currencies. It has applications in banking, finance, accounting, real estate, healthcare, election voting, digital identity and security (theft prevention), supply chain, cloud storage, music distribution, and even library databases, just to name a few. In short, blockchains can be used to distribute and protect any type of digital data.
Many experts believe the blockchain is the greatest technological innovation since the internet. The technology is still in its infancy, and will have future applications that nobody has yet thought of (nobody envisioned Google or Facebook when the internet was developed in the late 1980s).
Startups specializing in this area are looking for ways to improve and apply the technology, while many larger companies like IBM, Microsoft and Visa are already experimenting with blockchains in various ways to improve their businesses.
Blockchain Technology and the Legal Profession: Blockchains will change the way people do business in numerous industries. When such a disruptive technology comes along, the legal profession must adapt.
Here are just a few ways that blockchain technology may affect the legal profession:
1. Smart Contracts: Blockchains can store and distribute any type of digital information, including computer code. Computer code can be used to draw up digitized contracts that are automated and self-execute when a set of future conditions are met. In theory, a self-executing contract eliminates the need for human intervention. Smart contracts are already being used today. If widely adopted, smart contracts will surely lead to changes in how lawyers draft, review, interpret and execute contracts.
2. Securities Law: It is still unclear how securities regulators will regulate cryptocurrencies. Is it even possible to regulate a completely decentralized digital currency like bitcoin? Securities lawyers will have to keep up with what is sure to be a changing regulatory landscape.
3. Tax Law: How will governments tax investments in cryptocurrencies? Tax lawyers will need to stay informed on this developing area.
4. Real estate: Land registries are tailor-made for blockchains, where distributed ledgers can provide trustworthy and instantaneous records. Furthermore, conducting real estate transactions through a blockchain reduces the need for title searches or intermediaries to secure the title transfer. The blockchain can prove the authenticity of the transaction and save parties time and money (essentially making escrow companies obsolete).
5. Intellectual property: Distributed ledgers could revolutionize how intellectual property rights are registered and enforced, and how the holders of these rights are compensated. Again, this would change the way intellectual property lawyers assist clients with these matters.
Blockchain technology will inevitably change numerous industries, possibly on the same scale as the internet did just a couple of decades ago. The law will almost certainly follow suit, making this an area ripe with opportunities for lawyers. Clients will seek out general blockchain advice from lawyers in various practice areas, and those who can position themselves as blockchain experts will be better suited to serve clients’ needs.
For more information on how blockchains work, see this video.