Non-Profit Innovation and R&D Lab

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Hello Blockchain . . . Goodbye Lawyers?

Simon Krauss

By Simon Krauss, Deputy General Counsel

Apr 19, 2016

As the blockchain technology star begins to eclipse Bitcoin and the other cryptocurrencies that rely upon it, there has been an increase in research and development into using blockchain for “smart contracts.” Smart contracts are computer programs that facilitate, verify, execute, and enforce a contract. While smart contracts have existed to a limited extent for years in the commodities markets, vending machine, or adjustable rate mortgage industries, blockchain technology enables smart contracts to expand to cover new uses and, ultimately, become mainstream because contracts in blockchains are attestable, immutable, and visible.

What is a Contract? What is Blockchain?

A contract, in its simplest terms, is an agreement between people to do or refrain from doing something in exchange for something else. The agreement, generally, can be formed through a mutually signed document, a series of emails, verbal communication, clicking “I Agree” or any action showing agreement. A contract may be formed by the simple nodding of the head. A “person” can be a human being or an entity created in law with the ability to contract, like a corporation or a limited liability company. In order for an agreement to be upheld legally, the agreement cannot be against the law. Yet another reason why you don’t see drug dealers in court -- criminal court excepted.

Blockchain is a cryptographic technology that is used to create distributed, verifiable electronic ledgers to record events. For more elaboration refer to Steve Goeringer’s post. Smart contracts leverage blockchain technology to not only record the individuals and the amounts in the transaction but can also set up a self-executing “if this than that” structure using scripts.

A Smart Contract in Action

For example, if you and I were to agree upon a price for you to buy my car, we would both be worried about certain risks. I would be afraid whether or not your check will clear. You would be concerned if I actually hold a clear title to the car, whether the car is mechanically sound, if there are any liens on the car, and would want to confirm the odometer reading is accurately stated on the title. Addressing these concerns may take a week or more. With a blockchain, all the concerns are addressed simultaneously.

For this example, let’s assume we are living in the near future and the title (VIN number, ownership and odometer reading – the latter due to my car phoning in to update its secured record), and any liens are encoded on the blockchain, the payment will be in Bitcoin (or some other cryptocurrency), and my contract with the mechanic can also be on the blockchain. I would load the coded representation of our agreement onto the blockchain. The blockchain would immediately determine if you had the funds, I had the proper title, check for the “this car is okay” approval from the mechanic, check (and pay off) any liens and then, if all the conditions are present, transfer your payment to me, and transfer and record the title on the blockchain. We receive the mutual “okay” on our smart phones and I give you the car key. The sale of the car becomes spontaneous. So long as the cryptography is sound, there is no longer the need for trust. That is, I would not have to trust you to have the funds to purchase the car and you would not have to trust that I actually had title to the car, the car was mechanically sound, there were no liens on the car, and the odometer reading is correct.

Smart Contracts in the Cable Industry

Smart contracts can remove friction and provide transparency in the cable supply chain. For example, smart contracts could ensure that every time a cable operator shows a movie, appropriate payments are instantaneously made all the way down the programming supply chain. There is no need for audit as the transaction history is readily secured and apparent in the blockchain. Smart contracts could also reduce costs by streamlining content purchasing based upon industry standards. Smart contracts could also be readily applied to advertising insertion with payment made in real time.

So We Don’t Need Lawyers Anymore?

For certain simple transactions, for which you probably wouldn’t hire a lawyer, you still wouldn’t need a lawyer. However, the use of blockchain may reduce the need for a using a lawyer to resolve post-contract issues like lack of payment or, in the previous example, bad title. Smart contracts may reduce the need for litigators but become an additional tool for the transactional lawyer to master. The question may be better phrased as, “do lawyers need to learn coding along with Latin?” or “do coders need law degrees?” or even, “is coding a new role for paralegals?” Written contracts are legal documents and while you are free to draft your own, drafting for others constitutes practicing law without a license – which is against the law. While smart contracts will undoubtedly impact lawyers and the practice of law, smart contracts will not eliminate the need for lawyers right away. Smart contracts may, however, be one of several technologies that will bring us one step closer to eliminating or reducing the need for lawyers in the future.