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Blockchain and the Legal Industry

Blockchain and the Legal Industry – Dispelling Myths

With the blockchain hype of 2018 fading away, the industry is left with more tempered expectations regarding use cases for 2019. While blockchain may not be the solution to all the world’s problems, there are certain industries that could undeniably benefit from distributed ledger technology (DLT). Law is one of those industries. Here’s how we think it could work.

Legal Smart Contracts

Blockchain networks can integrate features called smart contracts – these are essentially autonomous computer programs that execute and run when certain conditions are met. Outside entities called oracles are programmed to feed information to a blockchain network, reviewing and verifying external data through web APIs or market data feeds. There are still pain points to be addressed in this process, the main one being that oracles rely on trusted third-party information sources in many cases, but if these sources are agreed upon by both parties, the contract is off to a good start. Smart contracts can be encoded with the same information that would be outlined in a legal contract. For example, a blockchain can be configured to receive information on the weather, and pay out dividends to farmers during times of drought. In employment of contractors or freelancers, money could be held in escrow and released automatically as certain pre-programmed contract conditions are met. In theory, the use of smart contracts could potentially help individuals by reducing the amount of time an attorney would need to spend on drafting legal documents for them, thus reducing billable hours as well. A constant complaint we hear at AskDegree from early stage ventures is “how can we lower our staggering legal fees?”. We believe Smart Contracts can be leveraged to reduce billable hours for routine legal matters such as business formation and licensing activities.  Lowering these early stage cost will in-turn lower barriers to entry which are restricting access to regulated markets. In some cases, it’s possible that entire processes that currently require a lawyer could be handled between two parties and a set of smart contracts, with no human legal representation necessary.

Is This Legally Binding?

A smart contract reviewed and signed by two parties could be viewed as a written agreement, but the jury is still out as to whether these agreements can be elevated to the same status as legal contracts without being crafted by experts in the field. Arizona and Tennessee were the first US states to recognize smart contracts as legally binding, but this has not been adopted worldwide or even throughout the US as of yet. However, with a legal precedent set recognizing signatures on smart contracts as a legally binding agreement in two US states, it doesn’t seem unreasonable to assume that others will follow suit.

High Hopes – Areas of Strength

Legal costs are the main area where smart contracts issued on a blockchain could make a big difference. 90% of US companies are engaged in litigation at any given time, with many of those lawsuits being considered frivolous. Civil lawsuits or “torts” cost a total of $248.1 billion in 2009 alone. Through increased automation, law firms can operate with less staff. Clients could perhaps make use of smart contracts to handle many mundane but expensive litigious processes, reducing the number of billable hours they need to pay and saving lawyer consultations for when they’re really needed. 40% of law firms already use automated contract software of some kind, and 39% use staff who are not qualified lawyers to handle their contracts. What this means is that the stage has already been set for blockchain technology to step in. Blockchain has the added benefits of trustlessness and efficiency, allowing for less human staff to be used in processes like drafting and implementing legal contracts.

Realistic Expectations – Areas of Weakness

One area of potential weakness is system security. No system is completely invulnerable to hacking or issues arising from bugs, no matter what blockchain cheerleaders insist. Smart contract security would be especially important when dealing with legal contracts. One study found that 3.4% of smart contracts were flawed, meaning there is much work to be done in order to make them unassailable. On the other hand, it’s worth bearing in mind that 9% of current legal contracts end up being disputed, leaving much room for improvement in our traditional legal contract architecture as it is.

Don’t Fire Your Lawyer Just Yet

While the use case could be promising, it’s early days. There’s no indication that blockchain will completely overhaul the legal system any time soon, and it seems likely that there will always be a need for human lawyers, regardless of the sophistication of smart contracts in the future. Like many industries, the legal industry may be destined to undergo major streamlining due to disruption from blockchain automation over the coming years. However, this does not spell doom for law firms, but rather, it offers an opportunity for them to research the emerging technology and decide for themselves whether they want to become outpace the competition early adopters of blockchain as a legal instrument.

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